nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒06‒04
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Contemporary monetary policy in China: A move towards price-based policy? By Nuutilainen, Riikka
  2. Term structures of inflation expectations and real interest rates By Aruoba, S. Boragan
  3. The Limits of Central Bank Forward Guidance under Learning By Cole, Stephen J.
  4. Monetary policy spillovers across the Pacific when interest rates are at the zero lower bound By Edda Claus; Iris Claus; Leo Krippner
  5. Does the Reserve Options Mechanism really decrease exchange rate volatility? The Synthetic Control Method Approach By Aytug, Huseyin
  6. Inflation anchoring in the euro area By Speck, Christian
  7. Assessing the link between price and financial stability By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance; Francesco Saraceno
  8. Does Easing Monetary Policy Increase Financial Instability? By Ambrogio Cesa-Bianchi; Alessandro Rebucci
  9. A Model of the International Monetary System By Emmanuel Farhi; Matteo Maggiori
  10. A dynamic network model of the unsecured interbank lending market By Blasques, Francisco; Brauning, Falk; Lelyveld, Iman Van
  11. Quantitative Easing and Financial Stability By Woodford, Michael
  12. Monetary policy and the current account; theory and evidence By Hjortsoe, Ida; Weale, Martin; Wieladek, Tomasz
  13. Monetary and Fiscal Policies and the Dynamics of the Yield Curve in Morocco By Calixte Ahokpossi; Pilar Garcia Martinez; Laurent Kemoe
  14. Deposit dollarization in emerging markets: modelling the hysteresis effect By Krupkina, Anna; Ponomarenko, Alexey
  15. Robustness in Foreign Exchange Rate Forecasting Models: Economics-Based Modelling After the Financial Crisis By Carlos Medel; Gilmour Camilleri; Hsiang-Ling Hsu; Stefan Kania; Miltiadis Touloumtzoglou
  16. Euro area monetary and fiscal policy tracking design in the time-frequency domain By Crowley, Patrick M.; Hudgins, David
  17. Are monetary unions more synchronous than non-monetary unions? By Crowley, Patrick M.; Trombley, Christopher
  18. Monetary Policy Stance: Comparison of Different Measures for Pakistan By Muhammad Nadeem Hanif; Sajawal Khan; Muhammad Rehman
  19. Comparing inflation and price level targeting: the role of forward guidance and transparency By Honkapohja, Seppo; Mitra, Kaushik
  20. Private Money Creation and Equilibrium Liquidity By Benigno, Pierpaolo; Robatto, Roberto
  21. Reverse Speculative Attacks By Amador, Manuel; Bianchi, Javier; Bocola, Luigi; Perri, Fabrizio
  22. Credit control instruments in a dual banking system: leverage control rate (LCR) – a proposal By Hasan, Zubair
  23. Large Depreciations: Recent Experience in Historical Perspective By Jose De Gregorio
  25. Applying a Microfounded-Forecasting Approach to Predict Brazilian Inflation By Wagner Piazza Gaglianone; João Victor Issler; Silvia Maria Matos
  27. The impact of credit supply shocks and a new FCI based on a FAVAR approach By Zsuzsanna Hosszú
  29. Political Economy of EMU. Rebuilding Systemic Trust in the Euro Area in Times of Crisis By Felix Roth

  1. By: Nuutilainen, Riikka
    Abstract: ​This paper focuses on monetary policy in China. A set of different specifications for the monetary policy reaction function are empirically evaluated using monthly data for 1999––2012. Variation is allowed both in the policy targets as well as in the monetary policy instrument itself. Overall, the performance of the estimated policy rules is surprisingly good. Chinese monetary policy displays countercyclical reactions to in‡ation and leaning-against-the-wind behaviour. The paper shows that there is a notable increase in the overall responsiveness of Chinese monetary policy over the course of the estimation period. The central bank interest rate is irresponsive to economic conditions during the earlier years of the sample but does respond in the later years. This finding supports the view that the monetary policy settings of the People's Bank of China have come to place more weight on price-based instruments. A time-varying estimation procedure suggests that the two monetary policy objectives are assigned to different instruments. The money supply instrument is utilised to control the price level and (after 2008) the interest rate instrument has been used to achieve the targeted output growth.
