nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒07‒16
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy on Twitter and its Effect on Asset Prices: Evidence from Computational Text Analysis By Jochen Lüdering; Peter Tillmann
  2. The risky steady state and the interest rate lower bound By Hills, Timothy; Nakata, Taisuke; Schmidt, Sebastian
  3. Does the Exchange rate regime shape currency misalignments in emerging and developing countries? By Carl Grekou
  4. Assessing the economic value of probabilistic forecasts in the presence of an inflation target By Christopher McDonald; Craig Thamotheram; Shaun P. Vahey; Elizabeth C. Wakerly
  5. The (Unintended?) Consequences of the Largest Liquidity Injection Ever By Miguel Faria-e-Castro; Luis Fonseca; Matteo Crosignani
  6. Exchange Rate Linkages between the ASEAN Currencies, the US Dollar and the Chinese RMB By Guglielmo Maria Caporale; Luis A. Gil-Alana; Kefei You
  7. Unconventional Monetary Policy and International Risk Premia By Rogers, John H.; Scotti, Chiara; Wright, Jonathan H.
  8. Money and Capital in a Persistent Liquidity Trap By Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
  9. Does uncertainty affect non-response to the European Central Bank's survey of professional forecasters? By López-Pérez, Víctor
  10. Recent Economic Developments, Monetary Policy Considerations and Longer-term Prospects: a speech at the Chicago Council on Global Affairs, Chicago, Illinois, June 28, 2016. By Powell, Jerome H.
  11. Money Creation, Monetary Policy, and Capital Regulation By Faure, Salomon; Gersbach, Hans
  12. Forward Guidance as a Monetary Policy Rule By Mitsuru Katagiri
  13. The U.S. Economic Outlook and Monetary Policy: The European Economics and Financial Centre, Distinguished Speakers Seminar, London, U.K. - July 1, 2016 By Mester, Loretta J.
  14. Extreme Events and Optimal Monetary Policy By Jinill KIM; Francisco RUGE-MURCIA
  15. On the Welfare Costs of Monetary Policy By Nlemfu Mukoko, Jean Blaise
  16. Nominal GDP targeting and the tax burden By Hatcher, Michael
  17. Stressed interbank markets: evidence from the European financial and sovereign debt crisis By Frutos, Juan Carlos; Garcia-de-Andoain, Carlos; Heider, Florian; Papsdorf, Patrick
  18. Observing and shaping the market: the dilemma of central banks By Romain Baeriswyl; Camille Cornand; Bruno Ziliotto
  19. Collective Versus Individual Decisionmaking : A Case Study of the Bank of Israel Law By Francisco RUGE-MURCIA; Alessandro RIBONI
  20. The Extrinsic Value of Low-Denomination Money Holdings By Hernandez-Chanto, Allan
  21. The science of monetary policy: an imperfect knowledge perspective By Eusepi, Stefano; Preston, Bruce
  22. EAGLE-FLI. A macroeconomic model of banking and financial interdependence in the euro area By Bokan, Nikola; Gerali, Andrea; Gomes, Sandra; Jacquinot, Pascal; Pisani, Massimiliano
  23. Money and Capital in a Persistent Liquidity Trap By Philippe Bacchetta; Kenza Benhima; Yannick Kalantzis
  24. Bank capital structure and the credit channel of central bank asset purchases By Darracq Pariès, Matthieu; Hałaj, Grzegorz; Kok, Christoffer
  25. Monetary Policy and Long-Run Risk-Taking By Gilbert COLLETAZ; Grégory LEVIEUGE; Alexandra POPESCU
  26. Fiscal Implications of Central Bank Balance Sheet Policies By Orphanides, Athanasios
  27. QE in the future: the central bank's balance sheet in a fiscal crisis By Reis, Ricardo
  28. Measuring the Effect of the Zero Lower Bound on Monetary Policy By Carlos Viana de Carvalho; EriC Hsu; Fernanda Necchio
