nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒02‒29
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Forward guidance and "lower for longer": The case of the ECB By Bletzinger, Tilman; Wieland, Volker
  2. Decomposing Euro Area Sovereign Debt Yields into Inflation Expectations and Expected Real Interest Rates By Mirdala, Rajmund
  3. Predetermined Exchange Rate, Monetary Targeting, and Inflation Targeting Regimes By Shigeto Kitano
  4. Interaction between monetary policy and bank regulation: lessons for the ECB By Marek D¹browski
  5. The Federal Reserve as global lender of last resort, 2007-2010 By Lawrence Broz
  6. Trend Fundamentals and Exchange Rate Dynamics By Florian Huber; Daniel Kaufmann
  7. Forecasting Inflation using Survey Expectations and Target Inflation: Evidence for Brazil and Turkey By Altug, Sumru G.; Cakmakli, Cem
  8. The Equity Premium, Long-Run Risk, & Optimal Monetary Policy By Diercks, Anthony M.
  9. Channels of US Monetary Policy Spillovers into International Bond Markets By Elías Albagli; Luis Ceballos; Sebastián Claro; Damián Romero
  10. On the Redistributional Effects of Long-Run Inflation in a Cash-in-Advance Economy By Kakar, Venoo
  11. Does Lack of Financial Stability Impair the Transmission of Monetary Policy? By Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
  12. Bitcoin as an example of a virtual currency By Anna Wiœniewska
  13. The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises By Corsetti, Giancarlo; Dedola, Luca
  14. Inflation persistence in African countries: Does inflation targeting matter? By Phiri, Andrew
  15. Measuring the Natural Rate of Interest Redux By Laubach, Thomas; Williams, John C.
  16. Trade finance and international currency: a moneatary search approach By Liu, Tao
  17. Searching for the FED's Reaction Function By Katrin Woelfel; Christoph Weber
  18. Sovereign yields and the risk-taking channel of currency appreciation By Boris Hofmann; Ilhyock Shim; Hyun Song Shin
  19. Euro money market trading during times of crisis By Fecht, Falko; Reitz, Stefan
  20. Credit, Money and Asset Equilibria with Indivisible Goods By Han Han; Benoit Julien; Asgerdur Petursdottir; Liang Wang
  21. Modelling long-run exchange rates in Botswana: a fundamental equilibrium approach By Odhiambo, Nicholas M.; Njindan Iyke , Bernard
  22. Trend growth, unemployment and optimal monetary policy By Lechthaler, Wolfgang; Tesfaselassie, Mewael
  23. Designing a Simple Loss Function for the Fed: Does the Dual Mandate Make Sense? By Davide Debortoli; Jinill Kim; Jesper Linde; Ricardo Nunes
  24. Regional Inflation and Financial Dollarization By Brown, Martin; Haas, Ralph De; Sokolov, Vladimir
  25. Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises By Gertler, Mark; Kiyotaki, Nobuhiro; Prestipino, Andrea
  26. Monetary transmission in Africa: a review of official sources By McKenzie, Rex A

  1. By: Bletzinger, Tilman; Wieland, Volker
    Abstract: A number of contributions to research on monetary policy have suggested that policy should be asymmetric near the lower bound on nominal interest rates. As inflation and economic activity decline, policy should ease more aggressively than it would in the absence of the lower bound. As activity recovers and inflation picks up, the central bank should act to keep interest rates lower for longer than without the bound. In this note, we investigate to what extent the policy easing implemented by the ECB since summer 2013 mirrors the rate recommendations of a simple policy rule or deviates from it in a way that indicates a "lower for longer" approach to policy near zero interest rates.
    Keywords: European Central Bank; forward guidance; interest rates; Monetary policy; zero bound
    JEL: E43 E47 E52 E58
    Date: 2016–02
  2. By: Mirdala, Rajmund
    Abstract: Quantitative easing conducted by European central bank to fight persisting risks of deflation is drawing an attention of increasing number of empirical studies. Moreover, effectiveness of monetary policy at near zero inflation rates reveals lot of issues on whether interest rates really have a lower bound around zero percent. As a result, traditional views on the role of inflation expectations and expected real interest rates in the long-term interest rates determination face the challenge of fundamental revision. In the paper we analyze relative contributions of inflation expectations and expected real interest rates to long-term interest rates on government bonds leading path as well as their responses to both types of shocks in the Euro Area member countries using SVAR methodology. We also decompose long-term interest rates into transitory and permanent components. Our research revealed considerable differences in the role of inflation expectations and expected real interest rates shocks in determining long-term interest rates between core and periphery countries of the Euro Area. The crisis period even intensified this trend.
