nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒07‒02
twenty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Credit Channel of Monetary Policy Transmission in Russia By Leontieva, E.A.; Perevyshin, Y.N.
  2. Raising an Inflation Target : The Japanese Experience with Abenomics By De Michelis, Andrea; Iacoviello, Matteo
  3. Evaluating monetary policy options for managing resource revenue shocks when fiscal policy is laissez-faire : Application to Nigeria By Chuku Chuku
  4. Time-Varying Persistence of Inflation: Evidence from a Wavelet-Based Approach By Heni Boubaker; Giorgio Canarella; Rangan Gupta; Stephen M. Miller
  5. Loan supply shocks in Macedonia: a Bayesian SVAR approach with sign restrictions By Rilind Kabashi; Katerina Suleva
  6. A note on imperfect credibility By Ippei Fujiwara; Timothy Kam; Takeki Sunakawa
  7. The European Central Bank's QE: A new hope By Garcia Pascual, Antonio; Wieladek, Tomasz
  8. "Regional Liquidity Risk and Covered Interest Parity during the Global Financial Crisis: Evidence from Tokyo, London, and New York " By Shin-ichi Fukuda
  9. The Liquidity Management of the Banking Sector and the Short-Term Money Market Interest Rates By Morgunov, V.I.
  10. The Study of the Factors and Consequences of the Restrictions on the Movement of the Capital By Bozhechkova, A.V.; Goryunov, E.L.; Trunin, Pavel
  11. Time-varying volatility, financial intermediation and monetary policy By Sandra Eickmeier; Norbert Metiu; Esteban Prieto
  12. The impact of unconventional monetary policy on the sovereign bank nexus within and across EU countries. A time-varying conditional correlation analysis By Giulio Cifarelli; Giovanna Paladino
  13. The Econometric Estimation of the Macroeconomic Effects of the Shock of Monetary Policy for the Russian Economy By Vashchelyuk, N.V.; Polbin, Andrey; Trunin, Pavel
  14. A New Currency of the Future: The Novel Commodity Money with Attenuation Coefficient Based on the Logistics Cost of Anchor By Boliang Lin; Ruixi Lin
  15. Macroeconomic Impact of International Reserves: Empirical Evidence from South Asia By Prakash Kumar Shrestha, Ph.D.
  16. Inflation targeting and exchange rate volatility in emerging markets By Cabral,Rene; Carneiro,Francisco Galrao; Mollick,Andre Varella
  17. Inflation Targets and the Zero Lower Bound In a Behavioral Macroeconomic Model By De Grauwe, Paul; Ji, Yuemei
  18. Macro, Money and Finance: A Continuous Time Approach By Brunnermeier, Markus K; Sannikov, Yuliy
  19. Linking excessive disinflation and output movements in an emerging, small open economy A hybrid New Keynesian Phillips Curve perspective By Karol Szafranek
  20. The collateral channel of open market operations By Cassola, Nuno; Koulischer, François
  21. Exchange Arrangements and Currency Crises: What´s the matter with the exchange rate classification? By Cruz-Rodríguez, Alexis
  22. Currency Value By Menkhoff, Lukas; Sarno, Lucio; Schmeling, Maik; Schrimpf, Andreas

  1. By: Leontieva, E.A. (Russian Presidential Academy of National Economy and Public Administration (RANEPA), Gaidar Institute for Economic Policy); Perevyshin, Y.N. (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: This study investigates the transmission of monetary policy onto retail bank interest rates in Russia. The paper reviews theoretical approaches of interest rate pass-through, the reasons for its incompleteness. Our estimates, based on ECM, show incomplete interest rate pass-through from MIACR to retail deposit rates in Russia in 2010-2014. The possible reasons of incomplete interest rate pass-through are imperfect substitution between bank deposits and other types of savings and weak competition within the Russian banking sector. Also we analyze how monetary policy of The Central Bank of Russian Federation influences the bank lending in Russia in 2010-2014. We use two approaches: cointegration analysis of macroeconomic data and panel regression on individual banks balance data. We show that monetary policy instruments (interest rate on auction REPO and volumes of refinancing operations) have affected bank lending at that time.