  29. The Financial Stability Dark Side of Monetary Policy By Frank Smets; Stefania Villa
  30. Repurchase agreements as an instrument of monetary policy at the time of the Accord By Garbade, Kenneth D.
  31. Announcements are not Enough: Foreign Exchange Intervention under Imperfect Credibility By Jose E. Gomez-Gonzalez; Julian A. Parra-Polania; Mauricio Villamizar-Villegas

  1. By: Jochen Lüdering (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: In this paper we dissect the public debate about the future course of monetary policy and trace the effects of selected topics of this discourse on U.S. asset prices. We focus on the “taper tantrum” episode in 2013, a period with large revisions in expectations about Fed policy. Based on a novel data set of 90,000 Twitter messages (“tweets”) covering the entire debate of Fed tapering on Twitter we use Latent Dirichlet Allocation, a computational text analysis tool to quantify the content of the discussion. Several estimated topic frequencies are then included in a VAR model to estimate the effects of topic shocks on asset prices. We find that the discussion about Fed policy on social media contains price-relevant information. Shocks to shares of “tantrum”-, “QE”- and “data”-related topics are shown to lead to significant asset price changes. We also show that the effects are mostly due to changes in the term premium of yields consistent with the portfolio balance channel of unconventional monetary policy.
    Keywords: Monetary Policy, Fed, Latent Dirichlet Allocation, Text Analysis, VAR
    JEL: E32 E44 E52
    Date: 2016
  2. By: Hills, Timothy; Nakata, Taisuke; Schmidt, Sebastian
    Abstract: Even when the policy rate is not at the effective lower bound (ELB), the possibility that the policy rate will become constrained by the ELB in the future lowers today’s inflation by creating tail risk in future inflation and thus reducing expected inflation. In an empirically rich model calibrated to match key features of the U.S. economy, we find that the tail risk induced by the ELB causes inflation to undershoot the target rate of 2 percent by as much as 45 basis points at the economy’s risky steady state. Our model suggests that achieving the inflation target may be more difficult now than before the Great Recession, if the recent ELB experience has led households and firms to revise up their estimate of the ELB frequency. JEL Classification: E32, E52
    Keywords: liquidity trap, zero lower bound
    Date: 2016–06
  3. By: Carl Grekou
    Abstract: Relying on a panel of 73 emerging and developing countries and on de facto exchange rate regimes’ classification —over the 1980-2012 period, we re-examine empirically the relationship between exchange rate regimes and currency misalignments. Overall our results suggest that no exchange rate regime performs better than the others as currency misalignments do not substantially and significantly differ across exchange rate regimes. This finding is in contrast to the different arguments (both theoretical and empirical) in favor or against any particular regime and instead supports the exchange regime neutrality view.
    Keywords: Currency misalignments; Exchange rate regimes; Emerging and developing countries
    JEL: C23 F31 F33
    Date: 2016
  4. By: Christopher McDonald; Craig Thamotheram; Shaun P. Vahey; Elizabeth C. Wakerly
    Abstract: We consider the fundamental issue of what makes a “good” probability forecast for a central bank operating within an inflation targeting framework. We provide two examples in which the candidate forecasts comfortably outperform those from benchmark specifications by conventional statistical metrics such as root mean squared prediction errors and average logarithmic scores. Our assessment of economic significance uses an explicit loss function that relates economic value to a forecast communication problem for an inflation targeting central bank. We analyse the Bank of England’s forecasts for inflation during the period in which the central bank operated within a strict inflation targeting framework in our first example. In our second example, we consider forecasts for inflation in New Zealand generated from vector autoregressions, when the central bank operated within a flexible inflation targeting framework. In both cases, the economic significance of the performance differential exhibits sensitivity to the parameters of the loss function and, for some values, the differentials are economically negligible.
    Keywords: Forecasting inflation, Inflation targeting, Cost-loss ratio, Forecast evaluation, Monetary policy
    Date: 2016–06
  5. By: Miguel Faria-e-Castro (New York University); Luis Fonseca (London Business School); Matteo Crosignani (NYU Stern)
    Abstract: We analyze some of the potentially unintended consequences of the largest liquidity injection ever conducted by a central bank: the European Central Bank’s three-year Long-Term Refinancing Operations conducted in December 2011 and February 2012. Using an unique dataset on monthly security- and bank-level holdings of government bonds for Portugal, we analyze the impact of this unconventional monetary policy operation on the demand for government debt. We find that: (i) Portuguese banks significantly increased their holdings of domestic government bonds after the announcement of this policy; (ii) This increase in holdings was tilted towards shorter maturities, with banks rebalancing their sovereign debt portfolios towards shorter term bonds. We employ a theoretical framework to argue that domestic banks engaged in a “collateral trade†, which involved the purchase of high yield bonds with maturities shorter than the central bank borrowing in order to mitigate funding liquidity risk. Our model delivers general equilibrium implications that are consistent with the data: the yield curve for the Portuguese sovereign steepens after the announcement, and the timing and characteristics of government bond auctions are consistent with a strategic response by the debt management agency.
