nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒04‒16
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Central Banks' Predictability: An Assessment by Financial Market Participants By Bernd Hayo; Matthias Neuenkirch
  2. Currency turmoil in an unbalanced world economy By Michel Aglietta; Virginie Coudert
  3. The Mechanism of Inflation Expectation Formation among Consumers By Abe, Naohito; Ueno, Yuko
  4. Monetary and Fiscal Policy Interactions: Leeper (1991) Redux By Guido Ascari; Anna Florio; Alessandro Gobbi
  5. Monetary Policy and Large Crises in a Financial Accelerator Agent-Based Model By Giri, Federico; Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
  6. Revisiting Gertler-Gilchrist Evidence on the Behavior of Small and Large Firms By Kudlyak, Marianna; Sanchez, Juan M.
  7. Empirical Assessment of the Impact of Monetary Policy Communication on the Financial Market By Masahiko Shibamoto
  8. Liquidity and Counterparty Risks Tradeoff in Money Market Networks By Carlos León; Miguel Sarmiento
  9. Monetary Policy According to HANK By Greg Kaplan; Benjamin Moll; Giovanni L. Violante
  10. A comparative analysis of developments in central bank balance sheet composition By Christiaan Pattipeilohy
  11. The speed of the exchange rate pass-through By Bonadio, Barthélémy; Fischer, Andreas M; Sauré, Philip
  12. Aging, international capital flows and long-run convergence By Frederic Ganon; Gilles Le Garrec; Vincent Touzé
  13. Limited Liability, Asset Price Bubbles and the Credit Cycle: The Role of Monetary Policy By Jakub Mateju; Michal Kejak
  14. Asset composition of the Philippines' universal and commercial banks : monetary policy or self-discipline? By Kashiwabara, Chie
  15. Should Central Banks Target Investment Prices? By Susanto Basu; Pierre De Leo
  16. Public spending, monetary policy and growth: Evidence from EU countries By Papaioannou, Sotiris
  17. A Stable 4% Inflation Could Get Canadians One Half Million More Jobs By Pierre Fortin
  18. Quantitative Easing Policy, Exchange Rates and Business Activity by Industry in Japan from 2001-2006 By Hiroyuki Ijiri; Yoichi Matsubayashi
  19. Mere criticism of the ECB is no solution By Fratzscher, Marcel; Gropp, Reint; Kotz, Hans-Helmut; Krahnen, Jan Pieter; Odendahl, Christian; di Mauro, Beatrice Weder; Wolff, Guntram B.
  20. How can it work? On the impact of quantitative easing in the Eurozone By Saraceno, Francesco; Tamborini , Roberto
  21. Countercyclical versus Procyclical Taylor Principles By Chatelain, Jean-Bernard; Ralf Kirsten
  22. The institutional underpinnings of the prospective euro adoption in Poland By Rapacki, Ryszard
  23. Fiscal Forecasts at the FOMC: Evidence from the Greenbooks By Dean Croushore; Simon van Norden
  24. Sustainable international monetary policy cooperation By Ippei Fujiwara; Timothy Kam; Takeki Sunakawa
  25. The Deposits Channel of Monetary Policy By Itamar Drechsler; Alexi Savov; Philipp Schnabl
  26. Why bank capital matters for monetary policy By Leonardo Gambacorta; Hyun Song Shin
  27. The Impact of Government-Driven Loans in the Monetary Transmission Mechanism: what can we learn from firm-level data? By Marco Bonomo and Bruno Martins
  28. The Outlook for the Economy and Monetary Policy: Low-Frequency Policymaking in a High-Frequency World By Mester, Loretta J.
  29. Investment and forward-looking monetary policy: A Wicksellian solution to the problem of indeterminacy By Stephen McKnight
  30. The Impact of Unconventional Monetary Policy on Firm Financing Constraints : Evidence from the Maturity Extension Program By Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison
  31. "The Empirics of Long-Term US Interest Rates" By Tanweer Akram; Huiqing Li
  32. Have Large Scale Asset Purchases Increased Bank Profits? By Juan A. Montecino; Gerald Epstein
  33. Beyond carbon pricing: the role of banking and monetary policy in financing the transition to a low-carbon economy By Emanuele Campiglio

  1. By: Bernd Hayo; Matthias Neuenkirch
    Abstract: In this paper, we examine the relationship between market participants' perception of central bank predictability and their assessment of central bank communication skills and success in conveying objectives as well as the importance of transparency-enhancing measures, such as voting records, transcripts or minutes of policy meetings, and conditional interest rate projections. Our analysis is based on a unique dataset of almost 500 market participants worldwide who were asked questions with respect to the performance of the Bank of England, the Bank of Japan, the European Central Bank, and the Federal Reserve. Our results indicate a positive and economically notable relationship between central banks’ ability to convey their objectives and their overall communication skills on the one hand, and market participants’ perception of the banks’ predictability on the other hand, for all four central banks. The dissemination of more specific information does not appear to contribute to better central bank predictability. This raises doubts about the widely-held notion that implementing ever more transparency-enhancing measures will improve central bank predictability.
