nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒06‒09
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary policies to counter the zero interest rate: an overview of research By Honkapohja, Seppo
  2. Quantitative easing, negative interest rates and money creation. What central banks can and cannot do? By Mariusz Kapuscinski; Dorota Scibisz
  3. Macroeconomic Dynamics Near the ZLB : A Tale of Two Countries By Schorfheide, Frank; Cuba-Borda, Pablo; Aruoba, S. Boragan
  4. Reserve requirements and the bank lending channel in China By Fungáčová, Zuzana; Nuutilainen, Riikka; Weill, Laurent
  5. Macroeconomic consequences of the real-financial nexus: Imbalances and spillovers between China and the U.S. By Pang, Ke; Siklos, Pierre L.
  6. The ECB’s latest gimmick: Cash for loans By Gros, Daniel; Valiante, Diego; De Groen, Willem Pieter
  7. The offshore renminbi exchange rate: Microstructure and links to the onshore market By Cheung, Yin-Wong; Rime, Dagfinn
  8. Monetary facts revisited By Pavel Gertler; Boris Hofmann
  9. Common faith or parting ways? A time varying parameters factor analysis of euro-area inflation By Delle Monache,; Ivan Petrella; Fabrizio Venditti
  10. Time-varying Volatility, Financial Intermediation and Monetary Policy By S. Eickmeier; N. Metiu; Esteban Prieto
  11. Estimates of Fundamental Equilibrium Exchange Rates, May 2016 By William R. Cline
  12. A monetary policy rule for Russia, or is it rules? By Korhonen, Iikka; Nuutilainen, Riikka
  13. The distributional consequences of large devaluations By Javier Cravino; Andrei A. Levchenko
  14. Price plans and the real effects of monetary policy By Fernando Alvarez; Francesco Lippi
  15. The net stable funding ratio requirement when money is endogenous By Kauko, Karlo
  16. On the Nexus of Monetary Policy and Financial Stability: Is the Financial System More Resilient? By Patricia Palhau Mora; Michael Januska
  17. International Monetary Stability: A Multiple Equilibria Problem? : a presentation at Hoover Institution at Stanford University, Stanford, Calif. May 5, 2016. By Bullard, James B.
  18. Forecasting Inflation with the Hybrid New Keynesian Phillips Curve: A Compact-Scale Global VAR Approach By Carlos Medel
  19. Interest Rate Rules, Exchange Market Pressure, and Successful Exchange Rate Management By Franc Klaassen; Kostas Mavromatis
  20. Trilemma or Dilemma; Inspecting the Heterogeneous Response of Local Currency Interest Rates to Foreign Rates By Luca Antonio Ricci; Wei Shi
  21. Spillovers from Japan’s Unconventional Monetary Policy to Emerging Asia; a Global VAR approach By Giovanni Ganelli; Nour Tawk
  22. A European Disease? Non-tradable inflation and real interest rate divergence By Sophie Piton
  23. Determinants of Central Bank Independence: a Random Forest Approach By Maddalena Cavicchioli; Angeliki Papana; Ariadni Papana Dagiasis; Barbara Pistoresi

  1. By: Honkapohja, Seppo
    Abstract: ​Many central banks have lowered their interest rates close to zero in response to the crisis since 2008. In standard monetary models the zero lower bound (ZLB) constraint implies the existence of a second steady state in addition to the inflation-targeting steady state. Large scale asset purchases (APP) have been used as a tool for easing of monetary policy in the ZLB regime. I provide a theoretical discussion of these issues using a stylized general equilibrium model in a global nonlinear setting. I also review briefly the empirical literature about effects of APP’s.
    Keywords: adaptive learning, monetary policy, inflation targeting, zero interest rate lower bound
    JEL: E63 E52 E58
    Date: 2015–08–20
  2. By: Mariusz Kapuscinski (Warsaw School of Economics, Narodowy Bank Polski); Dorota Scibisz (Warsaw School of Economics)
    Abstract: Since the Great Recession some central banks have introduced measures such as quantitative easing (QE) and negative interest rates which seem unconventional in terms of the pre-crisis monetary policy consensus. Some economists and policymakers expect these actions to affect the money supply, both directly and indirectly. The paper confronts these statements with some institutional constraints on money creation to examine whether the claimed influence on money supply is possible. Some types of QE could affect the money supply, however it should not be perceived as an incentive for commercial banks to increase lending. When it comes to the negative policy rates, the effect on banks’ lending might actually be quite the opposite to the expected growth. These discrepancies result from certain inaccurate beliefs about money creation. Some adjustments provide a more realistic view of possible consequences of unconventional monetary policies and may contribute to the better implementation of monetary policy at the zero-lower bound.
