nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒03‒17
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation Dynamics and Monetary Policy in Bolivia By Alejandro D. Guerson
  2. Taylor Visits Africa By Carlos Goncalves
  3. Breaking Through the Zero Lower Bound By Ruchir Agarwal; Miles Kimball
  4. Global Constraints on Central Banking:The case of Turkey By Ahmet Benlialper; Hasan Comert
  5. Robust monetary policy in a linear model of the polish economy: is the uncertainty in the model responsible for the interest rate smoothing effect? By Mariusz Gorajski
  6. Monetary Policy in a Developing Country; Loan Applications and Real Effects By Charles Abuka; Ronnie K Alinda; Camelia Minoiu; José-Luis Peydró; Andrea Presbitero
  7. A monetary policy rule for Russia, or is it rules? By Korhonen, Iikka; Nuutilainen, Riikka
  8. Uncertainty-Induced Dynamic Inefficiency and the Optimal Inflation Rate By Jung, Kuk Mo
  9. The Game of Anchors; Studying the Causes of Currency Crises in Belarus By Alex Miksjuk; Sam Ouliaris; Mikhail Pranovich
  10. Economic fundamentals and monetary policy autonomy By Davis, Scott
  11. Bringing the Central Bank into the Study of Currency Internationalization: Monetary Policy, Independence, and Internationalization By Hyoung-kyu Chey; Yu Wai Vic Li
  12. Monetary Transmission; Are Emerging Market and Low Income Countries Different? By Ales Bulir; Jan Vlcek
  13. Capital flows and central banking : the Indian experience By Gupta,Poonam - DECOS
  14. Macrofinancial Analysis in the World Economy; A Panel Dynamic Stochastic General Equilibrium Approach By Francis Vitek
  15. More on the Changing Imperatives for U.S. Monetary Policy Normalization By Bullard, James B.
  16. A Possible Explanation of the Missing Deflation Puzzle By Engin Kara; Ahmed Jamal Pirzada
  17. The Economy and Monetary Policy at the Global Interdependence Center, Sarasota, FL By Mester, Loretta J.
  18. Monetary Commitment and the Level of Public Debt By Stefano Gnocchi; Luisa Lambertini
  19. Understanding Firms' Inflation Expectations Using the Bank of Canada's Business Outlook Survey By Simon Richards; Matthieu Verstraete
  20. Inflation Expectations and a Model-Based Core Inflation Measure in Colombia By Hernando Vargas-Herrera
  21. Recent Monetary Policy Developments : a speech at the "Energy Transition: Strategies for a New World," 35th Annual IHS CERAWeek, Houston, Texas, February 23, 2016. By Fischer, Stanley
  22. How Was the Quantitative Easing Program of the 1930s Unwound? By Gabriel P. Mathy; Matthew Jaremski
  23. Identification of Monetary Policy Shocks within a Svar Using Restrictions Consistent with a DSGE Model By Nikolay Arefiev
  24. Virtual Currencies and Beyond; Initial Considerations By Dong He; Karl Friedrich Habermeier; Ross B Leckow; Vikram Haksar; Yasmin Almeida; Mikari Kashima; Nadim Kyriakos-Saad; Hiroko Oura; Tahsin Saadi Sedik; Natalia Stetsenko; Concha Verdugo Yepes
  25. Effects of Monetary Policy on the REIT Returns By I.Fatnassi; S.Chawechi; Z.Ftiti; A.Ben Maatoug
  26. Money markets after liftoff: assessment to date and the road ahead By Potter, Simon M.
  27. Implementing the Zero Lower Bound in an Estimated Regime-Switching DSGE Model By Andrew Binning
  28. Monetary Policy, Residential Investment, and Search Frictions: An Empirical and Theoretical Synthesis By Lunsford, Kurt Graden
  29. Insider-outsider labor markets, hysteresis and monetary policy By Jordi Galí
  30. Foreign exchange investment rules and endogenous currency crashes By Louis Raffestin

  1. By: Alejandro D. Guerson
    Abstract: This paper explores inflation dynamics and monetary policy in Bolivia. Bolivia’s monetary policy framework has been effective in stabilizing inflation in recent times. This has been a challenging task given high price volatility of key consumer goods subject to recurrent supply shocks, especially food items. Empirical testing indicates that the monetary policy framework has contributed to the stabilization of inflation, with effective transmission through the bank lending channel, while the defacto dollar peg has also played a role. Looking ahead, the current framework will be tested by the new commodity price normal and a potentially permanent adjustment in relative prices. Against this background, consideration could be given to a more flexible exchange rate policy arrangement, with short term interest rates as the main policy instrument.
