nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒05‒21
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Communicating dissent on monetary policy: Evidence from central bank minutes By David-Jan Jansen; Richhild Moessner
  2. When does the cost channel pose a challenge to inflation targeting central banks? By Smith, Andrew Lee
  3. Circumventing the Zero Lower Bound with Monetary Policy Rules Based on Money By Michael T. Belongia; Peter N. Ireland
  4. On the limits of macroprudential policy By Marcin Kolasa
  5. Measuring the effect of the zero lower bound on monetary policy By Carvalho, Carlos; Hsu, Eric; Nechio, Fernanda
  6. Disentangling the Monetary Policy Stance By Filippo Gori
  7. Soft budget constraints, European Central Banking and the financial crisis By Jannik, Jäger; Grigoriadis, Theocharis
  8. A Portfolio Model of Quantitative Easing By Signe Krogstrup
  9. Optimal monetary policy in open economies revisited By Fujiwara, Ippei; Wang, Jiao
  10. Population ageing and inflation with endogenous money creation By Igor Fedotenkov
  11. The spillovers, interactions, and (un)intended consequences of monetary and regulatory policies By Forbes, Kristin; Reinhardt, Dennis; Wieladek, Tomasz
  12. Heterogeneity in euro-area monetary policy transmission: Results from a large multi-country BVAR model By Mandler, Martin; Scharnagl, Michael; Volz, Ute
  13. Monetary Policy in the Presence of Islamic Banking By Mariam El Hamiani Khatat
  14. A Model of the International Monetary System By Emmanuel Farhi; Matteo Maggiori
  15. Implications of Food Subsistence for Monetary Policy and Inflation By Rafael Portillo; Luis-Felipe Zanna; Stephen A. O'Connell; Richard Peck
  16. Effects of US monetary policy shocks during financial crises - A threshold vector autoregression approach By Renee Fry-McKibbin; Jasmine Zheng
  17. Macroprudential and Monetary Policy Interactions in a DSGE Model for Sweden By Jiaqian Chen; Francesco Columba
  18. Liquidity and Counterparty Risks Tradeoff in Money Market Networks By Leon Rincon, C.E.; Sarmiento, M.
  19. Can currency competition work? By Fernandez-Villaverde, Jesus; Sanches, Daniel R.
  20. Financial Stability and Interest-Rate Policy; A Quantitative Assessment of Costs and Benefits By Andrea Pescatori; Stefan Laseen
  21. Money supply expansion through a dynamic CGE model By C. Ciaschini; R. Pretaroli; F. Severini; C. Socci
  22. A Theory of Deflation: Can Expectations Be Influenced by a Central Bank? By Harashima, Taiji
  23. Finding the Equilibrium Real Interest Rate in a Fog of Policy Deviations By Taylor, John B.; Wieland, Volker
  24. International dynamics of inflation expectations By Aleksei Netšunajev; Lars Winkelmann; ;
  25. The shadow rate as a predictor of real activity and inflation: Evidence from a data-rich environment By Hännikäinen, Jari
  26. Findings from the Financial Inclusion Insights Surveys in East Africa: Inequities in Use of Mobile Money By Clair Null; Duncan Chaplin; Jacob Hartog; Jessica Jacobson; Arif Mamun; Anu Rangarajan
  27. The real effects of monetary shocks in sticky price models. A sufficient statistic approach By Fernando Alvarez; Hervé Le Bihan; Francesco Lippi
  28. Effective macroprudential policy: Cross-sector substitution from price and quantity measures By Janko Cizel; Jon Frost; Aerdt Houben; Peter Wierts
  29. Macroprudential Policy: a Blessing or a Curse? By Lilit Popoyan
  30. Fed Liftoff and Subprime Loan Interest Rates: Evidence from the Peer-to-Peer Lending Market By Bertsch, Christoph; Hull, Isaiah; Zhang, Xin
  31. Foreign exchange rates with the Taylor rule and VECMs By Piersanti, Fabio Massimo; Rizzati, Massimiliano; Nakmai, Siwat
  32. Optimal Forward Guidance By Bilbiie, Florin Ovidiu
  33. Term Premium Variability and Monetary Policy By Fuerst, Timothy S.; Mau, Ronald

  1. By: David-Jan Jansen; Richhild Moessner
    Abstract: We study whether differences in views during monetary policy meetings affect central bank transparency. Using data published by four central banks, we find that dissent among committee members increases the file size of minutes of policy meetings. However, dissent does not affect the readability of these minutes. We conclude that minutes can still be useful in providing accountability when views differ without necessarily impairing transparency.