    Keywords: China, Monetary policy, Taylor rule, McCallum rule
    JEL: E52 E58
    Date: 2015–03–12
  2. By: Aruoba, S. Boragan (Federal Reserve Bank of Philadelphia)
    Abstract: In this paper, I use a statistical model to combine various surveys to produce a term structure of inflation expectations--inflation expectations at any horizon--and an associated term structure of real interest rates. Inflation expectations extracted from this model track realized inflation quite well, and in terms of forecast accuracy, they are at par with or superior to some popular alternatives. Looking at the period 2008.2015, I conclude that long-run inflation expectations remained anchored, and the policies of the Federal Reserve provided a large level of monetary stimulus to the economy.
    Keywords: Surveys; TIPS; Inflation swaps; Unconventional monetary policy; Treasury Inflation-Protected Securities (TIPS)
    JEL: C32 E31 E43 E58
    Date: 2016–03–14
  3. By: Cole, Stephen J. (Department of Economics Marquette University)
    Abstract: Central bank forward guidance emerged as a pertinent tool for monetary policymakers since the Great Recession. Nevertheless, the effects of forward guidance remain unclear. This paper investigates the effectiveness of forward guidance while relaxing two standard macroeconomic assumptions: rational expectations and frictionless financial markets. Agents forecast future macroeconomic variables via either the rational expectations hypothesis or a more plausible theory of expectations formation called adaptive learning. A standard Dynamic Stochastic General Equilibrium (DSGE) model is extended to include the financial accelerator mechanism. The results show that the addition of financial frictions amplifies the differences between rational expectations and adaptive learning to forward guidance. The macroeconomic variables are overall more responsive to forward guidance under rational expectations than under adaptive learning. During a period of economic crisis (e.g. a recession), output under rational expectations displays more favorable responses to forward guidance than under adaptive learning. These differences are exacerbated when compared to a similar analysis without financial frictions. Thus, monetary policymakers should consider the way in which expectations and credit frictions are modeled when examining the effects of forward guidance.
    Keywords: Forward Guidance, Monetary Policy, Adaptive Learning, Expectations, Financial Frictions
    JEL: D84 E30 E44 E50 E52 E58 E60
    Date: 2016–03
  4. By: Edda Claus; Iris Claus; Leo Krippner (Reserve Bank of New Zealand)
    Abstract: To conduct monetary policy effectively, central banks need to understand the transmission of monetary policy into financial markets. In this paper, we investigate the effects of United States and Japanese monetary policy shocks on their own asset markets, and the spillovers into each other's markets. However, because short-term nominal interest rates have been effectively zero in Japan since January 1998 and the United States from late 2008, monetary policy shocks cannot be quantified by considering observable changes in short-term market interest rates. Therefore, in our analysis we use a shadow short rate - a quantitative measure of overall conventional and unconventional monetary policy that is estimated from the term structure of interest rates. Our results suggest that the operation of monetary policy at the zero lower bound of interest rates alters the transmission of shocks. In particular, we find a limited response of exchange rates during the first episode of unconventional monetary policy in Japan but a significant impact since 2006.
    Date: 2016–08
  5. By: Aytug, Huseyin
    Abstract: After the invention of the Reserve Option Mechanism (ROM) by the Central Bank of Turkey, it has been debated whether it can help decrease the volatility of foreign exchange rate. In this study, I apply a new micro-econometric technique, the synthetic control method, in order to construct a counterfactual foreign exchange rate volatility in the absence of the ROM. I find that, USD/TRY rate is less volatile under the ROM. However, the ROM has not worked efficiently after the announcement of FED's tapering in May 2013. Furthermore, the ROM could have decreased the volatility of foreign exchange rate if FED had not started tapering.