    Keywords: Central Bank, Communication, Financial Market Participants, Objectives, Predictability, Survey, Transparency
    JEL: E52 E58
    Date: 2016
  2. By: Michel Aglietta; Virginie Coudert
    Abstract: The world is once again under threat of currency turmoil ignited by a vigorous appreciation of the dollar against all other currencies. This is the harbinger of another long cycle which has been the pattern of exchange rates since the fall of the Bretton Woods system in 1971. Because dollar cycles are driven by momentum dynamics disconnected from fundamentals, they are likely to distort real effective exchange rates between major currencies. The dollar appreciation phase may also wreak havoc in the financial systems of emerging countries that are heavily indebted in dollars. In the present state of the world economy, the prospect of a new dollar cycle is particularly worrisome since most countries, far from deleveraging after the financial crisis, have massively increased their debt relative to GDP in the non-financial sectors. The rise in dollar debt is due to subpar income growth in the world economy which has precluded deleveraging of the already high level of debt reached in 2007 on the one hand, and to the status of the dollar as the de facto exclusive supplier of international liquidity on the other hand. Because US monetary policy is not bound by any international rules, it has supplied liquidity on its own terms, flooding the world with cheap money in order to revive domestic consumption in the US. The catalyst for renewed dollar appreciation has been the divergence in monetary policy between the US on the one side, Japan until early 2013, and the euro area until late 2014 on the other. Monetary policies in these latter countries, working counter to the US before a recent change in course, have created deflation risks that the new trend of dollar appreciation compounded with the slump in the price of oil is expected to correct, spreading the recovery worldwide. However, this is the benign scenario. History would suggest the possibility of a much more unpleasant outcome. Misalignment in exchange rates is a repeated feature of dollar cycles, as much as unsustainable imbalances in the balance of payments. Currently, the gap between US long term interest rates and similar rates in the euro area and Japan is large and expected to widen. Nevertheless, the market’s expectations of future short-term interest rates up to end-2017 are much lower than the Fed’s. If the market expectations are right, this means that the US recovery will be hurt by the dollar turning from being cheap to expensive. If the US recovery stalls, this will mean that secular stagnation will be with us for an indefinite time.
    Keywords: dollar;exchange rate
    JEL: E52
    Date: 2015–07
  3. By: Abe, Naohito; Ueno, Yuko
    Abstract: How do we determine our expectations of inflation? Because inflation expectations greatly influence the economy, researchers have long considered this question. Using a survey with randomized experiments among 15,000 consumers, we investigate the mechanism of inflation expectation formation. Learning theory predicts that once people obtain new information on future inflation, they change their expectations. In this regard, such expectations are the weighted average of prior belief and information. We confirm that the weight for prior belief is a decreasing function of the degree of uncertainty. Our results also show that monetary authority information affects consumers to a greater extent when expectations are updated. With such information, consumers change their inflation expectations by 37% from the average. This finding supports improvements to monetary policy publicity.
    Keywords: inflation expectations, Bayesian updating, rational expectation, randomized survey experiments
    JEL: E31 C81 D80
    Date: 2016–03
  4. By: Guido Ascari; Anna Florio; Alessandro Gobbi
    Abstract: Abstract: A natural generalisation of the original Leeper (1991) taxonomy leads to the concepts of globally active (or passive) and globally switching policies to explain the determinacy properties of a model where both monetary and fiscal policies may switch according to a Markov process. Monetary and fiscal policies need to be globally balanced to guarantee a unique equilibrium: globally active monetary policies need to be coupled with globally passive fiscal policies, and switching monetary policies with switching fiscal policies. This new taxonomy also links the determinacy analysis to the model dynamics because it qualifies under which conditions expectations and wealth effectsarise in the Markov-switching model.
    Keywords: Monetary Policy and Fiscal Policy Interaction, Markov Switching, Non-linear models.
