nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒07‒30
28 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Sources of Asymmetry and Non-linearity in Pass-Through of Exchange Rate and Import Price to Consumer Price Inflation for the Turkish Economy during Inflation Targeting Regime By Suleyman Hilmi Kal; Ferhat Arslaner; Nuran Arslaner
  2. Transmission of global financial shocks to EMU member states: The role of monetary policy and national factors By Gelman, Maria; Jochem, Axel; Reitz, Stefan
  3. Corporate Finance and Monetary Policy By Randall Wright; Cathy Zhang; Guillaume Rocheteau
  4. The Equity Premium, Long-Run Risk, and Optimal Monetary Policy By Anthony Diercks
  5. Estimation of Unobserved Inflation Expectations in India using State-Space Model By Chattopadhyay, Siddhartha; Sahu, Sohini; Jha, Saakshi
  6. Challenges for Central Banks' Macro Models By Lindé, Jesper; Smets, Frank; Wouters, Rafael
  7. The Impact of the ECB’s Conventional and Unconventional Monetary Policies on Stock Markets By Reinder Haitsma; Deren Unalmis; Jakob de Haan
  8. Monetary Policy Effectiveness, Net Foreign Currency Exposure and Financial Globalisation By Josip Tica; Tomislav Globan; Vladimir Arčabić
  9. ECB footprints on inflation forecast uncertainty By Svetlana Makarova
  10. Leverage ratio, central bank operations and repo market By Annalisa Bucalossi; Antonio Scalia
  11. Near-Money Premiums, Monetary Policy, and the Integration of Money Markets : Lessons from Deregulation By Carlson, Mark A.; Wheelock, David C.
  12. Currency co-movements in Asia-Pacific: the regional role of the renminbi By Daniela Marconi
  13. Designing Central Banks for Inflation Stability By Benigno, Pierpaolo
  14. On the transactions costs ofquantitative easing By Francis Breedon; Philip Turner
  15. Unconventional Monetary Policy, Fiscal Side Effects and Euro Area (Im)balances By Michael Hachula; Michele Piffer; Malte Rieth
  16. Gaussian Mixture Approximations of Impulse Responses and The Non-Linear Effects of Monetary Shocks By Barnichon, Régis; Matthes, Christian
  17. QE in the future: the central bank's balance sheet in a fiscal crisis By Ricardo Reis
  18. Constrained Random Walk Models for Euro/Swiss Franc Exchange Rates: Theory and Empirics By Sandro Claudio LERA; Didier SORNETTE
  19. 'Characterizing monetary and fiscal policy rules and interactions when commodity prices matter' By Chuku Chuku; Paul Middleditch
  20. Bond Market Exposures to Macroeconomic and Monetary Policy Risks By Dongho Song
  21. Liquidity Risk, Bank Networks, and the Value of Joining the Federal Reserve System By Calomiris, Charles W.; Jaremski, Matthew; Park, Haelim; Richardson, Gary
  22. How Do Investors and Firms React to an Unexpected Currency Appreciation Shock? By Matthias EFING; Rüdiger FAHLENBRACH; Christoph HERPFER; Philipp KRÜGER
  23. Cross-Border Capital Flows in Emerging Markets : Demand-Pull or Supply-Push? By Kurmas Akdogan; Neslihan Kaya Eksi; Ozan Eksi
  24. Investment, Price Changes, and Monetary Policy: Models and Micro Data By Thomas Winberry; Joseph Vavra
  25. Endogeneity of Money Supply : Evidence From Turkey By Ibrahim Ethem Guney; Oguzhan Cepni
  26. The Asymmetric Effects of Monetary Policy on Economic Activity in Turkey By Tunc, Cengiz; Kılınç, Mustafa
  27. Sources of Regional Inflation in Poland By Pawel Gajewski
  28. Has the Forecasting Performance of the Federal Reserve’s Greenbooks Changed over Time? By Ozan Eksi; Cuneyt Orman; Bedri Kamil Onur Tas

  1. By: Suleyman Hilmi Kal; Ferhat Arslaner; Nuran Arslaner
    Abstract: Some recent studies indicate that exchange rate pass-through and import price pass-through is better characterized in a non-linear way. Having a better understanding of non-linearity of exchange rate pass-through (ERPT) and import prices pass-through (IPPT) under different conditions will contribute to the critical decisions on the proper role and magnitude of the exchange rate movements in the monetary policy. In this paper, we implement a state based non-linear method (Markov process) to identify, decompose, quantify and analyze the nonlinearities for both types of concurrent (same period) pass-through for the years between 2003 and 2014 for the Turkish economy. According to the results, both ERPT and IPPT are lower during appreciation and low volatility periods of nominal exchange rate. Even though ERPT does not differ depending on the level of business activity, IPPT is lower during contractionary periods compared to expansionary periods. The findings in this paper will allow for more nuanced monetary policy approaches to deal with pass-through stemming from different sources.
