nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒06‒25
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy Rules in Emerging Countries: Is There an Augmented Nonlinear Taylor Rule? By Guglielmo Maria Caporale; Abdurrahman Nazif Catik; Mohamad Husam Helmi; Faek Menla Ali; Coskun Akdeniz
  2. Credibility of History-Dependent Monetary Policies and Macroeconomic Instability By Cateau, Gino; Shukayev, Malik
  3. News and inflation expectation updates By Gerardo Licandro; Miguel Mello
  4. The Transformation of the Role and Tasks of the Central Bank (Monetary Authorities) in the Modern Economy By Kiyutsevskaya, Anna; Narkevich, Sergei; Trunin, Pavel
  5. The Doug Purvis Memorial Lecture—Monetary/Fiscal Policy Mix and Financial Stability: The Medium Term Is Still the Message By Stephen S. Poloz
  6. 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
  7. Are extremely low interest rates really caused by insufficient growth and inflation rather than by ECB policy? By Eric Dor
  8. International Liquidity and Exchange Rate Dynamics By Matteo Maggiori; Xavier Gabaix
  9. Risky Banks and Macroprudential Policy for Emerging Economies By Nuguer Victoria; Cuadra Gabriel
  10. When preferences for a stable interest rate become self-defeating By Ragna Alstadheim; Øistein Røisland
  11. The Spillovers, Interactions, and (Un)Intended Consequences of Monetary and Regulatory Policies By Kristin Forbes; Dennis Reinhardt; Tomasz Wieladek
  12. Monetary News, U.S. Interest Rate and Business Cycles in Emerging Economies By Vicondoa, Alejandro
  13. Interest rates, corporate lending and growth in the Euro Area By Gabriele Tondl
  14. Challenges for the ECB in Times of Deflation By Francesco Saraceno
  15. Monetary and Fiscal Policy Switching with Time-Varying Volatilities By Libo Xu; Apostolos Serletis
  16. Dynamic Efficiency of Stock Markets and Exchange Rates By Ahmet Sensoy; Benjamin M. Tabak
  17. Conditions and Results of the Application of Inflation Targeting By Zubarev, Andrei V.; Kiyutsevskaya, Anna; Trunin, Pavel
  18. Monetary Policy, Real Activity, and Credit Spreads : Evidence from Bayesian Proxy SVARs By Caldara, Dario; Herbst, Edward
  19. The Global Code of Conduct in the Foreign Exchange Market By Tetsuro Matsushima; Lisa Ohkawa; Hirotaka Inoue
  20. Modeling inflation shifts and persistence in Tunisia: Perspectives from an evolutionary spectral approach By Ftiti, Zied; Guesmi, Khaled; Nguyen, Duc Khuong; Teulon, Frédéric
  21. Inflation, currency depreciation and households balance sheet in Uruguay By Rodrigo Lluberas; Juan Odriozola
  22. Theoretical Paradigm on Bank Capital Regulation and its Impact on Bank-Borrower Behavior By Gunakar Bhatta, Ph.D.
  23. The ECB`s Monetary Policy: stability without "safe" assets? By Silke Tober
  24. A Review of Literature on Monetary Neutrality - The case of India By Kuek, Tai Hock
  25. Are Supply Shocks Contractionary at the ZLB? Evidence from Utilization-Adjusted TFP Data By Julio Garín; Robert Lester; Eric Sims
  26. Real Exchange Rate Misalignment in the Euro Area: Is the Current Development Helpful? By Jan Hajek
  27. Capital Flows and the Swiss Franc By Pinar Yesin
  28. The payment system benefits of high reserve balances By McAndrews, James J.; Kroeger, Alexander
  29. Understanding the changing equilibrium real interest rates in Asia-Pacific By Feng Zhu

  1. By: Guglielmo Maria Caporale; Abdurrahman Nazif Catik; Mohamad Husam Helmi; Faek Menla Ali; Coskun Akdeniz
    Abstract: This paper examines the Taylor rule in five emerging economies, namely Indonesia, Israel, South Korea, Thailand, and Turkey. In particular, it investigates whether monetary policy in these countries can be more accurately described by (i) an augmented rule including the exchange rate, as well as (ii) a nonlinear threshold specification (estimated using GMM), instead of a baseline linear rule. The results suggest that the reaction of monetary authorities to deviations from target of either the inflation or the output gap varies in terms of magnitude and/or statistical significance across the high and low inflation regimes in all countries. In particular, the exchange rate has an impact in the former but not in the latter regime. Overall, an augmented nonlinear Taylor rule appears to capture more accurately the behaviour of monetary authorities in these countries.
