nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒04‒04
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The European Central Bank: Building a Shelter in a Storm By Kang Dae Woong; Nick Ligthart; Ashoka Mody
  2. Unconventional US Monetary Policy: New Tools, Same Channels? By Martin Feldkircher; Florian Huber
  3. A Review of the Literature on Monetary Neutrality By Tang, Maggie May-Jean
  4. Demand shocks, new keynesian model and supply effects of monetary policy By Elliot Aurissergues
  5. Is optimal monetary policy always optimal? By Davig, Troy A.; Gurkaynak, Refet S.
  6. What if Brazil Hadn't Floated the Real in 1999? By Carlos Viana de Carvalho; André D. Vilela
  7. Covered interest parity: evidence from Russian money market By Kuga Iakov; Elena Kuzmina
  8. Monetary policy spillovers and currency networks in cross-border bank lending By Stefan Avdjiev; Elod Takats
  9. Spillover effects from euro area monetary policy across the EU: A factor-augmented VAR approach By Potjagailo, Galina
  10. Capital Controls as an Alternative to Credit Policy in a Small Open Economy By Shigeto Kitano; Kenya Takaku
  11. Inflation Targeting and Exchange Rate Management In Less Developed Countries By Marco Airaudo; Edward F. Buffie; Luis-Felipe Zanna
  12. "Japan's Liquidity Trap" By Tanweer Akram
  13. The dynamic effects of forward guidance shocks By Bundick, Brent; Smith, Andrew Lee
  14. Determinants of Monetary Transmission in Armenia By Sargsyan Hayk
  15. Inflation expectations curve: a tool for monitoring inflation expectations By Michelle Lewis
  16. Optimal Currency Area: A 20th Century Idea For the 21st Century? By Joshua Aizenman
  17. Are Monetary Policy Disturbances Important in Ghana? Some Evidence from Agnostic Identification By Njindan Iyke, Bernard
  18. Effectiveness of Monetary Policy in the Euro Area: The Role of US Economic Policy Uncertainty By Mehmet Balcilar; Riza Demirer; Rangan Gupta; Reneé van Eyden
  19. Too-Big-To-Fail Before the Fed By Gary Gorton; Ellis W. Tallman
  20. Non-Linearities in the Relationship between House Prices and Interest Rates: Implications for Monetary Policy By Guay Lim; Sarantis Tsiaplias
  21. Unconventional Policy Instruments in the New Keynesian Model By Zineddine Alla; Raphael A. Espinoza; Atish R. Ghosh
  22. What’s Different about Monetary Policy Transmission in Remittance-Dependent Countries? By Adolfo Barajas; Ralph Chami; Christian Ebeke; Anne Oeking
  23. Exit Risks and Contagion in the Euro Area By Canofari, Paolo; Messori, Marcello
  24. Monetary Policy and Defaults in the US By Michele Piffer
  25. A Note on Simple Monetary Policy Rules with Labour Market and Financial Frictions By Sarunas Girdenas
  26. Financial Development and Money Demand Function: Cointegration, Causality and Variance Decomposition Analysis for Pakistan. By Ahad, Muhammad
  27. Interest Rates and Inflation By Michael Coopersmith; Pascal J. Gambardella
  28. Quantitative Easing and United States Investor Portfolio Rebalancing Towards Foreign Assets By João Barata Ribeiro Blanco Barroso
  29. Learning from Potentially-Biased Statistics: Household Inflation Perceptions and Expectations in Argentina By Alberto Cavallo; Guillermo Cruces; Ricardo Perez-Truglia
  30. Does Central Bank Independence Affect Stock Market Volatility? By Stephanos Papadamou; Moïse Sidiropoulos; Eleftherios Spyromitros
  31. Review on Determinants of Capital Flight By Liew, Siew Ling

  1. By: Kang Dae Woong (Princeton University); Nick Ligthart (College of Europe in Bruges, Belgium); Ashoka Mody (Princeton University)
    Abstract: As the financial crisis gathered momentum in 2007, the United States Federal Reserve brought its policy interest rate aggressively down from 5¼ percent in September 2007 to virtually zero by December 2008 In contrast, although facing the same economic and financial stress, the European Central Bank’s first action was to raise its policy rate in July 2008. The ECB began lowering rates only in October 2008 once near global financial meltdown left it with no choice. Thereafter, the ECB lowered rates slowly, interrupted by more hikes in April and July 2011. We use the “abnormal†increase in stock prices—the rise in the stock price index that was not predicted by the trend in the previous 20 days—to measure the market’s reaction to the announcement of the interest rate cuts.Stock markets responded favorably to the Fed interest rate cuts but, on average, they reacted negatively when the ECB cut its policy rate The Fed’s early and aggressive rate cuts established its intention to provide significant monetary stimulus. That helped renew market optimism, consistent with the earlier economic recovery.In contrast, the ECB started building its shelter only after the storm had started. Markets interpreted even the simulative ECB actions either as “too little, too late†or as signs of bad news. We conclude that by recognizing the extraordinary nature of the circumstances, the Fed’s response not only achieved better economic outcomes but also enhanced its credibility. The ECB could have acted similarly and stayed true to its mandate. The poorer economic outcomes will damage the ECB’s long-term credibility