    JEL: E5
    Date: 2016–03–15
  5. By: Giri, Federico; Riccetti, Luca; Russo, Alberto; Gallegati, Mauro
    Abstract: An accommodating monetary policy followed by a sudden increase of the short term interest rate often leads to a bubble burst and to an economic slowdown. Two examples are the Great Depression of 1929 and the Great Recession of 2008. Through the implementation of an Agent Based Model with a financial accelerator mechanism we are able to study the relationship between monetary policy and large scale crisis events. The main results can be summarized as follow: a) sudden and sharp increases of the policy rate can generate recessions; b) after a crisis, returning too soon and too quickly to a normal monetary policy regime can generate a "double dip" recession, while c) keeping the short term interest rate anchored to the zero lower bound in the short run can successfully avoid a further slowdown.
    Keywords: Monetary Policy; Large Crises; Agent Based Model; Financial Accelerator; Zero Lower Bound.
    JEL: C63 E32 E44 E58
    Date: 2016–03–30
  6. By: Kudlyak, Marianna (Federal Reserve Bank of Richmond); Sanchez, Juan M. (Federal Reserve Bank of St. Louis)
    Abstract: Gertler and Gilchrist (1994) provide evidence for the prevailing view that adverse shocks are propagated via credit constraints of small firms. We revisit the behavior of small versus large firms during the episodes of credit disruption and recessions in the sample extended to cover the 2007-09 economic crisis. We find that large firms'' short-term debt and sales contracted relatively more than those of small firms during the 2007-09 episode. Furthermore, the short-term debt of large firms also contracted relatively more in the previous tight money episodes if one takes into account the longer period that it takes for large firms’ debt to reach its post-shock trough. Our findings challenge the view that propagation of shocks in the economy takes place via credit constraints of small firms.
    Keywords: Small and Large firms; Credit Constrains; Propagation of Shocks; Leverage
    JEL: E32 E51 E52
    Date: 2016–03–30
  7. By: Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: This paper proposes an empirical framework to explore the role of monetary policy communication. We develop an econometric methodology to impose restrictions for the identification of communication effects distinct from the effects of policy decisions. The empirical results support the hypothesis that both policy decision and communication factors are required to adequately capture the financial market reactions to monetary policy news. By applying a text mining approach focused on phrases that appear in press conferences on policy meeting days, we find that the communication factors identified are characterized by the policy intentions and preferences of the central bank.
    Keywords: Monetary policy communication, Policy surprise, Financial market, Event study, Text mining
    JEL: E52 E58 C30
    Date: 2016–04
  8. By: Carlos León (Banco de la República de Colombia); Miguel Sarmiento (Banco de la República de Colombia)
    Abstract: We examine how liquidity is exchanged in different types of Colombian money market networks (i.e. secured, unsecured, and central bank’s repo networks). Our examination first measures and analyzes the centralization of money market networks. Afterwards, based on a simple network optimization problem between financial institutions’ mutual distances and number of connections, we examine the tradeoff between liquidity risk and counterparty risk. Empirical evidence suggests that different types of money market networks diverge in their centralization, and in how they balance counterparty risk and liquidity risk. We confirm an inverse and significant relation between counterparty risk and liquidity risk, which differs across markets in an intuitive manner. We find evidence of liquidity cross-underinsurance in secured and unsecured money markets, but they differ in their nature. Central bank’s role in mitigating liquidity risk is also supported by our results. Classification JEL:D85, E58, L14
    Keywords: liquidity risk, counterparty risk, network, centralization, money market
    Date: 2016–04
  9. By: Greg Kaplan (Princeton University); Benjamin Moll (Princeton University); Giovanni L. Violante (New York University)
    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.
    Date: 2016–03
  10. By: Christiaan Pattipeilohy
    Abstract: In this paper we analyse developments in the composition of central bank balance sheets for a large set of central banks in a unified framework. Since 2007, central banks in advanced economies have experienced pronounced changes in balance sheet composition as a consequence of unconventional monetary policy measures. In addition, we document a convergence in balance sheet composition from 2007 until 2009, as the initial crisis response was fairly homogeneous across advanced economies, mostly driven by financial stability concerns. However, since 2009 design of balance sheet policies has been more diverse, reflecting diverging policy challenges across regions. By contrast, balance sheets of central banks in emerging market economies have remained broadly unchanged in terms of composition in the period under review.
