nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒09‒11
43 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Survey on New Zealanders’ Attitudes Towards and Knowledge of Macroeconomic Policy Issues: Documentation of Survey Methodology and Descriptive Results By Bernd Hayo; Florian Neumeier
  2. Asset managers, eurodollars and unconventional monetary policy By Lawrence L Kreicher; Robert Neil McCauley
  3. Optimal Monetary Policy at the Zero Lower Bound on Nominal Interest Rates in a Cost Channel Economy By Lasitha R. C. Pathberiyay
  4. Inflation and the Black Market Exchange Rate in a Repressed Market; A Model of Venezuela By Valerie Cerra
  5. Money, Asset Prices and the Liquidity Premium By Lee, Seungduck
  6. Financial shocks and inflation dynamics By Angela Abbate; Sandra Eickmeier; Esteban Prieto
  7. The loss of interest for the euro in Romania By Claudiu Albulescu; Dominique P\'epin
  8. Central Banks’ Predictability: An Assessment by Financial Market Participants By Bernd Hayo; Matthias Neuenkirch
  9. The effects of macroeconomic policies under fixed exchange rates: A Bayesian VAR analysis By Tevdovski, Dragan; Petrevski, Goran; Bogoev, Jane
  10. Dollarization of deposits in short and long run: evidence from CESE countries By Ivana Rajkoviæ; Branko Uroseviæ
  11. Monetary Policy Implementation and Volatility Transmission along the Yield Curve; The Case of Kenya By Emre Alper; R. Armando Morales; Fan Yang
  12. Crowding Out of Monetary Policy as a Limitation of Fiscal Policy By Hiermeyer, Martin
  13. Banking Union and the ECB as Lender of Last Resort By Karl Whelan
  14. Is Poland at risk of the zero lower bound? By Michal Brzoza-Brzezina; Marcin Kolasa; Mateusz Szetela
  15. Credit Defaults, Bank Lending and the Real Economy By Sebastiaan Pool
  16. Monetary Policy and Mispricing in Stock Markets By Benjamin Beckers; Kerstin Bernoth
  17. Currency Shifts as a Market Discipline Device: The Case of the Russian Market for Personal Deposits By Maria Semenova; Andrey Shapkin
  18. Outside the Band; Depreciation and Inflation Dynamics in Chile By Esther Perez Ruiz
  19. Quantitative Easing and Liquidity in the Japanese Government Bond Market By Kentaro Iwatsubo; Tomoki Taishi
  20. Money Influence on Real Economy Activity: Evidences Review on Japanese Context By Wong, Soon-Ming; Loi, Siew-Ling
  21. Monetary Policy in a Developing Country: Loan applications and Real effects By Camelia Minoui; Charles Abuka; Ronnie K. Alinda; Jose-Luis Peydro; Andrea F. Presbitero
  22. Monetary and Fiscal Policy Design at the Zero Lower Bound - Evidence from the Lab By Hommes, C.H.; Massaro, D.; Salle, I.
  23. Monetary Policy for a Bubbly World By Vladimir Asriyan; Luca Fornaro; Alberto Martín; Jaume Ventura
  24. Forward Misguidance By Luigi Paciello; Claudio Michelacci
  25. Monetary policy and financial asset prices in Poland By Mariusz Kapuściński
  26. Mutual Fund Flows, Monetary Policy and Financial Stability By Banegas, Ayelen; Montes-Rojas, Gabriel; Siga, Lucas
  27. Central Bank Sentiment and Policy Expectations By Paul Hubert; Fabien Labondance
  28. When did inflation expectations in the euro area de-anchor? By Andrea Fracasso; Rocco Probo
  29. On the Value of Virtual Currencies By Wilko Bolt; Maarten van Oordt
  30. Private Money and Equilibrium Liquidity By Roberto Robatto; Pierpaolo Benigno
  31. The Federal Reserve's Monetary Policy Toolkit: Past, Present, and Future : a speech at "Designing Resilient Monetary Policy Frameworks for the Future," a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26, 2016. By Yellen, Janet L.
