nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒08‒14
sixteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy with 100 Percent Reserve Banking: An Exploration By Edward C. Prescott; Ryan Wessel
  2. Do Fed Forecast Errors Matter? By Tara Sinclair; Pao-Lin Tien; Edward Gamber
  3. A Term Structure of Interest Rates Model with Zero Lower Bound and the European Central Bank's Non-standard Monetary Policy Measures By Viktors Ajevskis
  4. Regulatory Reforms and the Dollar Funding of Global Banks: Evidence from the Impact of Monetary Policy Divergence By Tomoyuki Iida; Takeshi Kimura; Nao Sudo
  5. PLS finance and monetary policy: a new measure mooted By Hasan, Zubair
  6. Pure Theory of the Federal Funds Rate By Homburg, Stefan
  7. Is Optimal Capital-Control Policy Countercyclical In Open-Economy Models With Collateral Constraints? By Stephanie Schmitt-Grohé; Martín Uribe
  8. QE in the future: the central bank’s balance sheet in a fiscal crisis By Ricardo Reis
  9. International Evidence on Long Run Money Demand By Luca Benati; Robert E. Lucas, Jr.; Juan Pablo Nicolini; Warren Weber
  10. The Fed and Lehman Brothers: Introduction and Summary By Laurence Ball
  11. On the Timing of Production Decisions in Monetary Economies By Anbarci, Nejat; Dutu, Richard; Sun, Ching-jen
  12. Quantifying the Effects of the CNB's Exchange Rate Commitment: A Synthetic Control Method Approach By Matej Opatrny
  13. Money Market Operations in Fiscal 2015 By Financial Markets Department
  14. The Formation of Consumer Inflation Expectations: Evidence From Japan's Deflation Experience By Jess Diamond; Kota Watanabe; Tsutomu Watanabe
  15. A pathway to financial inclusion: mobile money and individual Savings in Uganda By Mayanja, Musa; Adong, Annet
  16. The Road to International Currency: Global Perspective and Chinese Experience By Liu, Tao; Wang, Xiaosong

  1. By: Edward C. Prescott; Ryan Wessel
    Abstract: We explore monetary policy in a world without fractional reserve banking. In our world, banks are purely transaction institutions. Money is a form of government debt that bears interest, which can be negative as well as positive. Services of money are a factor of production. We show that the national accounts must be revised in this world. Using our baseline economy, we determine a balanced growth path for a set of money interest rate policy regimes. Besides this interest rate, the only policy variable that differs across regimes is the labor income tax rate. Within this set of policy regimes, there is a balanced growth welfare-maximizing regime. We show that Friedman monetary satiation without deflation is possible in this world. We also examine a set of inflation rate targeting regimes. Here, the only other policy variable that differs across regimes is the inflation rate.
    JEL: E4 E5 E6
    Date: 2016–07
  2. By: Tara Sinclair (George Washington University); Pao-Lin Tien (Bureau of Economic Analysis); Edward Gamber (Congressional Budget Office)
    Abstract: This paper constructs a measure of a forecast error shock for the Fed based on the assumption that it follows a forward-looking Taylor rule. The shock can be viewed as analogous to a monetary policy shock. However, it differs from a monetary policy shock in that it is completely unintended by the Fed rather than simply unanticipated by the public. We investigate the effect of the forecast error shock on output and price movements. Our results suggest that although the absolute magnitude of the forecast error shock is large, the impact of the shock on the macroeconomy is quite small.
    Keywords: Federal Reserve, Taylor rule, forecast evaluation, monetary policy shocks
    JEL: E32 E31 E52 E58
    Date: 2016
  3. By: Viktors Ajevskis (Bank of Latvia)
    Abstract: This paper proposes a ZLB/shadow rate term structure of interest rates model with both unobservable factors and those of non-standard monetary policy measures. The non-standard factors include the ECB's holdings of APP and LTROs as well as their weighted average maturities. The model is approximated by the Taylor series expansion and estimated by the extended Kalman filter, using the sample from July 2009 to September 2015. The results show that the 5-year OIS rate at the end of September 2015 was about 60 basis points lower than it would have been in the case of the absence of the non-standard monetary policy measures.