    Keywords: Central bank balance sheet; unconventional monetary policy; dissimilarity analysis
    JEL: E40 E42 E50 E58
    Date: 2016–04
  11. By: Bonadio, Barthélémy; Fischer, Andreas M; Sauré, Philip
    Abstract: This paper analyzes the speed of the exchange rate pass-through into importer and exporter unit values for a large, unanticipated, and unusually 'clean' exchange rate shock. Our shock originates from the Swiss National Bank's decision to lift the minimum exchange rate policy of one euro against 1.2 Swiss francs on January 15, 2015. This policy action resulted in a permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the response of unit values to this exchange rate shock at the daily frequency for different invoicing currencies using the universe of Switzerland's transactions-level trade data. The main finding is that the speed of the exchange rate pass-through is fast: it starts on the second working day after the exchange rate shock and reaches the medium-run pass-through after eight working days on average. Moreover, we decompose the pass-through by invoicing currencies and find strong evidence that underlying price adjustments occurred within a similar time frame. Our observations suggest that nominal rigidities play only a minor role in the face of large exchange rate shocks.
    Keywords: daily exchange rate pass-through; large exchange rate shock; speed
    JEL: F14 F31 F41
    Date: 2016–03
  12. By: Frederic Ganon (University of Le Havre - EDEHN); Gilles Le Garrec (OFCE Sciences PO); Vincent Touzé (OFCE, Sciences Po)
    Abstract: This paper analyses how the economic, demographic and institutional differences between two regions -one developed and called the North, the other emerging and called the South- drive the international capital flows and explain the world economic equilibrium. To this end, we develop a simple two-period OLG model. We compare closed-economy and open-economy equilibria. We consider that openness facilitates convergence of South’s characteristics towards North’s. We examine successively the consequences of a technological catching-up, a demographic transition and an institutional convergence of pension schemes. We determine the analytical solution of the dynamics of the world interest rate and deduce the evolution of the current accounts. These analytical results are completed by numerical simulations. They show that the technological catching-up alone leads to a welfare loss for the North in reason of capital flows towards the South. If we add to this first change a demographic transition, the capital demand is reduced in the South whereas its saving increases in reason of a higher life expectancy. These two effects contribute to reduce the capital flows from the North to the South. Finally, an institutional convergence of the two pension schemes reduces the South’s saving rate which increases the capital flow from the North to the South.
    Keywords: International Capital flows, OLG, Economic convergence, demographic transition
    JEL: D91 F40 J10 O33
    Date: 2016–03
  13. By: Jakub Mateju; Michal Kejak
    Abstract: This paper suggests that the dynamics of the non-fundamental component of asset prices are one of the drivers of the credit cycle. The presented model builds on the financial accelerator literature by including a stock market where investors with limited liability trade stocks of productive firms with stochastic productivities. Investors borrow funds from the banking sector and can go bankrupt. Their limited liability induces a moral hazard problem which shifts demand for risk and drives prices of risky assets above their fundamental value. Embedding the contracting problem in a New Keynesian general equilibrium framework, the model shows that expansionary monetary policy induces loose credit conditions and leads to a rise in both the fundamental and non-fundamental components of stock prices. A positive shock to the non-fundamental component triggers a credit cycle: collateral value rises, and lending and default rates decrease. These effects reverse after several quarters, inducing a credit crunch. The credit boom lasts only while stock market growth maintains sufficient momentum. However, monetary policy does not reduce the volatility of inflation and the output gap by reacting to asset prices.
    Keywords: Credit cycle, limited liability, monetary policy, non-fundamental asset pricing
    JEL: E32 E44 E52 G10
    Date: 2015–12
  14. By: Kashiwabara, Chie
    Abstract: The central bank of the Philippines (Bangko Sentral ng Pilipinas, BSP) has improved its monetary policy measures since the 2000s. After rationalizing the country's banking sector since late-1990s, its monetary policy and the uniiversal/commercial banks' (UCBs) behavior in allocating their assets has changed since mid-2000s. Though further and more detailed studies are nesessary, based on the results of simple correlation analyses conducted in this paper suggest a possible mixture of the country's monetary policy and their own decision-making in asset allocations, instead of a "follow-through" attitude.
    Keywords: Monetary policy, Banks, Monetary policy measure, Universal and commercial banks, The Philippines
    JEL: E42 E52 G38
    Date: 2016–03
  15. By: Susanto Basu (Boston College; NBER); Pierre De Leo (Boston College)
    Abstract: Yes, they should. Central banks nearly always state explicit or implicit inflation targets in terms of consumer price inflation. If there are nominal rigidities in the pricing of both consumption and investment goods and if the shocks to the two sectors are not identical, then monetary policy cannot stabilize inflation and output gaps in both sectors. Thus, the central bank faces a tradeoff between targeting consumption price inflation and investment price inflation. In this setting, ignoring investment prices typically leads to substantial welfare losses because the intertemporal elasticity of substitution in investment is much higher than in consumption. In our calibrated model, consumer price targeting leads to welfare losses that are at least three times the loss under optimal policy. A simple rule that puts equal weight on stabilizing consumption and investment price comes close to replicating the optimal policy. Thus, GDP deflator targeting is not a good approximation to optimal policy. We conclude that significant welfare gains can be achieved if central banks shift to targeting a weighted average of consumer and investment price inflation, although this would require a major change in current central banking practice.
