nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒06‒18
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy Transmission in Nepal By Birendra Bahadur Budha
  2. How can it work ? On the impact of quantitative easing in the Eurozone By Francesco Saraceno; Roberto Tamborini
  3. Inflation expectations and monetary policy in Europe By Andreou, Elena; Eminidou, Snezana; Zachariadis, Marios
  4. Five Points About Monetary Policy and Financial Stability (06-04-2016) Sveriges Riksbank Conference on Rethinking the Central Bank’s Mandate, Stockholm, Sweden By Mester, Loretta J.
  5. The credit channel is alive at the zero lower bound but how does it operate? Firm level evidence on the asymmetric effects of U.S. monetary policy By Uluc Aysun; Kiyoung Jeon; Zeynep Kabukcuoglu
  6. Bank leverage and monetary policy's risk-taking channel: evidence from the United States By Dell’Ariccia, Giovanni; Laeven, Luc; Suarez, Gustavo A.
  7. Exchange rate forecasting with DSGE models By Ca' Zorzi, Michele; Kolasa, Marcin; Rubaszek, Michał
  8. De facto exchange-rate regimes in Central and Eastern European Countries By Simón Sosvilla Rivero; Maria del Carmen Ramos Herrera
  9. Inflation Dynamics in a Dollarised Economy: The Case of Zimbabwe By William Kavila and Pierre Le Roux
  10. Inflation at the Household Level By Greg Kaplan; Sam Schulhofer-Wohl
  11. The Determinants of Exchange Rate Volatility in South Africa By Trust R. Mpofu
  12. Monetary policy according to HANK By Kaplan, Greg; Moll, Benjamin; Violante, Giovanni L.
  13. Basel III and recourse to Eurosystem monetary policy operations By Bucalossi, Annalisa; Fonseca Coutinho, Cristina; Junius, Kerstin; Luskin, Alaoishe; Momtsia, Angeliki; Rahmouni-Rousseau, Imene; Sahel, Benjamin; Scalia, Antonio; Schmitz, Stefan; Prior Soares, Rita Isabel; Schobert, Franziska; Wedow, Michael
  14. Parsing financial fragmentation in the euro area: a multi-country DSGE perspective By Darracq Pariès, Matthieu; Jacquinot, Pascal; Papadopoulou, Niki
  15. Income Inequality and Macroeconomic Imbalances under EMU By Benedicta Marzinotto
  16. The Financial Stability Dark Side of Monetary Policy By Piergiorgio Alessandri; Antonio M. Conti; Fabrizio Venditti
  17. How central is central counterparty clearing? A deep dive into a European repo market during the crisis By Ebner, André; Fecht, Falko; Schulz, Alexander
  18. Can the Euro Survive? By Jamal Ibrahim Haidar
  19. Reverse Speculative Attacks By Manuel Amador; Javier Bianchi; Luigi Bocola; Fabrizio Perri
  20. Central Bank Transparency and the consensus forecast: What does The Economist poll of forecasters tell us? By Emna Trabelsi
  21. Everything you always wanted to know about bitcoin modelling but were afraid to ask By Fantazzini, Dean; Nigmatullin, Erik; Sukhanovskaya, Vera; Ivliev, Sergey
  23. Money, Velocity, and the Stock Market By Karl Pinno; Apostolos Serletis
  24. Macro, Money and Finance: A Continuous Time Approach By Markus K. Brunnermeier; Yuliy Sannikov
  25. Incomplete Credit Markets and Monetary Policy with Heterogeneous Labor Supply : a Presentation Bank of Korea 2016 Conference, Employment and Growth, Seoul, Korea, May 30, 2016. By Bullard, James B.; Singh, Aarti
  26. Safeguarding the euro as a currency beyond the state By van Riet, Ad

  1. By: Birendra Bahadur Budha (Nepal Rastra Bank)
    Abstract: This paper examines the monetary policy transmission in Nepal based on the data for the period 2002-2015. As a first step in the analysis, the paper analyzes the issue of inflation convergence and the monetary independence in the context of the existing exchange rate peg and the capital flow policy of Nepal. The paper employs a number of macro indicators, and alternative empirical strategies based on the peculiarities of Nepal. The results show that the existing exchange rate peg has resulted in the convergence of the Nepalese price level to the Indian price level in the long-run. Despite the peg, there is an evidence of the independence of the Nepalese monetary policy to a large extent. The narrative approach of identifying monetary policy shows the evidence of the bank lending channel, interest rate channel, and the asset price channel of the Nepalese monetary policy though there exists a lag in monetary policy transmission due to high information asymmetry, adjustment costs and the poor financial infrastructure. In addition, the SVAR approach provides the evidence of the monetary policy transmission, in which the effect of the expansionary monetary policy on the gross domestic product decays to zero at about 8 quarters. Moreover, the paper also shows that the money market liquidity is largely guided by the remittance inflows in recent years. The analysis of the money market development indicates the need for the review of the operating procedures and the implementation aspects of the monetary policy. The evidence of monetary transmission channels implies that NRB can use its policy to achieve the specified objectives over certain time horizon.