    Keywords: interest rates, inflation expectations, economic crisis, SVAR, variance decomposition, impulse-response function
    JEL: C32 E43 F41
    Date: 2015–09
  3. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: Many works analyzing the Mundell-Fleming dictum compare the predetermined exchange rate regime and the monetary targeting regime under flexible exchange rates. Reflecting on the fact that many emerging market countries have shifted to the regime of inflation targeting, this paper aims to extend the literature to include the inflation targeting regime. The results of our analysis show that the interest rule with an inflation target is superior (or at least equal) to the two abovementioned regimes in absorbing both real and monetary shocks.
    Keywords: Optimal exchange rate regimes, Predetermined exchange rate, Flexible exchange rate, The Mundell-Fleming dictum, Small open economy
    JEL: E42 E58 F31 F41 O24
    Date: 2011–08
  4. By: Marek D¹browski
    Abstract: The European Central Bank (ECB) recently became engaged in macro-prudential policies and the micro-prudential supervision of the largest Euro area banks. These new tasks should help complete financial integration, and make the Euro area more resilient to financial instability risks. However, the multiplicity of mandates and instruments involves a risk of their inconsistency which could compromise the ECB’s core price-stability mandate as well as its independence. The experience of central banks during the recent global financial crisis confirms that such risks are not purely hypothetical.
    Keywords: monetary policy, macro-prudential policy, banking regulation, banking supervision, money multiplier, money velocity, financial stability, European Central Bank
    JEL: E51 E52 E58 G01 G18 G28
    Date: 2016–02
  5. By: Lawrence Broz
    Abstract: Passage of the Dodd-Frank financial reform bill, in conjunction with a Supreme Court ruling supporting a Freedom of Information Act request, required the Federal Reserve (Fed) to disclose bank-specific information about its emergency lending during the financial crisis. The disclosures revealed the extent to which the Fed had served as a global lender of last resort, providing dollar liquidity to foreign banks and foreign central banks. I exploit these unanticipated disclosures on two levels. First, I use the disclosed information to evaluate the motivations behind the Fed's global lending during the crisis. My findings indicate that the Fed supported foreign banks in countries in which U.S. money center banks had high loan exposures, which suggests that the Fed served the interests of major U.S. banks. Second, I explore the congressional response to the revelation of the Fed's massive global lending. I analyze an "Audit the Fed" vote in the House of Representatives that would end the Fed's confidentiality about the banks and countries it supports and reduce its monetary policy independence. I find the influence of U.S. money center banks also extends to Congress by way of campaign contributions: contributions from these banks significantly reduce the likelihood that a representative will vote in favor of the bill. In addition, I find that right-wing representatives were substantially more likely than their left-wing peers to support the bill, which suggests that new congressional coalitions are forming on the role of the Fed in the (global) economy.
    Keywords: Sovereign Default; Debt Crises; Political Survival; Networks; Voter Behavior.
    JEL: R21
    Date: 2015–01–08
  6. By: Florian Huber (Department of Economics, Vienna University of Economics and Business); Daniel Kaufmann (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: We estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US Dollar. The empirical model is based on the assumption that both countries' monetary policy strategies may be well described by Taylor rules with a time-varying inflation target, a time-varying natural rate of unemployment, and interest rate smoothing. The estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered. The model generally outperforms a benchmark model that does not account for changes in trend inflation and trend unemployment.
    Keywords: Exchange rate models, trend inflation, natural rate of unemployment, Taylor rule, unobserved components stochastic volatility model
    JEL: F31 E52 F41 C5 E31
    Date: 2016–01
  7. By: Altug, Sumru G.; Cakmakli, Cem
    Abstract: In this paper, we formulate a statistical model of inflation that combines data on survey expectations and the inflation target set by central banks.. Our model produces inflation forecasts that are aligned with survey expectations, thereby integrating the predictive power of the survey expectations together with the baseline model. We further incorporate the inflation target set by the monetary authority to examine the effectiveness of monetary policy in forming inflation expectations and therefore, predicting inflation accurately. Results indicate superior predictive power of the proposed framework compared to the model without survey expectations as well as several popular benchmarks such as the backward and forward looking Phillips curves and naive forecasting rule.