    Keywords: Taylor rule, nonlinearities, emerging countries
    JEL: C13 C51 C52 E52 E58
    Date: 2016
  2. By: Cateau, Gino (Bank of Canada); Shukayev, Malik (University of Alberta, Department of Economics)
    Abstract: This paper evaluates the desirability of history-dependent policy frameworks when the central bank cannot perfectly commit to maintain a level target path. Specifically, we consider a central bank that seeks to implement optimal policy under commitment in a simple New Keynesian model via a price-level (or nominal GDP level) target rule. However, the central bank retains the option to reset its target path if the social cost of not doing so exceeds a certain threshold. We find that endowing the central bank with the discretion to optimally reset its target path weakens the effectiveness of the history dependent framework to stabilize the economy through expectations. The endogenous nature of credibility brings novel results relative to models where the timing of target resets is exogenous. First, the central bank needs a high degree of policy credibility to realize the stabilization benefits associated with committing to a price-level target. In our benchmark calibration, the price-level target must be expected to last for 10 years to bridge three quarters of the welfare gap between discretion and full commitment. Second, there is a possibility of multiple equilibria. Indeed, it is possible to have a high credibility equilibrium where the probability of resetting the target is small. But it is also possible to have a low credibility equilibrium where the target is reset much more frequently leading inflation and output to be permanently more volatile.
    Keywords: monetary policy commitment; price-level targeting; nominal-income targeting; multiple equilibria; policy credibility
    JEL: E31 E52
    Date: 2016–06–08
  3. By: Gerardo Licandro (Banco Central del Uruguay); Miguel Mello (Banco Central del Uruguay)
    Abstract: Do inflation expectations react to news? In the last decade, Uruguay has resorted to heterodox practices along with inflation targeting to prevent the divergence of inflation, including price subsidies and agreements. Using data from a novel survey of firm's inflation expectations we study individual inflation expectation updates and the impact on individual expectation updates of news regarding monetary policy and other heterodox measures. To control for monetary policy stance we construct a qualitative index of monetary policy based on monetary policy communications. We construct several news indices for monetary policy and other measures. We find that price controls news tends to generate clusters of inflation expectations updates. Using several econometric techniques we are able to find that news about heterodox measures do affect inflation expectations with the expected sign.
    Keywords: Monetary transmission, inflation expectations, expectations channel
    JEL: E43 E52 E58
    Date: 2015
  4. By: Kiyutsevskaya, Anna (Gaidar Institute for Economic Policy, Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Narkevich, Sergei (Gaidar Institute for Economic Policy); Trunin, Pavel (Gaidar Institute for Economic Policy, Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: Study of transformation of the role and tasks of central banks at different stages of economic development allows us to determine the objective conditions underlying the evolution of monetary policy. For developed economies, the opportunity to conduct independent monetary policy becomes one of the major factors that determine the choice of the monetary regime. In addition, according to the international experience, the choice of goals and objectives of central banks both at present time and in the historical perspective is greatly affected by the degree of financial openness of the country and the development of its financial sector. While countries become more integrated in the world economy, their central banks shifted priorities, firstly, to achieve and maintain price stability, and, secondly, to increase the flexibility of exchange rate formation. The findings on the evolution of the goals and objectives of the central banks of developed and developing countries reveal the most suitable monetary policy regime for the Russian central bank.