    JEL: E5
    Date: 2015–12
  2. By: Martin Feldkircher (Oesterreichische Nationalbank (OeNB)); Florian Huber (Department of Economics, Vienna University of Economics and Business)
    Abstract: In this paper we compare the transmission of a conventional monetary policy shock with that of an unexpected decrease in the term spread, which mirrors quantitative easing. Employing a time-varying vector autoregression with stochastic volatility, our results are two-fold: First, the spread shock works mainly through a boost to consumer wealth growth, while a conventional monetary policy shock affects real output growth via a broad credit / bank lending channel. Second, both shocks exhibit a distinct pattern over our sample period. More specifically, we find small output effects of a conventional monetary policy shock during the period of the global financial crisis and stronger effects in its aftermath. This might imply that when the central bank has left the policy rate unaltered for an extended period of time, a policy surprise might boost output particularly strongly. By contrast, the spread shock has affected output growth most strongly during the period of the global financial crisis and less so thereafter. This might point to diminishing effects of large scale asset purchase programs.
    Keywords: Unconventional monetary policy, transmission channel, Bayesian TVP-SV-VAR
    JEL: C32 E52 E32
    Date: 2016–03
  3. By: Tang, Maggie May-Jean
    Abstract: Long-run monetary neutrality (LRMN) is an idea expressed from the quantity theory of money, which posits that a permanent change in money stock has no real effect in the long-run. The LRMN theory is an empirical matter with regard to monetary policy, where it helps to define the monetary transmission and is able to identify the effectiveness of monetary policy by investigating the role of money in the long run. As a result, the study of LRMN has attracted great interest for a long period of time.
    Keywords: Long-run monetary neutrality, literature review
    JEL: E4
    Date: 2016–03–18
  4. By: Elliot Aurissergues (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: Demand shocks likely play a key role in driving business cycles. However, in the standard new keynesian model, the monetary policy reaction to these shocks have a supply side effect. The change in real rate affects the marginal utility of consumption generating an income effect on labor supply. Wages, inflation and through monetary policy, aggregate demand will increase. This supply side effect have a surprising importance for the model, especially when the sensi- tivity of aggregate demand to interest rate is low. A demand shock will have a large impact (close to one) on output, but a very small one on the output gap. The limited monetary policy movement induced by the taylor rule remains very close to the natural rate of interest. There are nearly no differences between the sticky price and the flexible price model. It represents a very disappointing result, the entire purpose of sticky prices being to generate inefficiencies when the aggregate demand is hit. Coupled with very tiny empirical support for this supply side effect of monetary policy, it suggests to explore the theoretical possibilities to kill this ef- fect. First, we review the two ways the literature have proposed, nonseparable preferences and sticky wages. The main drawback is a strong reliance on very specific assumption for the labor market. We explore an alternative approach. We attempt a radical departure from traditionnal assumption about the optimizing behavior of the representative agent. Instead of optimizing simulatneously with respect to hours, consumption and saving, the household decomposes the problem in two steps. First, the agent chooses between labor income and hours. Second, he optimizes between consumption and saving. The interest is to disentangle the income effect which affects the labor equation and those affecting the intertemporal choice. Thus it is possible to reduce the wealth effect on labor supply whereas keeping a low sensitivity of consumption to interest rate. This flexible approach also allows to challenge the effect of interest rate on wealth offering a potential explanation for small effects of interest rate on both labor supply and consumption whereas keeping large income effects.