    Keywords: term structure of interest rates, lower bound, non-linear Kalman filter, non-standard monetary policy measures
    JEL: C24 C32 E43 E58 G12
    Date: 2016–08–03
  4. By: Tomoyuki Iida (Bank of Japan); Takeshi Kimura (Bank of Japan); Nao Sudo (Bank of Japan)
    Abstract: Deviations from the covered interest rate parity (CIP), the premium paid to the U.S. dollar (USD) supplier in the foreign exchange swap market, have long attracted the attention of policy makers, since they often accompany a banking crisis. In this paper, we document the emergence of the new drivers of CIP deviations taking the place of banks f creditworthiness and assess their roles. We first provide theoretical evidence to show that monetary policy divergence between the Federal Reserve and other central banks widens CIP deviations, and that regulatory reforms such as stricter leverage ratios raise the sensitivity of CIP deviations to monetary policy divergence by increasing the marginal cost of global banks f USD funding. We then empirically examine whether the data accords with our theory, and find that monetary policy divergence has recently emerged as an important driver that boosts CIP deviation. We also show that regulatory reforms have brought about dual impacts on the global financial system. By increasing the sensitivity of CIP deviations to various shocks, the stricter financial regulations have limited banks f excessive gsearch for yield h activities resulting from monetary policy divergence, and have thereby contributed to financial stability. However, the impact of severely adverse shocks in the asset management sector is amplified by the stricter financial regulations and is transmitted to the FX swap market and beyond, inducing non-U.S. banks to further cut back on their USD-denominated lending.
    Keywords: FX swap market; Monetary policy divergence; Regulatory reform; Financial stability
    JEL: F39 G15 G18
    Date: 2016–08–05
  5. By: Hasan, Zubair
    Abstract: Islam banishes interest. This raises two questions contextual to Central Banking. First, can Islamic banks create credit like the conventional? We shall argue that Islamic banks cannot avoid credit creation; an imperative for staying in the market where they operate in competition with their conventional rivals. Evidently, the interest rate policy would not be applicable to them as a control measure. This leads us to the second question: What could possibly replace the interest rate for Islamic banks? In reply, the paper suggests what it calls a leverage control rate (LCR) as an addition to Central Banks’ credit control arsenal. The proposed rate is derived from the sharing of profit ratio in Islamic banking.It is contended that the new measure has an edge over the old fashioned interest rate instrument which it can in fact replace with advantage. It can possibly be a common measure in a dual system.
    Keywords: Central banking; Credit creation; Leverage ControlRate (LCR); Islamic banks; Profit sharing
    JEL: E3 E31 E5
    Date: 2016–02
  6. By: Homburg, Stefan
    Abstract: While the target federal funds rate represents a policy instrument, the effective federal funds rate is determined in a competitive interbank market. The paper proposes a theory of its determination. This yields a specific term structure of interest rates, an account of why the money multiplier approach failed, and a demonstration that interest on reserves does not change bank incentives.
    Keywords: Federal funds rate; term structure of interest rates; excess reserves; money multiplier; zero lower bound.
    JEL: E43 E51 E58 G01
    Date: 2016–08
  7. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper contributes to a literature that studies optimal capital control policy in open economy models with pecuniary externalities due to flow collateral constraints. It shows that the optimal policy calls for capital controls to be lowered during booms and to be increased during recessions. Moreover, in the run-up to a financial crisis optimal capital controls rise as the contraction sets in and reach their highest level at the peak of the crisis. These findings are at odds with the conventional view that capital controls should be tightened during expansions to curb capital inflows and relaxed during contractions to discourage capital flight.
    JEL: E44 F41
    Date: 2016–08
  8. 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.
    JEL: E44 E58 E63
    Date: 2016–07
  9. By: Luca Benati; Robert E. Lucas, Jr.; Juan Pablo Nicolini; Warren Weber
    Abstract: We explore the long-run demand for M1 based on a dataset comprising 31 countries since 1851. In many cases cointegration tests identify a long-run equilibrium relationship between either velocity and the short rate, or M1, GDP, and the short rate. Evidence is especially strong for the United States and the United Kingdom over the entire period since World War I, and for high-inflation countries such as Israel. For low-inflation countries the data often prefer the specification in the levels of velocity and the short rate originally estimated by Selden (1956) and Latané (1960) to either the log-log, or the semi-log ones. This is especially clear for the United States.
    JEL: E4 E41
    Date: 2016–07
  10. By: Laurence Ball
    Abstract: Why did the Federal Reserve let Lehman Brothers fail? Fed officials say they lacked the legal authority to rescue the firm, because it did not have adequate collateral to borrow the cash it needed. This paper summarizes a monograph that disputes officials’ claims (Ball, 2016). These claims are incorrect in two senses: a perceived lack of legal authority was not why the Fed did not rescue Lehman; and the Fed did in fact have the authority for a rescue.
