nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒03‒29
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Do inflation expectations matter in a stylised New Keynesian model? The case of Poland By Tomasz Łyziak
  2. The interaction of monetary and macroprudential policies in economic stabilisation By Silvo, Aino
  3. How to monitor the exit from the Eurosystem's unconventional monetary policy: Is EONIA dead and gone? By Ronald Heijmans; Richard Heuver; Zion Gorgi
  4. Financial Frictions and Unconventional Monetary Policy in Emerging Economies By Roberto Chang; Andrés Velasco
  5. Inflation uncertainty, disagreement and monetary policy: Evidence from the ECB Survey of Professional Forecasters By Glas, Alexander; Hartmann, Matthias
  6. Estimating the money market microstructure with negative and zero interest rates By Edoardo Rainone; Francesco Vacirca
  7. Forward guidance and "lower for longer": The case of the ECB By Bletzinger, Tilman; Wieland, Volker
  8. Contemporary monetary policy in China: A move towards price-based policy? By Nuutilainen, Riikka
  9. Determinants of the movements in the euro-dollar exchange rate during the sovereign debt crisis By Alessio Anzuini; Martina Cecioni; Stefano Neri
  10. Do shadow banks create money? 'Financialisation' and the monetary circuit By Jo Michell
  11. Interbank funding as insurance mechanism for (persistent) liquidity shocks By Bluhm, Marcel
  12. Understanding Inflation as a Joint Monetary-Fiscal Phenomenon By Eric M. Leeper; Campbell Leith
  14. Comparing inflation and price level targeting: the role of forward guidance and transparency By Honkapohja, Seppo; Mitra, Kaushik
  15. Network Contagion and Interbank Amplification during the Great Depression By Mitchener, Kris James; Richardson, Gary
  16. The risk-taking channel of monetary policy in Norway By Artashes Karapetyan
  17. Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control By Funke, Michael; Mihaylovski, Petar; Zhu, Haibin
  18. Colonial Virginia's Paper Money Regime, 1755-1774: Value Decomposition and Performance By Farley Grubb
  19. Financial intermediation and monetary policy transmission in EMEs: What has changed post-2008 crisis? By Madhusudan Mohanty; Kumar Rishabh
  20. The Impact of Monetary Policy on Inequality in the UK. An Empirical Analysis By Haroon Mumtaz; Angeliki Theophilopoulou
  21. Did quantitative easing affect interest rates outside the US? New evidence based on interest rate differentials By Belke, Ansgar; Gros, Daniel; Osowski, Thomas
  22. Monetary Policy According to HANK By Greg Kaplan; Benjamin Moll; Giovanni L. Violante
  23. Financial Markets’ Views about the Euro-Swiss Franc Floor By Urban J. Jermann
  24. How Did Pre-Fed Banking Panics End? By Gary Gorton; Ellis W. Tallman
  25. Monetary policy and the over-investment cycle: China as an extreme case By Gros, Daniel
  26. Strategic central bank communication: discourse and game-theoretic analyses of the Bank of Japan's Monthly Report By Kohei Kawamura; Yohei Kobashi; Masato Shizume; Kozo Ueda
  27. Latent class analyisis for reliable measure of inflation expectation in the indian public By Sunil Kumar
  28. Discussion of economic conditions and implications for monetary policy By Kaplan, Robert Steven
  29. Exchange Rates and Macro News in Emerging Markets By Guglielmo Maria Caporale; Fabio Spagnolo; Nicola Spagnolo
  30. The Dynamics of Capital Flow Episodes By Christian Friedrich; Pierre Guérin
  31. Changing dynamics at the zero lower bound By Gregor Bäurle; Daniel Kaufmann; Sylvia Kaufmann; Rodney W. Strachan
  32. Lender of last resort versus buyer of last resort: The impact of the European Central Bank actions on the bank-sovereign nexus By Acharya, Viral; Pierret, Diane; Steffen, Sascha
  33. A pro-cyclical stock market under a countercyclical monetary policy in a model of endogenous business cycles By Yanovski, Boyan
  34. Sluggish Inflation Expectations: A Markov Chain Analysis By Narayana R. Kocherlakota
  35. Equilibrium Determinacy and Policy Rules : Role of Productive Money and Government Expenditure By Fujisaki, Seiya
  36. The Euro as a Foreign Currency for Greece By Mayer,Thomas
  37. Why Greece declined a euro holiday By Gros, Daniel
  38. Economic Policy Uncertainty and the Credit Channel: Aggregate and Bank Level U.S. Evidence over Several Decades By Michael D. Bordo; John V. Duca; Christoffer Koch

  1. By: Tomasz Łyziak