    Keywords: Demand shock, comovement, labor supply, elasticity of intertemporal substitution, wealth effect
    Date: 2016–02
  5. By: Davig, Troy A. (Federal Reserve Bank of Kansas City); Gurkaynak, Refet S.
    Abstract: No. And not only for the reason you think. In a world with multiple inefficiencies the single policy tool the central bank has control over will not undo all inefficiencies; this is well understood. We argue that the world is better characterized by multiple inefficiencies and multiple policy makers with various objectives. Asking the policy question only in terms of optimal monetary policy effectively turns the central bank into the residual claimant of all policy and gives the other policymakers a free hand in pursuing their own goals. This further worsens the tradeoffs faced by the central bank. The optimal monetary policy literature and the optimal simple rules often labeled flexible inflation targeting assign all of the cyclical policymaking duties to central banks. This distorts the policy discussion and narrows the policy choices to a suboptimal set. We highlight this issue and call for a broader thinking of optimal policies.
    Keywords: Monetary policy;
    JEL: E02 E52 E58 E61
    Date: 2015–07–30
  6. By: Carlos Viana de Carvalho (Department of Economics PUC-Rio); André D. Vilela (Banco Central do Brasil)
    Abstract: We estimate a dynamic, stochastic, general equilibrium model of the Brazilian economy taking into account the transition from a currency peg to inflation targeting that took place in 1999. The estimated model exhibits quite different dynamics under the two monetary regimes. We use it to produce counterfactual histories of the transition from one regime to another, given the estimated history of structural shocks. Our results suggest that maintaining the currency peg would have been too costly, as interest rates would have had to remain at extremely high levels for several quarters, and GDP would have collapsed. Accelerating the pace of nominal exchange rate devaluations after the Asian Crisis would have lead to higher inflation and interest rates, and slightly lower GDP. Finally, the first half of 1998 arguably provided a window of opportunity for a smooth transition between monetary regimes.
    Date: 2015–11
  7. By: Kuga Iakov; Elena Kuzmina
    Abstract: This paper tests covered interest parity at Russian money market over period of 2010-2014 and studies scale and sources of deviations from it. We use both offered and actual interbank interest rates for four different terms. Average deviations from the parity vary between 8 and 105 basis points depending on rates and terms. We test credit risk, turbulence and monetary policy as explanation of these deviations and assessed them quantitatively. For example, one standard deviation change in credit risk is responsible for 50 per cent of the average deviation from parity compared to 72 per cent due to monetary policy spread and (minus) 22 per cent due to turbulence for one week offered rate spread. Risk and turbulence effects grow with maturity and higher for actual rate spreads.
    JEL: E43 F31 G15
    Date: 2016–03–15
  8. By: Stefan Avdjiev; Elod Takats
    Abstract: We demonstrate that currency networks in cross-border bank lending have a significant impact on the size, distribution and direction of international monetary policy spillovers. Using the recently enhanced BIS international banking statistics, which simultaneously provide information on the lender, borrower and currency composition of cross-border bank claims, we map the major currency networks in international banking. Next, we show that during the 2013 Fed taper tantrum, exposure to dollar lending was associated with safe haven flows to the United States, virtually unchanged flow dynamics vis-à-vis other advanced economies, and strong outflows from emerging markets. Furthermore, this pattern was shaped by interbank lending rather than by lending to non-banks.
    Keywords: Currency networks, cross-border banking flows, international monetary policy spillovers
    Date: 2016–03
  9. By: Potjagailo, Galina
    Abstract: I analyze spillover effects from Euro area monetary policy shocks to thirteen EU countries outside the Euro area, i.e., ten countries from Central and Eastern Europe (CEE) and three Western EU members. The analysis is based on a FAVAR model with two blocks which exploits a large cross-country data set covering real activity variables, prices and financial variables. An expansionary Euro area monetary policy shock raises production in most non-Euro area countries. Somewhat larger and more instantaneous responses of production are observed in small open economies with fixed exchange rate regimes, where foreign demand effects are particularly strong. In addition, a Euro area monetary expansion leads to declines in interest rates and reductions in uncertainty in most non-Euro area countries. The spillovers on uncertainty are more pronounced in economies with flexible exchange rates, where the degree of financial market openness tends to be higher and where exchange rate appreciations further enhance risk taking by cushioning debt burdens from foreign currency loans. Finally, spillover effects on prices are heterogeneous across countries and behave asymmetrically in most CEE countries.
