nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒03‒06
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Self-oriented monetary policy, global financial markets and excess volatility of international capital flows By Ryan Niladri Banerjee; Michael B Devereux; Giovanni Lombardo
  2. Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory By Pfajfar, Damjan; Žakelj, Blaž
  3. Over-the-Counter Markets, Intermediation, and Monetary Policy By Han, Han
  4. Collective Household Economics: Why borrowers rather than banks should have been rescued! By De Koning, Kees
  5. Transmission of Volatility of Money Market Overnight Repo Rate along the Yield Curve in Pakistan By Asif Mahmood
  6. Optimal Monetary and Macroprudential Policies: Gains and Pitfalls in a Model of Financial Intermediation By Kiley, Michael T.; Sim, Jae W.
  7. Quantitative Easing and the Labor Market in Japan By Chun-Hung Kuo; Hiroaki Miyamoto
  8. Recent Estimates of Exchange Rate Pass-Through to Import Prices in the Euro Area By Nidhaleddine Ben Cheikh; Christophe Rault
  9. International liquidity and the European sovereign debt crisis: Was euro area unconventional monetary policy successful? By Everett, Mary M.
  10. Monetary policy and the asset risk-taking channel By Abbate, Angela; Thaler, Dominik
  11. Oil Prices, Inflation and U.S. Monetary Policy By Bullard, James B.
  12. Impact of Interbank Liquidity on Monetary Transmission Mechanism: A Case Study of Pakistan By Muhammad Omer; Jakob de Haan; Bert Scholtens
  13. The effect of monetary policy on bank wholesale funding By Choi, Dong Boem; Choi, Hyun-Soo
  14. Managing price and financial stability objectives - what can we learn from the Asia-Pacific region? By Soyoung Kim; Aaron Mehrotra
  15. Monetary Policy, Incomplete Information, and the Zero Lower Bound By Gust, Christopher J.; Johannsen, Benjamin K.; Lopez-Salido, J. David
  16. Monetary Developments and Expansionary Fiscal Consolidations: Evidence from the EMU By António Afonso; Luis Martins
  17. The effort to stabilise the financial system in Japan: an outline and the characteristics of the programme for financial revival By Yoichi Matsubayashi
  18. Eliciting GDP Forecasts from the FOMC’s Minutes Around the Financial Crisis By Ericsson, Neil R.
  19. The Common Factor of Bilateral U.S. Exchange Rates: What is it Related to? By Ponomareva, Natalia; Sheen, Jeffrey; Wang, Ben
  20. Risky Mortgages, Bank Leverage and Credit Policy By Ferrante, Francesco
  21. Equity Premium and Monetary Policy in a Model with Limited Asset Market Participation By Roman Horvath; Lorant Kaszab
  22. The Signaling Effect and Optimal LOLR Policy By Mei Li; Frank Milne; Junfeng Qiu
  23. Regime-Switching Models for Estimating Inflation Uncertainty By Nalewaik, Jeremy J.
  24. Monetary transmission under competing corporate finance regimes By De Grauwe, Paul; Gerba, Eddie
  25. The U.S. economic outlook and implications for monetary policy By Dudley, William
  26. Did quantitative easing affect interest rates outside the US? New evidence based on interest tate differentials By Belke, Ansgar; Gros, Daniel; Osowski, Thomas
  27. Will BRICS New Development Bank focus on off-US Dollar currencies as major currency- A review By Jermy, Amanda
  28. Limits to Arbitrage and Deviations from Covered Interest Rate Parity By James Pinnington; Maral Shamloo
  29. Exchange Rate Pass-Through in the Euro Area By Mirdala, Rajmund
  30. The asymmetric effects of monetary policy on housing across the level of development By Juan C. Medina; Robert R. Reed; Ejindu S. Ume
  31. On the role of market makers for money market liquidity and tensions By Fecht, Falko; Reitz, Stefan; Weber, Patrick
  32. International Dollar Flows By Banegas, Ayelen; Judson, Ruth; Sims, Charles; Stebunovs, Viktors
  33. A New Measure of the Canadian Effective Exchange Rate By Russell Barnett; Karyne B. Charbonneau; Guillaume Poulin-Bellisle
  34. Bitcoin as a virtual currency By Anna Wisniewska
  35. Interconnectedness in the Interbank Market By Brunetti, Celso; Harris, Jeffrey H.; Mankad, Shawn; Michailidis, George
  36. Why may large economies suffer more at the zero lower bound? By Michał Brzoza-Brzezina
  37. The Risky Steady State and the Interest Rate Lower Bound By Hills, Timothy S.; Nakata, Taisuke; Schmidt, Sebastian
  38. Credit Market Frictions and Coessentiality of Money and Credit By Ohik Kwon; Manjong Lee

  1. By: Ryan Niladri Banerjee; Michael B Devereux; Giovanni Lombardo
    Abstract: This paper explores the nature of macroeconomic spillovers from advanced economies to emerging market economies (EMEs) and the consequences for independent use of monetary policy in EMEs. We first empirically document the effects of US monetary policy shocks on a sample group of EMEs. A contractionary monetary shock leads a retrenchment in EME capital flows, a fall in EME GDP, and an exchange rate depreciation. We construct a theoretical model which can help to account for these findings. In the model, macroeconomic spillovers are exacerbated by financial frictions. We assess the extent to which domestic monetary policy can mitigate the negative spillovers from foreign shocks. Absent financial frictions, international spillovers are minor, and an inflation targeting rule represents an effective policy for the EME. With frictions in financial intermediation, however, spillovers are substantially magnified, and an inflation targeting rule has little advantage over an exchange rate peg. However, an optimal monetary policy markedly improves on the performance of naive inflation targeting or an exchange rate peg. Furthermore, optimal policies don't need to be coordinated across countries. Under the specific set of assumptions maintained in our model, a non-cooperative, self-oriented optimal policy gives results very similar to those of a global cooperative optimal policy.