    Keywords: Monetary policy transmission, Narrative approach, SVAR
    JEL: E42 E52 E58
    Date: 2015–08
  2. By: Francesco Saraceno (OFCE); Roberto Tamborini
    Abstract: How can the quantitative easing (QE) programme launched in March 2015 by the ECB be successful in the Eurozone (EZ)? What will be its impact on the member countries? And how will it relate to countries' fiscal policies? To address these questions, we use a simple extension of the three-equation New Keynesian model. We modify the benchmark model in two respects: 1) we (re)-introduce an LM money supply and demand equation to capture the fact that the ECB operates at the zero lower bound and hence cannot use a standard Taylor rule; and 2) we extend the model to a two-country framework. The model supports the ECB official view that the channel whereby QE is meant to operate is the reversal of deflationary expectations. It also highlights that instrumental to this goal is the elimination of persistent output gaps, both at the EZ and at the country level, and hence the reduction of country-specific interest-rate spreads -- the "unofficial" objective of the programme. We show that QE, if large enough, can succeed for the EZ as a whole. The ECB nevertheless cannot also close individual countries' output gaps, unless specific and unrealistic conditions are met. In this case fiscal accommodation at the country level should also intervene. We show that QE can enhance the effectiveness of fiscal policy, and therefore conclude that the coordination of fiscal and monetary policies is of paramount importance.
    Keywords: Monetary Policy; ECB; Deflation; Zero-Lower-Bound
    JEL: E3 E4
    Date: 2015–10
  3. By: Andreou, Elena; Eminidou, Snezana; Zachariadis, Marios
    Abstract: We use monthly data across fifteen euro-area economies for the period 1985:1-2015:3 to obtain different monetary policy shocks pertaining to more versus less informed individuals. We then investigate how these affect inflation expectations of different types of consumers before and after the incidence of the recent Crisis. Shocks obtained based on the assumption that individuals are well informed can have different impact on inflation expectations as compared to shocks obtained based on the assumption that they are not as informed. Moreover, monetary policy can have different effects on inflation expectations for different types of consumers. Finally, monetary policy has different effects on inflation expectations after as compared to before the incidence of the recent Crisis.
    Keywords: crisis; Inflation expectations; Monetary policy; shocks
    JEL: E31 E52 F41
    Date: 2016–06
  4. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Since the 2008 global financial crisis and the Great Recession that followed, economists and policymakers have been evaluating the factors that led to the crisis, assessing what could have been done to prevent, or at least limit, the damage, and considering what can and should be done to reduce the probability and impact of future disruptions to financial stability. That this is a very broad topic can easily be seen by looking at the agendas of this and previous years’ conferences organized by the Riksbank. Today I will focus my remarks on the nexus between monetary policy and financial stability, and I’ll arrange my comments around five main points. Before I continue, I should mention that these are my own views and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Keywords: monetary policy; financial stability; Macroprudential policy;
    Date: 2016–06–04
  5. By: Uluc Aysun (Department of Economics, College of Business Administration, University of Central Florida); Kiyoung Jeon (Research Department, Bank of Korea); Zeynep Kabukcuoglu (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: We calculate borrowing spreads for over 8,000 U.S. firms and investigate how these are related to the stance of monetary policy. After 2009, we observe, consistent with credit channel theory, a positive relationship between shadow federal funds rates and borrowing spreads for only firms with high borrowing spreads and low quality. Conversely, we find a negative relationship for firms (of high and low quality) with low borrowing spreads. These relationships are reversed for the period before 2008. Our results uncover the distortional effects of monetary policy. Loose monetary policy causes spreads to converge (diverge) across firms after 2009 (before 2008).