    Date: 2016
  6. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Kefei You
    Abstract: This paper investigates whether the RMB is in the process of replacing the US dollar as the anchor currency in nine ASEAN countries, and also the linkages between the ASEAN currencies and a regional currency unit. A long-memory (fractional integration) model allowing for endogenously determined structural breaks is estimated for these purposes (Gil-Alana, 2008). The results suggest that the ASEAN currencies are much more interlinked than previously thought, whether or not breaks are taken into account, which provides support for a regional currency index as an anchor. Moreover, incorporating a break shows that the linkages between these currencies and the RMB and the US dollar respectively are equally important, and in fact in recent years the former have become stronger than the latter. Therefore including the RMB in the regional index should be considered.
    Keywords: ASEAN currencies, Chinese RMB, US dollar peg, fractional integration, breaks
    JEL: F31 C22
    Date: 2016
  7. By: Rogers, John H.; Scotti, Chiara; Wright, Jonathan H.
    Abstract: We assess the relationship between monetary policy, foreign exchange risk premia and term premia at the zero lower bound. We estimate a structural VAR including U.S. and foreign interest rates and exchange rates, and identify monetary policy shocks through a method that uses these surprises as the crucial external instrument" that achieves identification without having to use implausible short-run restrictions. This allows us to measure effects of policy shocks on expectations, and hence risk premia. U.S. monetary policy easing shocks lower domestic and foreign bond risk premia, lead to dollar depreciation and lower foreign exchange risk premia. We present some evidence that U.S. monetary policy easing surprises at the ZLB shift options-implied skewness in the direction of dollar depreciation and also reduce the demand for the liquidity of short-term U.S. Treasuries. Both of these channels should lower foreign exchange risk premia.
    Date: 2016–05–31
  8. By: Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
    Abstract: In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity and price flexibility. We show that a liquidity trap leads to an increase in cash holdings and may be associated with a long-term output decline. This long-term impact is a supply-side effect that may arise when agents are heterogeneous. It occurs in particular with a persistent deleveraging shock, leading investors to hold cash yielding a low return. Policy implications differ from shorter-run analyses. Quantitative easing leads to a deeper liquidity trap. Exiting the trap by increasing expected inflation or applying negative interest rates does not solve the asset scarcity problem.
    Keywords: Asset scarcity; Deleveraging; liquidity trap; zero lower bound
    JEL: E22 E40 E58
    Date: 2016–07
  9. By: López-Pérez, Víctor
    Abstract: This paper explores how changes in macroeconomic uncertainty have affected the decision to reply to the European Central Bank's Survey of Professional Forecasters (ECB's SPF). The results suggest that higher (lower) aggregate uncertainty increases (reduces) non-response to the survey. This effect is statistically and economically significant. Therefore, the assumption that individual ECB's SPF data are missing at random may not be appropriate. Moreover, the forecasters that perceive more individual uncertainty seem to have a lower likelihood of replying to the survey. Consequently, measures of uncertainty computed from individual ECB's SPF data could be biased downwards.
    Keywords: Non-response,uncertainty,Survey of Professional Forecasters,European Central Bank
    JEL: D81 D84 E66
    Date: 2016
  10. By: Powell, Jerome H. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2016–06–29
  11. By: Faure, Salomon; Gersbach, Hans
    Abstract: We develop a general equilibrium model to study money creation by private banks and examine the impact of monetary policy and capital regulation. There are two production sectors, financial intermediation, aggregate shocks, safe deposits, and two types of money creation: private deposits when banks grant loans to firms or to other banks and central bank money when the central bank grants loans to private banks. We show that in the baseline model, equilibria yield the first-best level of money creation and lending, regardless of the monetary policy or capital regulation. If we add price rigidities coupled with the zero lower bound, there may be no equilibrium with banks, but under normal economic conditions, an adequate combination of monetary policy and capital regulation can restore the existence of equilibria and efficiency. Finally, we show that Forward Guidance and capital regulation can only avoid a slump in money creation and lending if economic conditions are sufficiently favorable.