    Keywords: International spillovers, Local Projections, Capital flows, Financial intermediaries, Monetary policy
    Date: 2016–01
  2. By: Pfajfar, Damjan (Board of Governors of the Federal Reserve System (U.S.)); Žakelj, Blaž (Universitat Pompeu Fabra)
    Abstract: Using laboratory experiments within a New Keynesian framework, we explore the interaction between the formation of inflation expectations and monetary policy design. The central question in this paper is how to design monetary policy when expectations formation is not perfectly rational. Instrumental rules that use actual rather than forecasted inflation produce lower inflation variability and reduce expectational cycles. A forward-looking Taylor rule where a reaction coefficient equals 4 produces lower inflation variability than rules with reaction coefficients of 1.5 and 1.35. Inflation variability produced with the latter two rules is not significantly different. Moreover, the forecasting rules chosen by subjects appear to vary systematically with the policy regime, with destabilizing mechanisms chosen more often when inflation control is weaker.
    Keywords: Inflation expectations; laboratory experiments; monetary policy design; New Keynesian model
    JEL: C91 C92 E37 E52
    Date: 2015–06–11
  3. By: Han, Han
    Abstract: During the Great Recession, the Federal Reserve implemented two monetary policies: cutting interest rates and quantitative easing (QE). I develop a model to examine these two policies in a frictional financial environment. In this model, agents sell assets to acquire money when a consumption opportunity arises, which can only be done through over-the-counter (OTC) markets. In equilibrium, when the interest rate is low (not necessarily zero), households who trade in OTC markets achieve their optimal consumption. When the interest rate is high, QE will raise asset prices and lower households’ consumption. The asset price increase indicates a higher liquidity premium, which reflects inefficiency in money reallocation.
    Keywords: OTC markets, Middlemen, Monetary Policy, QE, Asset Pricing
    JEL: E44 E52 E58 G12
    Date: 2015–12–18
  4. By: De Koning, Kees
    Abstract: In a series of lectures Dr. Ben S. Bernanke , the former Chairman of the Federal Reserve, discussed the two main responsibilities of central banks-financial stability and economic stability. Financial stability is achieved by central banks standing ready to act as lenders of last resort by providing short-term liquidity to financial institutions, replacing lost funding. For economic stability, the principal tool is monetary policy; in normal times that involves adjusting short-term interest rates. Dr. Bernanke admits that when the U.S. financial crisis occurred in 2007-2008, no government entity was in overall control of the measures that needed to be taken to counteract the crisis. This was seen as a managerial shortcoming. There were various other factors at play, which made it difficult for governments to deal with and contain the crisis. The demand for new homes seemed to be out of touch with reality. The shift in borrowing patterns for new homes was taken for granted rather than being scrutinized. The freedom to introduce poor quality mortgage products was left unchallenged. The widespread conversion of long-term mortgage debt into daily liquidity products through securitization was also left to market forces. However what resulted in the financial crisis being unduly prolonged and at much greater expense was that, in sharp contrast to the focus on support for lenders, no serious consideration was given to help the legions of mortgage borrowers who found themselves in trouble. Financial stability won over economic stability; put simply, there was no plan ready to be implemented to assist the 21.3 million households who were faced with foreclosure proceedings during the period 2006-2013. There was also no plan for the homeowners of the 5.8 million homes that were repossessed. Financial stability measures were not for the short term either. The balance sheet of the Federal Reserve as at 7th January 2016 still shows a holding of $1.747 trillion in mortgage-backed securities and $2.461 trillion in U.S. Treasury securities; several years after they were acquired. For the mortgage sector this still represents 18.5% of all outstanding mortgages as at same date. In September 2007, a few members of Congress pushed for direct federal aid to help homeowners in trouble, but most members did not want to spend substantial taxpayers funds on the problem. With the benefit of hindsight, the latter view may be regarded as a serious error of judgment. As this paper will show, the total costs of helping homeowners in trouble would have been $1.173 trillion over the period 2007-2013, which is less than the $1.747 trillion in mortgage bonds still on the books of the Fed. More importantly the U.S. government debt increase would have much lower than the nearly $9 trillion over the period 2007-2014. The only choice on the table should not be between economic growth or inflation, but between individual households’ income stability or instability. Income instability is a major cause of recessions.