  32. Monetary Transmission in Developing Countries; Evidence from India By Prachi Mishra; Peter J Montiel; Rajeswari Sengupta
  33. Words Matter: A Textual Analysis of SBP’s Monetary Policy Reviews By Asif Mahmood; Muhammad Zuhair Munawar
  34. Negative Interest Rate Policy (NIRP); Implications for Monetary Transmission and Bank Profitability in the Euro Area By Andreas Jobst; Huidan Lin
  35. Asean-5 Cluster Report; Evolution of Monetary Policy Frameworks By International Monetary Fund. Asia and Pacific Dept
  36. Endogenous Market Formation and Monetary Trade: an Experiment By Gabriele Camera; Dror Goldberg; Avi Weiss
  37. Evolution of Exchange Rate Behavior in the ASEAN-5 Countries By Vladimir Klyuev; To-Nhu Dao
  38. Inflation Targeting and Liquidity Traps under Endogenous Credibility By Hommes, C.H.; Lustenhouwer, J.
  39. Why may large economies suffer more at the zero lower bound? By Michal Brzoza-Brzezina
  40. Monetary Policy, Heterogeneity and the Housing Channel By Serdar Ozkan; Kurt Mitman; Fatih Karahan; Aaron Hedlund
  41. Nominal income versus Taylor-type rules in practice By Benchimol, Jonathan; Fourçans, André
  42. Inflation, Financial Developments, and Wealth Distribution By Wai-Yip Alex Ho; Chun-Yu Ho
  43. Global Financial Conditions and Monetary Policy Autonomy By Carlos Caceres; Yan Carriere-Swallow; Bertrand Gruss

  1. By: Bernd Hayo (University of Marburg); Florian Neumeier (University of Marburg)
    Abstract: This paper provides background information and basic descriptive statistics for a representative survey of the New Zealand population conducted on our behalf by Research New Zealand in May 2016. The survey addresses important fiscal and monetary policy issues, including: (1) public preferences for public debt and fiscal consolidation; (2) awareness of the government’s Fiscal Strategy Report; (3) citizens’ monitoring of and reaction to inflation and their inflation expectation formation; (4) knowledge and support for the Policy Target Agreement between the Reserve Bank of New Zealand and the government; (5) trust in economic institutions; and (6) indicators for (macro)economic literacy, that is, objective and subjective knowledge about variables and institutions relevant for macroeconomic policy.
    Keywords: Household survey, New Zealand, Fiscal policy, Public debt, Monetary policy, Public preferences, Economic literacy
    JEL: E52 E58 E62 H31 Z18
    Date: 2016
  2. By: Lawrence L Kreicher; Robert Neil McCauley
    Abstract: An asset manager's rapid liquidation in the weeks around the end of September 2014 of a very large position in eurodollar futures, a huge derivatives market that allows traders to position on the future path of dollar money rates, raises two questions. What is the profile of asset managers in this key market? And how has the Federal Reserve's unconventional monetary policy, including forward guidance about policy rates, affected this market? Asset managers generally hold the largest eurodollar positions among buy-side traders but play a lesser role in day-to-day trading. Second, the Fed's unconventional policy saw the average maturity of eurodollar contracts traded between 2008 and 2014 double and it has remained at an elevated maturity since then. Moreover, from 2012 into 2015 eurodollar turnover responded more strongly to Federal Reserve announcements than to macroeconomic news, a finding analogous to that of Filardo and Hofmann (2014) for yields. In 2015 asset managers took a large short position in eurodollar futures; this unprecedented position would profit if the Federal Reserve's own projections of policy rates ("dots") were realised. Judging from eurodollar futures, asset managers now play an important role in facilitating or hindering the transmission of monetary policy to market rates.
