nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒05‒14
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Differences of Opinion, Liquidity, and Monetary Policy By Johnson, Christopher
  2. Macroprudential regulation, credit spreads and the role of monetary policy By Tayler, William; Zilberman , Roy
  3. How can it work ? On the impact of quantitative easing in the eurozone By Roberto Tamborini; Francesco Saraceno
  4. Digital Currencies, Decentralized Ledgers, and the Future of Central Banking By Max Raskin; David Yermack
  5. Should Monetary Policy Lean Against Housing Market Booms? By Sami Alpanda; Alexander Ueberfeldt
  6. Liquidity Trap and Stability of Taylor Rules By Antoine Le Riche; Francesco Magris; Antoine Parent
  7. "Maximizing Price Stability in a Monetary Economy" By Warren Mosler; Damiano B. Silipo
  8. A discussion of key secular trends, economic conditions and monetary policy. Remarks at the Official Monetary Policy and Financial Institutions Forum, London, April 29, 2016 By Kaplan, Robert Steven
  9. Colonial American Paper Money and the Quantity Theory of Money: An Extension By Farley Grubb
  10. Monetary policy transmission: the case of Lithuania By Julius Stakenas; Rasa Stasiukynaite
  11. Inflation Expectations and the Stabilization of Inflation : Alternative Hypotheses By Nalewaik, Jeremy J.
  12. The macroeconomics effects of the implementation of the euro in Poland in relation to the experience of other countries By Bajan Bartlomiej
  13. Regional Banking Instability and FOMC Voting By Stefan Eichler; T. Lähner; Felix Noth
  14. A Model of the International Monetary System By Matteo Maggiori; Emmanuel Farhi
  15. Network Dependence in the Euro Area Money Market By Rünstler, Gerhard
  16. Optimal Capital Controls and Real Exchange Rate Policies: A Pecuniary Externality Perspective By Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
  17. Inflation and speculation in a dynamic macroeconomic model By Matheus Grasselli; Adrien Nguyen Huu
  18. Is there an alternative way to avoid another eurozone crisis to the Five Presidents' Report? By Wickens, Michael R.
  19. Forecasting the USD/CNY Exchange Rate under Different Policy Regimes By Yuxuan Huang
  20. Global inflation: the role of food, housing and energy prices By Miles Parker
  21. A macroprudential stable funding requirement and monetary policy in a small open economy By Punnoose Jacob; Anella Munro
  22. Animal Spirits in a Monetary Model By Roger E.A. Farmer; Konstantin Platonov
  23. Raise Rates to Raise Inflation? Neo-Fisherianism in the New Keynesian Model By Julio Garín; Robert Lester; Eric Sims

  1. By: Johnson, Christopher
    Abstract: Liquidity considerations are important in understanding the relationship between asset prices and monetary policy. Differences of opinion regarding the future value of an asset can affect liquidity of not only the underlying asset, but also of competing media of exchange, such as money. I consider a monetary search framework in which money and risky assets can facilitate trade, but where the asset is an opinion-sensitive medium of exchange in that traders may disagree on its future price. A pecking-order theory of payments is established between money and risky assets, which can go in either direction depending on the respective beliefs of both agents in a bilateral trade. In short, optimists prefer to use money over assets, whereas pessimists prefer to use assets over money. In contrast to a majority of the differences of opinion literature, not only do pessimists actively participate in the purchasing of assets, but in some cases their demand coincides with that of optimists. Additionally, in support of Bernanke and Gertler (2000), I find that monetary policy aimed at reducing asset price volatility need not be welfare-maximizing. Instead, the Friedman rule is welfare-maximizing.
    Keywords: liquidity, monetary policy, asset pricing, differences of opinion
    JEL: E4 E5
    Date: 2016–04–13
  2. By: Tayler, William (Lancaster University); Zilberman , Roy (Lancaster University)
    Abstract: We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords in alleviating the output-inflation trade-off faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of financial distress.