    Keywords: Asymmetry, Non-linearity, Inflation targeting, Pass-through of exchange rate and import price, Volatility, Markov switching regression
    JEL: C22 C52 E52 E58 F31
    Date: 2015
  2. By: Gelman, Maria; Jochem, Axel; Reitz, Stefan
    Abstract: The paper analyses the transmission of global financial shocks to individual member states of the European Monetary Union (EMU), in which monetary policy is delegated to the ECB and financial markets are fully integrated. Using a panel VAR model, we show that the asymmetric effects of global shocks on member states are partly offset by the uniform access of commercial banks to the Eurosystem's open market operations in conjunction with the redistribution of liquidity via the TARGET mechanism. However, an appropriate policy mix of sound public finances, solid financial regulation and targeted macroprudential measures is necessary in order to safeguard macroeconomic sustainability without needing to manage capital flows.
    Keywords: monetary union,capital flows,global financial cycle,macroeconomic imbalances
    JEL: F32 F36 F45
    Date: 2016
  3. By: Randall Wright (University of Wisconsin); Cathy Zhang (Purdue University); Guillaume Rocheteau (University of California, Irvine)
    Abstract: This paper provides a theory of external and internal finance where entrepreneurs finance random investment opportunities with fiat money, bank liabilities, or trade credit. Loans are distributed in an over-the-counter credit market where the terms of the loan contract, including size, rate, and down payment, are negotiated in a decentralized fashion subject to pledgeability constraints. The model has implications for the cross-sectional distribution of corporate loan rates and loan sizes, interest rate pass-through, and the transmission of monetary policy (described either as money growth or open market operations) with or without liquidity requirements.
    Date: 2016
  4. By: Anthony Diercks (Federal Reserve Board)
    Abstract: In this study I examine the welfare implications of monetary policy by constructing a novel production-based asset pricing New Keynesian model. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same model calibrated to a counterfactually low equity premium implies an optimal inflation rate close to zero and inflation volatility less than 10 basis points, consistent with much of the existing literature. Relatively higher optimal inflation is due to the greater welfare costs of recessions associated with matching the equity premium. The standard optimal policy that focuses on stabilizing inflation tends to amplify long-run risk. Furthermore, the interest rate rule that comes closest to matching the dynamics of the optimal Ramsey policy puts a sizable weight on capital growth along with the price of capital, as it emphasizes reducing long-run risk.
    Date: 2016
  5. By: Chattopadhyay, Siddhartha; Sahu, Sohini; Jha, Saakshi
    Abstract: Inflation expectations is an important marker for monetary policy makers. India being a new entrant to the group of countries that pursue inflation targeting as its monetary policy objective, estimating the inflation expectation is of paramount importance. This paper estimates the unobserved inflation expectations in India between 1993:Q1 to 2016:Q1 from the Fisher equation relation using the state space approach (Kalman Filter). We find that our results match well with the inflation forecasts made by the Survey of Professional Forecasters conducted by the Rerserve Bank of India and by the International Monetary Fund for the Indian economy. We apply the estimated series on inflation expectation to show that there is a long-run equilibrium relation between inflation expectations and monetary policy in India during the post liberalization period.
    Keywords: Fisher Equation, Kalman Filter, Expected Inflation, India
    JEL: E52 E58
    Date: 2016–07–21
  6. By: Lindé, Jesper; Smets, Frank; Wouters, Rafael
    Abstract: In this paper we discuss a number of challenges for structural macroeconomic models in the light of the Great Recession and its aftermath. It shows that a benchmark DSGE model that shares many features with models currently used by central banks and large international institutions has difficulty explaining both the depth and the slow recovery of the Great Recession. In order to better account for these observations, the paper analyses three extensions of the benchmark model. First, we estimate the model allowing explicitly for the zero lower bound constraint on nominal interest rates. Second, we introduce time-variation in the volatility of the exogenous disturbances to account for the non-Gaussian nature of some of the shocks. Third and finally, we extend the model with a financial accelerator and allow for time-variation in the endogenous propagation of financial shocks. All three extensions require that we go beyond the linear Gaussian assumptions that are standard in most policy models. We conclude that these extensions go some way in accounting for features of the Great Recession and its aftermath, but they do not suffice to address some of the major policy challenges associated with the use of non-standard monetary policy and macroprudential policies.