    Keywords: asset managers, mutual funds, derivatives, unconventional monetary policy, forward guidance, money market, eurodollar futures
    Date: 2016–08
  3. By: Lasitha R. C. Pathberiyay (School of Economics, The University of Queensland, St Lucia, Brisbane, Australia)
    Abstract: The nominal interest rates were at zero level in the recent past in many countries across the globe. It has been widely debated recently what a central bank should do to stimulate the economy when the nominal interest rate is at the zero lower bound (ZLB). The optimal monetary policy literature suggests that monetary policy inertia, i.e. committing to continue zero interest regime even after the ZLB is not binding, is a way to get the economy out of recession. In this paper, I examine whether this result holds when monetary policy has not only the conventional demand-side effect but also a supply-side effect on the economy. To accomplish this objective, I incorporate the cost channel of monetary policy into an otherwise standard new Keynesian model and evaluate the optimal monetary policy at the ZLB. The study revealed some important insights in the conduct of the optimal monetary policy in a cost channel economy at the ZLB. First, the discretionary policy requires central banks to keep interest rates at the zero lower bound for longer in a cost channel economy compared to no-cost channel economies. This is because, in cost channel economies, the deflation is high and persistent due to a larger negative demand shock than that found in no-cost channel economies. Further, cost channel economies introduce a policy trade-o between inflation and output gap. Under commitment policy, the simulation exercise shows that the central bank is able to terminate the zero interest rate regime earlier in a cost channel economy than otherwise. The reason for that is, in a cost channel economy, the private sector has inflated inflationary expectations when the central bank is planning to conduct a tight monetary policy. This result is in contrast to the results found under discretionary policy. It was also revealed that the cost channel generates substantially high welfare losses, under both discretionary and commitment policies. Accordingly, abstracting the cost channel in these types of models can lead to under estimation of welfare losses.
    Keywords: optimal monetary policy, zero rates on nominal interest rates, cost channel of monetary policy, new Keynesian model, liquidity trap
    JEL: E31 E52 E58 E61
    Date: 2016–09–01
  4. By: Valerie Cerra
    Abstract: This paper presents a stylized general equilibrium model of the Venezuelan economy. The model explains how the recent sharp fall in oil revenue combines with foreign exchange rationing to produce a steep rise in inflation. Counterintuitively, a devaluation of the official exchange rate could temporarily reduce inflation. The model also explains how the hyper-depreciation of the black market exchange rate reflects prices in the most distorted goods markets.
    Keywords: Inflation;Venezuela;Fiscal policy;Monetary policy;Devaluation;Official exchange market rates;Shadow economy;Consumer goods;General equilibrium models;inflation; black market; exchange rate; Venezuela; foreign exchange rationing; scarcity; cash in advance constraint; oil revenue; fiscal dominance
    Date: 2016–08–03
  5. By: Lee, Seungduck
    Abstract: This paper examines the effect of monetary policy on the liquidity premium, i.e., the market value of the liquidity services that financial assets provide. To guide the empirical analysis, I set up a monetary search model in which bonds provide liquidity services in addition to money. The theory predicts that money supply and the nominal interest rate are positively correlated with the liquidity premium, but the latter is negatively correlated with the bond supply. The empirical analysis over the period from 1946 and 2008 confirms the theoretical findings. This indicates that liquid bonds are substantive substitutes for money and the opportunity cost of holding money plays a key role in asset price determination. The model can rationalize the existence of negative nominal yields, when the nominal interest rate is low and liquid bond supply decreases.
    Keywords: asset price, money search model, liquidity, liquidity premium, money supply
    JEL: E31 E41 E51 E52 G12
    Date: 2016–08
  6. By: Angela Abbate; Sandra Eickmeier; Esteban Prieto
    Abstract: We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the "missing disinflation" during the Great Recession. We apply a vector autoregressive model to US data and identify financial shocks through sign restrictions. Our main finding is that expansionary financial shocks temporarily lower inflation. This result withstands a large battery of robustness checks. Moreover, negative financial shocks helped preventing a deflation during the crisis. We then explore the transmission channels of financial shocks relevant for inflation, and find that the cost channel explains the inflation response. A policy implication is that financial shocks that move output and inflation in opposite directions may worsen the trade-off for a central bank with a dual mandate.
    Keywords: Financial shocks, inflation dynamics, monetary policy, financial frictions, cost channel, sign restrictions
    JEL: E31 E44 E58
    Date: 2016–09
  7. By: Claudiu Albulescu (CRIEF); Dominique P\'epin (CRIEF)
    Abstract: We generalize a money demand micro-founded model to explain Romanians' recent loss of interest for the euro. We show that the reason behind this loss of interest is a severe decline in the relative degree of the euro liquidity against that of the Romanian leu.