    Keywords: Western Hemisphere;Exchange rate flexibility;Bolivia;Inflation;Monetary policy;Exchange rate peg, central bank, exchange rate, interest rates, foreign exchange, General, Bolivia.,
    Date: 2015–12–18
  2. By: Carlos Goncalves
    Abstract: Many low-income countries do not use interest rates as their main monetary policy instrument. In East Africa, for instance, targeting money aggregates has been pretty much the rule rather than the exception. Nevertheless, these targets are seldom met and often readjusted according to the economic environment. This opens up the possibility that central banks are de facto pursuing a strategy more akin to a Taylor Rule. Estimations of small-scale models for Kenya, Uganda and Tanzania suggest that these self-styled "monetary targeters" are respecting the Taylor Principle, that is are on average increasing nominal interest rates more than proportionally to inflation. Nevertheless, steep deviations from the Taylor Rule have taken place in Kenya and Tanzania. In Uganda, these errors are much smaller, in fact similar in size to Taylor Rule deviations found for Brazil. More surprisingly, they are smaller than South Africa’s, the continent’s sole long-term inflation targeter.
    Keywords: Tanzania;Uganda;South Africa;Sub-Saharan Africa;Kenya;Neutral interest rates, central bank, inflation target, monetary policy, interest rates, interest, inflation, central banks, General,
    Date: 2015–12–09
  3. By: Ruchir Agarwal; Miles Kimball
    Abstract: There has been much discussion about eliminating the “zero lower bound†by eliminating paper currency. But such a radical and difficult approach as eliminating paper currency is not necessary. Much as during the Great Depression—when countries were able to revive their economies by going off the gold standard—all that is needed to empower monetary policy to cut interest rates as much as needed for economic stimulus now is to change from a paper standard to an electronic money standard, and to be willing to have paper currency go away from par. This paper develops the idea further and shows how such a mechanism can be implemented in a minimalist way by using a time-varying paper currency deposit fee between private banks and the central bank. This allows the central bank to create a crawling-peg exchange rate between paper currency and electronic money; the paper currency interest rate can be either lowered below zero or raised above zero. Such an ability to vary the paper currency interest rate along with other key interest rates, makes it possible to stimulate investment and net exports as much as needed to revive the economy, even when inflation, interest rates, and economic activity are quite low, as they are currently in many countries. The paper also examines different options available to the central bank to return to par when negative interest rates are no longer needed, and the associated implications for the financial sector and debt contracts. Finally, the paper discusses various legal, political, and economic challenges of putting in place such a framework and how policymakers could address them.
    Keywords: Monetary policy;Negative interest rates;electronic money, currency, paper currency, interest rate, money, interest rates, General, All Countries,
    Date: 2015–10–23
  4. By: Ahmet Benlialper (Ipek University); Hasan Comert (Middle East Technical University)
    Abstract: This study aims to evaluate the developments in Turkish monetary policy after 2002 and understand constraints on the effectiveness of The Turkish Central Bank (CBRT). The CBRT has significantly altered its monetary policy in response to the crisis. It became much more experimental and aware of challenges it faced. However, the Bank’s ability to exert influence on key variables seems to have been restrained by factors outside of its control. Financial flows exert great influence on key macroeconomic variables the Bank monitors closely. Furthermore, energy prices are among the key determinants of inflation in Turkey. As a result, the Bank’s influence on growth and inflation through intermediate variables became a daunting task. The magnitude and direction of flows seem to be mainly related to global risk perception determining the worldwide liquidity conditions rather than domestic factors. Under these conditions central banks may not set their official interest rates independent of interest rates in advanced countries. Indeed, our VAR analysis exercise supports this argument for the Turkish case. Existing policy framework would not produce desired outcomes unless the sources of the problems such as financial flows as the main global constraints on monetary policy are addressed in a much more serious manner