    Keywords: financial crisis, financial and economic stability, mortgage lending, Federal Reserve, rescue program for mortgage borrowers
    JEL: E3 E32 E4 E44 E5 E58 E6 E65
    Date: 2016–01–23
  5. By: Asif Mahmood (State Bank of Pakistan)
    Abstract: This paper presents the empirical results of the volatility transmission of money market overnight repo rate along the yield curve in Pakistan. The results indicate that the transmission of volatility of overnight repo rate is higher at the shorter end of the yield curve compared to the longer end. These results are in line with empirical findings of volatility transmission of interest rates found in other countries. The results also suggest that the pass-through level of transmission of volatility from overnight repo rate to short and long term interest rates has decreased after State Bank of Pakistan (SBP) adopted the interest rate corridor framework in August 2009. The empirical findings show that the subsequent changes introduced in the current operational framework of SBP has further improved the signaling mechanism of SBP’s monetary policy stance to financial markets. These results indicate the smooth transmission of changes in SBP policy rate to short and long term market interest rates without spreading the unwarranted volatility across the yield curve.
    Keywords: Monetary policy, volatility, yield curve, GARCH
    JEL: E4 E5 G1
    Date: 2015–12
  6. By: Kiley, Michael T. (Board of Governors of the Federal Reserve System (U.S.)); Sim, Jae W. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We estimate a quantitative general equilibrium model with nominal rigidities and financial intermediation to examine the interaction of monetary and macroprudential stabilization policies. The estimation procedure uses credit spreads to help identify the role of financial shocks amenable to stabilization via monetary or macroprudential instruments. The estimated model implies that monetary policy should not respond strongly to the credit cycle and can only partially insulate the economy from the distortionary effects of financial frictions/shocks. A counter-cyclical macroprudential instrument can enhance welfare, but faces important implementation challenges. In particular, a Ramsey planner who adjusts a leverage tax in an optimal way can largely insulate the economy from shocks to intermediation, but a simple-rule approach must be cautious not to limit credit expansions associated with efficient investment opportunities. These results demonstrate the importance of considering both optimal Ramsey policies and simpler, but more practical, approaches in an empirically grounded model.
    Keywords: Bayesian estimation; DSGE models; Macroprudential policy; Monetary policy
    JEL: E58 E61 G18
    Date: 2015–09–04
  7. By: Chun-Hung Kuo (International Univeristy of Japan); Hiroaki Miyamoto (The University of Tokyo)
    Abstract: This paper studies the effectiveness of unconventional monetary policy on the labor market. By using the Japan's data, we estimate structural vector autoregressive models. Our empirical analysis demonstrates that while unconventional monetary policy boosts output and employment significantly, its effects on inflation and nominal wages are limited.
    Keywords: Quantitative easing, unemployment, wages, Japanese economy
    JEL: E24 E52 J60
    Date: 2016–02
  8. By: Nidhaleddine Ben Cheikh (ESSCA - Ecole Supérieure des Sciences Commerciales d'Angers - ESSCA); Christophe Rault (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper provides an update on the exchange rate pass-through (ERPT) estimates for 12 euro area (EA) countries. First, based on quarterly data over the 1990-2012 period, our study does not find a significant heterogeneity in the degree of pass-through across the monetary union members, in contrast to previous empirical studies. As we use a longer time span for the post-EA era than existing studies, this is not surprising, since the process of monetary union has entailed some convergence towards more stable macroeconomic conditions across EA member states. Second, when assessing the stability of pass-through elasticities, we find very weak evidence of a decline around the inception of the euro in 1999. However, our results reveal that a downtrend in ERPT estimates became apparent starting from the beginning of the 1990s. This observed decline was synchronous to the shift towards reduced inflation regimes in our sample of countries. Finally, we notice that the distinction between “peripheral” and “core” EA economies in terms of pass-through has significantly decreased over the last two decades.
    Abstract: Dans ce papier, nous étudions le niveau de rapprochement des économies du Maghreb vers les économies de l’Europe de l’Ouest. Nous faisons également une comparaison avec le niveau de convergence des Pays d’Europe Centrale et Orientale PECO-5 vers les pays de la zone euro. Pour ce faire, nous utilisons une modélisation VAR Structurelle pour l’identification des chocs d’offre et des chocs de demande. Nous faisons également appel à l’Analyse en composante Principale ACP dans l’étude de la dynamique de convergence. Nos résultats montrent un niveau différencié de rapprochement des économies des pays du Maghreb vers l’Europe : la Tunisie et le Maroc dans une moindre mesure, sont sur le sentier de la convergence et à un niveau qui se rapproche de celui des PECO-5 ; l’Algérie et la Libye restent très éloignés de la convergence en dépit de leur capacités. Ce résultat confirme le rôle important joué par le commerce bilatéral et plus particulièrement celui des produits manufacturés. La convergence de la Tunisie et du Maroc est également le fruit d’une dé-spécialisation de production des secteurs agroalimentaire et textile vers des secteurs moyennement et hautement technologiques.
    Keywords: Exchange rate pass-through, Import prices, Euro area,Transmission des variations des taux de change, prix à l'importation, zone euro
    Date: 2015
  9. By: Everett, Mary M.
    Abstract: Using novel data on individual euro area bank balance sheets this paper shows that exposure to stressed European sovereigns is associated with a contraction in international funding. The loan component of euro area bank asset portfolios is most adversely affected by this decline in international liquidity. Controlling for bank risk and credit demand, during the sovereign debt crisis credit supply to households declined less for non-stressed country banks, with relatively greater exposure to stressed sovereigns, and that accessed the ECB's unconventional monetary policy measures in the form of the first 3-year Long-Term Refinancing Operations (VLTROs) in December 2011. In contrast, the VLTROs in February 2012 were not effective in mitigating the effect of the European sovereign debt crisis on private non-financial sector credit supply.