    Keywords: monetary policy,Euro area,Central and Eastern Europe,exchange rate regime,financial transmission,FAVAR
    JEL: C33 E52 E58 F42
    Date: 2016
  10. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of Business, Aichi Shukutoku University)
    Abstract: We develop a sticky price, small open economy model with financial frictions a la Gertler and Karadi (2011), in combination with liability dollarization. An agency problem between domestic financial intermediaries and foreign investors of emerging economies introduces financial frictions in the form of time-varying endogenous balance sheet constraints on the domestic financial intermediaries. We consider a shock that tightens the balance sheet constraint and show that capital controls, the possibility of which is rigorously examined as a policy tool for the emerging economies, can be an alternative to credit policy employed by advanced economy central banks in mitigating the negative shock.
    Keywords: Capital control, Credit policy, Balance sheets, Small open economy, Nominal rigidities, New Keynesian, DSGE, Financial intermediaries, Financial frictions, Crisis
    JEL: E44 E58 F32 F41
    Date: 2015–03
  11. By: Marco Airaudo; Edward F. Buffie; Luis-Felipe Zanna
    Abstract: We analyze coordination of monetary and exchange rate policy in a two-sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets. Our central finding is that management of the exchange rate greatly enhances the efficacy of inflation targeting. In a flexible exchange rate system, inflation targeting incurs a high risk of indeterminacy where macroeconomic fluctuations can be driven by self-fulfilling expectations. Moreover, small inflation shocks may escalate into much larger increases in inflation ex post. Both problems disappear when the central bank leans heavily against the wind in a managed float.
    Date: 2016–03–08
  12. By: Tanweer Akram
    Abstract: Japan has experienced stagnation, deflation, and low interest rates for decades. It is caught in a liquidity trap. This paper examines Japan's liquidity trap in light of the structure and performance of the country's economy since the onset of stagnation. It also analyzes the country's liquidity trap in terms of the different strands in the theoretical literature. It is argued that insights from a Keynesian perspective are still quite relevant. The Keynesian perspective is useful not just for understanding Japan's liquidity trap but also for formulating and implementing policies that can overcome the liquidity trap and foster renewed economic growth and prosperity. Paul Krugman (1998a, b) and Ben Bernanke (2000; 2002) identify low inflation and deflation risks as the cause of a liquidity trap. Hence, they advocate a credible commitment by the central bank to sustained monetary easing as the key to reigniting inflation, creating an exit from a liquidity trap through low interest rates and quantitative easing. In contrast, for John Maynard Keynes (1936; reissued 2007) the possibility of a liquidity trap arises from a sharp rise in investors' liquidity preference and the fear of capital losses due to uncertainty about the direction of interest rates. His analysis calls for an integrated strategy for overcoming a liquidity trap. This strategy consists of vigorous fiscal policy and employment creation to induce a higher expected marginal efficiency of capital, while the central bank stabilizes the yield curve and reduces interest rate volatility to mitigate investors' expectations of capital loss. In light of Japan's experience, Keynes's analysis and proposal for generating effective demand might well be a more appropriate remedy for the country's liquidity trap.
    Keywords: Liquidity Trap; Japan; Monetary Policy; Interest Rates
    JEL: E02 E40 E43 E50 E52 E58 E60
    Date: 2016–03
  13. By: Bundick, Brent (Federal Reserve Bank of Kansas City); Smith, Andrew Lee (Federal Reserve Bank of Kansas City)
    Abstract: We examine the macroeconomic effects of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using a two-step procedure, which embeds high-frequency futures contracts in a structural vector autoregression. An exogenous extension of the zero lower bound duration increases economic activity and prices. We show that a standard model of nominal price rigidity largely replicates these empirical results. To calibrate our theoretical model, we generate a model-implied futures curve which allows us to closely link our model with the data. Our results suggest no disconnect between the empirical effects of forward guidance shocks and the predictions from a standard model of monetary policy.