    Keywords: central banking, economic and financial crisis, capital inflows, the Turkish economy
    JEL: E52 E52 G01 F31 F32 O53
    Date: 2015–07–01
  5. By: Mariusz Gorajski (Department of Econometrics, Faculty of Economics and Sociology, University of Lodz, Poland)
    Abstract: Estimates of the generalised Taylor rule suggest that monetary policy in Poland can be characterized as having reacted in a moderate fashion to output and inflation gaps and are strongly dependent on the lagged interest rate. Moreover, as for the majority of central banks the short-term rate paths are smooth and only gradual changes can be observed. Optimal monetary policy models in the linear-quadratic framework produce high variability of interest rates, and are hence inconsistent with the data. One can obtain gradual behaviour of optimal monetary policy by adding an interest rate smoothing term to the central bank objective. This heuristic procedure has not much substantiation in the central bank's targets and raises the question: What are the rational reasons for the gradual movements in the monetary policy instrument? In this paper we determine optimal monetary polices in a VAR model of the Polish economy with parameter uncertainty. By incorporating a proper structure of multiplicative uncertainty in the linear-quadratic model of the Polish economy we find a data consistent robust monetary policy rule. Thus proving that parameter uncertainty can be the rationale for "timid" movements in the short-interest rate dynamics. Finally, we show that there is trade-off between parameter uncertainty and the interest rate smoothing incentive.
    Keywords: Optimal Monetary Policy, Parameter Uncertainty, the Brainard conservatism principle, Interest rate smoothing, SVAR model
    JEL: E47 E52
    Date: 2016–01
  6. By: Charles Abuka; Ronnie K Alinda; Camelia Minoiu; José-Luis Peydró; Andrea Presbitero
    Abstract: The transmission of monetary policy to credit aggregates and the real economy can be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. We empirically assess the bank lending channel in Uganda during 2010–2014 using a supervisory dataset of loan applications and granted loans. Our analysis focuses on a short period during which the policy rate rose by 1,000 basis points and then came down by 1,200 basis points. We find that an increase in interest rates reduces the supply of bank credit both on the extensive and intensive margins, and there is significant pass-through to retail lending rates. We document a strong bank balance sheet channel, as the lending behavior of banks with high capital and liquidity is different from that of banks with low capital and liquidity. Finally, we show the impact of monetary policy on real activity across districts depends on banking sector conditions. Overall, our results indicate significant real effects of the bank lending channel in developing countries.
    Keywords: Demand for money;Central banks and their policies;Monetary policy transmission, Bank lending channel, Bank balance sheet channel, Developing countries, bank, banks, credit, lending, interest, Financial Markets and the Macroeconomy, Monetary Policy (Targets, Instruments, and Effects), All Countries,
    Date: 2015–12–23
  7. By: Korhonen, Iikka (BOFIT); Nuutilainen, Riikka (BOFIT)
    Abstract: We estimate several monetary policy rules for Russia for the period 2003–2015. We find that the traditional Taylor rule describes the conduct of monetary policy in Russia reasonably well, whether coefficients are restricted to being the same or allowed to change over the sample period. We find that the Bank of Russia often overshot its inflation target and that extensive overshooting is associated with large depreciations of the ruble, testifying to the importance of the exchange rate in the conduct of monetary policy in Russia.
    Keywords: monetary policy rule; Taylor rule; McCallum rule; Russia; inflation
    JEL: E31 E43 E52 P33
    Date: 2016–02–25
  8. By: Jung, Kuk Mo
    Abstract: I construct an overlapping-generations model of money with Epstein and Zin (1989) preferences and study how aggregate output uncertainty affects the optimal rate of inflation. When money only serves as savings instruments, I find that the optimality of Friedman Rule breaks up only if agents prefer late resolution of uncertainty. However, if an additional role of money as a medium of exchange is introduced, then the Friedman Rule becomes generally suboptimal regardless of agents' preferences for the timing of uncertainty resolution. The aggregate output uncertainty, nevertheless, crucially determines the level of optimal inflation rate in this case.