    Abstract: This paper estimates different versions of a stylised New Keynesian model of the Polish economy, in which alternative measures of inflation expectations are used. They include: model-based (rational) expectations as well as survey measures of inflation expectations formed by consumers, enterprises and financial sector analysts. After estimating the models we verify to what extent the use of different measures of inflation expectations affects the assessment of the monetary transmission mechanism, the exchange rate pass-through and the sacrifice ratio. Simulation results show different responses in all the analysed areas. For example, the maximum reaction of CPI inflation to the interest rate impulse is almost twice bigger if the direct measures of financial sector analysts are used instead of model-consistent expectations. Also the model with survey-based measures of producer inflation expectations displays stronger response of inflation to monetary policy impulse than the model, in which rational expectations are assumed. Estimates of the exchange rate pass-through from the models with survey-based expectations are very similar to each other, but stronger than in the model with rational expectations. The sacrifice ratio seems similar in the case of all versions of the New Keynesian model except its version with consumer inflation expectations that shows significantly larger output loss resulting from a permanent reduction of the inflation target than the other models. Differences in the assessment how monetary factors affect macroeconomic variables, particularly inflation, pose the question which model should be treated as the most adequate. To answer this question we run in-sample simulations, calculating inflation forecasting errors of all the models under consideration. We conclude that the model that assumes rational inflation expectations displays the lowest forecasting accuracy, while the model using inflation expectations of enterprises is the best-performing model. It suggests that the assumption of rational inflation expectations does not match the actual data well. Inflation expectations of Polish enterprises seem the most relevant from the macroeconomic point of view – more relevant than inflation expectations of consumers and financial sector analysts.
    Keywords: Inflation expectations, survey, New Keynesian model, monetary transmission mechanism, Poland.
    JEL: C54 D84 E17 E43
    Date: 2016
  2. By: Silvo, Aino
    Abstract: ​I analyse the dynamics of a New Keynesian DSGE model where the financing of investments is affected by a moral hazard problem. I solve for jointly Ramsey-optimal monetary and macroprudential policies. I find that when a financial friction is present in addition to the standard nominal friction, the optimal policy can replicate the first-best if the social planner can conduct both monetary and macroprudential policy to control both inflation and the level of investments. Using monetary policy alone is not enough to fully stabilise the economy: it leads to a policy trade-off between stabilising inflation and the output gap. When policy follows simple rules instead, the source of fluctuations is highly relevant for the choice of the appropriate policy mix.
    Keywords: monetary policy, macroprudential policy, financial frictions
    JEL: E32 E44 E52 G28
    Date: 2016–02–10
  3. By: Ronald Heijmans; Richard Heuver; Zion Gorgi
    Abstract: This paper investigates the impact of the "unconventional" monetary policy measures taken by the Eurosystem on both the unsecured and the secured money markets. Furthermore, we provide insight into the shifts between the unsecured and secured markets. We provide a euro area overview and a Core-versus-Periphery breakdown. Our results show that: 1) there is a clear segmentation between Core and Periphery; 2) the use of the unsecured money market has decreased substantially and is no longer representative as a reflection of the euro area as a whole; and 3) the use of the secured money markets has increased substantially in value terms since the start of the crisis. Both the secured and the unsecured money markets reacted strongly to the first 3-year long term refinancing operations and quantitative easing. It is not to be expected that turnover in the money markets will revert to pre-crisis levels, in part because new regulation, such as the Basel III requirements, dissuades banks from engaging in short-term lending. Therefore, monetary policy experts should also devote their attention to steering the rates in the secured money market.