    Keywords: FX Intervention, Synthetic Control Method, Required Reserves
    JEL: C31 E58 F31
    Date: 2016–01–01
  6. By: Speck, Christian
    Abstract: Did the decline in inflation rates from 2012 to 2015 and the low levels of market-based inflation expectations lead to de-anchored inflation dynamics in the euro area? This paper is the first time-varying event study to investigate the reaction of inflation-linked swap (ILS) rates - a market-based measure of inflation expectations - to macroeconomic surprises in the euro area. Compared to the pre-crisis period, surprises have a much stronger effect on spot ILS rates during the crisis. Medium-term forward ILS rates remain insensitive to news most of the time, which implies inflation anchoring. Only short periods of sensitivity on the part of medium-term forward ILS rates are identified at times of low inflation or recession. The sensitivity is lower over more distant forecast horizons such that medium-term sensitivity represents an inflation adjustment process and provides evidence for a de-anchoring of inflation expectations or a loss of credibility for the Eurosystem's policy target.
    Keywords: Inflation Anchoring,Inflation Expectations,Inflation-Linked Swaps,Event Study,Central Banking
    JEL: E31 E44 G12 G14
    Date: 2016
  7. By: Christophe Blot (OFCE); Jérôme Creel (OFCE); Paul Hubert (OFCE); Fabien Labondance (OFCE (OFCE)); Francesco Saraceno (OFCE)
    Abstract: This paper aims at investigating first, the (possibly time-varying) empirical relationship between price and financial stability, and second, the effects of some macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz's “conventional wisdom” that price stability would yield financial stability. Using simple correlations and VAR and Dynamic Conditional Correlations, we reject the hypotheses that price stability is positively correlated with financial stability and that the correlation is stable over time. The latter result and the analysis of the determinants of the link between price stability and financial stability cast some doubt on the appropriateness of the “leaning against the wind” monetary policy approach.
    Keywords: Price stability; Financial stability; DCC-GARCH; VAR
    JEL: C32 E31 E44 E52
    Date: 2015–02
  8. By: Ambrogio Cesa-Bianchi; Alessandro Rebucci
    Abstract: This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policy and to the role of U.S. monetary and regulatory policy in the run up to the Great Recession. There are two main results. First, real interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective second policy instrument aimed at preserving financial stability.
    JEL: E44 E52 E58 E65
    Date: 2016–05
  9. 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: a Hegemon vs. a multipolar world; abundant vs. scarce reserve assets; a gold exchange standard vs. a floating rate system; away from vs. at the zero lower bound (ZLB). We rationalize the Triffin dilemma, which posits the fundamental instability of the system, as well as the common prediction regarding the natural and beneficial emergence of a multipolar world, the Nurkse warning that a multipolar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold 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. We analyze forces that lead to the endogenous emergence of a Hegemon. Our analysis is both positive and normative.
    JEL: E12 E42 E43 E44 E52 E61 F02 F31 F32 F33 F34 F36 F38 F42 F44 F53 F55 G11 G12 G15 G18 G21 G23 G28 H12 H63 H87 N1 N10 N11 N12 N13 N14 N2 N20 N21 N22 N23 N24
    Date: 2016–05
  10. By: Blasques, Francisco (Vrije Universiteit Amsterdam); Brauning, Falk (Federal Reserve Bank of Boston); Lelyveld, Iman Van (De Nederlandsche Bank)
    Abstract: The unsecured interbank lending market plays a crucial role in financing business activity, a fact underscored by the market's disruption following the Lehman Brothers failure in September 2007. This event, a defining moment in the global financial crisis, fostered greater uncertainty about counterparty risk, an adverse shock that severely curtailed credit supply, hampered monetary policy, and negatively impacted the real economy. To counteract the consequences of the crisis, central banks became the primary intermediaries for a large portion of the money market. However, a single main counterparty reduces the incentives for peer monitoring and the market discipline obtained from private information about counterparty credit risk. To assess the benefits gained from having a decentralized market, this paper builds and estimates a dynamic network model of interbank lending using transaction-level data. The analysis focuses on assessing the roles that credit-risk uncertainty and private information, gathered through peer monitoring and repeated interactions, play in shaping the network of bilateral lending relationships, interest rates, loan volumes, and the liquidity allocation among banks. The paper also analyzes how changes in the central bank's interest rate corridor affect the interbank market structure.