    Keywords: Inflation Targeting; Investment-Specific Technical Change; Investment Price Rigidity; Optimal Monetary Policy
    JEL: E52 E58 E32 E31
    Date: 2016–03–25
  16. By: Papaioannou, Sotiris
    Abstract: This study examines whether differences in monetary policy are associated with diverging effects of public spending on growth. At first stage, we estimate public spending multipliers for each country of the European Union (EU). Their size varies considerably across countries. Then we incorporate in the analysis the role of monetary policy and examine whether real interest rates affect the relationship between public spending and growth. The main result of the econometric analysis is that government spending can affect growth positively only when real interest rates become negative. This result remains robust to several changes in the econometric specification and measures of interest rate.
    Keywords: Public spending, Fiscal multipliers, Monetary policy, Economic growth.
    JEL: E43 E62 O40
    Date: 2016–03–15
  17. By: Pierre Fortin
    Abstract: The Inflation-Control Agreement between the Government and the Bank of Canada is reviewed and renewed every five years. In this paper, I propose that the upcoming 2016 agreement increase the inflation target by 2 percentage points, from the current 2% to 4%. I first note that the room to stimulate economic activity and employment when the Bank of Canada judges that it is needed has narrowed dangerously in the past 25 years. I argue that the only fully effective means of freeing the Bank from the operational straightjacket into which it has fallen is setting the inflation target at 4% instead of 2%. I then report of evidence that the strong resistance of Canadian employers and employees to money wage cuts generates a significant permanent trade-off between inflation and unemployment at the macro level when inflation is less than 5%. Combining these two strands of observations, I conclude that moving to 4% inflation would generate about one half million more permanent jobs for Canadians and, over time, add some $50 billion per year to domestic income.
    Keywords: Inflation target, zero lower bound, anchoring of expectations, downward nominal wage rigidity, Bank of Canada, inflation-control agreement, monetary policy.
    JEL: E5 E6 H3 J3
    Date: 2016
  18. By: Hiroyuki Ijiri (Graduate School of Economics, Kobe University); Yoichi Matsubayashi (Graduate School of Economics, Kobe University)
    Abstract: This study empirically investigates the dynamic effect of Japan's quantitative easing (QE) policy on industry-specific business activity using a time-varying parameter model and monthly data spanning 2001-2006. This model yields more reliable and precise results than earlier fixed effects models using quarterly data. Its first major finding is that the effect of QE on yen-dollar exchange rates varied during the period and is most evident in its final phases, whereas its effect on stock prices persisted almost continuously. Second, QE's effect on Japan's real economy-that is, on industrial production- varies by industry and over time. Most notably, QE raised production via yen-dollar depreciation in the machinery sector (e.g. General and Transport machinery), Chemical, Nonferrous metal, and Iron and steel during its latter phases. This study is the first to investigate how unconventional monetary policy influences Japan's real economy by analyzing the yen-dollar exchange rate during the second half of QE implementation in Japan.
    Keywords: Quantitative easing (QE) policy, Time-Varying Parameter vector autoregressive (TVP-VAR) model, exchange rates, stock prices, export.
    JEL: E44 E52 E58
    Date: 2016–03
  19. By: Fratzscher, Marcel; Gropp, Reint; Kotz, Hans-Helmut; Krahnen, Jan Pieter; Odendahl, Christian; di Mauro, Beatrice Weder; Wolff, Guntram B.
    Abstract: The eurozone remains in a deep, largely macro-economic crisis. A robust global economy and falling oil prices have supported Europe´s economy for some time, but by now it is clear that the eurozone will only be able to pull itself out of this crisis by means of more decisive action. One response, the recent easing of monetary policy by the European Central Bank (ECB), has, for the most part, been sharply and onesidedly criticised in Germany. Monetary policy inaction seems to be the preferred option of many in Germany. The authors discuss the following question: What would happen if the ECB failed to respond to the excessively low inflation and the weak economy? And what economic policy would be suitable under the current circumstances, if not monetary policy?