    Keywords: monetary policy; repo; GC Pooling; MTS Repo; unsecured money market; central bank; Basel III
    JEL: E42 E44 E58 G01
    Date: 2016–03
  4. By: Roberto Chang; Andrés Velasco
    Abstract: We analyze conventional and unconventional monetary policies in a dynamic small open-economy model with financial frictions. In the model, financial intermediaries or banks borrow from the world market and lend to domestic households. Banks can borrow abroad up to a multiple of their equity; in turn, there is a limit to how much bank equity households can hold. An economy-wide credit constraint and an endogenous interest rate spread emerge from this combination of external and domestic frictions. The resulting financial imperfections amplify the domestic effects of exogenous shocks and make those effects more persistent. In response to external balance shocks, fixed exchange rates are contractionary and flexible exchange rates expansionary (although less so in the presence of currency mismatches); the opposite is true in response to increases in the world interest rate. Unconventional policies, including central bank direct credit, discount lending, and equity injections to banks, have real effects only if financial constraints bind. Because of bank leverage, central bank discount lending and equity injections are more effective than direct credit. Sterilized foreign exchange intervention is equivalent to lending directly to domestic agents. Unconventional policies are feasible only to the extent that the central bank holds a sufficient amount of international reserves.
    JEL: E52 E58 F41
    Date: 2016–02
  5. By: Glas, Alexander; Hartmann, Matthias
    Abstract: We analyze the determinants of average individual inflation uncertainty and disagreement based on data from the European Central Bank's Survey of Professional Forecasters. We empirically confirm the implication from a theoretical decomposition of inflation uncertainty that disagreement is an incomplete approximation to overall uncertainty. Both measures are associated with macroeconomic conditions and indicators of monetary policy, but the relations differ qualitatively. In particular, average individual inflation uncertainty is higher during periods of expansionary monetary policy, whereas disagreement rises during contractionary periods.
    Keywords: Inflation uncertainty; Disagreement; Density forecast; Central banking;Survey of Professional Forecasters.
    Date: 2016–03–15
  6. By: Edoardo Rainone (Bank of Italy); Francesco Vacirca (ECB and Bank of Italy)
    Abstract: Money market microstructure is fundamental to studying bank behaviour, to evaluating monetary policy and to assessing the financial stability of the system. Given the lack of granular data on interbank loans, Furfine (1999) proposed an algorithm to estimate the microstructure using data from the payment system. We propose an econometric methodology to assess and improve the quality of the money market microstructure estimated by the Furfine algorithm in the presence of zero and negative rates, exploiting information coming from market regularities. We first extend the standard Furfine algorithm to include negative rates and verify the presence of significant noise at a specific rate. Secondly, we propose an inferential procedure that enriches and corrects the standard algorithm based on the economic likelihood of loans. Market regularities observed in this decentralized market are used to increase the reliability of the estimated interbank network. Thirdly, the methodology is applied to TARGET2, the European wholesale payment system. The main impacts of recent monetary policy decisions on key interest rates are studied, comparing the standard algorithm with the new econometric procedure.
    Keywords: interbank markets, money, payment systems, trading networks, measurement error
    JEL: E52 E40 C21 G21 D40
    Date: 2016–02
  7. 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: monetary policy,interest rates,European Central Bank,forward guidance,zero lower bound
    JEL: E43 E47 E52 E58
    Date: 2016
  8. By: Nuutilainen, Riikka
    Abstract: ​This paper focuses on monetary policy in China. A set of different specifications for the monetary policy reaction function are empirically evaluated using monthly data for 1999––2012. Variation is allowed both in the policy targets as well as in the monetary policy instrument itself. Overall, the performance of the estimated policy rules is surprisingly good. Chinese monetary policy displays countercyclical reactions to in‡ation and leaning-against-the-wind behaviour. The paper shows that there is a notable increase in the overall responsiveness of Chinese monetary policy over the course of the estimation period. The central bank interest rate is irresponsive to economic conditions during the earlier years of the sample but does respond in the later years. This finding supports the view that the monetary policy settings of the People's Bank of China have come to place more weight on price-based instruments. A time-varying estimation procedure suggests that the two monetary policy objectives are assigned to different instruments. The money supply instrument is utilised to control the price level and (after 2008) the interest rate instrument has been used to achieve the targeted output growth.