    Keywords: quantitative easing; negative interest rates; money creation; monetary transmission
    JEL: E51 E52 E58
    Date: 2016–05
  3. By: Schorfheide, Frank; Cuba-Borda, Pablo; Aruoba, S. Boragan
    Abstract: We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium a sunspot shock can move the economy from a regime in which inflation is close to the central bank's target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A nonlinear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s transitioned to a deflation regime. The results are somewhat sensitive to the model specification, but on balance, the answer is affirmative for Japan and negative for the U.S.
    Keywords: Deflation ; DSGE Models ; Japan ; Multiple Equilibria ; Nonlinear Filtering ; Nonlinear Solution Methods ; Sunspots ; U.S. ; ZLB
    JEL: C5 E4 E5
    Date: 2016–05
  4. By: Fungáčová, Zuzana; Nuutilainen, Riikka; Weill, Laurent
    Abstract: This paper examines how reserve requirements influence the transmission of monetary policy through the bank lending channel in China while also taking into account the role of bank ownership. The implementation of Chinese monetary policy is characterized by the reliance on the reserve requirements as a regular policy tool with frequent adjustments. Using a large dataset of 170 Chinese banks for the period 2004–2013, we analyze the reaction of loan supply to changes in reserve requirements. We find no evidence of the bank lending channel through the use of reserve requirements. We observe, nonetheless, that changes in reserve requirements influence loan growth of banks. The same findings hold true for other monetary policy instruments. Further, we show that the bank ownership format influences transmission of monetary policy.
    Keywords: Chinese banks, bank lending channel, bank ownership
    JEL: E52 G21 P52
    Date: 2015–09–21
  5. By: Pang, Ke; Siklos, Pierre L.
    Abstract: ​Relying on quarterly data since 1998 we estimate, for China and the U.S., small scale econometric models that economize on the number of variables employed and yet are rich enough to provide useful insights about spillover effects between the two countries under different maintained assumptions about the exogeneity of the macroeconomic relationship between them. We conclude that inflation in China responds to credit shocks. Indeed, the monetary transmission mechanism in China resembles that of the US even if the channels through which monetary policy affects their respective economies differ. We also find that the monetary policy stance of the PBOC was helpful in mitigating the impact of the global financial crisis of 2008-9. Finally, spillovers from the US to China are significant and originate from both through the real and financial sectors of the US economy. Publication keywords: spillovers, monetary policy in China, dynamic factor models, credit
    JEL: E58 E52 C32
    Date: 2015–01–18
  6. By: Gros, Daniel; Valiante, Diego; De Groen, Willem Pieter
    Abstract: Among several important monetary policy initiatives decided by the European Central Bank on 10 March 2016 was the launch of a new set of targeted longer-term refinancing operations (TLTRO II), expanding on the previous TLTRO. In assessing this scheme, which might cost up to €24 billion, this Policy Brief finds that while it could become important, it is questionable whether it will achieve its goal of encouraging the extension of credit for new investment, as banks can easily window dress their loan book.
    Date: 2016–03
  7. By: Cheung, Yin-Wong; Rime, Dagfinn
    Abstract: The offshore renminbi (CNH) exchange rate is the exchange rate of the Chinese currency transacted outside China. We study the CNH exchange rate dynamics and its links with onshore exchange rates. Using a specialized microstructure dataset, we find that CNH is significantly affected by its order flow and limit-order imbalance. The offshore CNH exchange rate has an increasing impact on the onshore rate, and significant predictive power for the official RMB central parity rate. The CNH order flow also affects the onshore RMB exchange rate and the central parity rate. The interactions between variables are likely to be time-varying. Publication keywords: foreign exchange market microstructure, order flow, limit-order imbalance, CNH, CNY, central parity rate
    JEL: F31 F33 G14 G15 G21 G28
    Date: 2014–09–28
  8. By: Pavel Gertler; Boris Hofmann
    Abstract: This paper uses a cross-country database covering 46 economies over the post-war period to revisit two key monetary facts: (i) the long-run link between money growth and inflation and (ii) the link between credit growth and financial crises. The analysis reveals that the former has weakened over time, while the latter has become stronger. Moreover, the money-inflation nexus has been stronger in emerging market economies than in advanced economies, while it is the other way round for the link between credit growth and financial crises. These results suggest that there is an inverse relationship between the two monetary facts. The money-inflation link is weaker in regimes characterised by low inflation and highly liberalised financial systems, while the reverse holds true for the credit-crisis nexus.