    Keywords: interbank liquidity; financial networks; credit-risk uncertainty; peer monitoring; monetary policy; trading relationships; indirect parameter estimation
    JEL: C33 C51 E52 G01 G21
    Date: 2016–04–01
  11. By: Woodford, Michael
    Abstract: This paper compares three alternative dimensions of central-bank policy --- conventional interest-rate policy, quantitative easing, and macroprudential policy --- showing in the context of a simple intertemporal general-equilibrium model why they are logically independent dimensions of policy, and how they jointly determine financial conditions, aggregate demand, and the severity of risks to financial stability. Quantitative easing policies increase financial stability risk less than either of the other two policies, relative to the magnitude of aggregate demand stimulus; and a combination of expansion of the cental bank's balance sheet with a suitable tightening of macroprudential policy can have a net expansionary effect on aggregate demand with no increased risk to financial stability. This suggests that quantitative easing policies may be useful as an approach to aggregate demand management not only when the zero lower bound precludes further use of conventional interest-rate policy, but also when it is not desirable to further reduce interest rates because of financial stability concerns.
    Keywords: macroprudential policy; money premium; zero lower bound
    JEL: E44 E52
    Date: 2016–05
  12. By: Hjortsoe, Ida (Monetary Policy Committee Unit, Bank of England); Weale, Martin (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England)
    Abstract: Does the current account improve or deteriorate following a monetary policy expansion? We examine this issue theoretically and empirically. We show that a standard open economy DSGE model predicts that the current account response to a monetary policy shock depends on the degree of economic regulation in different markets. In particular, financial (product market) liberalisation makes it more likely that the current account deteriorates (improves) following a monetary expansion. We test these theoretical predictions with a varying coefficient Bayesian panel VAR model, where the coefficients are allowed to vary as a function of the degree of financial, product and labour market regulation on data from 1976 Q1–2006 Q4 for 19 OECD countries. Our empirical results support the theory. We therefore conclude that following a monetary policy expansion, the current account is more likely to go into deficit (surplus) in countries with more liberalised financial (product) markets.
    Keywords: Balance of payments; current account; Bayesian panel VAR; economic liberalisation; monetary policy
    JEL: C11 C23 E52 F32
    Date: 2016–03–04
  13. By: Calixte Ahokpossi; Pilar Garcia Martinez; Laurent Kemoe
    Abstract: We estimate the latent factors that underlie the dynamics of the sovereign bond yield curve in Morocco during 2004–14 based on the Dynamic Nelson-Siegel model. On this basis, we explore the interaction between macroeconomic variables and the yield curve, which is of direct relevance to macroeconomic policy-making. In Morocco’s context, we find that tighter monetary policy increases short-end maturities, and that the impact is small and short-lived. Economic activity is also briefly but significantly impacted, suggesting that even under a pegged exchange rate, monetary policy autonomy and effectiveness can be increased through greater central bank independence. Fiscal improvements significantly lower yield levels. Policy conclusions are that improvement in the fiscal and monetary policy frameworks, as well as greater financial sector development and inclusion, could benefit Morocco and strengthen the transmission mechanisms and effectiveness of macroeconomic policies.
    Date: 2016–05–23
  14. By: Krupkina, Anna; Ponomarenko, Alexey
    Abstract: We apply empirical modelling set-ups developed to capture the hysteresis effect in the data on deposit dollarization in a cross-section of emerging market economies. Specifically, we estimate a nonlinear relationship that determines two equilibrium levels of deposit dollarization depending on the current value of dollarization and previous episodes of sharp depreciation of the national currency over the past five years. When exchange rates are stable, convergence to a higher equilibrium level of dollarization begins when the 45–50% thresh-old of deposit dollarization is exceeded. We estimate the model for short-run dynamics of dollarization and find that the speed of convergence to the higher equilibrium implies quarterly increases of 1.2–3 percentage points in the ratio of foreign currency deposits to total deposits.