    Keywords: China, Monetary policy, Taylor rule, McCallum rule
    JEL: E52 E58
    Date: 2015–03–12
  9. By: Alessio Anzuini (Banca d'Italia); Martina Cecioni (Banca d'Italia); Stefano Neri (Banca d'Italia)
    Abstract: We identify the drivers of the movements in the euro-dollar exchange rate during the sovereign debt crisis. In particular, we show that the announcement of outright monetary transactions (OMT) by the Governing Council of the ECB during the summer of 2012 played a major role in the euro’s subsequent appreciation. OMT and the reform efforts undertaken by governments at national and European level saw off the risk of a euro-area break up and prompted net capital inflows. We estimate two models. The first is a reduced form high-frequency model, in which the exchange rate is explained by the differentials between interest rates in euros and dollars at both short- and long-term horizons, the sovereign spread in euro-area countries and an index of volatility. The second is a vector autoregressive (VAR) model including GDP growth differentials, short-term nominal interest rate differentials and inflation differentials between the euro area and the U.S., an average of the sovereign spreads of selected euro-area countries, the bilateral trade balance and the euro-dollar nominal exchange rate. Both approaches suggest that the evolution of the sovereign spread supported the value of the euro following the announcement of OMT in the summer of 2012.
    Keywords: exchange rates, sovereign spreads, vector autoregression
    JEL: F31 C32
    Date: 2016–01
  10. By: Jo Michell (University of the West of England)
    Abstract: The rise of the shadow banking system is viewed throught the lens of Graziani's Monetary Theory of Production. Graziani's categories of 'initial finance' and 'final finance' are used to analyse the new forms of credit created in the shadow banking sector. It is argued that the accumulation of leverage in the shadow banking system and the creation of credit money by the traditional banking sector are symbiotic processes. While Graziani's triangular debtor-bank-creditor relationship remains central, the circuit operates in a perverse form in which household debt is stored on the balance sheets of shadow banks, allowing the banking system to break the historical connection between money creation and productive activity.
    Keywords: monetary circuit, endogenous money, shadow banking, financialization, Graziani
    JEL: E12 E40 G21
    Date: 2016–03
  11. By: Bluhm, Marcel
    Abstract: The interbank market is important for the efficient functioning of the financial system, transmission of monetary policy and therefore ultimately the real economy. In particular, it facilitates banks' liquidity management. This paper aims at extending the literature which views interbank markets as mutual liquidity insurance mechanism by taking into account persistence of liquidity shocks. Following a theory of long-term interbank funding a financial system which is modeled as a micro-founded agent based complex network interacting with a real economic sector is developed. The model features interbank funding as an over-the-counter phenomenon and realistically replicates financial system phenomena of network formation, monetary policy transmission and endogenous money creation. The framework is used to carry out an optimal policy analysis in which the policymaker maximizes real activity via choosing the optimal interest rate in a trade-off between loan supply and financial fragility. It is shown that the interbank market renders the financial system more efficient relative to a setting without mutual insurance against persistent liquidity shocks and therefore plays a crucial role for welfare.
    Keywords: financial fragility,interbank market,liquidity,maturity,network model
    JEL: E44 E51 G01 G21 G28
    Date: 2015
  12. By: Eric M. Leeper; Campbell Leith
    Abstract: We develop the theory of price-level determination in a range of models using both ad hoc policy rules and jointly optimal monetary and fiscal policies and discuss empirical issues that arise when trying to identify monetary-fiscal regime. The article concludes with directions in which theoretical and empirical developments may go. The article is prepared for the Handbook of Macroeconomics, volume 2 (John B. Taylor and Harald Uhlig, editors, Elsevier Press).
    JEL: E31 E52 E58 E61 E62 E63
    Date: 2016–01
  13. By: Barış Soybilgen (İstanbul Bilgi University); Ege Yazgan (İstanbul Bilgi University)
    Abstract: Expectations on the future state of the inflation play a critical part in the process of price level determination in the market. Therefore, central banks closely follow the developments in inflation expectations to able to pursue a successful monetary policy. In Turkey, the Central Bank of the Republic of Turkey (CBRT) asks experts and decision makers from ï¬ nancial and real sectors about their expectations/predictions on the current and the future state of inflation every month to obtain market expectations on inflation. This paper examines these predictions of inflation using techniques of forecasting literature. We analyze both point and sign accuracy of these predictions. Point predictions from CBRT surveys are compared with those obtained from AR models, and tested whether they are statistically different. Sign predictions are tested whether they are valuable to a user. We also test predictions for unbiasedness.
    Keywords: Inflation Expectations, Evaluation Procedures, Sign Forecast Accuracy
    JEL: E37 E31
    Date: 2016–02
  14. By: Honkapohja, Seppo; Mitra, Kaushik
    Abstract: We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.