    Keywords: Forward guidance; Federal funds futures; Zero lower bound
    JEL: E32 E52
    Date: 2016–01–15
  14. By: Sargsyan Hayk
    Abstract: A well-functioning monetary policy transmission mechanism is a guarantee for a successful monetary policy, therefore examination of the impacts of its main determinants in Armenia was of a great interest, and served as an inspiration for the given research. Following the research objectives, a proxy variable for the strength of monetary pass-through in Armenia was estimated, and then the resulted variable was used in an empirical model to assess the long-run and short run relationship with its main factors.
    JEL: E52 E58
    Date: 2016–03–18
  15. By: Michelle Lewis (Reserve Bank of New Zealand)
    Abstract: Inflation expectations play an important role in monetary policy, where well-anchored expectations make it easier than otherwise to achieve the inflation target. This Note uses various surveyed measures of inflation expectations and yield curve modelling techniques to develop a framework for monitoring inflation expectations. From the resulting expectations curves, measures of the perceived inflation target focus and the expected time for inflation to return to target are estimated.
    Date: 2016–03
  16. By: Joshua Aizenman
    Abstract: This paper takes stock of the history of the European Monetary Union (EMU) and pegged exchange-rate regimes in recent decades, pointing out the need to reshape the optimal currency area (OCA) criteria into the twenty-first century. While contributions from the 1960s regarding the OCA remain relevant, they were written during the Bretton Woods system when financial integration among countries was low and banks were heavily regulated. The post-Bretton Woods greater financial integration and under-regulated financial intermediation have increased the cost of sustaining a currency area and other forms of fixed exchange-rate regimes. A key lesson learned from financial crises is that fast-moving asymmetric financial shocks interacting with real distortions pose a grave threat to the stability of currency areas and fixed exchange-rate regimes. Thus, the odds of a successful currency area depend on the viability of effective institutions and policies that deal with adjustment to asymmetric shocks. The financial crises of recent decades illustrate that the endogeneity of the OCA is time dependent, and that deeper trade and financial integration impacts the stability of the OCA in differential ways. Members of a currency union with closer financial links may accumulate asymmetric balance-sheet exposure over time, becoming more susceptible to sudden-stop crises. In a phase of deepening financial ties, countries may end up with more correlated business cycles. Down the road, debtor countries that rely on financial inflows to fund structural imbalances may be exposed to devastating sudden-stop crises, subsequently reducing the correlation of business cycles between currency area’s members, possibly ceasing the gains from membership in a currency union. A currency union of developing countries anchored to a leading global currency stabilizes inflation at a cost of inhibiting the use of monetary policy to deal with real and financial shocks. Currency unions with low financial depth and low financial integration of its members may be more stable at a cost of inhibiting the growth of sectors depending on bank funding. Similar trade-offs apply to other forms of fixed exchange-rate regimes.
    JEL: F15 F33 F4 F41
    Date: 2016–03
  17. By: Njindan Iyke, Bernard
    Abstract: This paper investigated whether monetary policy disturbances matter in Ghana. A previous study pursued this question but the evidence brought forth was plagued with the exchange rate and price puzzles. We argued, in this paper that these puzzles arise because of identification scheme of the kind utilized in that paper. We showed that a better approach to overcoming these puzzles is by using the agnostic identification scheme. Using a quarterly time series over the 1990Q1 – 2015Q3, and an efficient algorithm for solving sign restricted SVARs, we found that short-term interest rate responded largely and positively, real output and consumer prices reacted negatively, nominal exchange rate reacted by appreciating after just 2 quarters, and dropped gradually to its baseline, and monetary base and commodity prices reacted by dropping below zero and remained there, following a contractionary monetary policy disturbance. The reaction of nominal exchange rate is rather lethargic, taking into account the strong rise in the short-term interest rate, pointing to: some existing structural and institutional rigidities in the Ghanaian economy that inhibit the size of capital inflows expected, the country’s dismal sovereign bond rating, or the increase in the short-term interest rate is not high enough to mitigate the cost of capital investment.