    Keywords: monetary policy; minutes; dissent; transparency; accountability
    JEL: E52 E58
    Date: 2016–05
  2. By: Smith, Andrew Lee (Federal Reserve Bank of Kansas City)
    Abstract: In a sticky-price model where firms finance their production inputs, there is both a lower and an upper bound on the central bank's inflation response necessary to rule out the possibility of self-fulfilling inflation expectations. This paper shows that real wage rigidities decrease this upper bound, but coefficients in the range of those on the Taylor rule place the economy well within the determinacy region. However, when there is time-variation in the share of firms who finance their inputs (i.e. Markov-Switching) then inflation targeting interest rate rules are often found to result in indeterminacy, even if the central bank also targets output. In this case, adding money growth as an intermediate target in the Taylor rule can alleviate this indeterminacy and anchor inflation expectations. Whether the money growth target should be a constant feature of the central bank's policy rule or Markov-Switch depends on the weight the central bank places on output stability relative to inflation stability and the size of money demand shocks.
    Keywords: Taylors principle; Determinacy; Regime switching; Money; Cost channel; T Cost Channel; Taylor principle; Determinacy; Regime switching; Money
    JEL: C62 E3 E4 E5
    Date: 2015–06–01
  3. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: Discussions of monetary policy rules after the 2008-2009 recession highlight the potential impotence of a central bank's actions when the short-term interest rate under its control is limited by the zero lower bound. This perspective assumes, in a manner consistent with the canonical New Keynesian model, that the quantity of money has no role to play in transmitting a central bank's actions to economic activity. This paper examines the validity of this claim and investigates the properties of alternative monetary policy rules based on control of the monetary base or a monetary aggregate in lieu of a short-term interest rate. The results indicate that rules of this type have the potential to guide monetary policy decisions toward the achievement of a long run nominal goal without being constrained by the zero lower bound on a nominal interest rate. They suggest, in particular, that by exerting its influence over the monetary base or a broader aggregate, the Federal Reserve could more effectively stabilize nominal income around a long-run target path, even in a low or zero interest-rate environment.
    Keywords: Adjusted monetary base, Divisia monetary aggregates, Monetary policy rules, Nominal income targeting, Zero lower bound
    JEL: E31 E32 E37 E42 E51 E52 E58
    Date: 2016–05–01
  4. By: Marcin Kolasa
    Abstract: This paper studies how macroprudential policy tools can complement the interest ratebased monetary policy in achieving a selection of dual stabilization objectives. We show analytically in a canonical New Keynesian model with collateral constraints that using the loan-to-value ratio as an additional policy instrument does not resolve the inflation-output volatility tradeoff. Perfect targeting of inflation and either credit or house prices with monetary and macroprudential policy is possible only if the role of credit in the economy is sufficiently small. Any of these three dual stabilization objectives can be achieved with the monetary-fiscal policy mix. The identified limits to the LTV ratio-based policy are related to its predominantly intertemporal effect on decisions made by financially constrained agents.
    Keywords: macroprudential policy, monetary policy, stabilization tradeoffs
    JEL: E32 E58 E63 G21 G28
    Date: 2016
  5. By: Carvalho, Carlos (PUC-Rio); Hsu, Eric (UC Berkeley); Nechio, Fernanda (Federal Reserve Bank of San Francisco)
    Abstract: The Zero Lower Bound (ZLB) on interest rates is often regarded as an important constraint on monetary policy. To assess how the ZLB affected the Fed’s ability to conduct policy, we estimate the effects of Fed communication on yields of different maturities in the pre-ZLB and ZLB periods. Before the ZLB period, communication affects both short and long-dated yields. In contrast, during the ZLB period, the reaction of yields to communication is concentrated in longer-dated yields. Our findings support the view that the ZLB did not put such a critical constraint on monetary policy, as the Fed retained some ability to affect long-term yields through communication.