    Keywords: adaptive learning, monetary policy, inflation targeting, zero interest rate lower bound
    JEL: E63 E52 E58
    Date: 2015–04–07
  15. By: Mitchener, Kris James (Santa Clara University); Richardson, Gary (Federal Reserve Bank of Richmond)
    Abstract: Interbank networks amplified the contraction in lending during the Great Depression. Banking panics induced banks in the hinterland to withdraw interbank deposits from Federal Reserve member banks located in reserve and central reserve cities. These correspondent banks responded by curtailing lending to businesses. Between the peak in the summer of 1929 and the banking holiday in the winter of 1933, interbank amplification reduced aggregate lending in the U.S. economy by an estimated 15 percent.
    JEL: E44 G01 G21 L14 N22
    Date: 2016–03–15
  16. By: Artashes Karapetyan (Norges Bank (Central Bank of Norway))
    Abstract: We identify the effects of monetary policy on credit risk-taking using a unique dataset covering the population of corporate borrowers in Norway. We find that a lower benchmark interest rate (interbank rates or overnight rates) induces the average bank to grant more loans to risky firms. We also find that the strength of the bank's balance-sheet is important: less capitalized banks are more likely to increase loan volumes to ex-ante risky firms compared to more capitalized ones (Jimenez et al., 2014). The data allow us to distinguish the changes in the supply of credit from the changes in credit demand. In all our specifications we control for both observed and unobserved firm and bank heterogeneity by using financial statement information and firm, bank and time fixed effects.
    Keywords: Risk-taking channel, monetary policy, nancial stability, credit risk
    JEL: E44 E5 G01 G21 G28 L14
    Date: 2016–02–15
  17. By: Funke, Michael; Mihaylovski, Petar; Zhu, Haibin
    Abstract: The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.
    Keywords: DSGE model, monetary policy, financial market reform, shadow banking, China
    JEL: E32 E42 E52 E58
    Date: 2015–03–09
  18. By: Farley Grubb
    Abstract: I decompose Virginia’s paper money into expected real-asset present value, risk discount, and transaction premium or “moneyness” value. The value of Virginia’s paper money was determined primarily by its real-asset present value. The transaction premium was small. Positive risk discounts occurred in years when treasurer malfeasance was suspected. Virginia’s paper money was not a fiat currency, but a barter asset, with just enough “moneyness” value to make it the preferred medium of exchange for local transactions. Compared with alternative models, my decomposition model of inside monies is superior conceptually and statistically for explaining the performance of American colonial paper monies.
    JEL: E42 E51 G12 H60 N12 N22
    Date: 2016–01
  19. By: Madhusudan Mohanty; Kumar Rishabh
    Abstract: In contrast to the benign neglect of the financial system in traditional monetary models, there has been growing evidence in recent years that the size and the structure of financial intermediation play a critical role in the transmission of monetary policy. This paper reviews the implications of three key post-2008 crisis developments in financial intermediation - the role of banks, the globalisation of debt markets and the sustained decline in global long-term interest rates - for various transmission channels of monetary policy in EMEs. The paper argues that the globalisation of debt markets means that monetary policy can no longer be conducted through the short-term interest rate alone. This raises questions about the appropriate instruments to be used for economic stabilisation in this new environment.
    Keywords: financial intermediation, monetary policy, central banks
    Date: 2016–03
  20. By: Haroon Mumtaz (Queen Mary University of London); Angeliki Theophilopoulou (University of Westminister)
    Abstract: The UK has experienced a dramatic increase in earnings and income inequality over the past four decades. We use detailed micro level information to construct quarterly historical measures of inequality from 1969 to 2012. We investigate whether monetary policy shocks played a role in explaining this increase in inequality. We find that contractionary monetary policy shocks lead to a deterioration in earnings, income and consumption inequality and contribute to their fluctuation. The response of income and consumption at different quantiles suggests that contractionary policy has a larger negative effect on low income households and those that consume the least when compared to those at the top of the distribution. Our evidence also suggests that the policy of quantitative easing contributed to the increase in inequality over the Great Recession.