    Keywords: central banks, monetary policy
    Date: 2016–03–21
  5. By: Stephen S. Poloz
    Abstract: Financial stability risks have become topical in the wake of the global financial crisis and the subsequent extended period of very low interest rates. This paper investigates the significance of the mix of monetary and fiscal policies for financial stability through counterfactual simulations of three key historical episodes, using the Bank’s main policy model, ToTEM (Terms-of-Trade Economic Model). The paper finds that there is an intimate relationship between the monetary/fiscal policy mix and the dynamics of both private sector and public sector debt accumulation. No attempt is made to develop criteria for policy mix optimization, since it is clear from the model simulations that the appropriate policy mix is highly state-dependent. This finding points to the need for a coherent framework for weighing the relative financial and macroeconomic consequences of accumulating public sector versus private sector debt. Furthermore, the analysis suggests that there are potential benefits to ex ante monetary/fiscal policy coordination, and that Canada’s policy framework—where the monetary and fiscal authorities jointly agree on an inflation target while enshrining central bank operational independence—represents an elegant coordinating mechanism.
    Keywords: Economic models, Financial stability, Fiscal Policy, Monetary policy framework
    JEL: E37 E5 E63
    Date: 2016
  6. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    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
  7. By: Eric Dor (IESEG School of Management)
    Abstract: To fight deflationary pressures in the euro area, the ECB has been conducting exceptional policies, such as negative interest rates on excess reserves of banks on their accounts at the Eurosystem, or massive purchases of assets, essentially public bonds. The interest rate on the main refinancing operations is 0. Targeted long term refinancing operations are going to allow banks to borrow at potentially negative interest rates from the Eurosystem provided that they lend enough to the private sector. All these measures have pushed long term interest rates downward in the euro area. German public bonds yield negative returns for a whole set of maturities. Interest rates on saving accounts in German banks are extremely low. This policy of extremely low rates has been heavily criticized in Germany. The ECB is accused of exaggeratedly lowering the income of savers and retirees whose revenue partly depends on the return of accumulated wealth.
    Date: 2016–05
  8. By: Matteo Maggiori; Xavier Gabaix
    Abstract: We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus impacting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only helps rationalize the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, but also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. Our framework is flexible; it accommodates a number of important modeling features within an imperfect financial market model, such as non-tradables, production, money, sticky prices or wages, various forms of international pricing-to-market, and unemployment.
  9. By: Nuguer Victoria; Cuadra Gabriel
    Abstract: We develop a two-country DSGE model with global banks to analyze the role of cross-border banking flows on the transmission of a quality of capital shock in the United States to emerging market economies (EMEs). Banks face a moral hazard problem for borrowing from households. EME's banks might be risky: they can also be constrained to borrow from U.S. banks. A negative quality of capital shock in the United States generates a global financial crisis. EME's macroprudential policy that targets non-core liabilities makes the domestic economy resilient to the volatility of cross-border banking flows and makes EME's households better-off.
    Keywords: Global banking; emerging market economies; financial frictions; macroprudential policy.
    JEL: G28 E44 F42 G21
    Date: 2016–06
  10. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Øistein Røisland (Norges Bank (Central Bank of Norway))
    Abstract: Monetary policy makers often seem to have preferences for a stable interest rate, in addition to stable in?ation and output. In this paper we investigate the implications of having an interest rate level term in the loss function when the policymaker lacks commitment technology. We show that preferences for interest rate stability may lead to equilibrium indeterminacy. But even when determinacy is achieved, such preferences can become self-defeating, in the meaning of generating a less stable interest rate than in the case without preferences for interest rate stability. Aiming to stabilize the real interest rate instead of the nominal rate is more robust, as it always gives determinacy and also tends to give a more stable nominal interest rate than when the policymaker aims to stabilize the nominal rate.
    Keywords: Monetary policy, Discretion, Interest rate stability
    JEL: E52 E58
    Date: 2016–05–25
  11. By: Kristin Forbes; Dennis Reinhardt; Tomasz Wieladek
    Abstract: Have bank regulatory policies and unconventional monetary policies—and any possible interactions—been a factor behind the recent “deglobalisation” in cross-border bank lending? To test this hypothesis, we use bank-level data from the UK—a country at the heart of the global financial system. Our results suggest that increases in microprudential capital requirements tend to reduce international bank lending and some forms of unconventional monetary policy can amplify this effect. Specifically, the UK’s Funding for Lending Scheme (FLS) significantly amplified the effects of increased capital requirements on cross-border lending. Quantitative easing did not appear to have a similar effect. We find that this interaction between microprudential regulations and the FLS can explain roughly 30% of the contraction in aggregate UK cross-border bank lending between mid-2012 and end-2013, corresponding to around 10% of the global contraction in cross-border lending. This suggests that unconventional monetary policy designed to support domestic lending can have the unintended consequence of reducing foreign lending.