    Keywords: and VAR models; DSGE; Financial Frictions; great recession; macroprudential policy; Monetary policy; Open economy.; Regime-Switching; zero lower bound
    JEL: E52 E58
    Date: 2016–07
  7. By: Reinder Haitsma; Deren Unalmis; Jakob de Haan
    Abstract: Using an event study method, we examine how stock markets respond to the policies of the European Central Bank during 1999-2015. We use market prices of futures (government bonds) to identify surprises in (un)conventional monetary policy. Our results suggest that especially unconventional monetary policy surprises affect the EURO STOXX 50 index. We also find evidence for the credit channel, notably for unconventional monetary policy surprises. Our results also suggest that value and past loser stocks show a larger reaction to monetary policy surprises. These results are confirmed if identification of monetary policy surprises is based on the Rigobon-Sack heteroscedasticity approach.
    Keywords: Monetary policy surprises, Stock prices, Event studies approach, Identification through heteroscedasticity
    JEL: E43 E44 E52
    Date: 2016
  8. By: Josip Tica (Faculty of Economics and Business, University of Zagreb); Tomislav Globan (Faculty of Economics and Business, University of Zagreb); Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb)
    Abstract: In this paper we use an innovative methodological approach to investigate how the classic Mundell-Flemming trilemma monetary policy mix is affected by global financial integration ("dilemma" hypothesis), accumulation of international reserves ("quadrilemma" hypothesis) and foreign exchange rate exposure of developing, emerging and transition countries. In order to compare competing policy mix hypotheses within the single methodological framework we use two threshold variables simultaneously in a dynamic panel threshold model. Thresholds values are endogenously estimated using a grid search. Exchange rate stability index is used as a primary threshold variable and international reserves, financial openness and foreign currency exposure are rotated as secondary threshold variables. Results imply that there are significant differences between fixed and flexible exchange rate regimes even at the high levels of financial integration and that transmission of international business cycle might be a consequence of an exchange rate regime choice (due to foreign currency exposure) of developing and emerging countries and not a consequence of inability to implement counter-cyclical monetary policy.
    Keywords: Mundell-Fleming, Dillemma vs. trilemma, Foreign currency exposure, Qaudrilemma, Panel threshold model
    JEL: F15 F31 F41 E42
    Date: 2016–07–01
  9. By: Svetlana Makarova
    Abstract: The main scope of the paper is to evaluate the hypothesis that the monetary policy of the European Central Bank leads to convergence in bank-induced effects in inflation forecast uncertainty for euro area countries. Inflation forecast uncertainty is measured by the root mean squared pseudo ex-post errors of inflation forecasts net of the ARCH-GARCH effects. A bootstrap-type test is proposed for testing convergence of growth of the cross-country uncertainty ratio, understood as the fraction of the estimated policy effects in inflation uncertainty. Results obtained from monthly data for 16 countries for the period January 1991 to November 2014 and with forecast horizons from 1 to 18 months show strong evidence of such convergence among the euro area countries to a common leve
    Keywords: inflation ex-post uncertainty, monetary policy, country effects, inflation forecasting
    JEL: F14 F43 O57
    Date: 2016–07–19
  10. By: Annalisa Bucalossi (Bank of Italy); Antonio Scalia (Bank of Italy)
    Abstract: Using estimates of the Basel III leverage ratio, we show the rapid convergence of banks in the euro area towards levels well above the preliminary 3 per cent threshold. Contrary to predictions that the new requirement might interfere with the conduct of monetary policy and its transmission via the money market, throughout 2014 we find that leverage-constrained banks have decreased neither Eurosystem refinancing nor trading volume on repo markets. We measure the extent to which banks in the euro area have until now benefited from improvements in their regulatory capital, the low reporting frequency of the leverage ratio, and the favourable treatment of repo and derivatives trades with central counterparties in calculating the ratio, achieving an average of 5 per cent at end-June 2015. This level is likely to fall to around 4.5 per cent by March 2017, as a consequence of the Eurosystem Asset Purchase Programme, which causes an expansion of banks’ balance sheets and, therefore, an increase in the denominator of the leverage ratio.