    Date: 2016–06
  12. By: Mitsuru Katagiri (Bank of Japan)
    Abstract: Many central banks implement forward guidance according to an implicit or explicit policy rule in practice, and thus it is expected to influence the economy by changing expectations formation of private agents. In this paper, I investigate the effects of forward guidance particularly via expectations formation by formulating forward guidance as a monetary policy rule in a non-linear new Keynesian model. A quantitative analysis using the U.S. and Japanese data implies that a rule-based forward guidance significantly mitigates a decline in inflation and output growth in a crisis period via changing expectations formation.
    Keywords: Forward Guidance; Expectations Formation; Effective Lower Bound; Particle Filter
    JEL: E31 E32 E42 E52
    Date: 2016–06–27
  13. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: I thank the European Economics and Financial Centre for the invitation to speak to this distinguished audience, in this venerable venue, at this historically significant time. I will focus my remarks today on the other side of the pond — in particular, the U.S. economy and monetary policy. But as you know, we live in a global world, and so we are monitoring very closely what is happening on this side of the pond and assessing the implications for the economic outlook and monetary policy on my side of the pond. Before I begin, I should note that the views I'll present today are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Keywords: Economic growth; labor markets; inflation; Brexit; monetary policy;
    Date: 2016–07–01
  14. By: Jinill KIM; Francisco RUGE-MURCIA
    Abstract: This paper studies the positive and normative implication of extreme shocks for monetary policy. The analysis is based on a small-scale new Keynesian model with sticky prices and wages where shocks are drawn from asymmetric generalized extreme value (GEV) distributions. A nonlinear perturbation of the model is estimated by the simulated method of moments. Under both the Taylor and Ramsey policies, the central bank responds nonlinearly and asymmetrically to shocks. The trade-off between targeting a gross ináation rate above 1 as insurance against extreme shocks and strict price stability is unambiguously decided in favour of strict price stability.
    Keywords: extreme value theory, nonlinear models, skewness risk, monetary policy, third-order perturbation, simulated method of moments
    JEL: E4 E5
    Date: 2016
  15. By: Nlemfu Mukoko, Jean Blaise
    Abstract: This paper analyses the implications of monetary policy changes on the welfare in the U.S economy over the pre-1984 and post-1984 periods. We use a New-Keynesian model with trend inflation based on Ascari, Phaneuf and Sims (2015). First, our results show that the welfare costs respond symmetrically to a rise and a decline in trend inflation, trend growth and the level of volatility of output, output growth and inflation over the sample periods. Second, we find that changes in monetary policy and in trend inflation across the two subsamples play an important role in the shift of macroeconomic variables volatilities unconditionally and conditionally to neutral technology, marginal efficiency of investment and monetary shocks.
    Keywords: Welfare, trend in ation, New Keynesian Models
    JEL: E31 E32
    Date: 2016–06
  16. By: Hatcher, Michael
    Abstract: An overlapping generations model is set out in which monetary policy matters for distortionary taxes because unanticipated inflation has real wealth effects on households with nominal government debt. The model is used to study the tax burden under inflation and nominal GDP targeting. Nominal GDP targeting makes taxes less volatile than inflation targeting but raises average taxes. With a quadratic loss function, the expected tax burden is minimized with only indexed debt under inflation targeting, but with both indexed and nominal debt under nominal GDP targeting. Nominal GDP targeting lowers the tax burden relative to inflation targeting (except at very high indexation shares), but this conclusion hinges on risk aversion, productivity persistence and the loss function for the tax burden.