    Keywords: Inflation forecasting; inflation targeting; state space models; survey-based expectation; term structure of inflation expectations
    JEL: C32 C51 E31 E37
    Date: 2015–02
  8. By: Diercks, Anthony M. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this study I examine the welfare implications of monetary policy by constructing a novel New Keynesian model that properly accounts for asset pricing facts. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same model calibrated to a counterfactually low equity premium implies an optimal inflation rate close to zero and inflation volatility less than 10 basis points, consistent with much of the existing literature. Relatively higher optimal inflation is due to the greater welfare costs of recessions associated with matching the equity premium. Additionally, the second order approximation allows monetary policy to have positive welfare effects on the labor share of income. I show that this channel is generally absent in standard macroeconomic models that do not take risk into account. Furthermore, the interest rate rule that comes closest to matching the dynamics of the optimal Ramsey policy puts a sizable weight on capital growth along with the price of capital, as it emphasizes stabilizing the medium to long term over the very short run.
    Keywords: Asset Pricing; Long-run risk; Monetary policy
    Date: 2015–09–21
  9. By: Elías Albagli; Luis Ceballos; Sebastián Claro; Damián Romero
    Abstract: We document significant US monetary policy spillovers to domestic bond markets in a sample of 24 countries, including 12 developed and 12 emerging market economies. We rely on an event study methodology where US monetary policy changes are identified as the response of short-term US treasury yields within a narrow window of Federal Reserve meetings, and trace its consequences on domestic bond yields using panel data regressions. We decompose yields for each country into a risk neutral and a term premium component, using the methodology developed by Adrian et al. (2013). We emphasize three main results. First, spillovers to long-term rates in our sample of countries has increased substantially after the global financial crisis: a 100 bp increase in US short-term rates during monetary policy meetings is associated with increases between 70-80 bp on international bond yields. Second, these effects work through markedly different channels on different country groups: while the effects in developed economies work mostly through risk neutral rates -associated with signaling effects in the course of future monetary policy-, spillovers to emerging countries are concentrated predominantly on the term premium channel -associated with portfolio rebalancing effects. Third, these spillovers are large compared to the effects of other events, and at least as large as the effects of domestic MP in long-term rates after 2008.
    Date: 2015–09
  10. By: Kakar, Venoo
    Abstract: This paper analyzes the redistributional effects of long-run inflation on income, wealth and consumption in the United States in a model economy with heterogeneous agents where money is introduced via a cash-in-advance constraint. A calibrated version of our model is able to generate patterns of income inequality that are very similar to those observed in the United States. On an aggregate level, the cost of 5% inflation is 2.5% consumption. On an disaggregate level, uniform monetary transfers by the central bank result in inflation acting as a progressive tax on consumption.
    Keywords: Consumption, Inequality, Inflation, Heterogeneity
    JEL: E21 E31 E4 E5 E52
    Date: 2014–05–03
  11. By: Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel
    Abstract: We investigate the transmission of central bank liquidity to bank deposit and loan spreads of European firms over the January 2006 to June 2010 period. When the European Central Bank (ECB) allocated liquidity to banks in a competitive tender at the beginning of the crisis, higher “aggregate” central bank liquidity (i.e. the total liquidity in the banking system that is held at the ECB) reduces bank deposit rates of low risk banks but has no effect on deposit rates of high risk banks or on corporate loan spreads of high or low risk banks. After the ECB started to fully allot all liquidity requested by banks via its refinancing operations on October 8, 2008, an increase in liquidity decreases deposit rates of both high and low risk banks. While loan spreads of low risk banks decrease, those of high risk banks remain unchanged also under full allotment of liquidity. We find that borrowers of high risk banks refinance term loans drawing down loan commitments. They have lower payouts, lower capital expenditures and lower asset growth compared with borrowers of low risk banks. Our results suggest a differential transmission of central bank liquidity of low versus high risk banks, and an impaired transmission to corporate borrowers of high risk banks.