    Keywords: Basel III, leverage ratio, central bank operations, European banks, repo market
    JEL: E58 G21 G28 G1
    Date: 2016–07
  11. By: Carlson, Mark A. (Bank for International Settlements and Board of Governors of the Federal Reserve System); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: The 1960s and 1970s witnessed rapid growth in the markets for new money market instruments, such as negotiable certificates of deposit (CDs) and Eurodollar deposits, as banks and investors sought ways around various regulations affecting funding markets. In this paper, we investigate the impacts of the deregulation and integration of the money markets. We find that the pricing and volume of negotiable CDs and Eurodollars issued were influenced by the availability of other short-term safe assets, especially Treasury bills. Banks appear to have issued these money market instruments as substitutes for other types of funding. The integration of money markets and ability of banks to raise funds using a greater variety of substitutable instruments has implications for monetary policy. We find that, when deregulation reduced money market segmentation, larger open market operations were required to produce a given change in the federal funds rate, but that the pass through of changes in the funds rate to other market rates was also greater.
    Keywords: money markets; deregulation; market integration; monetary policy implementation; Eurodollars; Regulation Q
    JEL: E50 G18 N22
    Date: 2016–06–01
  12. By: Daniela Marconi (Bank of Italy)
    Abstract: The economic and political influence of China in the Asia-Pacific region is growing and the internationalization of the Chinese currency, the renminbi (RMB), is adding an additional channel of influence. This paper assesses the evolution of exchange rate co-movements against the US dollar within the region and finds that the RMB is exerting a growing influence. The degree of influence varies considerably across currencies. On the one hand, the Indonesian rupiah, the Korean won, the Malaysian ringgit, the Singaporean dollar, and the Taiwanese dollar show very strong co-movements with the RMB, while on the other hand, the Australian and the New Zealand dollars are not affected. Furthermore, the study confirms that Asian currencies move as if driven by the aim of stabilizing the effective exchange rate, thereby avoiding excessive appreciation against the USD.
    Keywords: exchange rates, Asia-Pacific, renminbi, China
    JEL: F31 F33
    Date: 2016–07
  13. By: Benigno, Pierpaolo
    Abstract: Well-designed central banks can uniquely determine a stable inflation rate following either active Taylor's rules or interest-rate pegs. They should receive an initial transfer of capital, hold only risk-free assets, rebate their income to the treasury. This system prevents permanent liquidity traps and inflationary spirals without further need of treasury's support beyond the initial capitalization. Instead, if the central bank engages in purchases of risky securities, fiscal support is required to uniquely back the value of money. Absent treasury's support and with a risky composition of assets, inflationary spirals and deflationary traps can develop due to self-fulfilling expectations or credit events.
    Date: 2016–07
  14. By: Francis Breedon; Philip Turner
    Abstract: Most quantitative easing programmes primarily involve central banks acquiring government liabilities in return for central bank reserves. In all cases this process is undertaken by purchasing these liabilities in the secondary market rather than directly from the government. Yet the only practical difference between secondary market purchases and bilateral central bank/Treasury operations is the transactions costs involved in market operations. This paper quantifies the significant cost of this round-trip transaction - government issuance of liabilities and then central bank purchase of those liabilities in the secondary market.
    Keywords: Quantitative Easing, auctions, bond interest rates, central bank balance sheets, exit strategy
    Date: 2016–07
  15. By: Michael Hachula; Michele Piffer; Malte Rieth
    Abstract: We study the macroeconomic effects of unconventional monetary policy in the euro area using structural vector autoregressions, identified with an external instrument. The instrument is the common unexpected variation in euro area sovereign spreads for different maturities on policy announcement days. We first show that expansionary monetary surprises are effective at lowering public and private interest rates and increasing economic activity, consumer prices, and inflation expectations. We also find, however, that the shocks lead to a rise in primary public expenditures, a divergence of consumer prices within the union, and a widening of internal trade balances.