    Date: 2016–07–04
  17. By: Frutos, Juan Carlos; Garcia-de-Andoain, Carlos; Heider, Florian; Papsdorf, Patrick
    Abstract: This paper documents stress in the unsecured overnight interbank market in the euro area over the course of the financial and sovereign debt crisis in Europe. We find that stress i) leads some banks to borrow in the market at rates that are higher than the rate of the marginal lending facility of the ECB, ii) leads to less cross-border transactions and contributes to the fragmentation of the euro area money market. A triple-difference estimate shows that the borrowing of banks in the periphery from banks in the core almost disappears in the second half of 2011. Domestic borrowing, however, replaces the loss of cross-border borrowing. Our findings document the severe malfunctioning of the market for liquidity caused by asymmetric information problems in crisis times. We exploit euro area payments data to construct a novel dataset of interbank lending and borrowing. We verify the validity of our approach using the post-trading structure MID, maintained at Banco de España. Based on our results, we conclude that MID is a very high quality source of Spanish interbank market data for research and policy purposes. JEL Classification: G01, G21, E58, F36
    Keywords: European sovereign debt crisis, financial crisis, Furfine algorithm, interbank markets, payment systems
    Date: 2016–06
  18. By: Romain Baeriswyl (Swiss National Bank, Boersenstrasse 15, 8022 Zurich, Switzerland); Camille Cornand (Univ Lyon, CNRS, GATE UMR 5824, F-69130 Ecully, France); Bruno Ziliotto (Paris Dauphine University, PSL Research University, Place du Maréchal de Lattre de Tassigny, F-75016 Paris, France)
    Abstract: While the central bank observes the market activity to assess economic fundamentals, it shapes the market outcome through its policy interventions. The more the central bank influences the market, the more it spoils the informational content of economic aggregates. How should the central bank act and communicate when it derives its information from observing the market? This paper analyses the optimal central bank's action and disclosure under endogenous central bank's information for three operational frameworks: pure communication, action and communication, and signaling action. When the central bank takes an action, it would be optimal for the central bank to be fully opaque to prevent its disclosure from deteriorating the information quality of market outcomes. However, in the realistic case where central bank's action is observable, it may be optimal to refrain from implementing any action.
    Keywords: heterogeneous information, public information, endogenous information, overreaction, transparency, coordination
    JEL: D82 E52 E58
    Date: 2016
  19. By: Francisco RUGE-MURCIA; Alessandro RIBONI
    Abstract: The new Bank of Israel Law of 2010 changed monetary policy decisionmaking at the Bank of Israel from a setup where decisions are taken by the governor to one where decisions are taken by a committee of voting members. We use this institutional change as a natural experiment to compare individual versus collective decisionmaking. Empirical results show different dynamics for interest rate decisions across the two regimes and support the view that the status quo bias is larger when decisions are taken by a committee than when they are taken by a single individual.
    Keywords: committees, voting models, political economy of central banking
    JEL: D7 E5
    Date: 2016
  20. By: Hernandez-Chanto, Allan
    Abstract: There have been many episodes in history where low-denomination money holdings have been exchanged with a premium over its face value. The most recent occurred in Panama only twenty five years ago, under a modern banking system. In such episodes, even where there is an entity capable to provide convertibility of money holdings at a fixed rate, and when agents expect this rate to prevail in the long run, arbitrage possibilities in the denomination of money arise as a consequence of a shortage of liquid assets and the presence of low prices in the economy. Despite of its relevance and recurrence, this phenomenon cannot be explained by current models of fiat money. To explain it we need a model where: (i) fiat money comes in different denominations which are used as a medium of exchange, (ii) there is an entity that provides convertibility of denominations at fixed rate, (iii) the natural rate is a feasible equilibrium of the model, and (iv) there are parameterizations where low denomination money holdings are given an extrinsic value. In this paper we build a money search model with all this characteristics and determine theoretically the specific conditions under which such equilibrium naturally arises.
    Keywords: Convertibility, Extrinsic value, Money holdings, Poisson technology
    JEL: E50 E52
    Date: 2016–01–15
  21. By: Eusepi, Stefano (Federal Reserve Bank of New York); Preston, Bruce (University of Melbourne)
    Abstract: New Keynesian theory identifies a set of principles central to the design and implementation of monetary policy. These principles rely on the ability of a central bank to manage expectations precisely, with policy prescriptions typically derived under the assumption of perfect information and full rationality. However, the challenging macroeconomic environment bequeathed by the financial crisis has led many to question the efficacy of monetary policy, and, particularly, to question whether central banks can influence expectations with as much control as previously thought. In this paper, we survey the literature on monetary policy design under imperfect knowledge and asses to what degree its policy prescriptions deviate from the rational expectations benchmark.