    Keywords: monetary policy, market interest rates, commercial banks, banking loans, interest rate pass-through, credit channel
    JEL: E52 E51 E58 E43 C32 C33 G21
    Date: 2015–03–04
  2. By: De Michelis, Andrea; Iacoviello, Matteo
    Abstract: This paper draws from Japan’s recent monetary experiment to examine the effects of an increase in the inflation target during a liquidity trap. We review Japanese data and examine through a VAR model how macroeconomic variables respond to an identified inflation target shock. We apply these findings to calibrate the effect of a shock to the inflation target in a new-Keynesian DSGE model of the Japanese economy. We argue that imperfect observability of the inflation target and a separate exchange rate shock are needed to successfully account for the behavior of nominal and real variables in Japan since late 2012. Our analysis indicates that Japan has made some progress towards overcoming deflation, but further measures are needed to raise inflation to 2 percent in a stable manner.
    Keywords: Abenomics ; Credibility ; Deflation ; Inflation target ; Japan ; Monetary policy
    JEL: E31 E32 E47 E52 E58 F31 F41
    Date: 2016–05
  3. By: Chuku Chuku
    Abstract: This study considers the implications of alternative monetary policy regimes to deal with a laissez-faire fiscal policy rule, where the government completely spends resource revenue windfall contemporaneously. A three sector dynamic stochastic general equilibrium model, which features key structural characteristics of resource-rich developing economies, such as; the Dutch disease, limited international capital mobility, credit constrained consumers, and limited labour mobility are core ingredients of the model. The model is calibrated to match the Nigerian economy.Three alternative mainstream monetary policy regimes are considered:i) a flexible exchange rate regime;ii) a crawling peg; andiii) a money growth target.The results show that the macroeconomic responses to these monetary policy regimes, depends on other auxiliary polices of the central bank, such as; sterilization policy, foreign reserve accumulation policy and openmarket operations. In particular, we find that a flexible exchange rate regime with full domestic absorption delivers the highest level of aggregate employment, though with higher volatility for other macroeconomic variables.The other policy rules deliver lower macroeconomic volatility but at the cost of crowding-out the private sector, depending on the mix of open-market operations. In welfare terms, policy regime (i) delivers the best outcome to economic agents.
    Keywords: Monetary policy
    Date: 2016
  4. By: Heni Boubaker (IPAG LAB, IPAG Business School, France); Giorgio Canarella (University of Nevada, Las Vegas, USA); Rangan Gupta (Department of Economics, University of Pretoria); Stephen M. Miller (University of Nevada, Las Vegas, USA)
    Abstract: We propose a new long-memory model with a time-varying fractional integration parameter, evolving non-linearly according to a Logistic Smooth Transition Autoregressive (LSTAR) specification. To estimate the time-varying fractional integration parameter, we implement a method based on the wavelet approach, using the instantaneous least squares estimator (ILSE). The empirical results show the relevance of the modeling approach and provide evidence of regime change in inflation persistence that contributes to a better understanding of the inflationary process in the US. Most importantly, these empirical findings remind us that a "one-size-fits-all" monetary policy is unlikely to work in all circumstances.