    Keywords: Inequality, Earnings, Income, SVAR, Monetary policy shocks
    JEL: E2 E3 E4 E5
    Date: 2016–02
  21. 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 followed a global downward trend prior to as well as during the financial crisis. Comparing interest rate developments in the US and the eurozone, it is difficult to detect a distinct impact of the first round of the Fed’s quantitative easing programme (QE1) on US interest rates for which the global environment – the global downward trend in interest rates – does not account. Motivated by these findings, we analyse the impact of the Fed’s QE1 programme on the stability of the US-euro long-term interest rate relationship by using a CVAR (cointegrated vector autoregressive) model and, in particular, recursive estimation methods. Using data gathered between 2002 and 2014, we find limited evidence that QE1 caused the break-up or destabilised the transatlantic interest rate relationship. Taking global interest rate developments into account, we thus find no significant evidence that QE had any independent, distinct impact on US interest rates.
    Date: 2016–01
  22. By: Greg Kaplan; Benjamin Moll; Giovanni L. Violante
    Abstract: We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where intertemporal substitution drives virtually all of the transmission from interest rates to consumption.
    JEL: E0
    Date: 2016–01
  23. By: Urban J. Jermann
    Abstract: Exchange rates and option prices incorporate market participants’ views about the credibility and the effects of exchange rate targets. I present a model to determine exchange rates under policy targets that can be used to price options. The model is estimated with Euro-Swiss Franc exchange rate and options price data. In the first few months of the minimum exchange rate policy, the implied survival probability of the policy for a three month horizon was typically less than 75%. Over time, the credibility increased and this probability reached 95% in August 2014. The analysis also implies that during the second quarter of 2012, when reserve accumulation was high, the exchange rate without the policy would have been as low as about 1 Swiss franc per euro.
    JEL: F31 G12
    Date: 2016–02
  24. By: Gary Gorton; Ellis W. Tallman
    Abstract: How did pre-Fed banking crises end? How did depositors’ beliefs change? During the National Banking Era, 1863-1914, banks responded to the severe panics by suspending convertibility, that is, they refused to exchange cash for their liabilities (checking accounts). At the start of the suspension period, the private clearing houses cut off bank-specific information. Member banks were legally united into a single entity by the issuance of emergency loan certificates, a joint liability. A new market for certified checks opened, pricing the risk of clearing house failure. Certified checks traded at a discount to cash (a currency premium) in a market that opened during the suspension period. Confidence was restored when the currency premium reached zero.
    JEL: E32 E42 E44 E58
    Date: 2016–02
  25. By: Gros, Daniel
    Abstract: Against the background of the severe turbulence that is hitting global stock markets, Daniel Gros examines the looming slowdown in the Chinese economy in this CEPS Commentary, which he attributes to an underlying ‘real’ domestic investment/savings imbalance. Given the magnitude of this imbalance, Gros thinks it is unlikely to be solved by monetary policy and that the best that can be hoped for is that the central banks will manage to ‘paper over’ some of the unavoidable symptoms in credit markets.
    Date: 2015–09
  26. By: Kohei Kawamura; Yohei Kobashi; Masato Shizume; Kozo Ueda
    Abstract: We conduct a discourse analysis of the Bank of Japan's Monthly Report and examine its characteristics in relation to business cycles. We find that the difference between the number of positive and negative expressions in the reports leads the leading index of the economy by approximately three months, which suggests that the central bank' reports have some superior information about the state of the economy. Moreover, ambiguous expressions tend to appear more frequently with negative expressions. Using a simple persuasion game, we argue that the use of ambiguity in communication by the central bank can be seen as strategic information revelation when the central bank has an incentive to bias the reports (and hence beliefs in the market) upwards.
    Keywords: Monetary policy, transparency, natural language processing, modality, latent Dirichlet allocation (LDA), verifiable disclosure model
    JEL: D78 D82 E58 E61
    Date: 2016–03
  27. By: Sunil Kumar
    Abstract: The main aim of this paper is to inspect the properties of survey based on households inflation expectations, conducted by Reserve Bank of India. It is theorized that the respondents answers are exaggerated by extreme response bias. Latent class analysis has been hailed as a promising technique for studying measurement errors in surveys, because the model produces estimates of the error rates associated with a given question of the questionnaire. I have identified a model with optimum performance and hence categorize the objective as well as reliable classifiers or otherwise.
    Date: 2016–03
  28. By: Kaplan, Robert Steven (Federal Reserve Bank of Dallas)
    Abstract: Remarks before the University of Texas Investment Management Company 20th Anniversary Event, Austin, TX, March 3, 2016.