    Keywords: credit channel; zero lower bound; firm-level data; shadow rates
    JEL: E44 E51 E52 G10
    Date: 2016–06
  6. By: Dell’Ariccia, Giovanni; Laeven, Luc; Suarez, Gustavo A.
    Abstract: We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on banks’ internal ratings on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (measured by the risk rating of new loans) is negatively associated with increases in short-term interest rates. This relationship is more pronounced in regions that are less in sync with the nationwide business cycle, and less pronounced for banks with relatively low capital or during periods of financial distress. JEL Classification: E43, E52, G21
    Keywords: banks, interest rates, leverage, monetary policy, risk
    Date: 2016–05
  7. By: Ca' Zorzi, Michele; Kolasa, Marcin; Rubaszek, Michał
    Abstract: We run a real exchange rate forecasting "horse race", which highlights that two principles hold. First, forecasts should not replicate the high volatility of exchange rates observed in sample. Second, models should exploit the mean reversion of the real exchange rate over long horizons. Abiding by these principles, an open-economy DSGE model performs well in real exchange rate forecasting. However, it fails to forecast nominal exchange rates better than the random walk. We find that the root cause is its inability to predict domestic and foreign inflation. This shortcoming leads us toward simpler ways to outperform the random walk. JEL Classification: C32, F31, F37
    Keywords: exchange rates, forecasting, mean reversion, new open economy macroeconomics
    Date: 2016–05
  8. By: Simón Sosvilla Rivero (Departamento de Economía Cuantitativa, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid.); Maria del Carmen Ramos Herrera (Departamento de Economía Cuantitativa, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid.)
    Abstract: This paper attempts to identify implicit exchange rate regimes for currencies of new European Union (EU) countries vis-à-vis the euro. To that end, we apply three sequential procedures that consider the dynamics of exchange rates to data covering the period from 1999:01 to 2012:12. Our results would suggest that implicit bands have existed in many sub-periods for almost all currencies under study. This paper provides new empirical evidence that strengthens the hypothesis of that the implemented policies differ from those announced by the monetary authorities, identifying the existence of de facto fixed monetary systems along large number of sub-periods for different currencies.
    Keywords: Exchange-rate regimes; Implicit fluctuation bands; Exchange rates.
    Date: 2015
  9. By: William Kavila and Pierre Le Roux
    Abstract: This paper explores the dynamics of inflation in the dollarised Zimbabwean economy using the Autoregressive Distributed Lag Model (ARDL) with monthly data from 2009:1 to 2012:12. The main determinants of inflation were found to be the US dollar/South African rand exchange rate, international oil prices, inflation expectations and South African inflation rate. During the local currency era, inflation dynamics in Zimbabwe were explained by excess growth in money supply, changes in import and administered prices, unit labour costs and output (Chhibber, Cottani, Firuzabadi and Walton, 1989). According to Makochekanwa (2007), hyperinflation during the same era was attributed to excess money supply growth, lagged inflation and political factors. Coorey, Clausen, Funke, Munoz and Ould-Abdallah (2007) affirmed these findings by identifying excess money supply growth as a source of high inflation in Zimbabwe during the local currency era. In essence, the findings of this study point to a shift in inflation dynamics in Zimbabwe. This shift in inflation dynamics means that policies, which were used to respond to both internal and external shocks that have an impact on price formation, might not be applicable in a dollarised economy.
    Keywords: Inflation, dollarisation, Autoregressive Distributed Lag Model
    JEL: E31 E42 C50
    Date: 2016
  10. By: Greg Kaplan; Sam Schulhofer-Wohl
    Abstract: We use scanner data to estimate inflation rates at the household level. Households' inflation rates are remarkably heterogeneous, with an interquartile range that varies between 6.2 and 9.0 percentage points on an annual basis. Most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods — a source of variation that previous research has not measured. The entire distribution of household inflation rates shifts in parallel with aggregate inflation. Deviations from aggregate inflation exhibit only slightly negative serial correlation within each household over time, implying that the difference between a household's price level and the aggregate price level is persistent. Together, the large cross-sectional dispersion and low serial correlation of household-level inflation rates mean that almost all of the variability in a household's inflation rate over time comes from variability in household-level prices relative to average prices for the same goods, not from variability in the aggregate inflation rate. We provide a characterization of the stochastic process for household inflation that can be used to calibrate models of household decisions.