    Date: 2016–09
  8. By: Bernd Hayo (University of Marburg); Matthias Neuenkirch (University of Trier)
    Abstract: In this paper, we examine the relationship between market participants’ perception of central bank predictability and their assessment of central bank communication skills and success in conveying objectives as well as the importance of transparency-enhancing measures, such as voting records, transcripts or minutes of policy meetings, and conditional interest rate projections. Our analysis is based on a unique dataset of almost 500 market participants worldwide who were asked questions with respect to the performance of the Bank of England, the Bank of Japan, the European Central Bank, and the Federal Reserve. Our results indicate a positive and economically notable relationship between central banks’ ability to convey their objectives and their overall communication skills on the one hand, and market participants’ perception of the banks’ predictability on the other hand, for all four central banks. The dissemination of more specific information does not appear to contribute to better central bank predictability. This raises doubts about the widely-held notion that implementing ever more transparency-enhancing measures will improve central bank predictability.
    Keywords: Central Bank, Communication, Financial Market Participants, Objectives, Predictability, Survey, Transparency
    JEL: E52 E58
    Date: 2016
  9. By: Tevdovski, Dragan; Petrevski, Goran; Bogoev, Jane
    Abstract: We analyse the effects of fiscal and monetary policies in two South Eastern European (SEE) economies with currency pegs (Croatia and Macedonia) estimated by the Bayesian Vector Autoregression. The main results of the study are as follows: Fiscal tightening leads to economic expansion in Macedonia and a decline in economic activity in Croatia. In both countries fiscal tightening leads to a decline in inflation and money market rates. Monetary tightening leads to output contraction and a decline in inflation in both countries. We find opposite reaction of fiscal authorities to a monetary shock: monetary contraction is accompanied by fiscal tightening in Croatia and by loose fiscal policy in Macedonia.
    Keywords: Fiscal Policy, Monetary Policy, Bayesian VAR
    JEL: E52 E58 E62 E63
    Date: 2016–03–21
  10. By: Ivana Rajkoviæ (National Bank of Serbia); Branko Uroseviæ (National Bank of Serbia)
    Abstract: We study drivers of permanent and transitory deposit dollarization on a sample of CESE countries using panel cointegration techniques. The results suggest that a positive cointegration relationship exists between permanent dollarization and minimum variance portfolio (MVP) share. This provides additional empirical validation of MVP method as the standard tool for analysing financial dollarization in the long run. In the long run agents make savings decisions based on relative volatilities of inflation and nominal depreciation rates and do not take into the account interest rate spread. In the short run dollarization exhibits persistence. Somewhat different factors affect dollarization in the short than in the long run. Namely, apart from MVP share, dollarization of deposits is in that case driven, also, by interest rate spread and nominal exchange rate movements. Our results suggest that affecting dollarization through change in the interest rate spread may have short term impact on dollarization. In the long run, however, for de-dollarization it is critical to reduce volatility of inflation compared to volatility of exchange rate depreciation.
    Keywords: Permanent and transitory dollarization, Transition economies
    JEL: C33 E51 E58 G21 G32
    Date: 2014–12
  11. By: Emre Alper; R. Armando Morales; Fan Yang
    Abstract: This paper analyzes the degree to which volatility in interbank interest rates leads to volatility in financial instruments with longer maturities (e.g., T-bills) in Kenya since 2012, year in which the monetary policy framework switched to a forward-looking approach, relative to seven other inflation targeting (IT) countries (Ghana, Hungary, Poland, South Africa, Sweden, Thailand, and Uganda). Kenya shows strong volatility transmission and high persistence similar to other countries in transition to a more forward-looking monetary policy framework. These results emphasize the importance of a strong commitment to an interbank rate as an operational target and suggest that the central bank could reduce uncertainty in short-term yields significantly by smoothing out the overnight interest rates around the policy rate.
    Keywords: Monetary policy;Kenya;Inflation targeting;Interest rates;Treasury bills and bonds;Econometric models;Monetary policy implementation, inflation targeting, volatility transmission
    Date: 2016–06–20
  12. By: Hiermeyer, Martin
    Abstract: If expansionary fiscal policy is inflationary, expansionary fiscal policy forces an inflation-targeting central bank to be somewhat more restrictive in its monetary policy. This altered central bank policy comes at a cost in terms of output which has to be calculated against the output gain achieved by the expansionary fiscal policy.