    Keywords: Time-varying long-memory, LSTAR model, MODWT algorithm, ILSE estimator
    JEL: C13 C22 C32 C54 E31
    Date: 2016–06
  5. By: Rilind Kabashi (National Bank of the Republic of Macedonia); Katerina Suleva (National Bank of the Republic of Macedonia)
    Abstract: This paper analyses the effects of loan supply, as well as aggregate demand, aggregate supply and monetary policy shocks between 1998 and 2014 in Macedonia using a structural Vector Auto Regression with sign restrictions and Bayesian estimation. The main results indicate that loan supply shocks have no significant effect on loan volumes and lending rates, as well as on economic activity and prices. The effects of monetary policy on lending activity are fairly limited, although there is some evidence that it affects lending rates more than loan volumes. Monetary policy shocks have strong effects on inflation, while the central bank reacts strongly to adverse shocks hitting the economy. Baseline results are fairly robust to several extensions and robustness checks. According to historical decomposition, the lending activity was supporting economic growth before and during the crisis, but its contribution became negative during the recovery and it was a drag on growth until the end of the period. Pre-crisis GDP growth is mostly explained by the supportive interest rate of the main monetary policy instrument. However, the restrictive policy during the crisis for the purposes of maintaining monetary policy goals was associated with a fall in GDP, while the policy became supportive again during the early stages of the recovery. Policy rates in the recent years mostly reflect subdued lending activity and aggregate supply factors, which the central bank tries to counteract with a more accommodative policy.
    Keywords: loan supply, monetary policy, Bayesian VAR, sign restrictions, Macedonia
    JEL: C11 C32 E51 E52
    Date: 2016–05
  6. By: Ippei Fujiwara; Timothy Kam; Takeki Sunakawa
    Abstract: We explore how outcomes of optimal monetary policy with loose commitment (Schaumburg and Tambalotti, 2007; Debortoli and Nunes, 2010) can be observationally equivalent, or interpretable as outcomes of deeper optimal policy under sustainable plans (Chari and Kehoe, 1990). Both interpretations of "imperfect credibility" in optimal monetary policy design are attempts to rationalize outcomes that lie in between the conventional extremes of optimal policy under commitment and under discretion. In a standard monetary-policy framework, when we match impulse responses of inflation and the output gap to large enough markup shocks, we find that a small probability (1 - a = 0.05) of replanning in the quasi/loose commitment world corresponds to N = 18 in the N-period punishment optimal sustainable monetary policy, in terms of observable outcomes. For plausible cases of loose-commitment model economies (with a between 0.77 and 1) we can find an observationally equivalent sustainable-plan economy indexed by some N.
    Keywords: imperfect credibility, monetary policy, sustainable policy
    JEL: E52 E58 E61
    Date: 2016–06
  7. By: Garcia Pascual, Antonio; Wieladek, Tomasz
    Abstract: We examine the impact of the ECB’s QE on Euro Area real GDP and core CPI with a Bayesian VAR, estimated on monthly data from 2012M6 to 2016M4. We assess the total impact via a counter-factual exercise, country-by-country and through alternative transmission channels. QE anouncement shocks are identified with four different identification schemes as in Weale and Wieladek (2016). We find that in absence of the first round of ECB QE, real GDP and core CPI would have been 1.3% and 0.9% lower, respectively. The effect is roughly 2/3 times smaller than in the UK/US. Impulse response analysis suggests that the policy is transmitted via the portfolio rebalancing, the signalling, credit easing and exchange rate channels. Spanish real GDP benefited the most and Italian the least.
    Keywords: ECB unconventional monetary policy; Transmission mechanism.
    JEL: E50 E51 E52
    Date: 2016–06
  8. By: Shin-ichi Fukuda (Faculty of Economics, The University of Tokyo)
    Abstract: During the global financial crisis, there were substantial deviations from covered interest parity (CIP) condition. In particular, in the post Lehman period, the US dollar interest rate became very low on the forward market. However, the deviations from the CIP condition varied across markets. After presenting a simple model, the following analysis examines how the CIP condition between the Japanese yen and the US dollar was violated in Tokyo, London, and New York markets. We show that the CIP deviations became largest in the New York market soon after the Lehman shock but were largest in the Tokyo market in the rest of the turmoil period. The regressions suggest that market-specific credit risks and central banks’ liquidity provisions explained the difference across the markets. In particular, they indicate that larger dollar-specific risk and smaller yen-specific risk caused larger deviations in the Tokyo market.