    Keywords: European sovereign crisis, cross-border banking, international shock transmission, unconventional monetary policy, ECB liquidity
    JEL: G21 G15 H63
    Date: 2015–06
  10. By: Abbate, Angela; Thaler, Dominik
    Abstract: Motivated by VAR evidence, we develop a monetary DSGE model where an agency problem between bank financiers, stemming from limited liability and unobservable risk taking, distorts banks' incentives leading them to choose excessively risky investments. A monetary policy expansion magnifies these distortions, increasing excessive risk taking and lowering the expected return on investment. We estimate the model on US data using Bayesian techniques and assess how this novel channel affects optimal monetary policy. Our results suggest that the monetary authority should stabilize the real interest rate, trading off more inflation volatility in exchange for less volatility in risk taking and output.
    Keywords: Bank Risk,Monetary policy,DSGE Models
    JEL: E12 E44 E58
    Date: 2015
  11. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: January 14, 2016. Presentation. "Oil Prices, Inflation and U.S. Monetary Policy." 2016 Regional Economic Briefing and Breakfast, Economic Club of Memphis, Memphis, Tenn.
    Date: 2016–01–14
  12. By: Muhammad Omer (State Bank of Pakistan); Jakob de Haan (De Nederlandsche Bank, Amsterdam, The Netherlands); Bert Scholtens (CESifo, Munich, Germany)
    Abstract: We investigate the transmission mechanism of policy-induced changes in the discount rate and required reserves in Pakistan. Our results suggest that the pass through to the lending rate is complete for the discount rate but incomplete for required reserves. However, only shocks to required reserves have an effect on the deposit rate and the exchange rate in the long run. The observation that the discount rate is not a very effective monetary policy tool is attributed to excess liquidity present in the interbank market of Pakistan. Finally, our findings suggest a structural shift in the interbank money market in Pakistan.
    Keywords: Monetary transmission mechanism, Pakistan, excess liquidity, VAR, ARDL
    JEL: E51 E52 E58 E61
    Date: 2014–05
  13. By: Choi, Dong Boem (Federal Reserve Bank of New York); Choi, Hyun-Soo (Singapore Management University)
    Abstract: We study how monetary policy affects the funding composition of the banking sector. When monetary tightening reduces the retail deposit supply owing to, for example, a decrease in bank reserves or in money demand, banks try to substitute the deposit outflows with more wholesale funding in order to mitigate the policy impact on their lending. Banks have varying degrees of accessibility to wholesale funding sources because of financial frictions, and those banks that are large or that have a greater reliance on wholesale funding increase their wholesale funding more. As a result, monetary tightening increases both the reliance on and the concentration of wholesale funding within the banking sector, indicating that monetary tightening could increase systemic risk. Our findings also suggest that introducing liquidity requirements can bolster monetary policy transmission through the bank lending channel by limiting the funding substitution of large banks.
    Keywords: bank funding; monetary policy transmission; systemic stability; liquidity regulation; bank lending channel
    JEL: E52 E58 G21 G28
    Date: 2016–01–01
  14. By: Soyoung Kim; Aaron Mehrotra
    Abstract: The international financial crisis led many central banks to adopt explicit financial stability objectives. This raises the question of how central banks deal with policy trade-offs resulting from potential conflicts between price and financial stability objectives. We analyse this issue in the Asia-Pacific region, where many economies with inflation targeting central banks have adopted macroprudential policies in order to safeguard financial stability. Using structural vector autoregressions that identify both monetary and macroprudential policy actions, our results highlight similarities in the effects of monetary and macroprudential policies on the real economy. Tighter macroprudential policies used to contain credit growth have also had a negative impact on output and inflation. The similar effects of monetary and macroprudential policies could create challenges for policy, given the frequency of episodes where low inflation coincides with buoyant credit growth.
    Keywords: multiple objectives, financial stability, price stability, macroprudential instruments, monetary policy
    Date: 2015–12
  15. By: Gust, Christopher J.; Johannsen, Benjamin K. (Board of Governors of the Federal Reserve System (U.S.)); Lopez-Salido, J. David (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In the context of a stylized New Keynesian model, we explore the interaction between imperfect knowledge about the state of the economy and the zero lower bound. We show that optimal policy under discretion near the zero lower bound responds to signals about an increase in the equilibrium real interest rate by less than it would when far from the zero lower bound. In addition, we show that Taylor-type rules that either include a time-varying intercept that moves with perceived changes in the equilibrium real rate or that respond aggressively to deviations of inflation and output from their target levels perform similarly to optimal discretionary policy. Our analysis of first-difference rules highlights that rules with interest rate smoothing terms carry forward current and past misperceptions about the state of the economy and can lead to suboptimal performance.