    Keywords: Central Bank Liquidity, Corporate Deposits, ECB, Financial Crisis, Loans
    JEL: E43 E58 G01 G21
    Date: 2015–06
  12. By: Anna Wiœniewska (Nicolaus Copernicus University, Poland)
    Abstract: Virtual currencies have recently become one of the most popular topics in the media. This paper focuses on economic aspects of Bitcoin, being an attempt to answer the question if Bitcoin can be considered money in the light of economic theories of money. On the basis of the reports published by the European Central Bank and the Financial Action Task Force, as well as the available Internet and primary sources, there have been presented the types, history and functioning of virtual currencies. The knowledge of virtual currencies makes it possible to foresee the problems arising from their existence, such as possible threats to international security, difficulties with taxation etc. The growing popularity of virtual currencies and cryptocurrencies is linked with the increase of importance of non-cash payments on global scale. Thus, Bitcoin may be considered next step in the evolution of digital money.
    Keywords: bitcoin, virtual currencies, cryptocurrencies, legal status of virtual currencies
    JEL: E40 G29 G28 K34
    Date: 2016–02
  13. By: Corsetti, Giancarlo; Dedola, Luca
    Abstract: We study the mechanism by which unconventional (balance-sheet) monetary policy can rule out self-fulfilling sovereign default in a model with optimizing but discretionary fiscal and monetary policymakers. By purchasing sovereign debt, the central bank effectively swaps risky government paper for monetary liabilities only exposed to inflation risk, thus yielding a lower interest rate. We characterize a critical threshold for central bank purchases beyond which, absent fundamental fiscal stress, the government strictly prefers primary surplus adjustment to default. Since default may still occur for fundamental reasons, however, the central bank faces the risk of losses on sovereign debt holdings, which may generate inefficient inflation. This risk does not undermine the credibility of a backstop, nor the ability of a central bank to pursue its inflation objectives when the latter enjoys fiscal backing or fiscal authorities are sufficiently averse to inflation.
    Keywords: Inflationary financing; Lender of last resort; Seigniorage; Sovereign risk and default
    JEL: E58 E63 H63
    Date: 2016–02
  14. By: Phiri, Andrew
    Abstract: This study investigates inflation persistence in annual CPI inflation collected between 1994 and 2014 for 46 African countries. We group these countries into panels according to whether they are inflation targeters or not and conduct estimations for pre and post inflation targeting periods. Interestingly enough, we find that inflation persistence was much higher for inflation targeters in periods before adopting their inflation targeting regimes and inflation persistence dropped by 40 percent for these countries after adopting the policy frameworks. For non-inflation targeters inflation persistence has increased by almost 290 percent between the two time periods.
    Keywords: African countries; Developing countries; Inflation persistence; Inflation targeting; Panel data.
    JEL: C1 C5
    Date: 2016–02–01
  15. By: Laubach, Thomas (Board of Governors of the Federal Reserve System (U.S.)); Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Persistently low real interest rates have prompted the question whether low interest rates are here to stay. This essay assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model. Since the start of the Great Recession, the estimated natural rate of interest fell sharply and shows no sign of recovering. These results are robust to alternative model specifications. If the natural rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and long-lasting. In addition, uncertainty about the natural rate argues for policy approaches that are more robust to mismeasurement of natural rates.
    Keywords: Econometrics; Money and interest rates
    Date: 2016–02–12
  16. By: Liu, Tao
    Abstract: The determinants of international currency received a lot of attention since the great recession. Classic literature focused on economy size and openness, but that couldn't explain why RMB remains largely national, while China is already leading in international trade. In this paper, I verified the importance of financial development for currency internationalization using SWIFT trade finance data. Then I built a two-country monetary search model where trade takes time, and lack of committment makes exporter and importer rely on bank-intermediated finance. The agent's currency choice is related with terms of trade, monetary policy, and financial efficiency. Optimal monetary policy differs according to currency regime. Related topic such as size effect and global imbalance is also discussed.
    Keywords: Trade finance; international currency; monetary search; global imbalance; optimal monetary policy
    JEL: E40 E50 F33 F41
    Date: 2016–01–14
  17. By: Katrin Woelfel; Christoph Weber
    Abstract: There is still some doubt about those economic variables that really matter for the FED’s decisions. In comparison to other estimations, this study uses the approach of Bayesian Model Averaging (BMA). The estimations show that over the long run in?ation, unemployment rates, and long-term interest rates are the crucial variables in explaining the Federal Funds Rate. In the other two estimation samples, also the federal de?cit and M2 were of relevance. In addition, we present the best models in more detail. Finally, a model average is constructed via BMA. The model average substantially outperforms a simple Taylor rule.