    JEL: G21 G28
    Date: 2016–06
  12. By: Vicondoa, Alejandro
    Abstract: This paper identifies anticipated (news) and unanticipated (surprise) shocks to the U.S. Fed Funds rate using CBOT Fed Funds Future Market and assesses their propagation to emerging economies. Anticipated movements account for 80% of quarterly Fed Funds fluctuations and explain a significant fraction of the narrative monetary policy shocks. An expected 1% increase in the reference interest rate induces a fall of 2% in GDP of emerging economies two quarters before the shock materializes. Unanticipated contractionary shocks also cause a recession. Both shocks have a larger impact in emerging relative to developed economies and the financial channel is the most relevant for their transmission. Anticipation is also relevant to understand the transmission of U.S. real interest rate shocks.
    Keywords: International business cycle, Interest rate, News shocks, Small open economy
    JEL: E32 E52 F41 F44
    Date: 2016
  13. By: Gabriele Tondl (Department of Economics, Vienna University of Economics and Business)
    Abstract: The sluggish development of corporate lending has remained the central concern of EU monetary policy makers as it is considered to hinder seriously the resurgence of growth. This paper looks at the development of loans to large corporations vs SMEs in the pre-crisis and post-crisis period and wishes to answer: (i) to which extent do allocated loan volumes actually contribute to output growth? (ii) which factors determine the development of loans, considering above all loan interest rates? and (iii) what causes differences in loan interest levels across the EA? The results indicate that different loan developments in the EA explain very well differences in output development, loans to SMEs contribute even more to output growth than those for large corporations. Loan development itself is negatively influenced by the interest level which differs significantly across EA members, with small loans in addition always being charged an interest premium over large loans. The capitalization of banks, the size of banks and their internationalization play a role as well. A part of the sluggish growth of loans can be explained by the increasing use of alternative financial instruments by large firms. Interest rates in turn are following the ECB interest rate, - but this link has become looser in the post-crisis period, and long term government bond rates. Different risks faced by banks and different bank structures have become important explanatories of interest rates in the post-crisis period.
    Keywords: Corporate lending, Credit market fragmentation, Interest pass-through, Bank lending rates, Finance and growth, Euro Area
    JEL: E40 E43 E44
    Date: 2016–06
  14. By: Francesco Saraceno (OFCE)
    Abstract: This paper assesses the performance of the European Central Bank (ECB) during the crisis that started in 2008. The ECB statute is consistent with a view of the economy that was predominant in the 1990s, a view that postulates a very limited role for discretional policies in managing the business cycle. The ECB had therefore to stretch its mandate on several occasions during the crisis to avoid severe outcomes. It was unable to avoid a slow but inexorable slide of the Eurozone towards deflation and a liquidity trap. To restore robust growth, fiscal policy should be used, and institutions should be redesigned away from the Washington Consensus framework that shaped the Maastricht Treaty. Better rules for fiscal governance and a widening of the ECB mandate are proposed.
    Keywords: Employment policy; Economic recession; Low income; Financial market
    Date: 2015
  15. By: Libo Xu (University of Calgary); Apostolos Serletis (University of Calgary)
    Abstract: This paper extends the ongoing literature on regime change. The extension allows time variation in disturbance variances of interest rate rules for monetary policy and tax rules for Â…fiscal policy that switch stochastically between two regimes. We achieve superior modelings of monetary and Â…fiscal policy rules with quarterly U.S. data.
    Date: 2016–06–13
  16. By: Ahmet Sensoy; Benjamin M. Tabak
    Abstract: We use generalized Hurst exponents to investigate long-range dependence across countries that have implemented an in ation targeting monetary policy regime and have a oating currency regime. We show that the degree of long-range dependence has changed after the 2008 crisis for equity markets but not as much for exchange rate markets. We compare results for developed and emerging economies and find that there still are some important differences but not as they were before the crisis. We also include an additional set of relevant countries and nd that our results are more pronounced for in ation targeters. We discuss several implications of these results.