    Keywords: Basel III — macroprudential policy; bank capital; monetary policy; borrowing cost channel; welfare
    JEL: E32 E44 E52 E58 G28
    Date: 2016–04–29
  3. By: Roberto Tamborini (University of Trento); Francesco Saraceno (OFCE Sciences Po & LUISS-SEP, Rome)
    Abstract: How can quantitative easing (QE) work in the Eurozone (EZ)? We model the EZ as the aggregate of two countries characterised by New Keynesian output and inflation equations with a Tobinian money market equation that determines each country's interest rate as a spread above the common policy rate. High spreads determine negative output gaps and deflationary pressure. With the ECB policy rate at the zero lower bound, QE expands money supply throughout the EZ. We show that QE, if large enough, can indeed be effective by reducing country spreads and the ensuing output gaps. However, zero output and deflation gaps can be obtained for the EZ on average, but not for all single countries unless fully symmetric conditions are met. Therefore fiscal accommodation at the country level should also intervene, and we conclude that the coordination of fiscal and monetary policies is of paramount importance.
    Keywords: monetary policy, ECB, deflation, Zero-lower-bound, Fiscal policy
    JEL: E3 E4 E5
    Date: 2016–05
  4. By: Max Raskin; David Yermack
    Abstract: Central banking in an age of digital currencies is a fast-developing topic in monetary economics. Algorithmic digital currencies such as bitcoin appear to be viable competitors to central bank fiat currency, and their presence in the marketplace may pressure central banks to pursue tighter monetary policy. More interestingly, the blockchain technology behind digital currencies has the potential to improve central banks’ payment and clearing operations, and possibly to serve as a platform from which central banks might launch their own digital currencies. A sovereign digital currency could have profound implications for the banking system, narrowing the relationship between citizens and central banks and removing the need for the public to keep deposits in fractional reserve commercial banks. Debates over the wisdom of these policies have led to a revival of interest in classical monetary economics.
    JEL: E42 E51 E52 E58 G21
    Date: 2016–05
  5. By: Sami Alpanda; Alexander Ueberfeldt
    Abstract: Should monetary policy lean against housing market booms? We approach this question using a small-scale, regime-switching New Keynesian model, where housing market crashes arrive with a logit probability that depends on the level of household debt. This crisis regime is characterized by an elevated risk premium on mortgage lending rates, and, occasionally, a binding zero lower bound on the policy rate, imposing large costs on the economy. Using our set-up, we examine the optimal level of monetary leaning, introduced as a Taylor rule response coefficient on the household debt gap. We find that the costs of leaning in regular times outweigh the benefits of a lower crisis probability. Although the decline in the crisis probability reduces volatility in the economy, this is achieved by lowering the average level of debt, which severely hurts borrowers and leads to a decline in overall welfare.
    Keywords: Economic models, Financial stability, Housing, Monetary policy framework
    JEL: E44 E52 G01
    Date: 2016
  6. By: Antoine Le Riche (University of Maine, Aix-Marseille University (Aix-Marseille School of Economics), GAINS, CNRS, GREQAM, EHESS & CAC); Francesco Magris (LEO, University "François Rabelais" of Tours and CAC); Antoine Parent (Sciences Po Lyon, LAET CNRS 5593)
    Abstract: We study a productive economy with safe government bonds and fractional cash-in-advance constraint on consumption expenditures. Government issues bonds and levies taxes to finance public expenditures, while the Central Bank follows a feedback Taylor rules by pegging the nominal interest rate. We show that when the nominal interest rate is bound to be non-negative, under active policy rules a liquidity trap steady state does emerge besides the Leeper (1991) equilibrium. The stability of the two steady states depends, in turns, upon the amplitude of the liquidity constraint. When the share of consumption to be paid cash is set lower than one half, the liquidity trap equilibrium is unstable. The stability of Leeper equilibrium too depends dramatically upon the amplitude of the liquidity constraint. Policy and Taylor rules are thus theoretically rehabilitated since their targets, by contrast with a vast literature, may be now stable. We also show that a relaxation of the liquidity constraint is Pareto-improving and that the liquidity trap equilibrium Pareto-dominates the Leeper one, in view of the zero cost of money.
    Keywords: Cash-in-Advance; Liquidity Trap; Monetary Policy; Multiple Equilibria.
    JEL: E31 E41 E43 E58
    Date: 2016–05–06
  7. By: Warren Mosler; Damiano B. Silipo
    Abstract: In this paper we analyze options for the European Central Bank (ECB) to achieve its single mandate of price stability. Viable options for price stability are described, analyzed, and tabulated with regard to both short- and long-term stability and volatility. We introduce an additional tool for promoting price stability and conclude that public purpose is best served by the selection of an alternative buffer stock policy that is directly managed by the ECB.