    Keywords: dollarization, hysteresis, nonlinear model, emerging markets
    JEL: E41 F31
    Date: 2015–11–10
  15. By: Carlos Medel; Gilmour Camilleri; Hsiang-Ling Hsu; Stefan Kania; Miltiadis Touloumtzoglou
    Abstract: Exchange rates (FX) typically measures structural misalignments anticipating future short-run dynamics of key macroeconomic variables aiming to correct those misalignments with or without external intervention. The aim of this article is to analyse the out-of-sample behaviour of a bunch of statistical and economics-based models when forecasting FX for the UK, Japan, and the Euro Zone in relation to the US, emphasising the commodity prices boom of 2007-8 and the financial crisis of 2008-9. We analyse the forecasting behaviour of six economic plus three statistical models when forecasting from one up to 60-steps-ahead, comprising from 1981.1 to 2014.6. Our six economicsbased models can be classified in three groups: interest rate spreads, monetary fundamentals, and purchasing power parity with global measures, covering a wide range of macroeconomic indicators. Our results indicate that there are changes of the best models when considering different time spans. In particular, interest-rate-based models tend to be better at predicting before 2008, also showing a better tracking when crisis hit. However, when considering until 2014, the models based on price differentials are more promising, but subject to heterogeneity across countries. These results are important since shed some light on what model specification use and combine when forecast facing different FX volatility.
    Date: 2016–05
  16. By: Crowley, Patrick M.; Hudgins, David
    Abstract: This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro Area quarterly GDP data from 1995 – 2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet decomposition model. Our study builds a MATLAB program that simulates optimal policy thrusts at each frequency range where: (1) both fiscal and monetary policy are emphasized, (2) only fiscal policy is relatively active, and (3) when only monetary policy is relatively active. The results show that the monetary authorities should utilize a strategy that influences the short-term market interest rate to undulate based on the cyclical wavelet decomposition in order to compute the optimal timing and levels for the aggregate interest rate adjustments. We also find that modest emphasis on active interest rate movements can alleviate much of the volatility in optimal government spending, while rendering similarly favorable levels of aggregate consumption and investment. This research is the first to construct joint fiscal and monetary policies in an applied optimal control model based on the short and long cyclical lag structures obtained from wavelet analysis.
    Keywords: discrete wavelet analysis, euro area, fiscal policy, LQ tracking, monetary policy, optimal control
    JEL: C49 C61 C63 C88 E52 E61
    Date: 2015–08–12
  17. By: Crowley, Patrick M.; Trombley, Christopher
    Abstract: Within currency unions, the conventional wisdom is that there should be a high degree of macroeconomic synchronicity between the constituent parts of the union. But this conjecture has never been formally tested by comparing sample of monetary unions with a control sample of countries that do not belong to a monetary union. In this paper we take euro area data, US State macro data, Canadian provincial data and Australian state data — namely real Gross Domestic Product (GDP) growth, the GDP deflator growth and unemployment rate data — and use techniques relating to recurrence plots to measure the degree of synchronicity in dynamics over time using a dissimilarity measure. The results show that for the most part monetary unions are more synchronous than non-monetary unions, but that this is not always the case and particularly in the case of real GDP growth. Furthermore, Australia is by far the most synchronous monetary union in our sample.