    Keywords: money; overlapping generations; recursive preferences; optimal inflation
    JEL: E31 E52 E58
    Date: 2016–02
  9. By: Alex Miksjuk; Sam Ouliaris; Mikhail Pranovich
    Abstract: Belarus experienced a sequence of currency crises during 2009-2014. Our empirical results, based on a structural econometric model, suggest that the activist wage policy and extensive state program lending (SPL) conflicted with the tightly managed exchange rate regime and suppressed monetary policy transmission. This created conditions for the unusually frequent crises. At the current juncture, refocusing monetary policy from exchange rate to inflation would help to avoid disorderly external adjustments. The government should abandon wage targets and phase out SPL to remove the underlying source of the imbalances and ensure lasting stabilization.
    Keywords: Europe;Belarus;Foreign exchange;Fiscal policy;currency crisis, exchange rate policies, currency, exchange rate, monetary policy, currency crises, economy, Time-Series Models, Monetary Policy (Targets, Instruments, and Effects), Open Economy Macroeconomics,
    Date: 2015–12–29
  10. By: Davis, Scott (Federal Reserve Bank of Dallas)
    Abstract: During a time of rising world interest rates, the central bank of a small open economy may be motivated to increase its own interest rate to keep from suffering a destabilizing outflow of capital and depreciation in the exchange rate. This is especially true for a small open economy with a current account deficit, which relies on foreign capital inflows to finance this deficit. This paper will investigate the underlying structural characteristics that would lead an economy with a floating exchange rate to adjust their interest rate in line with the foreign interest rate, and thus adopt a de facto exchange rate ”peg”. Using a panel data regression similar to that in Shambaugh (QJE 2004) and most recently in Klein and Shambaugh (AEJ Macro 2015), this paper shows that the method of current account financing has a large effect on whether or not the central bank will opt for exchange rate and capital flow stabilization during a time of rising world interest rates. A current account deficit financed mainly through reserve depletion or the accumulation of private sector debt will cause the central bank to pursue de facto exchange rate stabilization, whereas a current account deficit financed through equity or FDI will not. Quantitatively, reserve depletion of about 7% of GDP will motivate the central bank with a floating currency to adjust its interest rate in line with the foreign interest rate to where it appears that the central bank has an exchange rate peg.
    JEL: E30 E50 F30 F40
    Date: 2016–02–24
  11. By: Hyoung-kyu Chey (National Graduate Institute for Policy Studies); Yu Wai Vic Li (Hong Kong Institute of Education)
    Abstract: Despite the central bank's crucial position in the economy, as the issuer of the currency and the body responsible for monetary policy, its preferences regarding currency internationalization and its roles in that process have rarely been analyzed in the literature. This study attempts to fill this critical gap by bringing the central bank into the study of currency internationalization. A conventional understanding of currency internationalization is that it tends to reduce monetary policy autonomy, which implies a natural tendency of the central bank to oppose it. This study shows, however, that currency internationalization does not necessarily reduce the central bank's monetary policy autonomy, and may in fact even strengthen it. It shows that currency internationalization is likely to strengthen the central bank's independence as well. Based on these findings, this study argues that a central bank with weak monetary policy autonomy and low independence is more likely to support the internationalization of its country's currency. These arguments are empirically verified, mainly by in-depth analysis of the case of the People's Bank of China and the renminbi.
    Date: 2016–02
  12. By: Ales Bulir; Jan Vlcek
    Abstract: We use two alternative representations of the yield curve to test the functioning of the interest rate transmission mechanism along the yield curve based on government paper in a sample of emerging market and low-income countries. We find a robust link from shortterm policy and interbank rates to longer-term bond yields. Two policy implications emerge. First, the presence of well-developed secondary financial markets does not seem to affect transmission of short term rates along the yield curve. Second, the strength of the transmission mechanism seems to be affected by the choice of the monetary regime: countries with a credible inflation targeting regime seem to have “better behaved†yield curves than those with other monetary regimes.
    Date: 2015–11–20
  13. By: Gupta,Poonam - DECOS
    Abstract: Because of the steady liberalization of the capital account since the early 1990s and increased financial integration of the Indian economy, capital flows to India have moved in tandem with broad global trends. This paper looks at the extent to which India?s monetary policy has been affected by the ebbs and flows of the capital it receives. For ease of narration, the paper divides the post-liberalization period since the early 1990s into three phases--early 1990s to early 2000s, a period of increasing but still modest capital flows; early 2000s to 2007-08, a period of capital flow surge when inflows increased rapidly; and a period of sudden stops and volatility, starting in 2008-09, when capital flows reversed in the post-Lehman Brothers collapse, and again during the tapering tantrum of 2013. The paper shows that although ordinarily domestic policy imperatives, such as price stability and growth, have taken precedence over issues related to exchange rate or capital flows in policy rate setting, some accommodation in money supply is evident during the surge and stop episodes. The broad policy mix to handle large increases or reversals of capital flows has included reserve management, liquidity management, and capital flow measures.