    JEL: E43 E52 E58
    Date: 2016–04–01
  6. By: Filippo Gori (The Graduate Institute of International and Development Studies)
    Abstract: This paper presents an account of the monetary policy stance for euro area countries from 1999 to the beginning of the crisis in 2008. The analysis starts with the derivation of a synthetic index measuring the average tightness of monetary policy across euro area members. The index is constructed using pseudo-Taylor residuals, obtained from an estimated monetary policy rule for the whole euro area and country speci c fundamentals. This measure is then decomposed to disentangle the role of in ation and fundamental economic dynamics. Results suggest that there were signi cant di erences in monetary policy stance across euro area members over the period considered. Such di erences are primarily driven by wedges in price dynamics, most of which are disconnected from real economic activity.
    Keywords: Monetary policy, Eonia, euro area.
    JEL: E52 E58 E61
    Date: 2016–05–09
  7. By: Jannik, Jäger; Grigoriadis, Theocharis
    Abstract: During the European financial crisis, the European Central Bank implemented a series of unconventional monetary policy measures. We argue that these unconventional monetary policy measures created soft budget constraints for the Eurozone countries by lowering their bond yield spreads. This hypothesis is tested using pooled OLS estimations and two different datasets: monetary policy event dummies and the purchase volumes of the Securities Markets Programme (SMP). We find significantly negative effects on bond yield spreads for both datasets, leading us to accept the hypothesis. The results are confirmed by robustness checks that directly estimate the effect of unconventional monetary policy on central government debt.
    Keywords: soft budget constraints,bond yield spreads,monetary policy events,securities markets programme,European Central Bank
    JEL: F34 F37 F42 P17 P51
    Date: 2016
  8. By: Signe Krogstrup (Swiss National Bank and Peterson Institute for International Economics)
    Abstract: This paper presents a portfolio model of asset price effects arising from large-scale asset purchases by central banks—commonly known as quantitative easing (QE). Two financial frictions, segmentation of the market for central bank reserves and imperfect asset substitutability, give rise to two distinct portfolio effects. One derives from the reduced supply of the purchased assets. The other runs through banks’ portfolio responses to the created reserves and is independent of the assets purchased. The results imply that central bank reserve expansions can affect long-term bond prices even in the absence of long-term bond purchases.
    Keywords: : unconventional monetary policy, transmission, reserve-induced portfolio balance channel
    JEL: G11 E43 E50 E52 E58
    Date: 2016–04
  9. By: Fujiwara, Ippei (Keio University); Wang, Jiao (Australian National University)
    Abstract: This paper revisits optimal monetary policy in open economies, in particular, focusing on the noncooperative policy game under local currency pricing in a two-country dynamic stochastic general equilibrium model. We first derive the quadratic loss functions which noncooperative policy makers aim to minimize. Then, we show that noncooperative policy makers face extra trade-offs regarding stabilizing the real marginal costs induced by deviations from the law of one price under local currency pricing. As a result of the increased number of stabilizing objectives, welfare gains from cooperation emerge even when two countries face only technology shocks, which usually leads to equivalence between cooperation and noncooperation. Still, gains from cooperation are not large, implying that frictions other than nominal rigidities are necessary to strongly recommend cooperation as an important policy framework to increase global welfare.