    Keywords: business cycles, growth cycles, frequency domain, optimal currency area, macroeconomic synchronization, monetary policy, single currency
    JEL: C49 E32 F44
    Date: 2015–07–31
  18. By: Muhammad Nadeem Hanif (State Bank of Pakistan); Sajawal Khan (State Bank of Pakistan); Muhammad Rehman (State Bank of Pakistan)
    Abstract: This paper estimates monetary policy stance measures like Monetary Conditions Index (MCI), Financial Conditions Index (FCI), and Bernanke and Mihov Index (BMI) for Pakistan. The estimated monetary policy stance guides whether the policy is tight, neutral or loose relative to its objectives. And thus, it may help policy maker adjusting policy instrument(s) to guide the economy in desired direction. It also helps in knowing which monetary policy transmission channel is more effective along with the impact of various monetary policy measures upon the desired goals. Despite the fact that supply shocks are found to be dominant in Pakistan which gives little room to monetary policy to play an effective role as stabilizing tool, movements in exchange rate and monetary aggregates turned out to be more important than the interest rate in policy transmission mechanism. Being a small open economy facing persistent current account deficits, exchange rate consideration thus played major role in monetary policy transmission in Pakistan. State Bank of Pakistan had been targeting monetary aggregate until recently and just recently started active use of interest rate as policy instrument. It may take some time for interest rate channel to take lead. The comparison of different estimated measures shows that MCI performs better as measure of monetary policy stance (compared to FCI and BMI) in the case of Pakistan.
    Keywords: Financial markets and macroeconomy, monetary policy
    JEL: E44 E52
    Date: 2016–04
  19. By: Honkapohja, Seppo; Mitra, Kaushik
    Abstract: We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.
    Keywords: adaptive learning, monetary policy, inflation targeting, zero interest rate lower bound
    JEL: E63 E52 E58
    Date: 2015–04–07
  20. By: Benigno, Pierpaolo; Robatto, Roberto
    Abstract: Can creation of private money fulfill the liquidity needs of the economy? The answer is no if the market of private money is run only by forces of perfect competition. Multiple equilibria are possible: there exist good equilibria with complete satiation of liquidity and absence of default on private money, and bad equilibria characterized by shortage of liquidity and partial default. In this framework, capital requirements, distortions to the demand or supply of private money, and the role of public liquidity in substituting private liquidity or in offsetting liquidity crises are investigated.
    Date: 2016–04
  21. By: Amador, Manuel (Federal Reserve Bank of Minneapolis); Bianchi, Javier (Federal Reserve Bank of Minneapolis); Bocola, Luigi (Northwestern University); Perri, Fabrizio (Federal Reserve Bank of Minneapolis)
    Abstract: In January 2015, in the face of sustained capital inflows, the Swiss National Bank abandoned the floor for the Swiss Franc against the Euro, a decision which led to the appreciation of the Swiss Franc. The objective of this paper is to present a simple framework that helps to better understand the timing of this episode, which we label a “reverse speculative attack”. We model a central bank which wishes to maintain a peg, and responds to increases in demand for domestic currency by expanding its balance sheet. In contrast to the classic speculative attacks, which are triggered by the depletion of foreign assets, reverse attacks are triggered by the concern of future balance sheet losses. Our key result is that the interaction between the desire to maintain the peg and the concern about future losses, can lead the central bank to first accumulate a large amount of reserves, and then to abandon the peg, just as we have observed in the Swiss case.
    Keywords: Fixed exchange rates; Currency crises; Balance sheet concerns
    JEL: F31 F32
    Date: 2016–05–24
  22. By: Hasan, Zubair
    Abstract: Islam banishes interest. This raises two questions contextual to Central Banking. First, can Islamic banks create credit like the conventional? We shall argue that Islamic banks cannot avoid credit creation; an imperative for staying in the market where they operate in competition with their conventional rivals. Evidently, the interest rate policy would not be applicable to them as a control measure. This leads us to the second question: What could possibly replace the interest rate for Islamic banks? In reply, the paper suggests what it calls a leverage control rate (LCR) as an addition to Central Banks’ credit control arsenal. The proposed rate is derived from the sharing of profit ratio in Islamic banking. It is contended that the new measure has an edge over the old fashioned interest rate instrument which it can in fact replace with advantage. It can possibly be a common measure in a dual system.
    Keywords: Central Banking; Credit creation; leverage control rate. (LCR); Islamic banks; Profit sharing
    JEL: G0 G01 G2 G28
    Date: 2016–01
  23. By: Jose De Gregorio
    Abstract: Data for a large sample of countries dating back to the early 1970s reveal that the large depreciations against the dollar that are occurring in many countries are not unprecedented in magnitude or duration. The pass-through to inflation from exchange rate depreciation has been slightly more muted than in previous occasions, but it is not out of line with experience since the mid-1990s. The current account adjustment has been more limited than in the past, possibly suggesting that the period of weak currencies may be prolonged.