    Keywords: monetary policy; expectations formation; learning
    JEL: E31 E32 E52
    Date: 2016–06–01
  22. By: Bokan, Nikola; Gerali, Andrea; Gomes, Sandra; Jacquinot, Pascal; Pisani, Massimiliano
    Abstract: We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version of the model, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross- country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate as collateral whereas firms use both domestic real estate and physical capital. These features – together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks – allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector can amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union. JEL Classification: E51, E32, E44, F45, F47
    Keywords: banks, DSGE models, econometric models, financial frictions, open-economy macroeconomics, policy analysis
    Date: 2016–06
  23. By: Philippe Bacchetta; Kenza Benhima; Yannick Kalantzis
    Abstract: In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity and price exibility. We show that a liquidity trap leads to an increase in cash holdings and may be associated with a long-term output decline. This long-term impact is a supply-side effect that may arise when agents are heterogeneous. It occurs in particular with a persistent deleveraging shock, leading investors to hold cash yielding a low return. Policy implications differ from shorter-run analyses. Quantitative easing leads to a deeper liquidity trap. Exiting the trap by increasing expected inflation or applying negative interest rates does not solve the asset scarcity problem.
    Keywords: Zero lower bound; liquidity trap; asset scarcity; deleveraging
    JEL: E40 E22 E58
    Date: 2016–06
  24. By: Darracq Pariès, Matthieu; Hałaj, Grzegorz; Kok, Christoffer
    Abstract: With the aim of reigniting inflation in the euro area, in early 2015 the ECB embarked on a large-scale asset purchase programme. We analyse the macroeconomic effects of the Asset Purchase Programme via the banking system, exploiting the cross-section of individual bank portfolio decisions. For this purpose, an augmented version of the DSGE model of Gertler and Karadi (2013), featuring a segmented banking sector, is estimated for the euro area and combined with a bank portfolio optimisation approach using granular bank level data. An important feature of our modelling approach is that it captures the heterogeneity of banks’ responses to yield curve shocks, due to individual banks’ balance sheet structure, different capital and liquidity constraints as well as different credit and market risk characteristics. The deep parameters of the DSGE model which control the transmission channel of central bank asset purchases are then adjusted to reproduce the easing of lending conditions consistent with the bank-level portfolio optimisation. Our macroeconomic simulations suggest that such unconventional policies have the potential to strongly support the growth momentum in the euro area and significantly lift inflation prospects. The paper also illustrates that the benefits of the measure crucially hinge on banks’ ability and incentives to ease their lending conditions, which can vary significantly across jurisdictions and segments of the banking system. JEL Classification: C61, E52, G11
    Keywords: banking, DSGE, portfolio optimisation, quantitative easing
    Date: 2016–06
  25. By: Gilbert COLLETAZ; Grégory LEVIEUGE; Alexandra POPESCU
    Date: 2016
  26. By: Orphanides, Athanasios
    Abstract: Under ordinary circumstances, the fiscal implications of central bank policies tend to be seen as relatively minor and escape close scrutiny. The global financial crisis of 2008, however, demanded an extraordinary response by central banks which brought to light the immense power of central bank balance sheet policies as well as their major fiscal implications. Once the zero lower bound on interest rates is reached, expanding a central bank's balance sheet becomes the central instrument for providing additional monetary policy accommodation. However, with interest rates near zero, the line separating fiscal and monetary policy is blurred. Furthermore, discretionary decisions associated with asset purchases and liquidity provision, as well as with lender-of-last-resort operations benefiting private entities, can have major distributional effects that are ordinarily associated with fiscal policy. In the euro area, discretionary central bank decisions can have immense distributional effects across member states. However, decisions of this nature are incompatible with the role of unelected officials in democratic societies. Drawing on the response to the crisis by the Federal Reserve and the ECB, this paper explores the tensions arising from central bank balance sheet policies and addresses pertinent questions about the governance and accountability of independent central banks in a democratic society.
    Keywords: central bank accountability; central bank governance; central bank independence; lender of last resort; loss sharing; monetary financing; Quantitative easing; rules vs discretion.
    JEL: E52 E58 E61 G01 H12
    Date: 2016–07
  27. By: Reis, Ricardo
    Abstract: Analysis of quantitative easing (QE) typically focus on the recent past studying the policy's effectiveness during a financial crisis when nominal interest rates are zero. This paper examines instead the usefulness of QE in a future fiscal crisis, modeled as a situation where the fiscal outlook is inconsistent with both stable inflation and no sovereign default. The crisis can lower welfare through two channels, the first via aggregate demand and nominal rigidities, and the second via contractions in credit and disruption in financial markets. Managing the size and composition of the central bank's balance sheet can interfere with each of these channels, stabilizing inflation and economic activity. The power of QE comes from interest-paying reserves being a special public asset, neither substitutable by currency nor by government debt.