    JEL: D12 D30 E31
    Date: 2016–06
  11. By: Trust R. Mpofu
    Abstract: This paper investigates the determinants of exchange rate volatility in South Africa for the period 1986-–2013 using the New Open Economy Macroeconomics model by Obstfeld & Rogoff (1996) and Hau (2002). The main focus of the paper is to test the hypothesis that economic openness decreases Rand (ZAR) volatility. This follows South Africa’s liberalisation of its capital account in the mid-1990s and the mixed results in the literature on the relationship between exchange rate volatility and economic openness. Employing monthly time series data, GARCH models are estimated. The study …finds that switching to a fl‡oating exchange rate regime has a signi…ficant positive effect on ZAR volatility. The results also indicate that trade openness significantly reduces ZAR volatility only when bilateral exchange rates are used, but finds the opposite when multilateral exchange rates are used. The study also …finds that volatility of output, commodity prices, money supply and foreign reserves signi…ficantly in‡fluence ZAR volatility.
    Keywords: Exchange Rate Volatility, GARCH
    JEL: F31 C22
    Date: 2016
  12. By: Kaplan, Greg; Moll, Benjamin; Violante, Giovanni L.
    Abstract: We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where intertemporal substitution drives virtually all of the transmission from interest rates to consumption. JEL Classification: D14, D31, E21, E52
    Keywords: consumption, earnings kurtosis., heterogeneous agents, inequality, liquidity, monetary policy, new keynesian
    Date: 2016–04
  13. By: Bucalossi, Annalisa; Fonseca Coutinho, Cristina; Junius, Kerstin; Luskin, Alaoishe; Momtsia, Angeliki; Rahmouni-Rousseau, Imene; Sahel, Benjamin; Scalia, Antonio; Schmitz, Stefan; Prior Soares, Rita Isabel; Schobert, Franziska; Wedow, Michael
    Abstract: Following the emergence of the financial crisis in August 2007, the Basel Committee on Banking Supervision established in 2010 a new global regulatory framework. In addition to raising capital requirements, it introduced three ratios, two of which set out minimum standards for liquidity and funding risk, i.e. the liquidity coverage ratio and the net stable funding ratio, and one which aims to limit leverage in the banking system, i.e. the leverage ratio. All three ratios can have a number of implications for monetary policy implementation, in particular the liquidity coverage ratio and the net stable funding ratio owing to the special role of central banks in providing liquidity. This paper investigates the extent to which the regulatory initiatives might have already had an impact on banks’ behaviour in Eurosystem monetary policy operations. It also provides an overview of the regulatory state of play and major recent advancements in banks’ compliance with the three Basel III ratios. Based on aggregate data, the empirical evidence generally supports some of the theoretically predicted effects of the three ratios. However, no firm conclusions can be drawn as to whether the introduction of the three ratios could cause a significant change in banks’ recourse to Eurosystem monetary policy operations. This is partly due to the fact that, in aggregate, major developments, such as substantial fluctuations in the recourse to Eurosystem refinancing operations in the years between 2012 and 2015, have been driven by the financial crisis and the gradual recovery from it, as well as by the accommodative stance of monetary policy. JEL Classification: G28, E58
    Keywords: Basel III, liquidity regulation, monetary policy implementation
    Date: 2016–04
  14. By: Darracq Pariès, Matthieu; Jacquinot, Pascal; Papadopoulou, Niki
    Abstract: The euro area experience during the financial crisis highlighted the importance of financial and sovereign risk factors in macroeconomic propagation, as well as the constraints that bank lending fragmentation would pose for monetary policy conduct in a currency union. We design a 6-region multi-country DSGE model which provides a structural interpretation of the salient features of these developments. The model spans the relevant "financial wedges" at play during the crisis, together with its cross-country heterogeneity within the euro area, focusing on Ger- many, France, Italy, Spain, and rest-of-euro area. We construct three stylised macro-financial scenarios as a synopsis of the euro area financial crisis and argue that the adverse interactions between sovereign, banking and corporate risk, can account to a large extent for the financial repression and poor economic performance observed in some parts of the euro area. JEL Classification: E4, E5, F4
    Keywords: bank lending rates, banking, cross-country spillovers, DSGE models, financial regulation
    Date: 2016–04
  15. By: Benedicta Marzinotto
    Abstract: This paper explains the build-up and reversal of euro area macroeconomic imbalances by considering the interaction between the underlying income distribution in each country and EMU-induced financial liberalization. The argument is that the sharp increase in money supply since the early 1990s had the effect of relaxing collateral constraints for illiquid lower- income groups, whilst having no specific impact on other households. The former started over-borrowing against optimistic expectations about their future income. It follows that unequal countries such as Greece, Ireland, Italy, Portugal and Spain - where the share of lower-income groups is relatively high - had greater private debt burdens and worse external positions than equal countries. Consequently, current account reversal was asymmetric because the crisis forced these indebted households to abruptly reduce consumption not least because they were the first to be pulled out of the labour market and hardly had financial buffers. The hypothesis is tested using a difference-in-difference approach to panel data.