    Keywords: FED, Monetary Policy Reaction Functions, Model Uncertainty, Bayesian Model Averaging
    JEL: E43 E52 E58
    Date: 2014–07
  18. By: Boris Hofmann; Ilhyock Shim; Hyun Song Shin
    Abstract: Currency appreciation against the US dollar is associated with the compression of emerging market economy (EME) sovereign yields. We find that this yield compression is due to reduced risk premiums rather than expectations of interest rates already priced into forward rates. We explore a model which ties together dollar credit to EME corporates, sovereign tail risks and global investor portfolio adjustments driven by economic capital constraints. Consistent with our model, we find no empirical association between currency appreciation and sovereign spreads when we use the trade-weighted effective exchange rate that is unrelated to the US dollar.
    Keywords: bond spread, capital flow, credit risk, emerging market, exchange rate
    Date: 2016–01
  19. By: Fecht, Falko; Reitz, Stefan
    Abstract: This paper uses the order book for 2007 and 2008 of a key Euro area market maker in the unsecured money market to estimate a stylized pricing model which explicitly accounts for the over - the - counter structure and the unsecured nature of these transactions. The empirical results suggest that the market maker learns from order flow to update her beliefs about the fundamental value of the overnight rate, but this information aggregation via order flow was increasingly hampered as the crisis unfolded. In addition, order size was also used to infer the unobservable component of a counterparty's credit risk.
    Keywords: Euro money market,financial crisis,market microstructure,pricing behavior
    JEL: G15 E43 C32
    Date: 2015
  20. By: Han Han (School of Economics Peking University); Benoit Julien (UNSW Australia); Asgerdur Petursdottir (University of Bath); Liang Wang (University of Hawaii at Manoa)
    Abstract: In a New Monetarist framework, we study the trade of indivisible goods under credit, divisible money and divisible asset in a frictional market. We show how indivisibility on the goods side, instead of the money or asset side, matters for equilibria. The bargaining solution generates a price that is independent of nominal interest rate, dividend value of the asset, or the number of active buyers carrying the asset for liquidity purposes. To reestablish this link, we consider price posting with competitive search. We derive conditions under which stationary equilibrium exists. With asset and bargaining, we find that for negative dividend value on the asset, multiple equilibria occur. Otherwise, in all possible combinations of liquidity and price mechanisms, including positive dividend value under asset, the equilibrium is unique or generically unique.
    Keywords: Nash Bargaining; Competitive Search; Indivisibility; Multiplicity; Uniqueness
    JEL: D51 E40
    Date: 2016–01
  21. By: Odhiambo, Nicholas M.; Njindan Iyke , Bernard
    Abstract: In this paper, we have estimated the equilibrium real exchange rate for Botswana. We have also reviewed the exchange rate regimes pursued by Botswana from independence to date. The evidence suggests that Botswana operated a fixed exchange rate without adjustable pegs from 1966-1976; a fixed exchange with adjustable pegs from 1976-1980; and a fixed exchange with a currency basket from 1980 to date. From the ARDL bounds testing procedure, we found that the fundamental determinants of the equilibrium real exchange rate in Botswana are: the terms of trade and trade openness. The actual real exchange rate appears to have deviated significantly from the equilibrium exchange rate. Perhaps more worrying is the fact that our estimated speed of adjustment is very slow. This means that significant deviations are not corrected fast enough annually. Policymakers in Botswana are encouraged to pursue policies, which could raise the adjustment parameter, in order to avoid excess misalignments, when going forward.
    Keywords: Real Exchange Rate, Equilibrium Exchange Rate, Botswana
    Date: 2015–08
  22. By: Lechthaler, Wolfgang; Tesfaselassie, Mewael
    Abstract: We analyze the implications of changes in the trend growth rate for optimal monetary policy in the presence of search and matching unemployment. We show that trend growth in itself does not generate a trade-off for the monetary authority, but that it interacts importantly with the inefficiencies stemming from the labor market. Higher trend growth exacerbates the inefficiencies of the labor market and therefore calls for larger deviations from price stability.