    Keywords: Currencies and Exchange Rates,Debt Markets,Economic Theory&Research,Access to Finance,Emerging Markets
    Date: 2016–02–17
  14. By: Francis Vitek
    Abstract: This paper develops a structural macroeconometric model of the world economy, disaggregated into forty national economies. This panel dynamic stochastic general equilibrium model features a range of nominal and real rigidities, extensive macrofinancial linkages, and diverse spillover transmission channels. A variety of monetary policy analysis, fiscal policy analysis, macroprudential policy analysis, spillover analysis, and forecasting applications of the estimated model are demonstrated. These include quantifying the monetary, fiscal and macroprudential transmission mechanisms, accounting for business cycle fluctuations, and generating relatively accurate forecasts of inflation and output growth.
    Date: 2015–10–28
  15. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: St. Louis Fed President James Bullard spoke about how further declines in inflation expectations and a reduced risk of asset price bubbles likely give the FOMC more leeway in its normalization program.
    Date: 2016–02–24
  16. By: Engin Kara; Ahmed Jamal Pirzada
    Abstract: During the Great Recession, despite the large fall in output, the fall in inflation was modest. This is known as the missing deflation puzzle. In this paper, we develop and estimate a New Keynesian model to provide an explanation for the puzzle. The new model allows for time-varying volatility in cross-sectional idiosyncratic uncertainty and accounts for changes in intermediate goods prices. Our model can forecast the large fall in output and stable inflation during the Great Recession. We show that ination did not fall much because intermediate goods prices were increasing during the Great Recession.
    Keywords: Price Mark-up Shocks; Great Recession; Ination; DSGE; Intermediate Inputs.
    Date: 2016–03–01
  17. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: I thank David Kotok and his colleagues at the Global Interdependence Center for giving me the opportunity to speak with you this morning about economic developments and monetary policy. I am very happy to be here — and not just because I left single–digit temperatures in Cleveland. No, it’s because at each GIC program I’ve attended over the years — and there have been many — I’ve always walked away with some new insight or perspective with which to view the economy and policy. The GIC’s Central Banking Series is an important forum for discussing economic matters of global interest, and I am privileged to say that today’s talk is my second in the series. Last March, at the GIC’s program with the Banque de France, I spoke about the journey from extraordinary monetary policy back to ordinary monetary policy. Today, I will update you on the progress that’s been made on that journey and my outlook for the economy and monetary policy. As always, the views I’ll present today are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee
    Keywords: monetary policy; global economy; ordinary; extraordinary;
    Date: 2016–02–19
  18. By: Stefano Gnocchi; Luisa Lambertini
    Abstract: We analyze the interaction between committed monetary policy and discretionary fiscal policy in a model with public debt, endogenous government expenditures, distortive taxation and nominal rigidities. Fiscal decisions lack commitment but are Markov-perfect. Monetary commitment to an interest rate path leads to a unique level of debt. This level of debt is positive if the central bank adopts closed-loop strategies that raise the real interest rate when inflation is above target owing to fiscal deviations. More aggressive defence of the inflation target implies lower debt and higher welfare. Simple Taylor-type interest rate rules achieve welfare levels similar to those generated by sophisticated closed-loop strategies.
    Keywords: Credibility; Fiscal policy; Inflation targets; Monetary policy framework
    JEL: E24 E32 E52
    Date: 2016
  19. By: Simon Richards; Matthieu Verstraete
    Abstract: Inflation expectations are a key determinant of actual and future inflation and thus matter for the conduct of monetary policy. We study how firms form their inflation expectations using quarterly firm-level data from the Bank of Canada’s Business Outlook Survey, spanning the 2001 to 2015 period. The data are aggregated to construct an inflation expectations index. Results based on the index suggest that expectations are not consistent with the rationality assumption but are, still, more complex than purely adaptive expectations. Firms’ own unique experiences, such as the dynamics of the prices they expect to pay (wages/inputs), significantly influence aggregate expectations. Expectations are also found to be significantly and positively correlated with movements in oil prices. Most of the preceding results hold at the firm level. The estimation of structural shift specifications suggests that inflation expectations in Canada have drifted downward since the Great Recession. However, the data do not suggest that Canadian businesses’ expectations have become unanchored.