    Keywords: eurozone,crisis,monetary policy
    Date: 2015
  20. By: Saraceno, Francesco (LUISS School of European Political Economy); Tamborini , Roberto (University of Trento)
    Abstract: How can the quantitative easing (QE) programme launched in March 2015 by the ECB be successful in the Eurozone (EZ)? What will be its impact on the member countries? And how will it relate to countries' fiscal policies? To address these questions, we use a simple extension of the three-equation New Keynesian model. We modify the benchmark model in two respects: 1) we (re)-introduce an LM money supply and demand equation to capture the fact that the ECB operates at the zero lower bound and hence cannot use a standard Taylor rule; and 2) we extend the model to a two-country framework. The model supports the ECB official view that the channel whereby QE is meant to operate is the reversal of deflationary expectations. It also highlights that instrumental to this goal is the elimination of persistent output gaps, both at the EZ and at the country level, and hence the reduction of country-specific interest-rate spreads - the "unofficial" objective of the programme. We show that QE, if large enough, can succeed for the EZ as a whole. The ECB nevertheless cannot also close individual countries' output gaps, unless specific and unrealistic conditions are met. In this case fiscal accommodation at the country level should also intervene. We show that QE can enhance the effectiveness of fiscal policy, and therefore conclude that the coordination of fiscal and monetary policies is of paramount importance.
    Keywords: Monetary Policy; ECB; Deflation; Zero-­Lower-­Bound; Fiscal Policy
    JEL: E30 E40 E50
    Date: 2016–03–15
  21. By: Chatelain, Jean-Bernard; Ralf Kirsten
    Abstract: Assuming inflation is a forward variable in Taylor (1999) model, this paper finds opposite policy rule recommandations with counter-cyclical policy rule parameters (Taylor principle: inflation rule larger than one and bounded upwards) in the case of optimal policy under commitment versus pro-cyclical policy rule parameters (inflation rule parameter below zero) in the case of discretionary policy. For the observed high inertia of the Fed with variations of the nominal policy rate within the range [0%,4%] during the great moderation, the cost of time-inconsistency is negligible for optimal policy. Time-inconsistency cannot be the ultimate argument to reject counter-cyclical Taylor principle.
    Keywords: Monetary policy,Optimal policy under commitment,Time consistent discretionary policy,Taylor rule
    JEL: C6 E4 E5
    Date: 2016
  22. By: Rapacki, Ryszard
    Abstract: This paper aims to assess both the explicit and implicit convergence criteria for Poland's possible membership in the Economic and Monetary Union, with special emphasis on institutional underpinnings of the country's prospects of adopting the euro. While the former set of criteria (embedded in the Maastricht Treaty) comprises fiscal and monetary indicators of nominal convergence, the latter highlight the resilience of a country to adverse asymmetric shocks and its ability to compete internationally, and point to the importance of labor mobility in particular and institutional quality in general as key shock-absorbing mechanisms and main drivers of a sustainable comparative advantage of a country. The paper focuses therefore on the evaluation of existing institutions and their evolution in Poland vis-à-vis the standards prevailing in the euro zone, as key determinants of the country's readiness to become an EMU member. The theoretical background of the assessment involved comprises two chief pillars: the optimum currency area theory (OCA) and the 'diversity of capitalism' (DoC) approach.
    Keywords: euro adoption,convergence
    JEL: E66 B52
    Date: 2015
  23. By: Dean Croushore; Simon van Norden
    Abstract: This paper uses a new data set of fiscal policy forecasts and estimates prepared for the FOMC to understand how they have influenced U.S. monetary policy. We find limited evidence of bias in the Fed Staff’s fiscal forecasts and that these forecasts contain useful information beyond that in the CBO’s forecasts. Forecast errors for the fiscal variables have been only weakly correlated with forecast errors for inflation and output growth, but those for the structural surplus are much more highly correlated with those for the unemployment rate. Some fiscal variables can also account for a significant fraction of the “exogenous” changes in the federal funds rate target studied by Romer and Romer (2004).
    Keywords: fiscal policy, deficits, forecasting, FOMC, Greenbook,
    JEL: E62 H68
    Date: 2016–04–08
  24. By: Ippei Fujiwara; Timothy Kam; Takeki Sunakawa
    Abstract: We provide new insight on international monetary policy cooperation using a two-country model based on Benigno and Benigno (2006). Assuming symmetry, save for the volatility of (markup) shocks, we show that an incentive feasibility problem exists between the policymakers across national borders: The country faced with a relatively more volatile markup shock has an incentive to deviate from an assumed Cooperation regime to one with Noncooperation. More generally, a similar result obtains if countries differ in size. This motivates our study of a history-dependent Sustainable Cooperation regime which is endogenously sustained by a cross-country, state-contingent contract between policymakers. Under Sustainable Cooperation, the responses of inflation and the output gap in both countries are different from those induced by the Cooperation and Noncooperation regimes reflecting the endogenous welfare redistribution between countries under the state-contingent contract. Such history-contingent welfare redistributions are supported by resource transfers affected through incentive-compatible variations in the terms of trade (or net exports). Such an endogenous cooperative solution may also provide a theoretical rationale for perceived occasional cooperation between national central banks in reality.