    Date: 2016–03–03
  29. By: Guglielmo Maria Caporale; Fabio Spagnolo; Nicola Spagnolo
    Abstract: This paper uses a VAR-GARCH(1,1) model to analyse mean and volatility spillovers between macro news (in the form of newspaper headlines) and the exchange rates vis-avis both the US dollar and the euro of the currencies of a group of emerging countries including the Czech Republic, Hungary, Indonesia, Korea, Mexico, Poland, South Africa, Thailand and Turkey over the period 02/1/2003-23/9/2014. The results suggest limited dynamic linkages between the first moments compared to the second moments, causality-in-variance being found in a number of cases. The conditional correlations also provide evidence of co-movement. Finally, the recent global financial crisis appears to have had a significant impact.
    Keywords: Emerging markets, Exchange Rates, GARCH model, Macro news
    JEL: C32 F36 G15
    Date: 2016
  30. By: Christian Friedrich; Pierre Guérin
    Abstract: This paper proposes a novel methodology for identifying episodes of strong capital flows based on a regime-switching model. In comparison with the existing literature, a key advantage of our methodology is to estimate capital flow regimes without the need for context- and sample-specific assumptions. We implement this approach using weekly fund flows data for a large set of advanced and emerging economies. As an application of our methodology to the global financial cycle literature, we use a time-varying structural vector-autoregressive (VAR) model to assess the impact of U.S. stock market volatility (VIX) shocks and U.S. monetary policy shocks on aggregated measures of equity outflow and equity inflow episodes. Our results indicate that both VIX and U.S. monetary policy shocks had substantially time-varying effects on episodes of strong capital flows over our sample period.
    Keywords: Econometric and statistical methods, International financial markets, International topics, Uncertainty and monetary policy
    JEL: F21 F32 G11
    Date: 2016
  31. By: Gregor Bäurle (Swiss National Bank); Daniel Kaufmann (KOF ETH Zurich); Sylvia Kaufmann (Study Center Gerzensee); Rodney W. Strachan (The University of Queensland)
    Abstract: The interaction of macroeconomic variables may change as the nominal shortterm interest rates approaches zero. In this paper, we propose an empirical model capturing these changing dynamics with a time-varying parameter vector autoregressive process. State-dependent parameters are determined by a latent state indicator, of which the probability distribution is itself affected by the lagged interest rate. As the interest rate enters the critical zero lower bound (ZLB) region, dynamics between variables and the effect of shocks change. We estimate the model with Bayesian methods and take explicitly into account that the interest rate might be constrained in the ZLB region. We provide an estimate of the latent rate, i.e. the lower interest rate than the observed level which would be state- and modelconsistent. The endogenous specification of the state indicator permits dynamic forecasts of the state and the system variables. In an application to Swiss data, we evaluate state-dependent impulse-responses to a risk premium shock identified with sign-restrictions. Additionally, we discuss scenario-based forecasts and evaluate the probability of the system exiting the ZLB region based on the inherent dynamics only.
    Date: 2016–01
  32. By: Acharya, Viral; Pierret, Diane; Steffen, Sascha
    Abstract: In summer 2011, elevated sovereign risk in Eurozone peripheral countries increased the solvency risk of Eurozone banks, precipitating a run on their short-term debt. We assess the effectiveness of different European Central Bank (ECB) interventions that followed - lender of last resort vs. buyer of last resort - in stabilizing the European financial sector. We find that (i) by being lender of last resort to banks via the long-term refinancing operations (LTRO), ECB temporarily reduced funding pressure for banks, but did not help to contain sovereign risk. In fact, banks of the peripheral countries used the public funds to increase their exposure to risky domestic debt, so that when solvency risk in the Eurozone worsened the run of private short-term investors from Eurozone banks intensified. (ii) In contrast, ECB's announcement of being a potential buyer of last resort via the Outright Monetary Transaction program (OMT) significantly reduced the bank-sovereign nexus. The OMT increased the market prices of sovereign bonds, leading to a permanent reversal of private funding flows to Eurozone banks holding these bonds.