    Keywords: European Central Bank; Monetary Policy Tools and Price Stability; Buffer Stock Policy
    JEL: E52 E58
    Date: 2016–04
  8. By: Kaplan, Robert Steven (Federal Reserve Bank of Dallas)
    Abstract: Remarks at the Official Monetary Policy and Financial Institutions Forum, London, April 29, 2016.
    Date: 2016–04–29
  9. By: Farley Grubb
    Abstract: The quantity theory of money is applied to the paper money regimes of seven of the nine British North American colonies south of New England. Individual colonies, and regional groupings of contiguous colonies treated as one monetary unit, are tested. Little to no statistical relationship, and little to no magnitude of influence, between the quantities of paper money in circulation and prices are found. The failure of the quantity theory of money to explain the value and performance of colonial paper money is a general and widespread result, and not an isolated and anomalous phenomenon.
    JEL: E31 E42 E51 N11
    Date: 2016–04
  10. By: Julius Stakenas (Bank of Lithuania); Rasa Stasiukynaite (Bank of Lithuania)
    Abstract: In this paper we study the effect of a (standard) monetary policy shock in the euro area on the Lithuanian economy. For this purpose we employ a structural vector autoregressive (SVAR) model incorporating variables from both, the euro area and Lithuania. We identify the system using short-term zero restrictions. The model exhibits a block exogenous structure to account for the fact that Lithuania is a small economy and Lithuanian macro variables do not have a significant effect on the euro area variables. In general, we find that a monetary policy shock in the euro area has a stronger effect on the Lithuanian economy than it does on the euro area economy, though the effects are not significant, preventing firm conclusions. We further broaden our analysis employing a panel VAR model for the three Baltic states. This allows us to not only explore the time variation of the euro area monetary policy transmission in the Baltics, but also helps to verify our initial results. The effects are stronger when estimated using the panel VAR model.
    Keywords: monetary policy, SVAR, panel VAR
    JEL: C32 C33 E52
    Date: 2016–04–04
  11. By: Nalewaik, Jeremy J.
    Abstract: This paper examines two candidate hypotheses explaining the stabilization of U.S. inflation since the 1970s and 1980s. The first explanation credits the stabilization of inflation expectations, and assumes those expectations have a strong positive causal effect on actual subsequent inflation, while the second explanation credits the disappearance of such a strong positive causal effect. The paper reports statistical tests favorable to both a stabilization of inflation expectations and a marked decline in the effect of the general public’s inflation expectations on subsequent inflation.
    Keywords: Inflation ; Phillips Curve
    JEL: E31 E52
    Date: 2016–04–21
  12. By: Bajan Bartlomiej (Poznan University of Life Sciences)
    Abstract: In the chapter attempts have been taken to assess the potential impact of Polish accession to the euro zone. The analysis covers costs and benefits of monetary integration which are mostly pointed in literature, alluding to the experience of European Union countries. The analysis covers the years 1996-2004. A comparison was made between countries which have adopted the euro in 1999, and those that remained with the national currencies. There are differences between these two groups of countries in increments of GDP per capita, since the introduction of the euro in paper form, despite an earlier convergence of this indicator, however much smaller differences occurred in the case of the inflation rate. Both groups of countries have recorded a significant increase in foreign trade turnover since the inception of the euro area. The data used in the analysis come from the European Statistical Office (Eurostat) and the United Nations Conference on Trade and Development (UNCTAD).
    Keywords: monetary union; euro zone
    JEL: E02 E52 E59 F45
    Date: 2016–05
  13. By: Stefan Eichler; T. Lähner; Felix Noth
    Abstract: This study analyzes if regionally affiliated Federal Open Market Committee (FOMC) members take their districts’ regional banking sector instability into account when they vote. Considering the period from 1978 to 2010, we find that a deterioration in a district’s bank health increases the probability that this district’s representative in the FOMC votes to ease interest rates. According to member-specific characteristics, the effect of regional banking sector instability on FOMC voting behavior is most pronounced for Bank presidents (as opposed to governors) and FOMC members who have career backgrounds in the financial industry or who represent a district with a large banking sector.