    JEL: E52 F41 F42
    Date: 2016–05–01
  10. By: Igor Fedotenkov (Bank of Lithuania)
    Abstract: This paper provides an explanation as to why population ageing is associated with deflationary processes. For this reason we create an overlapping-generations model (OLG) with money created by credits (inside money) and intergenerational trade. In other words, we combine a neoclassical OLG model with post-Keynesian monetary theory. The model links demographic factors such as fertility rates and longevity to prices. We show that lower fertility rates lead to smaller demand for credits, and lower money creation, which in turn causes a decline in prices. Changes in longevity affect prices through real savings and the capital market. Furthermore, a few links between interest rates and inflation are addressed; they arise in the general equilibrium and are not thoroughly discussed in literature. Long-run results are derived analytically; short-run dynamics are simulated numerically.
    Keywords: Population ageing, inflation, OLG model, inside money, credits
    JEL: E12 E31 E41 J10
    Date: 2016–02–23
  11. By: Forbes, Kristin (Monetary Policy Committee Unit, Bank of England); Reinhardt, Dennis (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England)
    Abstract: Have bank regulatory policies and unconventional monetary policies — and any possible interactions — been a factor behind the recent ‘deglobalisation’ in cross-border bank lending? To test this hypothesis, we use bank-level data from the United Kingdom — a country at the heart of the global financial system. Our results suggest that increases in microprudential capital requirements tend to reduce international bank lending and some forms of unconventional monetary policy can amplify this effect. Specifically, the United Kingdom’s Funding for Lending Scheme (FLS) significantly amplified the effects of increased capital requirements on external lending. Quantitative easing may also have had an amplification effect, but these estimates are usually insignificant and smaller in magnitude. We find that this interaction between microprudential regulations and the FLS can explain roughly 30% of the contraction in aggregate UK cross-border bank lending between mid-2012 and end-2013, corresponding to around 10% of the contraction globally. This suggests that unconventional monetary policy designed to support domestic lending can have the unintended consequence of reducing foreign lending.
    Keywords: Capital requirements; Funding for Lending Scheme; financial deglobalisation
    JEL: G21 G28
    Date: 2016–01–22
  12. By: Mandler, Martin; Scharnagl, Michael; Volz, Ute
    Abstract: We study cross-country differences in monetary policy transmission across the large four euro-area countries (France, Germany, Italy and Spain) using a large Bayesian vector autoregressive model with endogenous prior selection. Drawing both on the posterior distributions of the cross-country differences in impulse responses as well as on a battery of other tests, we find real output to respond less negatively in Spain to monetary policy tightening than in the other three countries, while the decline in the price level is weaker in Germany. Bond yields rise more strongly and more persistently in France and Germany than in Italy and Spain.
    Keywords: monetary policy,transmission mechanism,euro area,Bayesian vector autoregression
    JEL: C11 C54 E52
    Date: 2016
  13. By: Mariam El Hamiani Khatat
    Abstract: This paper discusses key issues related to the conduct of monetary policy in countries that have Islamic banks. It describes the macrofinancial background and monetary policy frameworks where Islamic banks typically operate, and discusses the monetary transmission mechanism in economies where Islamic and conventional banking coexist. Most economies with Islamic banks also have conventional banks and this calls for a comprehensive approach to monetary policy. At the same time, a dual approach to monetary policy should be considered whenever the Islamic segment of the financial system is not as developed as the conventional one. The paper tries to shed light on potential spillovers between conventional and Islamic financial systems, and proposes specific recommendations on the design of Islamic monetary policy operations and for facilitating monetary transmission through the Islamic financial system.
    Keywords: Monetary policy;Islamic banking;Commercial banks;Monetary transmission mechanism;Islamic finance;Financial systems;Islamic banks, dual financial systems, monetary policy, monetary transmission mechanism, monetary operations, Sukuk markets, lender of last resort.