    Date: 2015–11–05
  16. By: António Afonso; Luis Martins
    Abstract: We provide new insights into the existence of expansionary fiscal consolidations in the Economic and Monetary Union, using annual panel data from 14 European Union countries, over the period of 1970-2013. Different measures were calculated for assessing fiscal consolidations, based on the changes in the cyclically adjusted primary balance. A similar ad-hoc approach was used to compute monetary episodes. Panel estimations for private consumption show that, in some cases, when fiscal consolidations are coupled with monetary expansions, the traditional Keynesian signals are reversed for general government final consumption expenditure, social transfers and taxes. Keynesian effects prevail when fiscal consolidations are not matched by monetary easing. Panel probit estimations suggest that longer consolidations contribute positively to its success, whilst the opposite is the case for revenue-based ones.
    JEL: C23 E21 E5 E62 H5 H62
    Date: 2016
  17. By: Yoichi Matsubayashi
    Abstract: This Working Paper provides an overview of the Programme for Financial Revival announced in October 2002 in Japan. The programme aimed to dramatically reduce the large amount of non-performing loans that remained until the end of the 1990s. In addition to solving the problem of bad loans, the Programme for Financial Revival aimed to build a strong financial system. For this purpose, the programme comprised three pillars - 1) creation of a new framework for the financial system, 2) creation of a new framework for corporate revitalisation, 3) creation of a new framework for financial administration. The Japanese experience suggests that despite its delayed introduction, this programme may be considered successful in going some way to drastically reduce non-performing loans and stabilise the financial system. Japan’s financial problems and their resolution since the 1990s provide a number of lessons for other economies, particularly for Europe in relation to the difficulties over the euro.
    Date: 2015–03
  18. By: Ericsson, Neil R. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Stekler and Symington (2016) construct indexes that quantify the Federal Open Market Committee's views about the U.S. economy, as expressed in the minutes of the FOMC's meetings. These indexes provide insights on the FOMC's deliberations, especially at the onset of the Great Recession. The current paper complements Stekler and Symington's analysis by showing that their indexes reveal relatively minor bias in the FOMC's views when the indexes are reinterpreted as forecasts. Additionally, these indexes provide a proximate mechanism for inferring the Fed staff's Greenbook forecasts of the U.S. real GDP growth rate, years before the Greenbook's public release.
    Keywords: Autometrics; bias; Fed; financial crisis; FOMC; forecasts; GDP; Great Recession; Greenbook; impulse indicator saturation; projections; Tealbook; United States
    JEL: C53 E58
    Date: 2015–11–17
  19. By: Ponomareva, Natalia; Sheen, Jeffrey; Wang, Ben
    Abstract: We identify a common factor driving a panel of fifteen monthly bilateral exchange rates against the U.S. dollar. We find this factor is closely related to U.S. nominal and real macroeconomic variables, financial market variables and commodity prices. Our results suggest this common factor is broadly related to the macroeconomic fundamentals in the Taylor rule and uncovered interest parity models. However, the set of fundamentals relevant to these models changes over time.
    Keywords: Principal Component Analysis; Exchange Rate Models;
    JEL: C52 F31
    Date: 2015–12
  20. By: Ferrante, Francesco (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Two key channels that allowed the 2007-2009 mortgage crisis to severely impact the real economy were: a housing net worth channel, as defined by Mian and Sufi (2014), which affected the wealth of leveraged households; and a bank net worth channel, which reduced the ability of financial intermediaries to provide credit. To capture these features of the Great Recession, I develop a DSGE model with balance-sheet constrained banks financing both risky mortgages and productive capital. Mortgages are provided to agents facing idiosyncratic housing depreciation risk, implying an endogenous default decision and a link between their borrowing capacity and house prices. The interaction among the housing net worth channel, the bank net worth channel and endogenous foreclosures generates novel amplification mechanisms. I analyze the quantitative implications of these new channels by considering two different shocks linked to the supply of mortgage credit: an increase in the variance of housing risk and a deterioration in the collateral value of mortgages for bank funding. Both shocks are able to produce co-movements in house prices, business investment, consumption and output. Finally, I study two types of policy interventions that are able to reduce the severity of a mortgage crisis: debt relief for borrowing households and central bank credit intermediation.
    Keywords: Bank runs; deposit insurance; large depositors
    JEL: E32 E44 E58 G21
    Date: 2015–12–18
  21. By: Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic); Lorant Kaszab (Central Bank of Hungary)
    Abstract: This short paper shows that a New Keynesian model with limited asset market participation can generate a high risk-premium on unlevered equity relative to short-term risk-free bonds and high variability of equity returns driven by monetary policy shocks with zero persistence.
    Keywords: Limited Participation, Monetary Policy, DSGE, Equity Premium
    JEL: E32 E44 G12
    Date: 2016–02
  22. By: Mei Li (Univeristy of Guelph); Frank Milne (Queen's University); Junfeng Qiu (Central University of Finance and Economics)
    Abstract: When a central bank implements the LOLR policy in a financial crisis, bank creditors often infer a bank’s quality from whether or not it borrows from the central bank. We establish a formal model to study the optimal LOLR policy in the presence of this signaling effect, assuming that the central bank aims to encourage central bank borrowing to avoid inefficiencies caused by contagion. In our model, there are two types of banks: a high quality type with high expected asset returns and a low quality type with lower returns. Both types of banks need to roll over their short-term debts. A central bank offers to lend to both types of banks. After private creditors observe whether banks borrow from the central bank, banks try to borrow from the private market. We find that there may exist a separating equilibrium where only low quality banks borrow from the central bank; and two pooling equilibria where both types of banks do and do not borrow from the central bank. Our major results are as follows: (1) Considering the signaling effect, the central bank should set its lending rate lower than the prevailing market rate to induce both types of banks to borrow from the central bank. (2) Hiding the identity of banks borrowing from the central bank will encourage banks to borrow from the central bank. (3) The central bank may serve as a coordinator for the realization of its favored equilibrium.