    Keywords: Fiscal Policy
    JEL: E62 E63
    Date: 2016–09–02
  13. By: Karl Whelan
    Abstract: This paper focuses on how the lender of last resort function works in the euro area. It argues that the Eurosystem does not provide a clear and transparent lender of last resort facility and discusses how this has promoted financial instability and has critically undermined free movement of capital in the euro area. Until this weakness in the euro area’s policy infrastructure is fixed, it will be difficult to have a truly successful banking union.
    Keywords: European Central Bank; Lender of last resort; Banking union
    JEL: E58 G21
    Date: 2016–08
  14. By: Michal Brzoza-Brzezina; Marcin Kolasa; Mateusz Szetela
    Abstract: In early 2015, the policy (open market operations) rate of Narodowy Bank Polski was reduced to an all-time low of 1.5%. At the same time, prices of consumer goods and services dropped by 1.5% in year-on-year terms. This raised concerns that Poland might become the next country to hit the zero lower bound (ZLB) constraint on nominal interest rates. The purpose of this paper is to examine the scale of this risk and its possible consequences. According to our results, the odds of the Polish economy hitting the ZLB remain low, despite having risen considerably in 2014-15. At the same time, the consequences of such a scenario would be substantial as the ZLB would amplify the economy’s responses to adverse demand shocks and make their impact more persistent. The current level of the inflation target (2.5%) protects the Polish economy against the zero lower bound to a signifficant degree. However, its potential reduction would significantly increase the likelihood that this threat materializes.
    Keywords: zero lower bound, Polish monetary policy, small open economy
    JEL: E43 E47 E52
    Date: 2016–07
  15. By: Sebastiaan Pool
    Abstract: This paper examines how the materialization of credit defaults affects the real economy. I estimate a DSGE model including banks, firms and financial frictions using euro area data. The estimation results show that a positive credit default shock, which is identified as an unanticipated increase in credit default losses, complicates monetary policy because output falls while inflation goes up. The monetary authority must choose between stabilizing output and inflation and is therefore less effective. Inflation increases slightly because firms experience besides a demand contraction also a cost-push effect when banks increase the lending rate. Countercyclical capital buffers can in this case complement conventional monetary policy but there is a trade-off: they effectively attenuate macroeconomic fluctuations, but increase the persistence of the slump as banks rebuild their capital more slowly. A bank recapitalization overcomes this trade-off and significantly reduces macroeconomic fluctuations.
    Keywords: Banking; Credit risk; Credit defaults; Countercyclical Capital Buffer; Bayesian Estimation
    JEL: E44 E51 E52
    Date: 2016–08
  16. By: Benjamin Beckers; Kerstin Bernoth
    Abstract: This paper investigates whether central banks can attenuate excessive mispricing in stocks as suggested by the proponents of a \leaning against the wind" (LATW) monetary policy. For this, we decompose stock prices into a fundamental component, a risk premium, and a mispricing component. We argue that mispricing can arise for two reasons: (i) from false subjective expectations of investors about future fundamentals and equity premia; and (ii) from the inherent indeterminacy in asset pricing in line with rational bubbles. We show that the response of the excessive stock price component to a monetary policy shock is ambiguous in both the short- and long-run, and depends on the nature of the mispricing. Subsequently, we evaluate the scope for a LATW policy empirically by employing a time-varying coefficient VAR with a flexible identification scheme based on impact and long-run restrictions using data for the S&P500 index from 1962Q1 to 2014Q4. We _nd that a contractionary monetary policy shock in fact lowers stock prices beyond what is implied by the response of their underlying fundamentals.