    Date: 2016–03–18
  14. By: Emmanuel Farhi; Matteo Maggiori
    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: 2016–01
  15. By: Rafael Portillo; Luis-Felipe Zanna; Stephen A. O'Connell; Richard Peck
    Abstract: We introduce subsistence requirements in food consumption into a simple new-Keynesian model with flexible food and sticky non-food prices. We study how the endogenous structural transformation that results from subsistence affects the dynamics of the economy, the design of monetary policy, and the properties of inflation at different levels of development. A calibrated version of the model encompasses both rich and poor countries and broadly replicates the properties of inflation across the development spectrum, including the dominant role played by changes in the relative price of food in poor countries. We derive a welfare-based loss function for the monetary authority and show that optimal policy calls for complete (in some cases nearcomplete) stabilization of sticky-price non-food inflation, despite the presence of a foodsubsistence threshold. Subsistence amplifies the welfare losses of policy mistakes, however, raising the stakes for monetary policy at earlier stages of development.
    Keywords: Consumption;Low-income developing countries;Food prices;Sticky prices;Inflation;Stabilization measures;Welfare;Econometric models;Structural Transformation, Monetary Policy, Inflation, Subsistence.
    Date: 2016–03–17
  16. By: Renee Fry-McKibbin; Jasmine Zheng
    Abstract: This paper analyzes the impact of monetary policy during periods of low and high financial stress in the US economy using a Threshold Vector Autoregression model. There is evidence that expansionary monetary policy is effective during periods of high financial stress with larger responses having a higher proportionate effect on output. The existence of a cost channel effect during periods of high financial stress implies the existence of a short run output-inflation trade off during financial crises. Large expansionary monetary shocks also increase the likelihood of moving the economy out of a high financial stress regime.
    Keywords: Monetary policy, financial stress, threshold vector autoregression models
    JEL: F44 E44 E52
    Date: 2016–05
  17. By: Jiaqian Chen; Francesco Columba
    Abstract: We analyse the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden. Households face a ceiling on their loan-to-value ratio and must amortize their mortgages. The government grants mortgage interest payment deductions. Lending rates are affected by mortgage risk weights. We find that demand-side macroprudential measures are more effective in curbing household debt ratios than monetary policy, and they are less costly in terms of foregone consumption. A tighter macroprudential stance is also found to be welfare improving, by promoting lower consumption volatility in response to shocks, especially when using a combination of macroprudential instruments.
    Keywords: Housing;Sweden;Mortgages;Housing prices;Debt;Macroprudential Policy;Monetary policy;General equilibrium models;Macroprudential Policies; Monetary Policy; Collateral Constraints
    Date: 2016–03–23
  18. By: Leon Rincon, C.E. (Tilburg University, Center For Economic Research); Sarmiento, M.
    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.
    Keywords: liquidity risk; counterparty risk; network; centralization; money market
    JEL: D85 E58 L14
    Date: 2016
  19. By: Fernandez-Villaverde, Jesus (University of Pennsylvania, NBER, and CEPR); Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: Can competition work among privately issued fiat currencies such as Bitcoin or Ethereum? Only sometimes. To show this, we build a model of competition among privately issued fiat currencies. We modify the current workhorse of monetary economics, the Lagos-Wright environment, by including entrepreneurs who can issue their own fiat currencies in order to maximize their utility. Otherwise, the model is standard. We show that there exists an equilibrium in which price stability is consistent with competing private monies but also that there exists a continuum of equilibrium trajectories with the property that the value of private currencies monotonically converges to zero. These latter equilibria disappear, however, when we introduce productive capital. We also investigate the properties of hybrid monetary arrangements with private and government monies, of automata issuing money, and the role of network effects.
    Keywords: Private money; Currency competition; Cryptocurrencies; Monetary policy
    JEL: E40 E42 E52
    Date: 2016–04–03
  20. By: Andrea Pescatori; Stefan Laseen
    Abstract: Should monetary policy use its short-term policy rate to stabilize the growth in household credit and housing prices with the aim of promoting financial stability? We ask this question for the case of Canada. We find that to a first approximation, the answer is no— especially when the economy is slowing down.
    Keywords: Interest rate policy;Canada;Household credit;Housing prices;Credit expansion;Financial risk;Monetary policy;Financial stability;Monetary Policy, Endogenous Financial Risk, Bayesian VAR, Non-Linear Dynamics, Policy Evaluation.