    Keywords: Signaling, Lender of Last Resort
    JEL: E58 G28
    Date: 2016–01
  23. By: Nalewaik, Jeremy J. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper constructs regime-switching models for estimating the probability of inflation returning to its relatively high levels of variability and persistence in the 1970s and 1980s. Forecasts and probabilities of extreme events from the models are evaluated against comparable estimates from other statistical models, from surveys, and from financial markets. The paper then uses the models to construct prediction intervals around Federal Reserve Board staff forecasts of PCE price inflation, combining the recent non-parametric forecast error distribution with parametric information from the model. The outer tails of the prediction intervals depend importantly on the probability inflation is in its high-variance, high-persistence regime.
    Keywords: Inflation; Markov-Switching; Uncertainty
    JEL: E30
    Date: 2015–09–01
  24. By: De Grauwe, Paul; Gerba, Eddie
    Abstract: The behavioural agent-based framework of De Grauwe and Gerba (2015) is extended to allow for a counterfactual exercise on the role of banks for monetary transmissions. A bank-based corporate financing friction is introduced and the relative contribution of that friction to the effectiveness of monetary policy is evaluated. We find convincing evidence that the monetary transmission channel is stronger in the bank-based system compared to the market-based. Impulse responses to a monetary expansion are around the double of those in the market-based framework. The (asymmetric) effectiveness of monetary policy in counteracting busts is, on the other hand, relatively higher in the market-based model. The statistical fit of the bank-based behavioural model is also improved compared to the benchmark model. Lastly, we find that a market-based (bankbased) financing friction in a general equilibrium produces highly asymmetric (symmetric) distributions and more (less) pronounced business cycles.
    Keywords: monetary policy in the EA,monetary transmissions,banks,financial frictions,market based finance
    JEL: E52 E44 G21 G32
    Date: 2016
  25. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Economic Leadership Forum, Somerset, New Jersey.
    Keywords: personal consumption expenditure (PCE) deflator; PCE inflation rate; domestic demand; The New York Fed’s Survey of Consumer Expectations; lift-off; accommodative monetary policy; normalization; recession risk; overnight fixed-rate reverse repurchase facility (RRP); Summary of Economic Projections (SEP)
    Date: 2016–01–15
  26. By: Belke, Ansgar; Gros, Daniel; Osowski, Thomas
    Abstract: This paper explores the effects of non-standard monetary policies on international yield relationships. Based on a descriptive analysis of international long-term yields, we find evidence that long-term rates have followed a global downward trend prior to as well as during the financial crisis. Comparing interest rate developments in the United States and the Eurozone, it appears difficult to find a distinct impact of the Fed's QE1 on US interest rates for which the global environment - the global downward trend in interest rates - does not account. Motivated by these results, we analyze the impact of the Fed's QE1 program on the stability of the US-Euro long-term interest rate relationship by using a CVAR and, in particular, recursive estimation methods. Using data between 2002 and 2014, we find limited evidence that QE1 caused a breakup or a destabilization of the transatlantic interest rate relationship. Taking global interest rate developments into account, we thus find no significant evidence that QE had an independent, distinct impact on US interest rates.
    Abstract: Der vorliegende Artikel untersucht die Auswirkungen unkonventioneller geldpolitischer Maßnahmen auf internationale Zinsbeziehungen. Aufbauend auf einer deskriptiven Analyse ergeben sich Hinweise, dass die weltweite Entwicklung der Langfristzinsen vor und während der Finanzkrise von einem globalen Abwärtstrend geprägt war. Unter Berücksichtigung dieser trendmäßigen Zinsreduktionen lässt sich im Rahmen eines Vergleichs der europäischen und amerikanischen Zinsentwicklungen kein separater Effekt des 'Quantitative Easings' der Federal Reserve auf den amerikanischen Zins erkennen. Ausgehend von diesem Ergebnis werden empirisch im Rahmen eines kointegrierten vektorautoregressiven Models ('CVAR') die Auswirkungen des 'QE1'- Programms auf die Stabilität der Beziehung zwischen europäischem und amerikanischem Langfristzins untersucht. Die Ergebnisse der Analyse generieren nur geringe Hinweise, dass 'QE1' zu einer Destabilisierung bzw. einem Zerfall der transatlantischen Zinsbeziehung geführt hat. In dieser Hinsicht ergeben sich keine signifikanten Hinweise darauf, dass das 'Quantitative Easing' der Federal Reserve einen unabhängigen bzw. separaten Einfluss auf den amerikanischen Langfristzins hatte.