    Keywords: Monetary policy cooperation, Sustainable plans, Welfare
    JEL: E52 F41 F42
    Date: 2016–04
  25. By: Itamar Drechsler; Alexi Savov; Philipp Schnabl
    Abstract: We propose and test a new channel for the transmission of monetary policy. We show that when the Fed funds rate increases, banks widen the interest spreads they charge on deposits, and deposits flow out of the banking system. We present a model in which imperfect competition among banks gives rise to these relationships. An increase in the nominal interest rate increases banks' effective market power, inducing them to increase deposit spreads. Households respond by substituting away from deposits into less liquid but higher-yielding assets. Using branch-level data on all U.S. banks, we show that following an increase in the Fed funds rate, deposit spreads increase by more, and deposit supply falls by more, in areas with less deposit competition. We control for changes in banks' lending opportunities by comparing branches of the same bank. We control for changes in macroeconomic conditions by showing that deposit spreads widen immediately after a rate change, even if it is fully expected. Our results imply that monetary policy has a significant impact on how the financial system is funded, on the quantity of safe and liquid assets it produces, and on its lending to the real economy.
    JEL: E52 E58 G12 G21
    Date: 2016–04
  26. By: Leonardo Gambacorta; Hyun Song Shin
    Abstract: One aim of post-crisis monetary policy has been to ease credit conditions for borrowers by unlocking bank lending. We find that bank equity is an important determinant of both the bank's funding cost and its lending growth. In a cross-country bank-level study, we find that a 1 percentage point increase in the equity-to-total assets ratio is associated with a 4 basis point reduction in debt financing and with a 0.6 percentage point increase in annual loan growth.
    Keywords: Bank capital, book equity, monetary transmission mechanisms, funding, bank lending
    Date: 2016–04
  27. By: Marco Bonomo and Bruno Martins
    Abstract: Government-driven credit had been expanding in Brazil since the financial crisis of 2007/2008, reaching almost half of the total credit in 2012. While this large participation may buffer the banking system from external shocks, it undoubtedly affects the transmission of monetary policy. Using a huge repository of corporate loan contracts, composing an unbalanced panel of almost 300,000 non-financial firms between 2006 and 2012, this paper investigates its impact on the monetary transmission mechanism. Our results show that the credit channel of monetary policy is less effective for firms with government-driven loans access. This effect is shown in the smaller variation both in the total amount of loans and in the lending rate charged by private banks on free loan market. Merging loans database with employment data from RAIS (Annual Social Information Report), we also investigate the effects of monetary policy rate on employment. Our results indicate that changes in policy rate have smaller effect on the level of employment for firms with more access to earmarked and government-owned banks loans. Additionally, we examine whether firms with larger fraction of government-driven loans are better able to insulate themselves from the effects of external shocks, with resulting attenuated impact of those shocks on loans growth, interest rate on private loans and employment growth. The evidence we found confirms this hypothesis
    Date: 2016–03
  28. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Good afternoon. I thank Ellen Zentner and the New York Association for Business Economics for the invitation to speak to you today. I believe that one of the important responsibilities of a Federal Reserve policymaker is to share his or her economic perspectives with the public. Congress has wisely given the Fed independence in making monetary policy decisions in pursuit of our statutory goals of price stability and maximum employment. I say "wisely" because a body of research and practical experience both here and abroad show that when central banks formulate monetary policy free from short-run political interference, the policy is more effective and yields better economic outcomes. But to preserve that independence, the central bank must be held accountable for its policy decisions. And a key component of that accountability involves policymakers providing information to the public on their evaluation of economic conditions, their outlook for the economy, and the rationale for their decisions.
    Keywords: Monetary Policy; central banks; independence;
    Date: 2016–04–01
  29. By: Stephen McKnight (El Colegio de México)
    Abstract: Recent research has shown that forward-looking Taylor rules are subject to indeter- minacy in New Keynesian models with capital and investment spending. This paper shows that adopting a forward-looking Wicksellian rule that responds to the price level, rather than to inflation, is one potential remedy to the indeterminacy problem. This result is shown to be robust to variations in both the labor supply elasticity and the degree of price stickiness, the inclusion of capital adjustments costs, and if output also enters into the interest-rate feedback rule. Finally, it is shown that the superiority of Wicksellian rules over Taylor rules is not only confined to forward-looking policy, but also extends to both backward-looking and contemporaneous-looking specifications of the monetary policy rule.