    Date: 2016–03–21
  21. By: C. Ciaschini (University of Macerata); R. Pretaroli (University of Macerata); F. Severini (University of Macerata); C. Socci (University of Macerata)
    Abstract: The ongoing economic stagnation and low inflation rates affecting EU have refuelled the debate on the role and the limits of monetary policy in pushing the economic growth. Given the tight margins for fiscal policy for EU state members, traditional and unconventional monetary policies are becoming more looked-for to break out of this condition. However, the main issue on whether the real or nominal aspects prevails still remains. In this situation, a framework able to identify and analyse any interaction between economic and financial flows becomes crucial to detect the dynamics pushing towards expansions or contractions resulting from monetary policies. Therefore, the aim of this paper is to investigate the direct and indirect impact of monetary policies implemented by the European Central Bank on the main Italian macroeconomic variables both in aggregate and disaggregate terms. For this purpose we use Dynamic Computable General Equilibrium model calibrated on the Social Accounting Matrix integrated with financial tools.
    JEL: C63 E17 E52 D57 D58
    Date: 2016–05
  22. By: Harashima, Taiji
    Abstract: This paper examines how to reverse deflation to inflation. Once deflation takes root, it is not easy to reverse because of the zero lower bound in nominal interest rates. My model indicates that there are two steady states where both inflation/deflation (i.e., changes in prices) and real activity (i.e., quantities) remain unchanged: that is, there are inflationary and deflationary steady states. The model indicates that, to switch a deflationary steady state to an inflationary steady state, a central bank needs to influence the time preference rates of the government and the representative household. It is not easy, however, to do so, and the best way of switching deflation to inflation may be to wait for a lucky event (i.e., an exogenous shock).
    Keywords: Deflation; The zero lower bound; Monetary policies; Quantitative easing; Time preference
    JEL: E31 E52 E58
    Date: 2016–05–15
  23. By: Taylor, John B.; Wieland, Volker
    Abstract: Recently there has been an explosion of research on whether the equilibrium real interest rate has declined, an issue with significant implications for monetary policy. A common finding is that the rate has declined. In this paper we provide evidence that contradicts this finding. We show that the perceived decline may well be due to shifts in regulatory policy and monetary policy that have been omitted from the research. In developing the monetary policy implications, it is promising that much of the research approaches the policy problem through the framework of monetary policy rules, as uncertainty in the equilibrium real rate is not a reason to abandon rules in favor of discretion. But the results are still inconclusive and too uncertain to incorporate into policy rules in the ways that have been suggested.
    Keywords: equilibrium real interest rate; interest rate rules; Monetary policy
    JEL: E43 E52
    Date: 2016–05
  24. By: Aleksei Netšunajev; Lars Winkelmann; ;
    Abstract: To what extent are US and Euro Area (EA) inflation expectations determined by foreign shocks? How do transmissions change during the great recession and European sovereign debt crisis? We address these questions with a flexible structural VAR model of weekly financial markets’ inflation expectations and an index of commodity futures. For the identification of the model, we exploit the heteroscedasticity of the data. We propose instrument-type regressions to uncover the economic nature and origin of identified shocks. In line with the discussion about global inflation, we find that inflation expectations can be labeled global over short expectations horizons but local at long horizons. While large US macro shocks explain the strong drop in US and EA inflation expectations during the great recession, expectations shocks are the important driver from 2009 on.
    Keywords: Spillover, monetary policy, expectations shocks, financial crisis, identification through heteroskedasticity
    JEL: E31 F42 E52
    Date: 2016–03
  25. By: Hännikäinen, Jari
    Abstract: This paper examines the predictive content of the shadow rates for U.S. real activity and inflation in a data-rich environment. We find that the shadow rates contain substantial out-of-sample predictive power for inflation in non-zero lower bound and zero lower bound periods. In contrast, the shadow rates are uninformative about future real activity.