    JEL: E52 E58 E65
    Date: 2016–07
  11. By: Anbarci, Nejat; Dutu, Richard; Sun, Ching-jen
    Abstract: In most macroeconomic models inflation tends to be harmful. In this paper we show that by simply changing the timing of production decisions by firms from “on demand” to “in advance”, some inflation can boost welfare as long as goods are sufficiently perishable. The main conclusion from this research is that by effectively hiding the strategic interaction between supply and demand, assuming production on demand is not without loss of generality.
    Keywords: Timing, Perishability, Production, Money, Inflation, Search.
    JEL: C7 D2 E4
    Date: 2016–07–19
  12. By: Matej Opatrny (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: In this paper I evaluate the quantitative effects of the Czech National Bank's commitment to keep the Koruna from appreciating that were put in place in 2013. I focus its on the impact on output, unemployment, and inflation. I use the synthetic control method, which allows me to compute the counter-factual development of the Czech economy in the absence of the commitment. I find that, until the end of 2015, the commitment helped create about 100,000 jobs. The effect on overall output is also strongly positive, almost 2% for growth in 2015, but only marginally statistically significant, which might be connected to disturbances created by changes in excise taxes. The effect of the commitment on inflation is positive but not statistically significant at standard levels.
    Keywords: Inflation, Unemployment, Output, Currency, Monetary Policy, Synthetic Control Method
    JEL: E42 E47 E50 E51 E52 E58
    Date: 2016–08
  13. By: Financial Markets Department (Bank of Japan)
    Date: 2016–08–01
  14. By: Jess Diamond (Hitotsubashi University); Kota Watanabe (CIGS and University of Tokyo); Tsutomu Watanabe (University of Tokyo)
    Abstract: Using a new micro-level dataset we investigate the relationship between the inflation experience and inflation expectations of individuals in Japan. We focus on the period after 1995, when Japan began its era of deflation. Our key findings are fourfold. Firstly, we find that inflation expectations tend to increase with age. Secondly, we find that measured inflation rates of items purchased also increase with age. However, we find that age and inflation expectations continue to have a positive correlation even after controlling for the individual-level rate of inflation. Further analysis suggests that the positive correlation between age and inflation expectations is driven to a signi cant degree by the correlation between cohort and inflation expectations, which we interpret to represent the effect of historical inflation experience on expectations of future inflation rates.
    Date: 2016–07
  15. By: Mayanja, Musa; Adong, Annet
    Abstract: This study provides a micro perspective on the impact that mobile money services have on an individual’s saving behavior using 2013 Uganda FinScope data. The results show that although saving through mobile phones is not a common practice in Uganda, being a registered mobile money user increases the likelihood of saving with mobile money. Using mobile money to save is more prevalent in urban areas and in the central region than in other regions. This can be explained by several factors. First, rural dwellers on average tend to have lower incomes and thus have a lower propensity to save compared with their urban counterparts. Second, poor infrastructure in rural areas in terms of the lack of electricity and poor telecommunication network coverage may limit the use of mobile phones and consequently the use of mobile money as a saving mechanism. Overall, the use of mobile money as a saving mechanism is still very low, which could be partly explained by legal limitations that do not incorporate mobile finance services into mobile money. The absence of interest payments on mobile money savings may also act as a disincentive to save through this mechanism. Given the emerging mobile banking services, there is need to create greater awareness and to enhance synergies between telecoms companies and commercial banks.
    Keywords: Mobile Money, Financial Inclusion, Savings, Uganda, Community/Rural/Urban Development, Financial Economics, Labor and Human Capital,
    Date: 2016–03
  16. By: Liu, Tao; Wang, Xiaosong
    Abstract: This paper studies the international currency use in financial transaction, with SWIFT dataset from 2011 to 2013. A currency becomes international when used outside of its issuing country, and advances to international vehicle currency if used among nonresidents. We estimate a gravity model to explain the geographical distribution of international currency use. For major currencies, higher level of integration and stable macroeconomic environment increase their international use. Specifically, trade and portfolio investment are more helpful in raising the direct use, while FDI has stronger effect in promoting the vehicle use. For RMB, trade improves the intensity of its global use, and FDI increases the number of its user. The policy effect on RMB internationalization is significant only for direct use. Additionally, major currencies experience death of distance, whereas RMB use is decreasing in geographical distance, implying its role to be more regional during this period. We recommend outward FDI by private Chinese firms to increase the vehicle use of RMB and make it truly international.
    Keywords: RMB internationalization, gravity model, policy effect, death of distance
    JEL: F33 F36 G15
    Date: 2016–07

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