    Keywords: equilibrium determinacy, interest-rate rules, monetary policy; investment; Taylor rule
    JEL: E22 E31 E52 E58
    Date: 2016–03
  30. By: Foley-Fisher, Nathan; Ramcharan, Rodney; Yu, Edison
    Abstract: This paper investigates the impact of unconventional monetary policy on firm financial constraints. It focuses on the Federal Reserve’s maturity extension program (MEP), intended to lower longer-term rates and flatten the yield curve by reducing the supply of long-term government debt. Consistent with those models that emphasize bond market segmentation and limits to arbitrage, around the MEP’s announcement, stock prices rose most sharply for those firms that are more dependent on longer-term debt. These firms also issued more long-term debt during the MEP and expanded employment and investment. These responses are most pronounced for those firms that are larger and older, and hence less likely to be financially constrained. There is also evidence of “reach for yield” behavior among some institutional investors, as the demand for riskier corporate debt also rose during the MEP. Our results suggest that unconventional monetary policy might have helped to relax financial constraints for some types of firms in part by inducing gap-filling behavior and affecting the pricing of risk in the bond market.
    Keywords: unconventional monetary policy ; firm‐financial constraints ; bond markets
    JEL: E52 G23 G32
    Date: 2016–02
  31. By: Tanweer Akram; Huiqing Li
    Abstract: US government indebtedness and fiscal deficits increased notably following the global financial crisis. Yet long-term interest rates and US Treasury yields have remained remarkably low. Why have long-term interest rates stayed low despite the elevated government indebtedness? What are the drivers of long-term interest rates in the United States? John Maynard Keynes holds that the central bank's actions are the main determinants of long-term interest rates. A simple model is presented where the central bank's actions are the key drivers of long-term interest rates through short-term interest rates and various monetary policy measures. The empirical findings reveal that short-term interest rates, after controlling for other crucial variables such as the rate of inflation, the rate of economic activity, fiscal deficits, government debts, and so forth, are the most important determinants of long-term interest rates in the United States. Public finance variables, such as government fiscal balances or government indebtedness, as a share of nominal GDP appear not to have any discernable effect on long-term interest rates.
    Keywords: Government Bond Yields; Long-Term Interest Rates; Short-Term Interest Rates; Monetary Policy
    JEL: E43 E50 E60 G12
    Date: 2016–03
  32. By: Juan A. Montecino (University of Massachusetts, Amherst); Gerald Epstein (University of Massachusetts, Amherst)
    Abstract: This paper empirically examines the effects of the Federal Reserve's Large Scale Asset Purchases (LSAP) on bank profits. We use a new dataset on individual LSAP transactions and bank holding company data from the Fed's FRY-9C regulatory reports to construct a large panel of banks for 2008Q1 to 2009Q4. Our results suggest that banks that sold Mortgage-backed Securities to the Fed (“treatment banks†) experienced economically and statistically significant increases in profitability after controlling for common determinants of bank performance. Banks heavily “exposed†to MBS purchases should also experience increases in profitability through asset appreciation. Our results also provide evidence for this type of spillover effect and suggest that large banks may have been more affected. Although our results suggest that MBS purchases increased bank profits, we find only mixed evidence that these were associated with increased lending. Our findings are thus consistent with the hypothesis that the Federal Reserve undertook these policies, at least in part, to increase the profitability of their main constituency: the large banks.
    JEL: G21 G28 G32
    Date: 2015–02
  33. By: Emanuele Campiglio
    Abstract: It is widely acknowledged that introducing a price on carbon represents a crucial precondition for filling the current gap in low-carbon investment. However, as this paper argues, carbon pricing in itself may not be sufficient. This is due to the existence of market failures in the process of creation and allocation of credit that may lead commercial banks – the most important source of external finance for firms – not to respond as expected to price signals. Under certain economic conditions, banks would shy away from lending to low-carbon activities even in presence of a carbon price. This possibility calls for the implementation of additional policies not based on prices. In particular, the paper discusses the potential role of monetary policies and macroprudential financial regulation: modifying the incentives and constraints that banks face when deciding their lending strategy - through, for instance, a differentiation of reserve requirements according to the destination of lending - may fruitfully expand credit creation directed towards low-carbon sectors. This seems to be especially feasible in emerging economies, where the central banking framework usually allows for a stronger public control on credit allocation and a wider range of monetary policy instruments than the sole interest rate.
    Keywords: green investment; low-carbon finance; banking; credit creation; green macroprudential regulation; monetary policy
    JEL: E50 G20 Q56
    Date: 2015–03–27

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.