    Date: 2016–05
    Date: 2016
  25. By: Wagner Piazza Gaglianone; João Victor Issler; Silvia Maria Matos
    Abstract: In this paper, we investigate whether combining forecasts from surveys of expectations is a helpful strategy for forecasting inflation in Brazil. We employ the FGV-IBRE Economic Tendency Survey, which consists of monthly qualitative information from approximately 2,000 consumers since 2006, and the Focus Survey of the Central Bank of Brazil, with daily forecasts since 1999 from roughly 250 registered professional forecasters. Natural candidates to win a forecast competition in the literature of surveys of expectations are the (consensus) cross-sectional average forecasts (AF). In an exploratory investigation, we first show that these forecasts are a bias ridden version of the conditional expectation of inflation. The no-bias tests are conducted for the intercept and slope using the methods in Issler and Lima (2009) and Gaglianone and Issler (2015). The results reveal interesting data features: consumers systematically overpredict inflation (by 2.01 p.p., on average), whereas market agents underpredict it (by -0.68 p.p. over the same sample). Next, we employ a pseudo out-of-sample analysis to evaluate different forecasting methods: the AR(1) model, the Granger and Ramanathan (1984) forecast combination (GR), the consensus forecast (AF), the Bias-Corrected Average Forecast (BCAF), and the extended BCAF. Results reveal that: (i) the MSE of the AR(1) model is higher compared to the GR (and usually lower compared to the AF); and (ii) the extended BCAF is more accurate than the BCAF, which, in turn, dominates the AF. This validates the view that the bias corrections are a useful device for forecasting using surveys
    Date: 2016–05
    Date: 2016
  27. By: Zsuzsanna Hosszú (Magyar Nemzeti Bank, Central Bank of Hungary)
    Abstract: In this paper, relying on a time-varying parameters FAVAR model, two credit supply factors are calculated, the first of which is identified as willingness to lend, while the second as lending capacity. The impact of these two types of credit supply shocks on macroeconomic variables and their changes in time is examined. The two types of lending shocks affect the macro variables rather differently; a positive lending capacity shock in a banking system mostly owned by non-residents influences GDP through the decrease in country risk and the easing of monetary policy, while willingness to lend primarily increases lending activity. The two financial shocks also differ in terms of their evolution over time: the change in the impact of willingness to lend was driven by foreign currency lending and one-off events (e.g. the outbreak of the crisis), thus the deviations occur usually for short periods of time and they are of small degree between the various quarters. On the other hand, in the case of lending capacity, trending processes can be observed: before the crisis the situation of the banking system plays an increasing role in country risk, while after 2008 it appears that monetary policy paid increasing attention to financial stability. Finally, a new type of financial conditions index is quantified based on our estimates, which measures the impact of the banking system’s lending activity on GDP growth.
    Keywords: dynamic factor model, dual Kalman-filter, financial conditions index, credit supply shocks, time varying parameter VAR.
    JEL: C32 C38 C58 E17 G21
    Date: 2016
    Date: 2016
  29. By: Felix Roth
    Abstract: This paper revisits the existent empirical evidence of a decline in citizens’ systemic trust in times of crisis for a 12-country sample of the euro area (EA12) from 1999 to 2014. They affirm a pronounced decline in trust in the periphery countries of the EA12, leading to particular low levels in the national government and parliament in Spain and Greece. They discuss the consequences of this decline for the political economy of Economic and Monetary Union and corroborate the strong and negative association between unemployment and trust. They provide evidence of the increase in unemployment in Spain and examine policy measures at the national and EU level to tackle unemployment. They revisit the evidence of the enduring support for the euro and discuss its relevance to crisis management. They elaborate upon the question of how to restore systemic trust without and with treaty change.
    JEL: C23 D72 E24 E42 E65 F50 G01 J0 O4 O52 Z13
    Date: 2015–09
    Date: 2016

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