    Keywords: Central banks, structural VAR with external instruments, fiscal policy, monetary union
    JEL: E52 E58 E63
    Date: 2016
  16. By: Barnichon, Régis; Matthes, Christian
    Abstract: This paper proposes a new method to estimate the (possibly non-linear) dynamic effects of structural shocks by using Gaussian basis functions to parametrize impulse response functions. We apply our approach to the study of monetary policy and obtain two main results. First, regardless of whether we identify monetary shocks from (i) a timing restriction, (ii) sign restrictions, or (iii) a narrative approach, the effects of monetary policy are highly asymmetric: A contractionary shock has a strong adverse effect on unemployment, but an expansionary shock has little effect. Second, an expansionary shock may have some expansionary effect, but only when the labor market has some slack. In a tight labor market, an expansionary shock generates a burst of inflation and no significant change in unemployment.
    Date: 2016–07
  17. By: Ricardo Reis
    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. Also published as a CEPR discussion paper and an NBER working paper.
    Keywords: new-style central banks; unconventional monetary policy
    JEL: E44 E58 E63
    Date: 2016–07
  18. By: Sandro Claudio LERA (ETH Zurich, Singapore-ETH Centre); Didier SORNETTE (ETH Zurich and Swiss Finance Institute)
    Abstract: We study the performance of the euro/Swiss franc exchange rate in the extraordinary period from September 6, 2011 and January 15, 2015 when the Swiss National Bank enforced a minimum exchange rate of 1.20 Swiss francs per euro. Within the general framework built on geometric Brownian motions (GBM), the first-order effect of such a steric constraint would enter a priori in the form of a repulsive entropic force associated with the paths crossing the barrier that are forbidden. It turns out that this naive theory is proved empirically to be completely mistaken. The clue is to realise that the random walk nature of financial prices results from the continuous anticipations of traders about future opportunities, whose aggregate actions translate into an approximate efficient market with almost no arbitrage opportunities. With the Swiss National Bank stated commitment to enforce the barrier, trader's anticipation of this action leads to a volatility of the exchange rate that depends on the distance to the barrier. This effect described by Krugman's model [P.R. Krugman. Target zones and exchange rate dynamics. The Quarterly Journal of Economics, 106(3):669-682, 1991] is supported by non-parametric measurements of the conditional drift and volatility from the data. To the best of our knowledge, our results are the first to provide empirical support for Krugman's model, likely due to the exceptional pressure on the euro/Swiss franc exchange rate that made the barrier effect particularly strong. Despite the obvious differences between "brainless" physical Brownian motions and complex financial Brownian motions resulting from the aggregated investments of anticipating agents, we show that the two systems can be described with the same mathematics after all. Using a recently proposed extended analogy in terms of a colloidal Brownian particle embedded in a fluid of molecules associated with the underlying order book, we derive that, close to the restricting boundary, the dynamics of both systems is described by a stochastic differential equation with a very small constant drift and a linear diffusion coefficient. As a side result, we present a simplified derivation of the linear hydrodynamic diffusion coefficient of a Brownian particle close to a wall.
    Keywords: Exchange rate dynamics, target zone, order book fluid, econophysics
    JEL: E50 E51 E52 E58
  19. By: Chuku Chuku; Paul Middleditch
    Abstract: Using conventional rules to characterize policy behaviour in emerging market economies requires innovations capable of capturing distinctive structural characteristics. We examine the extent to which commodity price fluctuations matter for monetary and fiscal policy formulation in high primary commodity export economies. Markov mixture specifications of monetary and fiscal policy rules stylized to account for commodity price slacks are estimated using specifically designed Bayesian techniques. We find that policy authorities indeed respond to commodity price slacks but with variations depending on the policy regime in place and country. The results hold implications for the correct specification of policy rules and interactions in DSGE models for such economies.
    Date: 2016
  20. By: Dongho Song (Boston College)
    Abstract: The paper estimates a model that allows for shifts in the aggressiveness of monetary policy and time variation in the distribution of macroeconomic shocks. These model features induce variations in the cyclical properties of inflation and the riskiness of bonds. The estimation identifies inflation as procyclical from the late 1990s, when the economy shifted toward aggressive monetary policy and experienced procyclical macroeconomics shocks. Since bonds hedge stock market risks when inflation is procylical, the stock-bond return correlation turned negative in the late 1990s. The risks of encountering countercyclical inflation in the future could lead to an upward-sloping yield curve, like in the data.