  9. By: Morgunov, V.I. (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: In the modern world the most common method of monetary policy implementation is to control short-term money market interest rates. This paper discusses methodological and theoretical foundations of such policy, its instruments and procedures. The focus is on the method of monetary policy, that is called a symmetric interest rate corridor. The author investigates the role of open market operations and standing facilities, analyses the problem of forecasting the liquidity needs of the banking sector. The experience of the Bank of Russia in the management of short-term money market interest rates is analyzed on the base of modern theoretical concepts.
    Keywords: monetary policy, short-term interest rates, money market, symmetric interest rate corridor
    Date: 2016–03–21
  10. By: Bozhechkova, A.V. (Gaidar Institute for Economic Policy, Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Goryunov, E.L. (Gaidar Institute for Economic Policy); Trunin, Pavel (Gaidar Institute for Economic Policy, Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: In this paper we study key factors that determine implementation of capital controls and their consequences. We describe theoretical framework that takes into account capital flow restrictions, survey evolution of views regarding such restrictions and summarize the most common objectives of capital controls, including support of independent monetary policy under fixed exchange rates, maintaining financial stability etc. We also analyze existing international experience on capital controls including inflow and outflow controls in both advanced and emerging economies (Brazil, Malaysia, Iceland, Cyprus etc.). We consider several particular measures and study factors that explain their different macroeconomic outcomes. Finally, we discuss empirical works analyzing effectiveness of capital flows restrictions.
    Keywords: capital controls, capital control consequences, Brazil, Malaysia, Iceland, Cyprus
    Date: 2016–03–21
  11. By: Sandra Eickmeier; Norbert 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. To rationalize our robust empirical results, we use a macroeconomic model in which financial intermediaries endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, financial intermediaries lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy. Hence, we provide a novel explanation for the non-linear effects of monetary stimuli observed in the data, linking the effectiveness of monetary policy to the procyclicality of leverage.
    Keywords: Monetary policy, credit spread, non-linearity, intermediary leverage, financial accelerator
    JEL: C32 E44 E52
    Date: 2016–05
  12. By: Giulio Cifarelli (Dipartimento di Scienze per l'Economia e l'Impresa); Giovanna Paladino
    Abstract: We investigate the time varying dynamics of the linkages between sovereign and bank default risks over the period 2006-2015, using the credit default swap (CDS) spreads of the bonds of major international banks and of sovereign issuers as indicators of risk within four major European countries. The nexus between bank risk in core countries and sovereign risk of peripheral countries is also analyzed, under the hypothesis that higher bond yields and preferential treatment of bond issued by euro sovereigns under Basle II may have favored the stocking of peripheral sovereign bonds in core bank portfolios. The use of a time-varying regime switching correlation analysis, the STCC-GARCH, allows to identify the economic variable behind the state shifts, the so-called “transition variable†, and to date precisely the changes in the size of the correlations that are due to shocks (viz. the Lehman crisis, the evolution of the Greek crisis) or to unconventional monetary policies such as Quantitative Easing and TLTRO.
    Keywords: CDS spreads, Unconventional monetary policy, STCC-GARCH correlation analysis
    JEL: E43 E52 F36 C32
    Date: 2016
  13. By: Vashchelyuk, N.V. (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Polbin, Andrey (Russian Presidential Academy of National Economy and Public Administration (RANEPA), Gaidar Institute for Economic Policy); Trunin, Pavel (Russian Presidential Academy of National Economy and Public Administration (RANEPA), Gaidar Institute for Economic Policy)
    Abstract: The paper is devoted to identifying the shock of monetary policy and evaluating its impact on the main macroeconomic variables of the Russian economy with the help of the structural vector autoregression model. According to the results monetary policy shocks have a significant impact on the real sector of the Russian economy in the short term period and on the nominal variables (interest rates, price level, lending). Positive monetary policy shock leads to a temporary increase in output, the volume of lending, as well as to a reduction in nominal interest rates on loans. At the same time the contribution of monetary policy shocks to the variance of macroeconomic variables is small.