    Keywords: current account, income inequality, financial liberalization, debt leverage, difference-in-difference
    JEL: F32 F41 E2
    Date: 2016–05
  16. By: Piergiorgio Alessandri (Bank of Italy); Antonio M. Conti (Bank of Italy; ECARES, Université libre de Bruxelles); Fabrizio Venditti (Bank of Italy)
    Abstract: Market risk premia play an important role in the transmission of monetary policy. If the transmission were to work asymmetrically for positive and negative shocks, monetary authorities would face a problematic trade-off: a temporary stimulus could boost the economy in the short run, but at the same time sow the seeds of a painful medium-run market reversal (the "financial stability dark side" of monetary policy of Stein, 2014). We study the relation between interest rates, credit spreads and output in the U.S. using monthly data and a range of nonlinear dynamic models. We find clear signs of a reduced-form asymmetry, but no evidence in support of the causal mechanism that underpins the 'dark side' argument: spreads rise noticeably ahead of economic slowdowns but they do not appear to cause them directly, particularly if they move in response to monetary shocks. This suggests that the asymmetry is best interpreted as a purely predictive relation, with markets being particularly sensitive to bad economic news; and that it creates no complications for monetary policy or for the exit strategy from monetary accommodation.
    Keywords: risk premia, asymmetry, monetary policy, financial stability, local projections.
    JEL: C32 E32 F34
    Date: 2016–05
  17. By: Ebner, André; Fecht, Falko; Schulz, Alexander
    Abstract: Repo markets offering central counterparty (CCP) clearing and anonymized trading were remarkably resilient during the recent crises. We use the full transaction level dataset on all repo trades on Eurex Repo, including identifiers for market participants, to provide a detailed description of the market's development and microstructure during the crises and under different monetary policy interventions. Overall, we find high excess liquidity being associated with lower private liquidity provision in this market. Cross-segment arbitrage and market making is limited but growing steadily. The reallocation of liquidity risk across banks within this market varies substantially with the general market conditions.
    Keywords: repo,central counterparty,market microstructure,financial crisis
    JEL: G2 D4 E58
    Date: 2016
  18. By: Jamal Ibrahim Haidar
    Abstract: One of the fascinating aspects of the European debt crisis has been the resilience of the euro. For much of 2011, the euro was a key reserve currency, oblivious to the chaos ravaging European economies. Now, however, the gravity of the crisis is finally dragging down the euro. As the Euro zone debt crisis enters its third uncertain year, the question about whether the euro can survive rises. This paper argues that the euro can survive given policymakers still have in hand various tools. These tools include creating exit rules, implementing new stabilisation rules and instruments, adopting new fiscal policy, introducing conditional Eurobonds, using inflation differentials and providing more independence to the European Central Bank.
  19. By: Manuel Amador; Javier Bianchi; Luigi Bocola; Fabrizio Perri
    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.
    JEL: F31 F32
    Date: 2016–06
  20. By: Emna Trabelsi (ISG - Institut Supérieur de Gestion de Tunis [Tunis] - Université de Tunis [Tunis])
    Abstract: We are interested, in this paper, in studying the effects that central banks exert on private sector forecasts by means of their transparency and communication measures. We analyze the impact of central bank transparency on the accuracy of the consensus forecasts (usually calculated as the mean or the median of the forecasts from a panel of individual forecasters) for a series of macroeconomic variables: inflation, Real output growth and the current account as a share of GDP for 7 advanced economies. Interestingly, while it is found of significance of central bank transparency and communication measures on forecasts themselves, there appear some limits of the same measures when we study their impact on forecast errors. Our findings, indeed, suggest that deviations of the economic forecast data from the realized ones (RGDP and the current account as a share of GDP) are a bit affected by the central bank transparency measures considered in the paper. Inflation forecast errors, especially, are not affected at all by those measures. A possible explanation (among others) could be attributed to the inefficiency of the mean forecasts. Inefficiency of the consensus forecasts is not a new issue from a theoretical point of view, but its empirical relevance is for the first time (to our knowledge) questioned on data extracted from the Economist poll of forecasters. More particularly, our paper extracts practical implications over the effectiveness of transparent announcements in forecast formation process. We rely on two noisy information models, though having different mechanisms (Kim et al, 2001; Morris and Shin, 2002) both of which are consistent with overweighting issue to explain the inefficiency of the consensus forecast.