    Keywords: quantity theory, credit growth, financial crises
    Date: 2016–06
  9. By: Delle Monache, (Bank of Italy); Ivan Petrella (Department of Economics, Mathematics & Statistics, Birkbeck; Bank of England); Fabrizio Venditti (Bank of Italy)
    Abstract: We analyze the interaction among the common and country specific components for the inflation rates in twelve euro area countries through a factor model with time varying parameters. The variation of the model parameters is driven by the score of the predictive likelihood, so that, conditionally on past data, the model is Gaussian and the likelihood function can be evaluated using the Kalman filter. The empirical analysis uncovers significant variation over time in the model parameters. We find that, over an extended time period, inflation persistence has fallen over time and the importance of common shocks has increased relatively to the idiosyncratic disturbances. According to the model, the fall in inflation observed since the sovereign debt crisis, is broadly a common phenomenon, since no significant cross country inflation differentials have emerged. Stressed countries, however, have been hit by unusually large shocks.
    Keywords: inflation, time-varying parameters, score driven models, state space models, dynamics factor models.
    JEL: E31 C22 C51 C53
    Date: 2015–07
  10. By: S. Eickmeier; N. Metiu; Esteban Prieto
    Abstract: We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. Exogenous policy changes are identified by adapting an external instruments approach to the non-linear model. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods.
    Keywords: monetary policy, credit spread, non-linearity, intermediary leverage,
    JEL: C32 E44 E52
    Date: 2016–05
  11. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: The US dollar is overvalued by about 7 percent, approximately the same amount as estimated last year (May and November 2015). Divergent phases of monetary policy in the United States, on one hand, and the euro area and Japan, on the other, and a collapse in commodity prices drove the stronger dollar. After rising about 5 percent from October 2015 (the base of the November 2015 assessment) to January 2016, the real effective exchange rate of the dollar fell slightly below its October level by April 2016 (the base of the current estimates). This semiannual evaluation also finds the yen is slightly undervalued (by 3 percent) despite its recent strengthening, but there is no misalignment of the other two leading currencies, the euro and Chinese renminbi.
    Date: 2016–05
  12. By: Korhonen, Iikka; Nuutilainen, Riikka
    Keywords: monetary policy rule, Taylor rule, McCallum rule, Russia, inflation
    JEL: E31 E43 E52 P33
    Date: 2016–02–10
  13. By: Javier Cravino; Andrei A. Levchenko
    Abstract: We study the differential impact of large exchange rate devaluations on the cost of living at different points on the income distribution. Across product categories, the poor have relatively high expenditure shares in tradeable products. Within tradeable product categories, the poor consume lower-priced varieties. Changes in the relative price of tradeables and the relative prices of lower-priced varieties following a devaluation will affect the cost of the consumption basket of the low-income households relative that of the high-income households. We quantify these effects following the 1994 Mexican peso devaluation and show that their distributional consequences can be large. In the two years that follow the devaluation, the cost of the consumption basket of those in the bottom decile of the income distribution rose between 1.46 and 1.6 times more than the cost of the consumption basket for the top income decile. .
    Keywords: Exchange rates, large devaluations, distributional effects, consumption baskets
    JEL: F31 F61
    Date: 2016–02
  14. By: Fernando Alvarez (University of Chicago); Francesco Lippi (University of Sassari and EIEF)
    Abstract: We analyze a sticky price model where a firm chooses a price plan, namely a set of 2 prices. Changing the plan entails a “menu cost”, but either price in the plan can be charged at any point in time. We analytically solve for the optimal policy and for the output response to a monetary shock. The setup generates a persistent reference price level and short lived deviations from it, as well as a decreasing hazard function for price changes, consistent with some datasets. We show that the temporary price changes substantially increase the flexibility of the aggregate price level.