    Keywords: monetary policy, macroeconomic variables, Russian economy
    Date: 2016–03–21
  14. By: Boliang Lin; Ruixi Lin
    Abstract: In this paper, we reveal the attenuation mechanism of anchor of the commodity money from the perspective of logistics warehousing costs, and propose a novel Decayed Commodity Money (DCM) for the store of value across time and space. Considering the logistics cost of commodity warehousing by the third financial institution such as London Metal Exchange, we can award the difference between the original and the residual value of the anchor to the financial institution. This type of currency has the characteristic of self-decaying value over time. Therefore DCM has the advantages of both the commodity money which has the function of preserving wealth and credit currency without the logistics cost. In addition, DCM can also avoid the defects that precious metal money is hoarded by market and credit currency often leads to excessive liquidity. DCM is also different from virtual currency, such as bitcoin, which does not have a corresponding commodity anchor. As a conclusion, DCM can provide a new way of storing wealth for nations, corporations and individuals effectively.
    Date: 2016–06
  15. By: Prakash Kumar Shrestha, Ph.D. (Nepal Rastra Bank)
    Abstract: In recent years, many emerging countries have been accumulating substantial amount of international reserves by outpacing traditional benchmark in response to a series of financial crises in the world. In this context, this paper constructs a dynamic macro model with new monetary policy rule to examine the implications of international reserve accumulation for macroeconomic outcomes such as economic growth and inflation. Such a macro model is empirically examined in the data of South Asian countries, namely Bangladesh, India, Nepal, Pakistan and Sri Lanka by using Panel VAR method for the period of 1990-2013. The empirical results show that increase in international reserves tends to cause higher economic growth in these countries but without significant impact on inflation. This implies that these countries can move further utilizing the accumulated international reserves productively which will enhance economic growth and maintain internal and external balances.
    Keywords: International Reserves, Macroeconomic impact, South Asia
    JEL: C23 C61 F31 F41 F43
    Date: 2016–03
  16. By: Cabral,Rene; Carneiro,Francisco Galrao; Mollick,Andre Varella
    Abstract: The paper investigates the relevance of the exchange rate on the reaction function of the central banks of 24 emerging market economies for the period 2000Q1 to 2015Q2. This is done by first employing fixed-effects ordinary least squares and then system generalized method of the moments techniques. Under fixed effects, the exchange rate is found to be an important determinant in the reaction function of emerging market economies. Allowing for the endogeneityof inflation, output gap, and exchange rate, the exchange rate remains a positive and significant determinant, but less quantitatively relevant across inflation-targeting countries. When the sample is partitioned into targeting and nontargeting countries, the exchange rate remains relevant in the reaction function of the latter group. The results remain robust to splitting the sample at the time of the financial crisis of 2007?09 and suggest that, after the crisis, the central banks of emerging market economies responded only to inflation movements in the interest rate reaction function.
    Keywords: Currencies and Exchange Rates,Debt Markets,Economic Theory&Research,Economic Stabilization,Emerging Markets
    Date: 2016–06–20
  17. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We analyze the relation between the level of the inflation target and the zero lower bound (ZLB) imposed on the nominal interest rate. We analyze this relation in the framework of a behavioral macroeconomic model in which agents experience cognitive limitations. The model produces endogenous waves of optimism and pessimism (animal spirits) that, because of their self-fulfilling nature, drive the business cycle and in turn are influenced by the business cycle. We find that when the inflation target is too close to zero, the economy can get gripped by "chronic pessimism" that leads to a dominance of negative output gaps and recessions, and in turn feeds back on expectations producing long waves of pessimism. The simulations of our model, using parameter calibrations that are generally found in the literature, suggests that an inflation target of 2% is too low, i.e. produces negative skewness in the distribution of the output gap. We find that an inflation target in the range of 3% to 4% comes closer to producing a symmetric distribution of the output gap and avoids the economy being trapped in a region of chronic pessimism.