    Keywords: Agnostic Identification; Monetary Disturbances; Structural Shocks; Ghana
    JEL: C11 C32 E52
    Date: 2016–02–01
  18. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Turkey ; Department of Economics, University of Pretoria, South Africa ; IPAG Business School, France); Riza Demirer (Department of Economics & Finance, Southern Illinois University Edwardsville, USA.); Rangan Gupta (Department of Economics, University of Pretoria); Reneé van Eyden (Department of Economics, University of Pretoria)
    Abstract: This paper examines the role of U.S. economic policy uncertainty on the effectiveness of monetary policy in the Euro area. Using a structural Interacted Vector Autoregressive (IVAR) model conditional on high and low levels of U.S. economic policy uncertainty, we find that uncertainty regarding policy changes in the U.S. dampens the effect of monetary policy shocks in the Euro area, with both price and output reacting more significantly to monetary policy shocks when the level of U.S. policy uncertainty is low. We argue that the U.S. government’s actions regarding policy changes in the U.S. is a source of uncertainty for Euro area investors and high levels of policy uncertainty that spill over from the U.S. drive Euro area investors to adopt a wait-and-see approach, leading to a relatively weaker (and sometimes insignificant) response of price and output to monetary tightening in the Euro area. The findings underscore the importance of market integration and coordination of economic policy changes on the effectiveness of monetary policy on the macroeconomy on both sides of the Atlantic. Our results thus, provide evidence in favour of the policy ineffectiveness hypothesis in the Euro area contingent on the economic policy uncertainty of the U.S.
    Keywords: Economic Policy Uncertainty, Monetary Policy, Interacted Structural Vector Autoregressive Model
    JEL: C32 C51 C54 E30 E31 E32 E52
    Date: 2016–03
  19. By: Gary Gorton; Ellis W. Tallman
    Abstract: “Too-big-to-fail” is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to member banks during financial crises. This behavior strongly suggests that “too-big-to-fail” is not the problem causing modern crises. Rather it is a reasonable response to the threat posed to large banks by the vulnerability of short-term debt to runs.
    JEL: E02 E32 E42 E52 E58
    Date: 2016–03
  20. By: Guay Lim (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Sarantis Tsiaplias (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: Understanding the impact of changes in interest rates on house prices is important for managing house price bubbles and ensuring housing affordability. This paper investigates the effect of interest rates on regional house price to income measures based on a non-linear smooth transition VAR model of inter-regional house price dynamics. To minimize the impact of housing mix changes on estimated effects, we apply the model to an Australian dataset of regional hedonic house price indices that account for both changes in housing mix and quality over time. The empirical analysis provides evidence that house price to income ratios depend non-linearly on interest rates, and moreover that there is an interest rate ‘transition point’ below which a house price bubble is probable. We investigate the implications for monetary policy of stable and unstable house price regimes and propose a housing lending rate lower bound that achieves long-run house price stability in the presence of regime uncertainty. To check the generality of the result, we also apply the model to aggregate Australian and US data. Classification-C30, E43, E52, G21, R10, R31
    Keywords: House prices, interest rates, monetary policy, nonlinear VAR, housing affordability, bubbles
    Date: 2016–01
  21. By: Zineddine Alla; Raphael A. Espinoza; Atish R. Ghosh
    Abstract: This paper analyzes the use of unconventional policy instruments in New Keynesian setups in which the ‘divine coincidence’ breaks down. The paper discusses the role of a second instrument and its coordination with conventional interest rate policy, and presents theoretical results on equilibrium determinacy, the inflation bias, the stabilization bias, and the optimal central banker’s preferences when both instruments are available. We show that the use of an unconventional instrument can help reduce the zone of equilibrium indeterminacy and the volatility of the economy. However, in some circumstances, committing not to use the second instrument may be welfare improving (a result akin to Rogoff (1985a) example of counterproductive coordination). We further show that the optimal central banker should be both aggressive against inflation, and interventionist in using the unconventional policy instrument. As long as price setting depends on expectations about the future, there are gains from establishing credibility by using any instrument that affects these expectations.