    Keywords: bond market, inflation, monetary policy
    Date: 2016–05–25
  21. By: Calomiris, Charles W. (Columbia University); Jaremski, Matthew (Colgate University); Park, Haelim (Office of Financial Research, Department of Treasury); Richardson, Gary (Federal Reserve Bank of Richmond)
    Abstract: Reducing systemic liquidity risk related to seasonal swings in loan demand was one reason for the founding of the Federal Reserve System. Existing evidence on the post-Federal Reserve increase in the seasonal volatility of aggregate lending and the decrease in seasonal interest rate swings suggests that it succeeded in that mission. Nevertheless, less than 8 percent of state-chartered banks joined the Federal Reserve in its first decade. Some have speculated that nonmembers could avoid higher costs of the Federal Reserve’s reserve requirements while still obtaining access indirectly to the Federal Reserve discount window through contacts with Federal Reserve members. We find that individual bank attributes related to the extent of banks’ ability to mitigate seasonal loan demand variation predict banks’ decisions to join the Federal Reserve. Consistent with the notion that banks could obtain indirect access to the discount window through interbank transfers, we find that a bank’s position within the interbank network (as a user or provider of liquidity) predicts the timing of its entry into the Federal Reserve System and the effect of Federal Reserve membership on its lending behavior. We also find that indirect access to the Federal Reserve was not as good as direct access. Federal Reserve member banks saw a greater increase in lending than nonmember banks.
    JEL: G21 G28 N22
    Date: 2016–07–06
  22. By: Matthias EFING (University of Geneva and Swiss Finance Institute (PhD Program)); Rüdiger FAHLENBRACH (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute); Christoph HERPFER (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute (PhD Program)); Philipp KRÜGER (University of Geneva and Swiss Finance Institute)
    Abstract: The Swiss National Bank surprisingly announced in January 2015 that it would no longer hold the Swiss franc at a fixed exchange rate of 1.2 Swiss francs per Euro, a peg it had defended for more than three years. The Swiss franc appreciated by approximately 15% immediately after the announcement. We exploit the removal of the currency peg to study how investors and firms respond to exogenous foreign currency shocks. We find large negative announcement returns for Swiss firms with significant foreign currency exposure. Affected firms experience a drop in profitability and react by reducing capital expenditures and moving production abroad.
  23. By: Kurmas Akdogan; Neslihan Kaya Eksi; Ozan Eksi
    Abstract: We disentangle the cross-border capital flows into demand-pull and supply-push components for four selected emerging markets : Brazil, Indonesia, Malaysia and Turkey. We employ vector autoregressions with sign restrictions method, using two variables: noncore liabilities of banks and the money market rates. Demand shocks are defined as those that move these two variables in the same direction and supply shocks as those that move them in opposite directions. Our results imply that, in the wake of the global financial crisis, worsening demand conditions in the recipient countries and the high levels of uncertainty were the main determinants of the decline in cross border flows. However, once the unconventional policy measures by the advanced economies were put into effect, the proliferation of global liquidity worked as a push factor for cross border flows.
    Keywords: Financial stability, Capital flows, Non-core liabilities, Sign restrictions
    JEL: C32 E44 G21
    Date: 2016
  24. By: Thomas Winberry (University of Chicago); Joseph Vavra (University of Chicago)
    Abstract: The effects of monetary policy on the economy are shaped by two broad frictions: nominal frictions, such as price adjustment costs, determine the demand for output; and real frictions, such as capital adjustment costs, determine the supply of output. Although there are active literatures exploring each of these frictions in isolation, there is so far little work exploring their interaction. In this paper, we argue that ignoring these interactions is not innocuous. We show that in a quantitative model with endogenous state-dependent investment and pricing decisions, capital adjustment costs amplify price stickiness and thus the effects of monetary policy. However, the extent of these effects depends crucially on the size of the two key frictions at the micro level. We therefore estimate the model by combining confidential P.P.I. data on prices with Compustat data on investment, and use this estimated model to reassess the aggregate effects of monetary policy in models with realistic micro rigidities.