    Keywords: Hurst exponent, market eciency, exchange rate, stock market, emerging markets, developed markets
    JEL: C65 F31 G01 G14 G15
    Date: 2016–05
  17. By: Zubarev, Andrei V. (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Kiyutsevskaya, Anna (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Trunin, Pavel (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: More than twenty years of experience of inflation targeting allows us not only to evaluate the nature of the monetary policy regime, but also the results of its implementation. The findings suggest that the high adaptability of the regime to the specific operating conditions of each country. Active integration of national economies into global economic processes, the increasing role and importance of not only commercial, but also financial relations was the objective factor in determining the attractiveness of the monetary policy regime, not only in developed but also in developing countries. The findings of empirical evidence demonstrates not only the slowdown in consumer prices and reduce its volatility in the framework of inflation targeting (hereinafter - it), including: and in countries exporting raw materials, but also the lack of sustained negative impact on the dynamics of the issue. However, as international experience shows, the monetary authorities and after the transition to the regime of IT retain its presence in the domestic market, which is especially important for developing countries with underdeveloped financial sector and financial markets.
    Keywords: inflation targeting, adaptability, national economies
    Date: 2015–04–17
  18. By: Caldara, Dario; Herbst, Edward
    Abstract: This paper studies the interaction between monetary policy, financial markets, and the real economy. We develop a Bayesian framework to estimate proxy structural vector autoregressions (SVARs) in which monetary policy shocks are identified by exploiting the information contained in high frequency data. For the Great Moderation period, we find that monetary policy shocks are key drivers of fluctuations in industrial output and corporate credit spreads, explaining about 20 percent of the volatility of these variables. Central to this result is a systematic component of monetary policy characterized by a direct and economically significant reaction to changes in credit spreads. We show that the failure to account for this endogenous reaction induces an attenuation bias in the response of all variables to monetary shocks.
    Keywords: Bayesian Inference ; Monetary policy ; Vector Autoregressions
    JEL: E52 C3 C5
    Date: 2016–05
  19. By: Tetsuro Matsushima (Bank of Japan); Lisa Ohkawa (Bank of Japan); Hirotaka Inoue (Bank of Japan)
    Abstract: In the foreign exchange market where diverse participants transact across borders, it is crucial to enhance confidence in the market globally for effective functioning of the market. In July 2015, the BIS established the Foreign Exchange Working Group (FXWG) to facilitate the development of a single global code of conduct for the foreign exchange market (the Global Code) and to promote greater adherence to the Global Code. Since its inception, central banks including the Bank of Japan and private-sector professionals from around the world have been working closely together to complete the Global Code by May 2017. The first phase of the Global Code and Principles for Adherence to the Global Code were released in May 2016 by the FXWG. The Global Code is principle-based instead of detailed and rule-based, and therefore takes into account the diversity of market participants, while reinforcing discipline to prevent misconduct. The Bank of Japan believes that market participants should fully understand and adhere to the principles underlined in the Global Code, which will contribute to sound development and effective functioning of the foreign exchange market.
    Date: 2016–06–17
  20. By: Ftiti, Zied; Guesmi, Khaled; Nguyen, Duc Khuong; Teulon, Frédéric
    Abstract: This article examines the dynamic characteristics of the inflation rate in Tunisia over the last two decades, and particularly following the onset of the Arab Spring in 2010 which causes distortions in this country’s monetary policy. We focus on the two specific dimensions of the Tunisian inflation rate: inflation regimes and persistence. We tackle this issue by adopting an evolutionary spectral approach, initially proposed by Priestley and Tong (1973). Our main findings indicate a stable inflation regime in the last 10 years, with an average inflation rate of around 5.5%. It is also found that the Tunisian inflation experienced a high degree of inertia which reflects its gradual responses to shocks. We also discuss the policy implications of these results, which typically require policy-makers to implement sound institutional reforms to reduce inflation.