    Keywords: shadow rate; zero lower bound; unconventional monetary policy; forecasting; data-rich environment
    JEL: C53 E37 E43 E44 E58
    Date: 2016–05–18
  26. By: Clair Null; Duncan Chaplin; Jacob Hartog; Jessica Jacobson; Arif Mamun; Anu Rangarajan
    Abstract: A report to the Financial Services for the Poor program at the Bill & Melinda Gates Foundation.
    Keywords: Financial Inclusion Insights Surveys, East Africa, Inequities in Use of Mobile Money, international
    JEL: F Z
    Date: 2015–01–30
  27. By: Fernando Alvarez (University of Chicago); Hervé Le Bihan (Banque de France); Francesco Lippi (EIEF and University of Sassari)
    Abstract: We analytically solve a menu cost model that encompasses several models, such as Taylor (1980), Calvo (1983), Reis (2006), Golosov and Lucas (2007), Nakamura and Steinsson (2010), Midrigan (2011) and Alvarez and Lippi (2014). The model accounts for the positive excess kurtosis of the size-distribution of price changes that appears in the data. We show that the ratio of kurtosis to the frequency of price changes is a sufficient statistics for the real effects of monetary shocks, measured by the cumulated output response following a monetary shock. We review empirical measures of kurtosis and frequency and conclude that a model that successfully matches the micro evidence produces persistent real effects that are about 4 times larger than the Golosov-Lucas model, about 30% below the effect of the Calvo model. We discuss the robustness of our results to changes in the setup, including small in ation and leptokurtic cost shocks.
    Date: 2016
  28. By: Janko Cizel; Jon Frost; Aerdt Houben; Peter Wierts
    Abstract: Macroprudential policy is increasingly being implemented worldwide. Key questions are its effectiveness in influencing bank credit and substitution effects beyond banking. Our results confirm the expected effects of macroprudential policies on bank credit, both for advanced economies and emerging market economies. But results also confirm substitution effects towards non-bank credit, especially in advanced economies, reducing the policies' effect on total credit. Quantity restrictions are particularly potent in constraining bank credit but also cause the strongest substitution effects. Policy implications indicate a need to extend macroprudential policy beyond banking, especially in advanced economies.
    Keywords: Financial cycle; macroprudential regulation; financial supervision; (shadow) banking
    JEL: E58 G10 G18 G20
    Date: 2016–04
  29. By: Lilit Popoyan
    Abstract: After the destructive impact of the global financial crisis of 2008, many believe that pre-crisis financial market regulation did not take the "big picture" of the system suffciently into account and, subsequently, financial supervision mainly "missed the forest for the trees". As a result, the need for macroprudential aspects of regulation emerged, which has recently become the focal point of many policy debates. This has also led to intense discussion on the contours of monetary policy after the post-crisis "new normal". Here, I review recent progress in empirical and theoretical research on the effectiveness of macroprudential tools, as well as the current state of the debate, in order to extract common policy conclusions. The work highlights that, despite the achievements in the literature, the current experience and knowledge of how macroprudential instruments work, their calibration, and the mechanisms through which they interact with each other and with monetary policy are rather limited and conflicting. Moreover, I critically survey and note the current challenges faced by macroprudential regulation in creating stable, yet effcient financial systems. At the same time, I emphasize the importance of accepting that many risks may remain, requiring that we proceed prudently and develop better plans for future crises.
    Keywords: macroprudential policy; Basel III regulation; capital adequacy ratio; counter-cyclical capital buffer; leverage requirement; systemic risk; crisis management; financial stability
    Date: 2016–05–16
  30. By: Bertsch, Christoph (Research Department, Central Bank of Sweden); Hull, Isaiah (Research Department, Central Bank of Sweden); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: On December 16th of 2015, the Fed initiated "liftoff," raising the federal funds rate range by 25 basis points and ending a 7-year regime of near-zero rates. We use a unique dataset of 640,000 loan-hour observations to measure the impact of liftoff on interest rates in the peer-to-peer lending segment of the subprime market. We find that the average interest rate dropped by 16.9-22.6 basis points. This holds for 14 and 28 day windows centered around liftoff, and is robust to the inclusion of a broad set of loan-level controls and fixed effects. We also find that the spread between high and low credit rating borrowers decreased by 16% and demonstrate that this was not generated by a change in the composition of borrowers along observable dimensions. Furthermore, we find no evidence that either result was driven by a collapse in demand for funds. Our results are consistent with an investor-perceived reduction in default probabilities; and suggest that lifto provided a strong, positive signal about the future solvency of subprime borrowers, reducing their borrowing cost, even as short term rates increased in other markets.