    Keywords: FOMC voting, regional banking sector instability, lobbying
    JEL: E43 E52 E58 G21
    Date: 2016–05
  14. By: Matteo Maggiori; Emmanuel Farhi
    Abstract: We propose a simple model of the international monetary system. We study the world supply and demand for reserve assets denominated in different currencies under a variety of scenarios: under a Hegemon vs. a multi-polar world; when reserve assets are abundant vs. scarce; under a gold exchange standard vs. a floating rate system; away from or at the zero lower bound (ZLB). We rationalize the Triffin dilemma which posits the fundamental instability of the system, the common prediction regarding the natural and beneficial emergence of a multi-polar world, the Nurkse warning that a multi-polar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold exchange standard or at the ZLB is recessive. We show that competition among few countries in the issuance of reserve assets can have perverse effects on the total supply of reserve assets. Our analysis is both positive and normative.
    Date: 2016–05
  15. By: Rünstler, Gerhard
    Abstract: I estimate network dependence effects in the euro area unsecured overnight interbank market during the ?financial crisis. I use linear spatial regressions to estimate the dependence of individual banks?trading volumes (and interest rates) on the trading volumes (and interest rates) of their network neighbours. Neighbours are de?fined from past trading relations. I ?find that banks?net lending volumes and lending-borrowing interest rate spread depend negatively on their neighbours? respective outcomes. By contrast, there arise positive effects for total trading volume and borrowing rates. Overall, however, these effects are small and signi?ficant only in periods of market turmoil or of major policy interventions. The results suggest that neighbours act as a buffer in absorbing idiosyncratic liquidity shocks. JEL Classification: C21, E42
    Keywords: euro area money markets, financial crisis, network analysis, spatial regressions
    Date: 2016–03
  16. By: Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
    Abstract: A new theoretical literature studies the use of capital controls to prevent financial crises in models in which pecuniary externalities justify government intervention. Within the same theoretical framework, we show that when ex-post policies such as defending the exchange rate can contain or resolve financial crises, there is no need to intervene ex-ante with capital controls. On the other hand, if crises management policies entail some efficiency costs, then crises prevention policies become part of the optimal policy mix. In the standard model economy used in the literature with costly crisis management policies, the optimal policy mix combines capital controls in tranquil times with support for the real exchange rate to limit its depreciation during crises times. The optimal policy mix yields more borrowing and consumption, a lower probability of financial crisis, and twice as large welfare gains than in the socially planned equilibrium with capital controls alone.
    JEL: E52 F38 F41
    Date: 2016–05
  17. By: Matheus Grasselli (Department of Mathematics and Statistics, McMaster University, Hamilton, Canada, Fields Institute for Research In Mathematical Sciences - Fields Institute for Research In Mathematical Sciences); Adrien Nguyen Huu (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - École des Ponts ParisTech (ENPC) - UPE - Université Paris-Est)
    Abstract: We study a monetary version of the Keen model by merging two alternative extensions, namely the addition of a dynamic price level and the introduction of speculation. We recall and study old and new equilibria, together with their local stability analysis. This includes a state of recession associated with a deflationary regime and characterized by falling employment but constant wage shares, with or without an accompanying debt crisis. We also emphasize some new qualitative behavior of the extended model, in particular its ability to produce and describe repeated financial crises as a natural pace of the economy, and its suitability to describe the relationship between economic growth and financial activities.
    Keywords: limit cycles,local stability,Minsky's financial instability hypothesis,Keen model,stock-flow consistency,financial crisis,dynamical systems in macroeconomics
    Date: 2015–07–06
  18. By: Wickens, Michael R.
    Abstract: The EU Commission's Five Presidents' Report proposes new rules for the eurozone covering fiscal policy, banking and financial markets designed to avert another eurozone crisis. This paper examines the causes of the current eurozone crisis and discusses whether the Report's proposals are likely to succeed. It is argued that the main causes of the crisis were EMU and the failure of financial markets to price risk correctly. It is claimed that the Report may not solve these problems. Having already lost their monetary policy instrument, the Report's fiscal proposals would remove their fiscal policy instrument too and deprive countries of the means of economic stabilisation. The proposals would also transfer to an undemocratic and unaccountable Commission important national competences.