    Keywords: Economist poll of forecasters,Inefficiency,Consensus forecasts,Communication,Transparency
    Date: 2016
  21. By: Fantazzini, Dean; Nigmatullin, Erik; Sukhanovskaya, Vera; Ivliev, Sergey
    Abstract: Bitcoin is an open source decentralized digital currency and a payment system. It has raised a lot of attention and interest worldwide and an increasing number of articles are devoted to its operation, economics and financial viability. This article reviews the econometric and mathematical tools which have been proposed so far to model the bitcoin price and several related issues, highlighting advantages and limits. We discuss the methods employed to determine the main characteristics of bitcoin users, the models proposed to assess the bitcoin fundamental value, the econometric approaches suggested to model bitcoin price dynamics, the tests used for detecting the existence of financial bubbles in bitcoin prices and the methodologies suggested to study the price discovery at bitcoin exchanges.
    Keywords: Bitcoin, Crypto-currencies, Hash rate, Investors' attractiveness, Social interactions, Money supply, Money Demand, Speculation, Forecasting, Algorithmic trading, Bubble, Price discovery.
    JEL: C22 C32 C51 C53 E41 E42 E47 E51 G17
    Date: 2016
    Date: 2016
  23. By: Karl Pinno (University of Calgary); Apostolos Serletis (University of Calgary)
    Abstract: This paper provides a study of the relationship between money growth variability, velocity, and the stock market, using recent advances in financial econometrics. We estimate a trivariate VARMA, GARCH-in-Mean, BEKK model to quantify the effects of financial market and money supply instability. We investigate the robustness of the results to different definitions of money using monthly Divisia indices for the United States from the Center for Financial Stability (CFS). Empirical evidence supports significance of financial market and money supply volatility, and we conclude that Friedman's money supply volatility hypothesis is alive and well.
    Date: 2016–06–06
  24. By: Markus K. Brunnermeier; Yuliy Sannikov
    Abstract: This paper puts forward a teaching manual for how to set up and solve a continuous time model that allows one to analyze endogenous (1) level and risk dynamics. The latter includes (2) tail risk and crisis probability as well as (3) the Volatility Paradox. Concepts such as (4) illiquidity and liquidity mismatch, (5) endogenous leverage, (6) the Paradox of Prudence, (7) undercapitalized sectors (8) time-varying risk premia, and (9) the external funding premium are part of the analysis. Financial frictions also give rise to an endogenous (10) value of money.
    JEL: C63 E32 E41 E44 E51 G01 G11 G20
    Date: 2016–06
  25. By: Bullard, James B. (Federal Reserve Bank of St. Louis); Singh, Aarti (University of Sydney)
    Abstract: During an academic talk in Seoul at the Bank of Korea, St. Louis Fed President James Bullard discussed optimal monetary policy when credit markets are incomplete. He examined optimal policy both in ordinary times and in times when the zero lower bound on short-term nominal interest rates is encountered. The presentation was based on a paper in progress with Aarti Singh of the University of Sydney. Bullard also discussed the decline in U.S. labor force participation in recent years and said that the results of the paper may help to inform the debate on whether U.S. monetary policy needs to worry about such a decline.
    Date: 2016–06–30
  26. By: van Riet, Ad
    Abstract: This paper reviews the debate on the longer-term requirements for safeguarding the euro as a currency beyond the state that is anchored through collective governance instead of a central government. The strengthening of EU economic and financial governance in the wake of the euro area crisis goes a long way towards creating the minimum conditions for a more perfect EMU. At the same time, the current principle of nation states coordinating their sovereignty to ‘do whatever is required’ to stabilise the euro area as a whole rather than sharing their sovereignty in common institutions to achieve this common objective has its limitations. Challenges in this context relate inter alia to the effectiveness of market discipline and reinforced economic policy surveillance, the requirement of a truly single financial system, the demand for eurobonds and a euro area fiscal capacity, and the transnational democracy that should legitimate EMU decision-making based on common values. To safeguard the euro as a currency beyond the state, euro area countries should consider pooling their national sovereignty over a wider range of EMU-related policy areas, as necessary to achieve more effective risk control and more efficient risk sharing. JEL Classification: E4, E6, F15, F33
    Keywords: collective governance, euro area stability, national sovereignty
    Date: 2016–05

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