    Keywords: behavioral macroeconomics; Inflation targeting; zero lower bound
    Date: 2016–06
  18. By: Brunnermeier, Markus K; Sannikov, Yuliy
    Abstract: This paper puts forward a 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.
    Keywords: (Inside) Money; Endogenous Risk Dynamics; Financial Frictions; Macroeconomic Modeling; Monetary Economics; Paradox of Prudence; Volatility Paradox
    JEL: C63 E32 E41 E44 E51 G01 G11 G20
    Date: 2016–06
  19. By: Karol Szafranek
    Abstract: Excessive disinflation and the flattening of the Phillips curve are recently popular phenomena in many advanced economies. In the environment of low inflation, the fading relationship between the price dynamics and the adjustments in the domestic real activity is vigorously investigated for highly developed economies. Still little evidence has been presented for emerging, small open economies. In this paper I address this issue by investigating the behavior of the Phillips curve for Poland. In particular, I aim at answering the question whether a Phillips curve flattening or a steepening can be observed during the recent abrupt disinflation. The outstanding problem of considerable uncertainty accompanying the model specification is accounted for by estimating a substantial number of regressions and exploring the cross-section properties of the hybrid Nkpc parameters. The results advocate that a statistically significant relationship between inflation and the domestic real activity developments persists. However, in the recently observed disinflation period the Phillips curve tends to flatten as the inflation’s sensitivity with respect to changes in economic slack diminishes. That notwithstanding, the impact of external factors rises significantly. Conditional ex-post forecasts suggest that while only a limited number of Phillips curve specifications manage to explain the disinflation process in Poland, employing unemployment gap or real Gdp as economic slack proxies delivers the most accurate inflation forecasts.
    Keywords: hybrid Nkpc, inflation, Phillips curve flattening, emerging, small open economy
    JEL: C13 C22 C26 E31
    Date: 2016
  20. By: Cassola, Nuno; Koulischer, François
    Abstract: We build a model of collateral choice by banks that allows to recover the opportunity cost of collateral use and the access of banks to the interbank market. We estimate the model using country-level data on assets pledged to the European Central Bank from 2009 to 2011. The model can be used to quantify how changes in haircuts affect the collateral used by banks and can provide proxies for the funding cost of banks. Our results suggest for example that a 5% higher haircut on low rated collateral would have reduced the use of this collateral by 10% but would have increased the average funding cost spread between high yield and low yield countries by 5% over our sample period. JEL Classification: E52, E58, G01, F36
    Keywords: central bank, collateral, haircut, money market
    Date: 2016–05
  21. By: Cruz-Rodríguez, Alexis
    Abstract: The purpose of this paper is to empirically investigate whether certain exchange rate arrangements are more prone to currency crises using a probit model. We define a currency crisis as a period characterised by the presence of intense foreign exchange market pressure. The definition is based on a foreign exchange market pressure index (MPI). If the value of the MPI is above a certain threshold, we define that period as a crisis state; otherwise the period is defined as a tranquil state. The definition of currency crises used in this paper focuses on discrete events.
    Keywords: Exchange rate regimes, currency crises, speculative attacks.
    JEL: F31 F33
    Date: 2016–06–06
  22. By: Menkhoff, Lukas; Sarno, Lucio; Schmeling, Maik; Schrimpf, Andreas
    Abstract: We assess the properties of currency value strategies based on real exchange rates. We find that real exchange rates have predictive power for the cross-section of currency excess returns. However, adjusting real exchange rates for key country-specific fundamentals (productivity, the quality of export goods, net foreign assets, and output gaps) better isolates information related to the currency risk premium. In turn, the resulting measure of currency value displays considerably stronger predictive power for currency excess returns. Finally, the predictive information content in our currency value measure is distinct from that embedded in popular currency strategies, such as carry and momentum.
    Keywords: Currency value; macro fundamentals; predictability; real exchange rate
    JEL: F31 G12 G15
    Date: 2016–06

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