    Keywords: eurozone crisis; financial markets; Fiscal policy; Monetary policy; pricing risk
    JEL: E52 E61 E63
    Date: 2016–04
  19. By: Yuxuan Huang (The George Washington University)
    Abstract: The USD/CNY exchange rate exhibits very different pattern in different periods as it changes wildly from one period to another according to the economic reforms and policies. This paper compares the performance of six different forecasting models of USD/CNY exchange rate under three different forecast scenarios from 2005-2015. In particular, the paper focuses in answering the following questions. (i) Do models' forecast performance change when the marketization level changes? (ii) Which model has the best forecast when the regimes change? (iii) Can forecasting robustifications help? The forecast results show that models incorporates economic fundamentals perform better in less regulated periods when the exchange rate can oat more freely. For the forecast experiments with breaks in the forecast origin, the exchange rate CVAR model perform the best before robustifications. In most cases, the intercept-correction and doubledifference device improve the forecast performance in both dynamic forecast and one-step forecast. Different models seem to do well under different forecast scenario after applying the robust devices.
    Keywords: Exchange rates; Forecasting; US Dollar; Chinese Yuan
    JEL: F31 F37 C53
    Date: 2016–01
  20. By: Miles Parker (Reserve Bank of New Zealand)
    Abstract: This paper studies the role of global factors in causing common movements in consumer price inflation, with particular focus on the food, housing and energy sub-indices. It uses a comprehensive dataset of 223 countries and territories collected from national and international sources. Global factors explain a large share of the variance of national inflation rates for advanced countries - and more generally those with greater GDP per capita, financial development and central bank transparency - but not for middle and low income countries. Common factors explain a large share of the variance in food and energy prices.
    Date: 2016–05
  21. By: Punnoose Jacob; Anella Munro (Reserve Bank of New Zealand)
    Abstract: The Basel III net stable funding requirement, scheduled for adoption in 2018, requires banks to use a minimum share of long-term wholesale funding and deposits to fund their assets. This paper introduces a stable funding requirement (SFR) into a small open economy DSGE model featuring a banking sector with richly-specified liabilities. We estimate the model for New Zealand, where a similar requirement was adopted in 2010, and evaluate the implications of an SFR for monetary policy trade-offs. Altering the steady-state SFR does not materially affect the transmission of most structural shocks to the real economy and hence has little effect on the optimised monetary policy rules. However, a higher steady-state SFR level amplifes the effects of bank funding shocks, adding to macroeconomic volatility and worsening monetary policy trade-offs conditional on these shocks. We find that this volatility can be moderated if optimal monetary or prudential policy responds to credit growth.
    JEL: E31 E32 E44 F41
    Date: 2016–04
  22. By: Roger E.A. Farmer; Konstantin Platonov
    Abstract: We integrate Keynesian economics with general equilibrium theory in a new way. Our approach differs from the prevailing New Keynesian paradigm in two ways. First, our model displays steady state indeterminacy. This feature allows us to explain persistent unemployment which we model as movements among the steady state equilibria of our model. Second, our model displays dynamic indeterminacy. This feature allows us to explain the real effects of nominal shocks by selecting a dynamic equilibrium where prices are slow to respond to unanticipated money supply disturbances. Price rigidity arises as part of a rational expectations equilibrium in which the equilibrium is selected by beliefs. To close our model, we introduce a new fundamental that we refer to as the belief function.
    JEL: E12 E3 E4
    Date: 2016–03
  23. By: Julio Garín; Robert Lester; Eric Sims
    Abstract: Increasing the inflation target in a textbook New Keynesian (NK) model may require increasing, rather than decreasing, the nominal interest rate in the short run. We refer to this positive short run co-movement between the nominal interest rate and inflation conditional on a nominal shock as Neo-Fisherianism. We show that the NK model is more likely to be Neo-Fisherian the more persistent is the change in the inflation target and the more flexible are prices. Neo-Fisherianism is driven by the forward-looking nature of the model. Modifications which make the framework less forward-looking make it less likely for the model to exhibit Neo-Fisherianism. As an example, we show that a modest and empirically realistic fraction of "rule of thumb" price-setters may altogether eliminate Neo-Fisherianism in the textbook model.
    JEL: E31 E43 E52
    Date: 2016–04

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