    Date: 2016
  15. By: Kauko, Karlo
    Abstract: The NSFR regulation reduces banks’ liquidity risks by encouraging the use of deposit funding. Deposit money is created by lending, but the requirement restricts possibilities to grant loans. This contradiction may be destabilising if there is a substantial foreign debt. Keywords: net stable funding ratio; endogenous money; liquidity regulation
    JEL: E51 G21 G28
    Date: 2015–01–26
  16. By: Patricia Palhau Mora; Michael Januska
    Abstract: Monetary policy and financial stability are closely intertwined, and the resilience of the financial system carries weight in this relationship. This paper explores whether the financial system is more resilient as a result of the G20’s post-crisis agenda for financial regulatory reform. It summarizes the agenda’s key measures and implementation schedules, both internationally and in Canada, reviews the effectiveness of the reform measures in preventing and addressing financial imbalances, and outlines outstanding issues. It finds that, to date, there is evidence that the G20’s reform measures are increasing financial system resilience globally, especially in the banking sector. Yet, implementation is still ongoing, and it may be too early to judge how the reform measures are interacting with one another. In Canada, the resilience of the financial system is being enhanced by the ongoing implementation of more-rigorous global regulatory and supervisory standards. Consequently, the likelihood and impact of severe financial stress in the future should be reduced, supporting the primary focus of monetary policy on achieving its 2 per cent inflation target.
    Keywords: Financial stability, Financial system regulation and policies, Monetary policy framework
    JEL: E52 G01 G21 G23 G28
    Date: 2016
  17. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: St. Louis Fed President James Bullard addresses two ways of approaching the classic question of whether monetary policy should be better coordinated across countries. The traditional approach assumes all central banks follow “good” policy, defined as obeying the Taylor principle. In the alternative view, some countries do not follow the Taylor principle and, therefore, have “bad” policy. The first approach leads, in theory, to a unique worldwide equilibrium; the second approach leads to multiple equilibria with potentially more volatility in global financial markets. The choice of which way to look at this question these days, in a post-crisis world, may come down to a judgment of whether U.S. and foreign policymakers are still following “good” policy rules as they were, in theory, before the financial crisis. Bullard’s remarks were prepared as part of a panel discussion at a conference at the Hoover Institution at Stanford University in California.
    Date: 2016–05–05
  18. By: Carlos Medel
    Abstract: In this article, it is analysed the multihorizon predictive power of the Hybrid New Keynesian Phillips Curve (HNKPC) making use of a compact-scale Global VAR (GVAR) for the headline inflation of six developed countries with different inflationary experiences; covering from 2000.1 until 2014.12. The key element of this article is the use of direct measures of inflation expectations—Consensus Economics—embedded in a GVAR environment, i.e. modelling cross-country interactions. The GVAR point forecast is evaluated using the Mean Squared Forecast Error (MSFE) statistic and statistically compared with several benchmarks. These belong to traditional statistical modelling, such as autoregressions (AR), the exponential smoothing model (ES), and the random walk model (RW). One last economics-based benchmark is the closed economy univariate HNKPC. The results indicate that the GVAR has a low performance compared to that exhibited by the RW. The most accurate forecasts, however, are obtained with the AR and especially with the univariate HNKPC. In the long-run, the ES model also appears as a better alternative rather than the RW. The MSPE is obviously affected by the unanticipated effects of the financial crisis started in 2008. So, when considering an evaluation sample just before the crisis, the GVAR appears as a valid alternative for some countries in the long-run. The most robust forecasting devices across countries and horizons result in the univariate HNKPC, giving a role for economic fundamentals when forecasting inflation.
    Date: 2016–05
  19. By: Franc Klaassen (University of Amsterdam, the Netherlands); Kostas Mavromatis (University of Amsterdam, the Netherlands)
    Abstract: Central banks with an exchange rate objective set the interest rate in response to what they call ''pressure.'' Instead, existing interest rate rules rely on the exchange rate minus its target. To stay closer to actual policy, we introduce a rule that uses exchange market pressure (EMP), the tendency of the currency to depreciate. Our rule can also explain a high interest rate even if the actual exchange rate is on target, in contrast to traditional rules. A further improvement is that the coefficient for EMP depends on the interest rate effectiveness: the rate should be used less if it is more effective. This shows how policy makers should adapt their policy in case of a structural change to avoid missing their objective. Our rule can be applied to many regimes, from the float to the fixed, and to many models, such as the New Keynesian model, as we illustrate.