    Keywords: peer-to-peer lending; subprime consumer loans; Fed liftoff; monetary policy signaling; default channel; household debt
    JEL: D14 E43 E52 G21
    Date: 2016–04–01
  31. By: Piersanti, Fabio Massimo; Rizzati, Massimiliano; Nakmai, Siwat
    Abstract: In this project, we challenge the conventional wisdom on exchange rate predictability with the Taylor rule (Molodtsova & Papell, 2009; Rossi, 2013) by employing the vector error correction model (VECM) when the cointegration (CI) rank of our multivariate model is greater than one and less than full. Even though our approach is quite bounded to the finding of a suitable CI rank, our predictions are quite good when compared to a driftless random walk as a benchmark in the long run, whilst the performance in the short run is not. Notwithstanding we claim that we could also obtain better results had we been able to perform a static forecast for three months ahead rather than one (the latter is the only case admitted by the gretl software).
    Keywords: Foreign exchange rates, the Taylor rule, VECMs
    JEL: C53 F31
    Date: 2016–03–30
  32. By: Bilbiie, Florin Ovidiu
    Abstract: For how long should central banks prolong a low interest rates policy beyond the end of a liquidity trap? I solve analytically for the optimal, welfare-maximizing duration of forward guidance FG, modelled stochastically---through a probability of low interest rates once out of the trap. Optimal FG balances the welfare benefit of higher consumption (and lower volatility) today with the welfare cost of higher consumption volatility once the trap is over. Its main determinants are the trap duration and the severity of the recession. Reassuringly for policymakers, a simple rule consisting of announcing an expected FG duration equal to half the duration of the trap, times a factor proportional to interest rate spreads is close to optimal. I extend this analytical apparatus to more sophisticated models with heterogenous agents: informational asymmetries, and financial frictions
    Keywords: forward guidance; hand-to-mouth.; heterogenous agents; heterogenous beliefs; incomplete markets; liquidity trap; Optimal monetary policy; unemployment risk; zero lower bound
    JEL: E21 E31 E40 E50
    Date: 2016–04
  33. By: Fuerst, Timothy S. (Federal Reserve Bank of Cleveland); Mau, Ronald (University of Notre Dame)
    Abstract: Two traditional explanations for the mean and variability of the term premium are: (i) time-varying risk premia on long bonds, and (ii) segmented markets between long- and short-term bonds. This paper integrates these two approaches into a medium-scale DSGE model. We consider two sources of business cycle variability: shocks to total factor productivity (TFP), and shocks to the marginal efficiency of investment (MEI). The ability of the risk approach to match the first moment of the term premium depends upon the relative importance of these two shocks. If MEI shocks are an important driver of the business cycle, then long bonds are a hedge against the business cycle so that the average term premium is negative. The opposite is the case for the TFP shocks. But for either source of shocks, the risk approach to the term premium predicts a trivial amount of variability in the term premium. In contrast, the segmented markets model can easily match both moments. The market segmentation reflects a real distortion, so that smoothing the term premium is typically welfare-improving. There are two difficulties with such a policy. First, the mean level of the term premium will not properly reflect the segmentation distortion because of the risk adjustment. Second, if the term premium is measured with error, the welfare gain of a term premium peg is naturally reduced. The paper demonstrates that both of these effects are quantitatively modest so that the welfare advantage to a term premium peg survives.
    Keywords: Term premium peg; time-varying risk premia; DSGE; total factor productivity; marginal efficiency of investment; monetary policy;
    JEL: E52 G12 G17
    Date: 2016–05–06

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