    Date: 2016–03–10
  22. By: Adolfo Barajas; Ralph Chami; Christian Ebeke; Anne Oeking
    Abstract: Despite welfare and poverty-reducing benefits for recipient households, remittance inflows have been shown to entail macroeconomic challenges; producing Dutch Disease-type effects through their upward (appreciation) pressure on real exchange rates, reducing the quality of institutions, delaying fiscal adjustment, and ultimately having an indeterminate effect on long-run growth. The paper explores an additional challenge, for monetary policy. Although they expand bank balance sheets, providing a stable flow of interest-insensitive funding, remittances tend to increase banks’ holdings of liquid assets. This both reduces the need for an interbank market and severs the link between the policy rate and banks’ marginal costs of funds, thus shutting down a major transmission channel. We develop a stylized model based on asymmetric information and a lack of transparent borrowers and undertake econometric analysis providing evidence that increased remittance inflows are associated with a weaker transmission. As independent monetary policy becomes impaired, this result is consistent with earlier findings that recipient countries tend to favor fixed exchange rate regimes.
    Keywords: Remittances;Monetary policy;Worker’s Remittances, lending channel, banking sector, bank balance sheets, balance sheets, exchange, General, Fiscal and Monetary Policy in Development, All Countries, banking sector.,
    Date: 2016–03–01
  23. By: Canofari, Paolo (LUISS School of European Political Economy); Messori, Marcello (LUISS School of European Political Economy)
    Abstract: This paper aims to assess the possible impact that the depreciation of a common currency can have on the stability of the related monetary union. It shows that, other things being equal, this depreciation reduces the probability of the weakest Member States leaving the monetary union when hit by a specific and negative demand shock, and the probability of other Member States, which belong to the same area but are not directly hit by any shock, deciding to leave due to the contagion effect. Obviously, the depreciation of the common currency is not the only variable affecting the stability of a monetary area. In this respect, it is sufficient to recall that competition in the international markets is not just price competition. Hence, the paper also analyzes the role played by trade balance elasticities. In our framework, it emerges that higher (lower) elasticities of the weakest countries hit by the specific shock make their exit more (less) likely. Moreover, given the elasticities of these same countries, there is a threshold value in the elasticities of the other Member States under which contagion can never happen. It is apparent that this framework applies to the possible behavior of ‘peripheral’ countries in the European Economic and Monetary Union (EMU), and to their interactions with the rest of the area. Hence, this paper can be read as a strategic interaction between two representative countries of the euro area in order to identify the selection mechanisms between good and bad equilibria.
    Keywords: Euro breakup; currency crisis; contagion; Nash equilibria
    JEL: F30 F31 F41 G01
    Date: 2016–11–05
  24. By: Michele Piffer
    Abstract: This paper uses a structural VAR model to study the effect of monetary policy on the delinquency rate of business loans and consumer credit. The VAR is identified using at the same time several external instruments, which cover different approaches from the literature. Delinquency rates, defined as the rate of loans whose repayment is overdue for more than a month relative to total loans, are found to decrease in response to a monetary expansion. The results are consistent with a general equilibrium effect formalized in the paper using a standard model of optimal defaults. According to the model, the decrease in defaults is driven by the fact that monetary expansions increase aggregate demand and push up profits and income, thereby improving the repayment possibility of borrowers.
    Keywords: Monetary shocks, risk-taking channel, SVAR with external instruments
    JEL: E52 E58
    Date: 2016
  25. By: Sarunas Girdenas (Department of Economics, University of Exeter)
    Abstract: We consider a New-Keynesian model with ?financial and labour market frictions where ?firms borrowing is limited by the enforcement constraint. The wage is set in a bargaining process where the fi?rm?s shareholder and worker share the production surplus. As debt service is considered to be a part of production costs, ?firms borrow to reduce the surplus which allows to lower the wage. We study the model?s response to ?nancial shock under two Taylor-type interest rate rules: ?first one responds to in?ation and borrowing, second - to in?ation and unemployment. We have found that the second rule delivers better policy in terms of the welfare measure. Additionally, we show that the feedback on unemployment in this rule depends on the extent of workers? bargaining power.
    Keywords: Labour Market Frictions, Financial Frictions, Optimal Monetary Policy, Monetary Policy Rules.
    JEL: E52 E43 E24
    Date: 2016
  26. By: Ahad, Muhammad
    Abstract: This study has investigated money demand function incorporating financial development, industrial production, income and exchange rate over the period of 1972-2012 for Pakistan. The newly introduced cointegration approach (Bayer-Hanck combined cointegration) and Johansen cointegration approach have been used to test cointegration among variables. The Vector Error Correction Model (VECM) model has applied to explain the direction of causality in the long run and short run. The Unit root problem has been tested by ADF and PP unit root tests. The results reveal that long run relationship exists between money demand, financial development, income, industrial production and exchange rate. Financial development is the main factor to determine the money demand function in both long and short run. The results indicate that feedback effect is found between financial development and money demand.