    Keywords: Central bank research, Credibility, Econometric and statistical methods, Firm dynamics, Inflation and prices, Inflation targets, Monetary policy framework
    JEL: C1 C2 C25 D21 D84 E31 E52 E58
    Date: 2016
  20. By: Hernando Vargas-Herrera
    Abstract: Inflation expectations in Colombia are characterized. Empirical evidence following conventional tests suggests that they might not be rational, although the period of disinflation included in the sample makes it difficult to ascertain this conclusion. Inflation expectations display close ties with observed past and present headline inflation and are affected by exogenous shocks in a possibly non-linear way. A model-based core inflation measure is computed that addresses the shortcomings of traditional exclusion measures when temporary supply shocks have widespread effects and are persistent.
    Keywords: Inflation expectations, core inflation, supply shocks, monetary policy
    JEL: E31 E37 E52
    Date: 2016–02–26
  21. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2016–02–23
  22. By: Gabriel P. Mathy; Matthew Jaremski
    Abstract: Outside of the recent past, excess reserves have only concerned policymakers in one other period: the Great Depression of the 1930s. This historical episode thus provides the only guidance about the Fed's current predicament of how to unwind from the extensive Quantitative Easing program. Excess reserves in the 1930s were never actually unwound through a reduction in the monetary base. Nominal economic growth swelled required reserves while an exogenous reduction in monetary gold inflows due to war embargoes in Europe allowed banks to naturally reduce their excess reserves. Excess reserves fell rapidly in 1941 and would have unwound fully even without the entry of the United States into World War II. As such, policy tightening was at no point necessary and likely was even responsible for the 1937-1938 recession.
    Date: 2016
  23. By: Nikolay Arefiev (National Research University Higher School of Economics)
    Abstract: I identify and estimate the monetary policy rule and the monetary policy shocks within a structural vector autoregression model for the US economy. I make two contributions to the literature. First, for identi cation I propose to use restrictions consistent with the literature on dynamic stochastic general equilibrium (DSGE) models. Typical DSGE model produces more restrictions than is required for the identi cation, so overidentifying restrictions can be tested against the data. The second contribution is a new method of testing the overidentifying restrictions. This method divides the set of identifying restrictions into subsets, and tests each subset independently of the others. This method does not reject most restrictions produced by the DSGE model. The only rejections provide evidence that the Federal Reserve uses delayed information about the in ation in policy making. The proposed approach to identi cation helps explain and solve the price puzzle problem reported in the previous literature.
    Keywords: graphical identi cation; sparse SVAR; price puzzle.
    JEL: C30 E52
    Date: 2016
  24. By: Dong He; Karl Friedrich Habermeier; Ross B Leckow; Vikram Haksar; Yasmin Almeida; Mikari Kashima; Nadim Kyriakos-Saad; Hiroko Oura; Tahsin Saadi Sedik; Natalia Stetsenko; Concha Verdugo Yepes
    Abstract: New technologies are driving transformational changes in the global financial system. Virtual currencies (VCs) and the underlying distributed ledger systems are among these. VCs offer many potential benefits, but also considerable risks. VCs could raise efficiency and in the long run strengthen financial inclusion. At the same time, VCs could be potential vehicles for money laundering, terrorist financing, tax evasion and fraud. While risks to the conduct of monetary policy seem less likely to arise at this stage given the very small scale of VCs, risks to financial stability may eventually emerge as the new technologies become more widely used. National authorities have begun to address these challenges and will need to calibrate regulation in a manner that appropriately addresses the risks without stifling innovation. As experience is gained, international standards and best practices could be considered to provide guidance on the most appropriate regulatory responses in different fields, thereby promoting harmonization and cooperation across jurisdictions.