    Keywords: quantitative easing,unconventional monetary policies,time series econometrics,Cointegrated VAR (CVAR),recursive methods
    JEL: C32 E43 E44 E58 F31 G01 G15
    Date: 2016
  27. By: Jermy, Amanda
    Abstract: Will the New Development Bank (NDB) – all the more generally known as the BRICS bank – free South Africa and other rising and creating nations from the grasp of the forceful dollar? The paper is a review of futuristic and contemporary views of the first president of the NDB. It has been reviewed as to the quantum of the influential credential of the newly established entity on the international monetary environment.
    Keywords: BRICS New Development Bank; BRICS nations; regional development; developmental economics
    JEL: E5 E51 G2 G28
    Date: 2016–02–10
  28. By: James Pinnington; Maral Shamloo
    Abstract: We document an increase in deviations from short-term covered interest rate parity (CIP) in the first half of 2015. Since the Swiss National Bank’s (SNB) decision to abandon its minimum exchange rate policy, both the magnitude and volatility of deviations from CIP have increased across several currency pairs. The effect is particularly pronounced for pairs involving the Swiss franc. These deviations are distinct from those observed during the financial crisis. We argue that they are a consequence of reduced liquidity in foreign exchange markets, rather than imbalances in international funding markets. A reduction in the supply of forward contracts, owing to limited dealer capacity following the SNB decision, led to wide bid-ask spreads in the forward market. This friction, pertaining specifically to the foreign exchange market rather than broader funding markets, allowed deviations from CIP to persist.
    Keywords: Exchange rates, International financial markets
    JEL: F31 G15
    Date: 2016
  29. By: Mirdala, Rajmund
    Abstract: Time-varying exchange rate pass-through effects to domestic prices under fixed euro exchange rate perspective represent one of the most challenging implications of the common currency. The problem is even more crucial when examining crisis related redistributive effects associated with relative price changes. The degree of the exchange rate pass-through to domestic prices reveals its role as the external price shocks absorber especially in the situation when the leading path of exchange rates is less vulnerable to the changes in the foreign prices. Adjustments in domestic prices followed by exchange rate shifts induced by sudden external price shocks are associated with changes in the relative competitiveness among member countries of the currency area. In the paper we examine exchange rate pass-through to domestic prices in the Euro Area member countries to examine crucial implications of the nominal exchange rate rigidity. Our results indicate that absorption capabilities of nominal effective exchange rates clearly differ in individual countries. As a result, an increased exposure of domestic prices to the external price shocks in some countries represents a substantial trade-off of the nominal exchange rate stability.
    Keywords: exchange rate pass-through, inflation, Euro Area, VAR, impulse-response function
    JEL: C32 E31 F41
    Date: 2015–06
  30. By: Juan C. Medina (Universidad Autónoma de Ciudad Juárez); Robert R. Reed (Universidad de Alabama); Ejindu S. Ume (Universidad de Ohio)
    Abstract: We study the effects of money growth in a neoclassical growth model with wealth effects. As the capital stock is the only component of wealth which contributes to an individual’s utility, the model should be interpreted as a model of housing production and housing wealth since the capital stock affects utility. Consistent with empirical evidence on the relationship between residential investment and GDP across countries, there are significant non-linearities between housing market activity and aggregate income in our framework.
    Keywords: Development, housing, monetary policy, inflation.
    JEL: E31 E52 E58
    Date: 2015–11–01
  31. By: Fecht, Falko; Reitz, Stefan; Weber, Patrick
    Abstract: We analyze the trading book of a key market maker in the European unsecured money market and study the extent to which liquidity risks accumulated by this market maker affect his pricing of liquidity and the bid/ask spread he quotes on unsecured borrowing and lending. We find that the larger the funding liquidity risk assumed by the market maker is, the higher the market price for liquidity. Furthermore, his bid/ask spread and the sensitivity of his bid/ask spread to the maturity of the transaction increases as his assumed liquidity risk rises. Our findings have two important implications: First, we document that the funding constraints and funding risks of market makers affect market liquidity in line with Gromp and Vayanos (2004) and Brunnermeier and Pedersen (2009) also in the unsecured money market. Second, we document that the retained liquidity risks of money market makers led to an economically significant rise in the unsecured to secured money market rates and contributed to the dry-up of this market in 2007/2008.
    Keywords: Funding liquidity risk and money market liquidity,Liquidity constraints,Money market makers,Liquidity spirals
    JEL: G01 G10 G21
    Date: 2015
  32. By: Banegas, Ayelen (Board of Governors of the Federal Reserve System (U.S.)); Judson, Ruth (Board of Governors of the Federal Reserve System (U.S.)); Sims, Charles (Federal Reserve Bank of New York); Stebunovs, Viktors (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using confidential Federal Reserve data, we study the factors driving U.S. banknote flows between the United States and other countries. These flows are a significant component of capital flows in emerging market economies, where physical U.S. currency functions as a safe asset and precautionary demand for U.S. banknotes is a form of flight to quality. Prior to the global financial crisis, country-specific factors, including local economic uncertainty, largely explain the volume and heterogeneity of the flows. Since the crisis, global factors, particularly, global economic uncertainty, explain the flows markedly well. Further, precautionary demand for U.S. banknotes is not episodic.
    Keywords: capital flows; currency flows; U.S. banknotes; safe asset; emerging market economies; economic uncertainty; flight to quality; capital flight; money demand.