    Keywords: trend growth,trend inflation,unemployment
    JEL: E12 E24 E52
    Date: 2015
  23. By: Davide Debortoli (UPF and Barcelona GSE); Jinill Kim (Department of Economics, Korea University, Seoul, Republic of Korea); Jesper Linde (Sveriges Riksbank, Stockholm School of Economics and CEPR); Ricardo Nunes (Federal Reserve Bank of Boston)
    Abstract: Yes, it makes a lot of sense. Using the Smets and Wouters (2007) model of the U.S. economy, we ?nd that the role of the output gap should be equal to or even more important than that of annualized in?ation when designing a simple loss function to represent household welfare. The high weight on the output gap is driven by several important characteristics in the estimated model, including a low elasticity of substitution between monopolistic goods, price indexation, and sticky wages. Moreover, we document that a loss function with nominal wage in?ation and the hours gap provides an even better approximation of the true welfare function than a standard objective based on in?ation and the output gap. Our results hold up when we introduce interest rate smoothing in the simple mandate to capture the observed gradualism in policy behavior and to ensure that the probability of the federal funds rate hitting the zero lower bound is negligible.
    Keywords: Central banks' objectives, simple loss function, monetary policy design, Smets-Wouters model
    JEL: C32 E58 E61
    Date: 2016
  24. By: Brown, Martin; Haas, Ralph De; Sokolov, Vladimir
    Abstract: We exploit variation in consumer price inflation across 71 Russian regions to examine the relationship between the perceived stability of the domestic currency and financial dollarization. Our results show that regions with higher inflation experience an increase in deposit dollarization and a decrease in the dollarization of loans to households and firms in non-tradable sectors. The negative impact of inflation on credit dollarization is weaker in regions with less integrated banking markets. This suggests that the asset-liability management of banks constrains the currency-portfolio choices of both households and firms without a natural currency hedge.
    Keywords: Financial dollarization, financial integration, regional inflation
    JEL: E31 E42 E44 F36 G21 P22 P24
    Date: 2015–06
  25. By: Gertler, Mark (NYU); Kiyotaki, Nobuhiro (Princeton University); Prestipino, Andrea (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households. In fact, the recent financial crisis that triggered the Great Recession featured a disruption of wholesale funding markets, where banks lend to one another. Accordingly, to understand the financial crisis as well as to draw policy implications, it is essential to capture the role of wholesale banking. The objective of this paper is to characterize a model that can be seen as a natural extension of the existing literature, but in which the analysis is focused on wholesale funding markets. The model accounts for both the buildup and collapse of wholesale banking, and also sketches out the transmission of the crises to the real sector. We also draw out the implications of possible instability in the wholesale banking sector for lender-of-last resort policy as well as for macroprudential policy.
    Keywords: financial crises; wholesale banking; interbank markets; rollover risk
    JEL: E44
    Date: 2016–01–29
  26. By: McKenzie, Rex A (Kingston University London)
    Abstract: This paper focuses on the subject of monetary transmission in Africa. It begins with a report on the effects of the financial crisis of 2008 in Africa. In the countries with more developed financial systems, the financial channel proved to be the most important in transmitting the crisis. In the more peripheral countries, the trade channel proved to be the most important. Where countries were able to withstand the global shock coming from the financial crisis, they did so with a diversified group of trading partners in fast growing economies. The paper then turns to examine three post crisis institutional developments and asks how a) an increased momentum towards regional integration, b) the rise of Pan African banking and, c) an increase in cross border flows, are affecting the monetary transmission mechanism (MTM) in Africa. It is clear from the literature that the rise of Pan African banking and the regionalization thrust of the authorities are deepening the financial channels between countries. But, with respect to cross border flows, the huge size of deposits maintained by Africa’s BIS reporting banks suggests relatively low levels of bank intermediation and competition. Thus, the benefits that are assumed to accrue as a result of increased cross border flows are withdrawn from the local economy and stored up in the BIS banks. We know large deposits reflect the expectations of the deposit holders. But beyond that, very little is known about the role of expectations and the workings of the expectations channel in monetary transmission in Africa. Even less is known about how such expectations would interact with those formed as a result of operations in the large informal sectors which characterise African macro economies. Until research can bridge this gap, the increasing cross border flows with the large deposits held in BIS banks form the basis for yet another explanation for the historical weakness of the MTM in Africa.
    Keywords: Africa; Economic Development; Monetary Policy; Central Banking
    JEL: E50 E60 G10 O16
    Date: 2015–09–16

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