    Keywords: Monetary policy;Virtual currencies, cryptocurrencies, payment technology, distributed ledger, blockchain, financial innovation, financial efficiency, financial inclusion, AML/CFT, consumer protection, tax evasion, exchange controls, capital flows management, financial regulation, financial stability, international cooperation, currencies, exchange, currency, goods, General, General, Government Policy and Regulation, Government Policy and Regulation, General, General, All Countries, Bitcoin, efficiency gains, regulatory challenges, consumer risk, tax treatment, circumvention of capital controls,
    Date: 2016–01–20
  25. By: I.Fatnassi; S.Chawechi; Z.Ftiti; A.Ben Maatoug
    Date: 2016–02–18
  26. By: Potter, Simon M. (Federal Reserve Bank of New York)
    Abstract: Remarks at the 70th Anniversary Celebration of the School of International and Public Affairs at Columbia University, New York City.
    Keywords: monetary policy implementation; the Desk; Open Market Desk; reserve draining; authority to pay interest on reserve balances (IOR); zero lower bound (ZLB); new framework; interest rate control; overnight reverse repo (ON RRP); Eurodollar market; Treasury bills; lift-off
    Date: 2016–02–22
  27. By: Andrew Binning
    Abstract: The Zero Lower Bound (ZLB) on policy rates is one of the key monetary policy issues du jour. In this paper we investigate the problem of modelling and estimating the ZLB in a simple New Keynesian model with regime switches. The key features of the model include switches in the time preference shock, productivity growth rate and the steady state rate of inflation leading to two steady states: a normal steady state and a ZLB steady state. The model is fitted to US data using Bayesian methods and is found to match the US experience over the great moderation and the ZLB periods very well. The key features of the model allow us to test competing theories about the determinants of the ZLB steady state. Our results suggest that the ZLB steady state is driven by precautionary savings behavior. It is also found that expectations over different regimes crucially matter for the dynamics of the system.Length: 43 pages
    Keywords: Zero Lower Bound, Regime-switching, DSGE, Bayesian Estimation
    Date: 2016–02
  28. By: Lunsford, Kurt Graden (Federal Reserve Bank of Cleveland)
    Abstract: Using a factor-augmented vector autoregression (FAVAR), this paper shows that residential investment contributes substantially to GDP following monetary policy shocks. Further, it shows that the number of new housing units built, not changes in the sizes of existing or new housing units, drives residential investment fluctuations. Motivated by these results, this paper develops a dynamic stochastic general equilibrium (DSGE) model where houses are built in discrete units and traded through searching and matching. The search frictions transmit shocks to housing construction, making them central to producing fluctuations in residential investment. The interest rate spread between mortgages and risk-free bonds also transmits monetary policy to the housing market. Following monetary shocks, the DSGE model matches the FAVAR’s positive co-movement between nondurable consumption and residential construction spending. In addition, the FAVAR shows that the mortgage spread falls following an expansionary monetary shock, providing empirical support for the DSGE model’s monetary transmission mechanism.
    Keywords: Factor-augmented vector autoregression; interest rate spread; monetary policy; residential investment; search theory;
    JEL: C32 E30 E40 E50 R31
    Date: 2016–02–12
  29. By: Jordi Galí
    Abstract: I develop a version of the New Keynesian model with insider- outsider labor markets and hysteresis that can account for the high persistence of European unemployment. I study the implications of that environment for the design of monetary policy. The optimal policy calls for strong emphasis on unemployment stabilization which a standard interest rate rule fails to deliver, with the gap between the two increasing in the degree of hysteresis. A simple interest rule that includes the unemployment rate is shown to approximate well the optimal policy.
    Keywords: wage stickiness, New Keynesian model, unemployment fluctuations, Phillips curve, monetary policy tradeoffs.
    JEL: E24 E31 E32
    Date: 2016–01
  30. By: Louis Raffestin (Larefi - Université Montesquieu - Bordeaux 4)
    Abstract: We present a model of the FX market with 3 agents: carry traders, momentum traders, and fundamentalists, where carry traders are subject to funding constraints. We show that the interactions between these agents provide a theoretical base for the empirical observation that exchange rates go up the stairs and down the elevator. Such microstructure eects also help explaining some important puzzles of the FX market such as the exchange rate disconnect from fundamentals and the seemingly abnormal prots to momentum and carry trading.
    Keywords: currency crashes,Foreign exchange
    Date: 2016–02–22

This nep-mon issue is ©2016 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.