    JEL: E40 E50 F30
    Date: 2015–09–09
  33. By: Russell Barnett; Karyne B. Charbonneau; Guillaume Poulin-Bellisle
    Abstract: Canada’s international competitiveness has received increasing attention in recent years as exports have fallen short of expectations and Canada has lost market share. This paper asks whether the Bank of Canada’s current effective exchange rate measure, the CERI, is still an accurate measure of Canada’s international competitiveness. Overall, while the CERI represented an improvement over previous measures when it was introduced, we find that it has several drawbacks that make it less well suited to address current competitiveness issues. To address these deficiencies, we develop a new Canadian effective exchange rate (CEER) index using a methodology based on current international best practices. The new index includes a broader set of countries and uses annually updated competition-based weights. These weights account for both Canada’s bilateral trade with another country and the competition Canada faces from that country on a product-by-product basis in third markets. We find that the CEER has depreciated less than the CERI in recent years, reflecting the greater importance of third-market competition from emerging-market economies in the CEER. This could help explain why Canada’s share of the U.S. import market has continued to decline despite the recent large depreciation of the Canadian dollar against the currencies of a number of advanced economies.
    Keywords: Exchange rates, International topics
    JEL: F1 F31
    Date: 2016
  34. By: Anna Wisniewska (Nicolaus Copernicus University, Poland)
    Abstract: The aim of this article is to show the position of Bitcoin among virtual currencies. 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 and the history of virtual currencies, the way in which Bitcoin functions and the methods of acquiring it. The article is based on the assumption that an in-depth knowledge of virtual currencies, their classification and their functioning will make it possible to regulate their legal status. It is necessary not only for tax purposes, but also in order to avoid the risk of using this payment method for terrorist or criminal purposes. The knowledge of the history of virtual currencies also makes it possible to foresee the problems that may hinder the functioning of Bitcoin and other virtual currencies. 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 a next step in the evolution of digital money.
    Keywords: bitcoin, virtual currencies, cryptocurrencies
    JEL: E40 G29 E49
    Date: 2015–06
  35. By: Brunetti, Celso (Board of Governors of the Federal Reserve System (U.S.)); Harris, Jeffrey H. (American University); Mankad, Shawn (University of Maryland); Michailidis, George (University of Michigan)
    Abstract: We study the behavior of the interbank market before, during and after the 2008 financial crisis. Leveraging recent advances in network analysis, we study two network structures, a correlation network based on publicly traded bank returns, and a physical network based on interbank lending transactions. While the two networks behave similarly pre-crisis, during the crisis the correlation network shows an increase in interconnectedness while the physical network highlights a marked decrease in interconnectedness. Moreover, these networks respond differently to monetary and macroeconomic shocks. Physical networks forecast liquidity problems while correlation networks forecast financial crises.
    Keywords: Interconnectedness; correlation network; financial crisis; interbank market; physical network
    Date: 2015–09–30
  36. By: Michał Brzoza-Brzezina
    Abstract: This paper compares the consequences of hitting the zero lower bound in small open and large closed economies. I costruct a two-economy New Kenynesian model and calibrate it so that one economy is small and open and the second large and closed. Then I conduct a number of experiments assuming that the zero lower bound binds for one or the other economy. At the ZLB bad shocks are amplified and good shocks dampened. I show that this modifications are much stronger in the large than in the small economy. As a result the large economy may suffer more at the ZLB.
    Keywords: zero lower bound, small open economy, amplification of shocks
    JEL: E43 E52
    Date: 2016
  37. By: Hills, Timothy S. (New York University); Nakata, Taisuke (Board of Governors of the Federal Reserve System (U.S.)); Schmidt, Sebastian (European Central Bank)
    Abstract: Even when the policy rate is currently not constrained by its effective lower bound (ELB), the possibility that the policy rate will become constrained in the future lowers today's inflation by creating tail risk in future inflation and thus reducing expected inflation. In an empirically rich model calibrated to match key features of the U.S. economy, we find that the tail risk induced by the ELB causes inflation to undershoot the target rate of 2 percent by as much as 45 basis points at the economy's risky steady state. Our model suggests that achieving the inflation target may be more difficult now than before the Great Recession, if the recent ELB experience has led households and firms to revise up their estimate of the ELB frequency.
    Keywords: Deflationary Bias; Disinflation; Inflation Targeting; Risky Steady State; Tail Risk; Zero Lower Bound
    JEL: E32 E52
    Date: 2016–02–12
  38. By: Ohik Kwon (Department of Economics, Korea University, Seoul, Republic of Korea); Manjong Lee (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We explore how credit market frictions matter for the coessentiality of money and credit. There are high-productivity and low-productivity borrowers. Limited commitment can yield a one-for-one credit limit in accordance with a borrower's productivity. An adverse selection problem caused by asymmetric information, however, makes lenders impose the credit limit of a low-productivity borrower on a high-productivity borrower. If productivities dier suciently between borrowers, a high-productivity borrower is credit-constrained and is willing to hold money to compensate for the deficiency of her credit limit, but a low-productivity borrower is not. This eventually implies the coessentiality of money and credit in the sensethat the use of both improves the allocation from a social welfare perspective.
    Keywords: asymmetric information, adverse selection, cash, coessentiality, credit
    JEL: E41 E44 E50
    Date: 2016

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