    Keywords: money market funds,repos,bank risk,sovereign debt,ECB
    JEL: G01 G21 G28
    Date: 2016
  33. By: Yanovski, Boyan
    Abstract: During the last 25 years, the stock market in the US has been strongly pro-cyclical in the presence of a counter-cyclical monetary policy. In this paper, we use an endogenous business cycle model to explore the factors contributing to a pro-cyclical stock market. A dynamic expectation structure in the real sector gives rise to a strong non-linearity and is responsible for the emergence of endogenous business cycles in the model. In the context of this model, we find that a timid or ineffective monetary policy allows the stock market to be dominated by the fluctuations of profits in the real sector. We model the potential ineffectiveness of monetary policy in terms of an endogenous risk premium. The model is calibrated to fit key properties of the data. In particular, it can generate a pro-cyclical stock market in the presence of a counter-cyclical monetary policy.
    Keywords: pro-cyclical stock market,Tobin's average Q,endogenous cycles,heterogeneous expectations,monetary policy
    JEL: D84 E12 E32 E52 G00
    Date: 2016
  34. By: Narayana R. Kocherlakota
    Abstract: A large body of recent empirical work on inflation dynamics documents that current real variables (like unemployment or output gaps) have little explanatory power for future inflation. Motivated by these findings, I explore the properties of a wide class of models in which inflation expectations respond little, if at all, to real economic conditions. In this general context, I examine Markov equilibria to games in which the relevant forcing processes are Markov chains and the central bank chooses a short- term nominal interest rate at each date subject to a lower bound. I construct a simple numerical algorithm to solve for such Markov equilibria. I apply the algorithm to a numerical example. In the example, the economy can experience long periods of what looks like secular stagnation because households believe that there is a significant risk of a crisis (that is, a sharp decline in economic activity). Within the example, there are large benefits to being able to reduce the lower bound on the short-term nominal interest rate by as little as fifty basis points.
    JEL: E31 E32 E52 E58
    Date: 2016–02
  35. By: Fujisaki, Seiya
    Abstract: We analyze the relation between policy mixture and equilibrium determinacy in an economy where money and government expenditures are used for production. We find that an adequate mix of income tax and interest-rate control is important to realize a stable economy, as well as the relation between contribution of government expenditures to production and the basic tax rate as a source of the revenue for these expenditure.
    Keywords: equilibrium determinacy, progressive income tax, Taylor rule, productive government expenditure and money
    JEL: E52 E62
    Date: 2016–03–03
  36. By: Mayer,Thomas
    Abstract: In contrast to his contribution just a month ago, which examined how a Greek parallel currency to the euro could allow the Greek government to gain some room for manoeuver in fiscal policy while at the same time continuing the adjustment programme demanded by the country’s creditors, Thomas Mayer explores in the present note the question of how the Greek population could still keep the euro after a default of its government. Contrary to general belief, he finds that Grexit and the reintroduction of the euro as a foreign currency would probably be positive for the Greek economy, although its creditors would be hard hit. It is therefore primarily in their interest that default and Grexit are avoided.
    Date: 2015–06
  37. By: Gros, Daniel
    Abstract: In a CEPS Commentary, Daniel Gros speculates on why the Greek government suddenly turned an about-face on July 13th and conceded to terms that not only controverted its own promises, but also closely resembled those that voters had overwhelmingly rejected in a popular referendum barely a week earlier?
    Date: 2015–08
  38. By: Michael D. Bordo; John V. Duca; Christoffer Koch
    Abstract: Economic policy uncertainty affects decisions of households, businesses, policy makers and Financial intermediaries. We first examine the impact of economic policy uncertainty on aggregate bank credit growth. Then we analyze commercial bank entity level data to gauge the effects of policy uncertainty on Financial intermediaries' lending. We exploit the cross-sectional heterogeneity to back out indirect evidence of its effects on businesses and households. We ask (i) whether, conditional on standard macroeconomic controls, economic policy uncertainty affected bank level credit growth, and (ii) whether there is variation in the impact related to banks' balance sheet conditions; that is, whether the effects are attributable to loan demand or, if impact varies with bank level financial constraints, loan supply. We find that policy uncertainty has a significant negative effect on bank credit growth. Since this impact varies meaningfully with some bank characteristics – particularly the overall capital-to-assets ratio and bank asset liquidity–loan supply factors at least partially (and significantly) help determine the influence of policy uncertainty. Because other studies have found important macroeconomic effects of bank lending growth on the macroeconomy, our findings are consistent with the possibility that high economic policy uncertainty may have slowed the U.S. economic recovery from the Great Recession by restraining overall credit growth through the bank lending channel.
    JEL: E40 E50 G21
    Date: 2016–02

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