    Keywords: DSGE; exchange market pressure; exchange rate regime; fixed exchange rate; monetary policy; open economy Taylor rule
    JEL: E43 E52 F31 F33
    Date: 2016–04–29
  20. By: Luca Antonio Ricci; Wei Shi
    Abstract: This paper studies the heterogeneous response across countries of local currency interest rates to foreign and domestic factors, thus contributing to the discussion on the policy trilemma in international economics. On average, floaters appear to be less affected by the U.S. in the short run (up to about one year). However, there is large cross-country heterogeneity in the response: floaters that care less about domestic objectives, exhibit stronger fear of floating, or show higher co-cyclicality with the U.S., respond more to foreign rates. This suggests that floating does not necessarily imply a lack of response of local policy rates to foreign ones, but seems to allow independence when needed. Moreover, the effect of foreign rates on the short end of the local interest rate curve seems to operate mainly via the foreign influence on local policy rates, thus suggesting that central banks may be themselves the source of conduit of the “global credit cycle†discussed by Rey (2014). At the same time, most countries face the equivalent of a “Greenspan conundrum†as their long term rates are mainly influenced by foreign factors.
    Keywords: Interest rates;Monetary policy;Central bank independence;Exchange rate regimes;Floating exchange rates;Capital controls;Developed countries;Econometric models;
    Date: 2016–03–23
  21. By: Giovanni Ganelli; Nour Tawk
    Abstract: We use a Global VAR model to study spillovers from the Bank of Japan’s quantitative and qualitative easing (QQE) on emerging Asia.1 Our main result is that, despite an appreciation of their currencies vis-Ã -vis the yen, the impact on emerging Asia’s GDP tended to be positive and significant. Our results suggest that the positive effect of QQE on expectations, by improving confidence, more than offset any negative exchange rate spillover due to expenditure switching from domestic demand to Japanese goods. They also suggest that spillovers from QQE might have worked mainly through the impact of expectations and improved confidence, captured by increases in equity prices, rather than through balance sheet adjustments which might have been captured by movements in the monetary base.
    Date: 2016–05–20
  22. By: Sophie Piton (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: This paper studies the contribution of real interest rate divergence to the dynamics of the relative price of non-tradables within Europe. Based on a model by De Gregorio et al. (1994), it shows that the real interest rate fall in the Euro Area (EA) periphery following the single currency's inception induced an increase in the relative price of non-tradable goods. using a new dataset, it documents the dynamics of the tradable and the non-tradable sectors over 1995-2013 and the expansion of the non-tradable sector in the periphery before the euro crisis. it then carries out an econometric estimation for 11 EA countries over 1995-2013 and quantifies the contribution of the pure Balassa-Samuelson effect and the impact of the interest rate on non-tradable relative prices. Diverging evolution in the interest rate impacted greatly the evolution of non-tradable relative prices within the euro area over the period. In Greece, the fall in the real interest rate over 1995-2008 could explain almost half of the non-tradable price increase relative to the EA average, while in Germany the increase in the real interest rate might have contributed up to 7% of the decrease of the non-tradable price relative to the average of the EA
    Keywords: Non-tradable prices; Balassa-Samuelson effect; Real interest rate
    JEL: F41 F45 E43
    Date: 2016–05
  23. By: Maddalena Cavicchioli; Angeliki Papana; Ariadni Papana Dagiasis; Barbara Pistoresi
    Abstract: In this paper we implement an efficient non-parametric statistical method, Random survival forests, for the selection of the determinants of Central Bank Independence (CBI) among a large database of political and economic variables for OECD countries. This statistical technique enables us to overcome omitted variables and over omitting problems. It turns out that the economic variables are major determinants compared to the political ones and linear and nonlinear effects of chosen predictors on CBI are found.
    Keywords: Central bank independence, political and economic determinants, Random survival forests
    JEL: E58 C82
    Date: 2016–05

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