    Keywords: Inflation, Structural break, Spectral analysis, Inflation persistence
    JEL: C1 C14 C5 C51 E3 E31 E6 E60
    Date: 2014–11–30
  21. By: Rodrigo Lluberas (Banco Central del Uruguay); Juan Odriozola (Banco Central del Uruguay)
    Abstract: The aim of this study is to analyze the effect of inflation and currency depreciation on wealth distribution in Uruguay. Previous empirical work either completely disregard assets denominated in foreign currency or do not consider the effect of changes in the nominal exchange rate on wealth redistribution. We take a different approach and study not only the effect of unexpected inflation but also of exchange rate movements in nominal wealth redistribution within the household sector. This is of particular importance in Uruguay due to the historical relevance of US dollar denominated assets and liabilities. Based on the recent history, we study three alternative scenarios. A 2002-crisis type scenario with a rate of currency depreciation higher than inflation, an early 2008-crisis type scenario with an appreciation of the peso and low inflation and a 2013-type scenario in which depreciation and inflation are roughly the same. A large proportion of household assets are real and most Uruguayan households do not own financial assets or debts. This results in small movements in households nominal positions after unexpected inflation or currency depreciation, particularly compared to similar studies for developed countries. Our results suggest that a crisis like the one experienced in 2002 with an annual inflation of 26% and a 93.5% devaluation of the currency results in an small increase in wealth inequality.
    Keywords: inflation, nominal wealth, redistribution, households
    JEL: D14 D31 E31
    Date: 2015
  22. By: Gunakar Bhatta, Ph.D. (Nepal Rastra Bank)
    Abstract: Bank equity plays an important role in the credit allocation process of financial intermediaries. Financial institutions with higher level of equity are in better position to absorb losses and repay deposits in a timely manner. This relates to the bank capital channel of monetary policy transmission mechanism stating that banks having sound financial health could contribute significantly in transmitting monetary impulses to the real sector. Considering the important role that bank equity plays in shaping the risk taking behavior of financial intermediaries, central banks set the minimum paid-up capital requirement for banks and financial institutions. Though this regulatory requirement is aimed at ensuring the smooth financial intermediation, this could become costlier in extending loans particularly in the times of business cycle fluctuations. A higher capital requirement might also constrain the lending capacity of a bank. Given the conflicting theoretical assumptions on the role of equity capital on financial stability and economic growth, this paper develops a theoretical model examining the relationship between bank equity and its effect on bank-borrower behavior. The theoretical model recommends that higher level of bank equity might be helpful in ensuring financial stability by altering the behavior of the bank and borrower.
    Keywords: Bank, Credit, Capital, Regulation, Stability
    JEL: E51 G00 G21 G32 G38
    Date: 2015–09
  23. By: Silke Tober
    Abstract: The ECB's expansionary monetary policy has positive effects on the euro area economy. Interest rates have declined further, bank lending is improving, and the euro is weaker. However, inflation remains much too low and aggregate demand too weak for the output gap to close rapidly. Further weakening the euro is not a feasible option. A weaker euro would aggravate global imbalances and impact negatively on less-than-robust global growth. Expansionary fiscal policy therefore needs to add to the effects of monetary policy.The euro area, moreover, suffers a key problem that not only impedes monetary policy effectiveness but also constrains fiscal policy and puts the future stability of the euro area at risk: With the decision to give up on the safe-asset quality of euro area sovereign bonds the euro area is losing a fundamental stability anchor.
    Date: 2016
  24. By: Kuek, Tai Hock
    Abstract: This paper reviews the literature on monetary neutrality in India from empirical perspectives. Based on monetary neutrality proposition, increment in money supply has no effect on real variables in the long-run. In another words, monetary injection into the economy by the government will not trigger or promote real economic growth as in real gross domestic product (GDP) in the long-run. With monetary neutrality proposition, effectiveness of the current monetary policies in an economy can be examined. For the case of India, mixed results have been obtained on the issue of monetary neutrality.
    Keywords: Monetary neutrality, literature review, India
    JEL: E4
    Date: 2016–06–13
  25. By: Julio Garín; Robert Lester; Eric Sims
    Abstract: The basic New Keynesian model predicts that positive supply shocks are less expansionary at the zero lower bound (ZLB) compared to periods of active monetary policy. We test this prediction empirically using Fernald's (2014) utilization-adjusted total factor productivity series, which we take as a measure of exogenous productivity. In contrast to the predictions of the model, positive productivity shocks are estimated to be more expansionary at the ZLB compared to normal times. However, in line with the predictions of the basic model, positive productivity shocks have a stronger negative effect on inflation at the ZLB.