    Keywords: new-style central banks; Unconventional Monetary Policy
    JEL: E44 E58 E63
    Date: 2016–07
  28. By: Carlos Viana de Carvalho (Department of Economics PUC-Rio); EriC Hsu (UC Berkeley); Fernanda Necchio (FRB San Francisco)
    Abstract: The Zero Lower Bound (ZLB) on interest rates is often regarded as an important constraint on monetary policy. To assess how the ZLB affected the Fed's ability to conduct policy, we estimate the effects of Fed communication on yields of different maturities in the pre-ZLB and ZLB periods. Before the ZLB period, communication affects both short- and long-dated yields. In contrast, during the ZLB period, the reaction of yields to communication is concentrated in longer-dated yields. Our findings support the view that the ZLB did not put such a critical constraint on monetary policy, as the Fed retained some ability to affect long-term yields through communication.
    Date: 2016–04
  29. By: Frank Smets (European Central Bank); Stefania Villa (KU Leuven; University of Foggia)
    Abstract: This paper examines whether financial conditions of the non-financial corporate sector can explain why the recovery from recessions in the United States is slower since the mid-1980s. Leverage by the corporate sector has increased significantly since the financial deregulation of the mid-1980s. Empirical evidence shows that slow recoveries are associated with a significant drop in the growth rates of investment and bank loans, and with a surge in the growth rates of corporate bonds. In an estimated dynamic stochastic general equilibrium model with a financial accelerator, counterfactual experiments based on estimates of two samples - 1965-1983 and 1984-2007 - show that the non-financial corporate indebtedness affects only marginally the speed of the recovery in the two samples.
    Keywords: speed of recoveries, indebtedness, financial frictions, estimated DSGE model.
    JEL: E32 E44
    Date: 2016–06
  30. By: Garbade, Kenneth D. (Federal Reserve Bank of New York)
    Abstract: Following the Treasury–Federal Reserve Accord of March 3, 1951, the Federal Open Market Committee (FOMC) focused on free reserves—the difference between excess reserves (reserve deposits in excess of reserve requirements) and borrowed reserves—as the touchstone of U.S. monetary policy. However, managing free reserves was problematic because highly variable and not readily predictable autonomous factors, including float, Treasury balances at Federal Reserve Banks, and currency in the hands of the public, induced comparable volatility and unpredictability in reserve deposits and hence in free reserves. Managing free reserves effectively required policy instruments that could inject and drain large quantities of reserves quickly at low transaction costs. {{p}}This paper surveys the two leading policy instruments for reserves management: 1) open market purchases and sales of Treasury bills, and 2) repurchase agreements. Outright transactions in bills were specifically authorized by statute and used in unexceptional ways for managing reserves over relatively long periods, but they had significant drawbacks for short-term “in and out” operations when additional reserves were needed for only a few days. Repos, however, while not specifically authorized by statute, were ideally suited for in-and-out operations. The acceptance of repurchase agreements as an instrument of monetary policy, even in the face of active resistance by some FOMC members, illustrates how utility can sometimes trump concerns about statutory authority, equity, and need.
    Keywords: repurchase agreements; reserves management; accord
    JEL: E5 G2 N2
    Date: 2016–06–01
  31. By: Jose E. Gomez-Gonzalez (Banco de la República de Colombia); Julian A. Parra-Polania (Banco de la República de Colombia); Mauricio Villamizar-Villegas (Banco de la República de Colombia)
    Abstract: Central banks in emerging countries frequently build-up (diminish) reserves while attempting to depreciate (appreciate) their domestic currencies. Even if these interventions are effective, they often entail various costs. Basu (2012), nonetheless, proposes a model in which the sole announcement of an intervention schedule leads to a desired exchange rate without actually buying or selling foreign currency. In this paper we present a generalization that allows for imperfect credibility of foreign exchange intervention. Namely, market dealers know that the central bank carries strategic incentives when announcing its schedule and may not perfectly believe it. We show that, under this setup, it may be impossible for central banks to achieve the desired exchange rate level without changing their position of international reserves. Classification JEL: F31, E58, G20, D43
    Keywords: Exchange rate, Foreign exchange intervention, Central bank Credibility, Credibility function
    Date: 2016–07

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.
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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.