    Keywords: Financial Development, Money demand, Cointegration, Causality, Pakistan
    JEL: E41 G20
    Date: 2015
  27. By: Michael Coopersmith; Pascal J. Gambardella
    Abstract: This article is an extension of the work of one of us (Coopersmith, 2011) in deriving the relationship between certain interest rates and the inflation rate of a two component economic system. We use the well-known Fisher relation between the difference of the nominal interest rate and its inflation adjusted value to eliminate the inflation rate and obtain a delay differential equation. We provide computer simulated solutions for this equation over regimes of interest. This paper could be of interest to three audiences: those in Economics who are interested in interest and inflation; those in Mathematics who are interested in examining a detailed analysis of a delay differential equation, which includes a summary of existing results, simulations, and an exact solution; and those in Physics who are interested in non-traditional applications of traditional methods of modeling.
    Date: 2016–03
  28. By: João Barata Ribeiro Blanco Barroso
    Abstract: We show robust evidence that quantitative easing policies by the Federal Reserve cause portfolio rebalancing by US investors towards foreign assets in emerging market economies. These effects are on top of any effects such polices might have through global or specific conditions of the recipient economies. To control for such conditions, we use capital flows from the rest of the world to the same recipient economy as a proxy variable. We gather a comprehensive dataset for Brazilian capital flows and a smaller dataset for other emerging market economies from completely independent sources. Both datasets show that more than 50% of US flows to the recipient economies in the period is accounted for by quantitative easing policies. We use the detailed datasets to break down this overall effect on the specific asset categories and sectors of the recipient economies.
    Date: 2016–03
  29. By: Alberto Cavallo; Guillermo Cruces; Ricardo Perez-Truglia
    Abstract: When forming expectations, households may be influenced by the possibility that the information they receive is biased. In this paper, we study how individuals learn from potentially-biased statistics using data from both a natural and a survey-based experiment obtained during a period of government manipulation of inflation statistics in Argentina (2006-2015). This period is interesting because of the attention to inflation information and the availability of both official and unofficial statistics. Our evidence suggests that rather than ignoring biased statistics or navively taking them at face value, households react in a sophisticated way, as predicted by a Bayesian learning model, effectively de-biasing the official data to extract all its useful content. We also find evidence of an asymmetric reaction to inflation signals, with expectations changing more when the inflation rate rises than when it falls. These results are useful for understanding the formation of inflation expectations in less extreme contexts than Argentina, such as the United States and Europe, where experts may agree that statistics are unbiased but households do not.
    JEL: C83 C93 E31 E58
    Date: 2016–03
  30. By: Stephanos Papadamou; Moïse Sidiropoulos; Eleftherios Spyromitros
    Abstract: This paper addresses the issue of impacts of central banks’ conservativeness/independence on stock market volatility. Using a simple theoretical macroeconomic model, we analytically find a positive link between stock prices volatility and central bank conservativeness. By applying panel data analysis on a set of 29 countries from 1998 to 2005, sufficient evidence for this positive relationship is provided using two different measures of stock market volatility.
    Keywords: Central bank independence, stock market volatility, panel data.
    JEL: E52 E58 G1
    Date: 2016
  31. By: Liew, Siew Ling
    Abstract: capital flight is the shift of one investment to another in search of greater prospect or increased returns. Capital flight is sometimes stimulated by a nation’s unfavorable conditions where the country may be undergoing high inflation or political turmoil. However, it is most commonly seen at times of currency instability. Most of the time, the outflows are large enough to affect a country’s entire financial system. Simply to say, such phenomenon is bad for the home country as it deters the economy. This is especially true for developing countries whereby the nation’s financial status is often not strong enough to sustain huge amount of capital flight. There are three different methods to measure capital flight, namely Cuddington (1986) measure, World Bank (1985) measure and Morgan Guaranty Trust Company (1986) measure.
    Keywords: Literature review, capital flight, economic growth
    JEL: F0
    Date: 2016–03–22

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