    Date: 2016
  25. By: Ibrahim Ethem Guney; Oguzhan Cepni
    Abstract: [EN] There is a long discussion among academics and central bankers about the theories of money supply. According to the exogenous view, central banks have full control over money supply via policy actions including the adjustments of interest rates and reserve ratios, both of which alter commercial banks’ lending decisions. However, the theory of endogenous money supply emphasizes the role of demand for bank loans in money creation. More specifically, banks create money by meeting the demand of economic agents. In this study, we investigate which of the money supply theories holds in the Turkish economy for the period 2006-2015 by employing cointegration and causality tests. Our findings show that the relation runs from bank loans to money supply both in the short and long terms, which supports the endogenous view in a sense that central bank and the banks fully meet the total demand for money in the Turkish economy. [TR] Akademisyenler ve merkez bankacilari icinde para arzi teorileri ile ilgili uzun suredir devam eden bir tartisma bulunmaktadir. Dissal bakis acisina gore, merkez bankalari ticari bankalarin borc verme kararlari uzerinde etkili olan faiz ve rezerv oranindaki degisiklikleri iceren politika adimlari ile para arzi uzerinde tam kontrole sahiptir. Ancak, para arzinin icselligi teorisi para olusturmada banka kredilerine olan talebin rolunu vurgulamaktadir. Diger bir deyisle, bankalar iktisadi ajanlarin taleplerini karsilayarak para olusturmaktadir. Bu calismada, esbutunlesme ve nedensellik testleri kullanilarak 2006-2015 yillarý arasinda Turkiye ekonomisi icin hangi para arzi teorisinin gecerli oldugu incelenmektedir. Bulgularimiz, hem kisa hem de uzun vadelerde nedenselligin banka kredilerinden para arzina dogru oldugunu gosterdiginden, Turkiye ekonomisinde Merkez Bankasi ve bankalarin toplam para talebini karsiladigi ve para arzinin icsel oldugu goruslerini desteklemektedir.
    Date: 2016
  26. By: Tunc, Cengiz; Kılınç, Mustafa
    Abstract: In this paper, we look at the sector-level asymmetric effects of the monetary policy shocks on economic activity in Turkey. Using business cycles for the state of the economy, we find that monetary policy shocks have strong effects on both aggregate GDP, services and industrial production and sub-sectors during recessionary periods. The results are weaker for the expansionary periods. We further study whether the results depend on the state of the credit cycles. Similar results emerge in that the monetary policy is more effective during credit slowdowns with economically more feasible quantitative effects compared to the business cycles.
    Keywords: Monetary Policy Transmission, Markov Switching Models, Business Cycles, Credit Cycles.
    JEL: E32 E44 E52
    Date: 2016–02–22
  27. By: Pawel Gajewski (Department of Economics, Faculty of Economics and Sociology, University of Lodz, Lodz, Poland)
    Abstract: This paper aims at shedding some light on the sources of regional inflation in Poland. More specifically, it investigates the role of external, national and idiosyncratic shocks. In a two-step procedure, we estimate orthogonal components corresponding to each of these shocks, while performing variance decomposition to assess their relative importance in explaining inflation in individual regions. In the course of the paper we develop two ad hoc hypotheses. First, that regional inflation rates are largely driven by national shocks, while the impact of external shocks is smaller. Second, that shocks to inflation which are asymmetric between Poland and its external environment contribute to the cross-regional divergence of inflation rates in Poland. Empirical evidence supports both of these assertions. Indeed, we show that the importance of idiosyncratic shocks in the Polish regions is strikingly low. However, regional differences in inflation co-movements can be attributed to the diverse importance of global and national shocks. In auxiliary regressions we confirm that shocks which strongly and asymmetrically affect inflation in Poland and the EU, also contribute to crossregional inflation divergence in Poland. To the best of our knowledge this is the first attempt to investigate sources of regional inflation in a CEE country.
    Keywords: regional inflation, principal components, parallel analysis, regional economic dynamics
    JEL: E31 R11
    Date: 2016–06
  28. By: Ozan Eksi; Cuneyt Orman; Bedri Kamil Onur Tas
    Abstract: We investigate how the forecasting performance of the Federal Reserve Greenbooks has changed relative to commercial forecasters between 1974 and 2009. To this end, we analyze time-variation in the Greenbook coefficients in forecast encompassing regressions. Assuming that model coefficients change continuously, we estimate unobserved components models using Bayesian inference techniques. To verify that our results do not depend on the specific way change is modeled, we also allow the coefficients to change discretely rather than continuously and test for structural breaks using classical inference techniques. We find that the Greenbook forecasts have been consistently superior to the commercial forecasts at all horizons throughout our sample period. Although the forecasting performance gap has narrowed at more distant horizons after the early-to-mid 1980s, it remains significant.
    Keywords: Greenbook inflation forecasts, SPF inflation forecasts, Evaluating forecasts, Time-variation in coefficients
    JEL: C11 E52 E43
    Date: 2015

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.