    JEL: E31 E32 E43 E52
    Date: 2016–06
  26. By: Jan Hajek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: We use the behavioral equilibirum exchange rate (BEER) approach to examine the extent of real exchange rate misalignment in the euro area over the period 1980-2014. In a panel data setting, we find significant links between real exchange rates, relative productivity, trade balance and terms of trade. Unlike other papers related to the topic, we go further in the direction of linking the estimated misalignment to inflationary differentials. Our results indicate that a positive 1 percentage point inflationary differential between individual country and the euro area itself translates into 1.7 percentage point increase in overvaluation of the individual country’s real exchange rate. We also show the extent of overvaluation in peripheral countries of the euro area has been increasing since mid-2000s. At the end of observed period this trend partially stopped due to emergence of falling prices in these economies. We discuss implications of such reversal and conclude deflation in peripheral countries of t he euro area might be helpful when restoring its competitiveness.
    Keywords: real exchange rates, misalignment, euro area, panel data, inflationary differentials
    JEL: C21 E31 F31 F45
    Date: 2016–06
  27. By: Pinar Yesin
    Abstract: The Swiss franc is known to appreciate strongly during financial market turmoil, demonstrating its status as a typical safe haven currency. One possible mechanism behind this appreciation during times of global turmoil is assumed to be higher capital inflows to Switzerland. This paper attempts to find some empirical evidence for this presumption. The analysis reveals that capital flow variables are not necessarily coincident with the movements of the Swiss franc. Interest rate differentials, a traditional determinant of exchange rates, co-move only weakly with Swiss franc movements. However, a robust and stronger link between variables that capture global or regional market uncertainty and movements of the Swiss franc is observed. Specifically, the information channel rather than new cross-border investment is found to be coincident with the Swiss franc. The weak link between capital flows and the exchange rate is confirmed to some extent for some other countries.
    Keywords: Exchange rate, safe haven currency, gross capital flows, net flows, private flows
    JEL: F21 F31 F32
    Date: 2016
  28. By: McAndrews, James J. (Federal Reserve Bank of New York); Kroeger, Alexander (Federal Reserve Bank of New York)
    Abstract: The policy measures taken since the financial crisis have greatly expanded the size of the Federal Reserve’s balance sheet and have thus raised the level of aggregate bank reserves as well. Over the same period there has been a significant shift in the timing of payments made over the Federal Reserve’s Fedwire Funds Service toward earlier settlement. This paper documents this timing change and presents regression results suggesting that the increase in overall reserve balances explains the vast majority of this development. The paper also discusses the benefits of high aggregate reserve balances for the robustness of the payment system and the potential implications for policy going forward.
    Keywords: Fedwire; settlement liquidity; reserves; monetary policy implementation
    JEL: G20 G21 G28
    Date: 2016–06–01
  29. By: Feng Zhu
    Abstract: This paper studies the evolution of the equilibrium real interest rate (ie natural or neutral interest rate) in Asia-Pacific. I take an empirical approach to estimate the rate, simple estimates suggest that except for China, and Thailand since 2005, the natural interest rate may have declined substantially in Asian-Pacific economies since the early or mid-1990s, by over 4 percentage points on average. In many economies the rate has turned negative. The tendency has become more accentuated in the 2000s, especially since the onset of the global financial crisis. Yet simple natural interest rate estimates are unreliable, which vary significantly over time and across the economies. I use frequency-domain techniques to examine the relationship between the long-run component of real interest rate and those of population characteristics, globalisation, and a range of macroeconomic and financial variables (eg credit and asset prices). I estimate spectral and cospectral densities, coherency and the frequency-specific coefficients of correlation and regression proposed by Zhu (2005). the association seems to be broad and strong between the natural interest rate and the low-frequency trend components of demographic and global factors in Asia- Pacific, but weak between the natural interest rate and trends in asset prices, creditto GDP ratio and trend growth in many economies in the region. In most cases, the natural interest rate seems to be correlated with broad measures of long-term financial sector development, and trends in saving rate and investment ratio.
    Keywords: asset price, credit, demography, equilibrium real interest rates, frequency-domain methods, globalisation, natural interest rates, population ageing, trend growth
    Date: 2016–06

This nep-mon issue is ©2016 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.