    Keywords: Asset pricing, bubbles, financial stability, leaning against the wind, mispricing, monetary policy, time-varying coefficient VAR, zero and sign restrictions
    JEL: E44 E58 E52 G12 G14
    Date: 2016
  17. By: Maria Semenova (National Research University Higher School); Andrey Shapkin (Sberbank)
    Abstract: Market discipline in the personal deposit market is of great importance for regulators. In developing economies, which rely much and are dependent on the dollar and euro, changes in the currency structure of the deposits may be strategic and work as an additional disciplining mechanism. Our study sheds light on this mechanism of currency shifts in the Russian market for personal deposits. Using data on more than 900 Russian banks for 2005¬–2015, we provide evidence that less risky banks—at least in terms of capital adequacy and liquidity—demonstrate higher growth of both the volume and the share of deposits denominated in foreign currency, even when the exchange rate volatility component is extracted. This mechanism continued working during the financial crisis of 2008–2009
    Keywords: Market discipline, Personal deposits, Currency shifts, Russia
    JEL: G21 G01 P2
    Date: 2016
  18. By: Esther Perez Ruiz
    Abstract: This paper examines inflation dynamics in Chile during the last peso depreciation episode 2013-15. The evidence is for substantial pass-through effects to inflation, given the large and persistent depreciation movement. Widespread indexation practices in non-traded goods markets are found to amplify the inflation response to the depreciation, while the role of wage indexation is less relevant to the inflation dynamics. Overall, inflation would have remained within the central bank’s target band absent the peso depreciation. The analysis also shows that tightening monetary policy in response to a depreciation shock can be costly in terms of output: the response of activity to rates is found to be strong, while the transmission from activity to inflation is found to be weak. Simulations under uncertainty about the extent of the pass-through also suggest that monetary policy can play a countercyclical role in the face of depreciation shocks at a moderate inflationary cost, as long as inflation expectations remain anchored.
    Keywords: Inflation;Chile;Exchange rate depreciation;Goods;Monetary policy;Floating exchange rates;Exchange rate regimes;Small open economies;Econometric models;Time series;traded goods inflation, non-traded goods inflation, exchange rate pass-through, indexation, monetary policy, Chile
    Date: 2016–07–06
  19. By: Kentaro Iwatsubo (Graduate School of Economics, Kobe University); Tomoki Taishi (Graduate School of Economics, Kobe University)
    Abstract: The gQuantitative and Qualitative Monetary Easing (QQE) h enacted immediately after the inauguration of the Bank of Japan Governor Kuroda brought violent fluctuations in the prices of government bonds and deteriorated market liquidity. Does a central bank fs government bond purchasing policy generally reduce market liquidity? Do conditions exist that can prevent the decrease? This paper analyzes how the Bank of Japan fs purchasing policy changes influenced market liquidity. The results revealed that three specific policy changes contributed significantly to improving market liquidity: 1) increased purchasing frequency; 2) a decrease in the purchase amount per transaction; and 3) a reduced variability in the purchase amounts. These policy changes facilitated investors f purchase schedule expectations and helped reduce market uncertainty. The evidence supports the theory that the effect of government bond purchasing policy on market liquidity depends on the market fs informational environment.
    Date: 2016–09
  20. By: Wong, Soon-Ming; Loi, Siew-Ling
    Abstract: Over the past few decades, voluminous studies have been carried out to find out the money influence on real economy activity. Various models and methodologies have been employed to empirically examine the precision of monetary neutrality proposition as well as the money validity in order to generate the answer on whether money is posited a viable variable of monetary policy. This paper discussed some varied empirical findings in general as well as in Japanese context out of these numerous literature.
    Keywords: Long-run Neutrality of Money, Money Influence in Japanese Economy
    JEL: E5
    Date: 2016–09–08
  21. By: Camelia Minoui (International Monetary Fund); Charles Abuka; Ronnie K. Alinda; Jose-Luis Peydro; Andrea F. Presbitero
    Abstract: We examine the bank lending channel in Uganda, a developing country where monetary policy transmission may be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. Our analysis employs a supervisory loan-level dataset and focuses on a short period during which the policy rate rose by 1,000 basis points and then came down by 1,100 basis points. We find that an increase in interest rates reduces the supply of bank credit both on the extensive and intensive margins, and there is significant pass-through to retail lending rates. We document a strong bank balance sheet channel, as the lending behavior of banks with high capital and liquidity is different from that of banks with low capital and liquidity. Finally, we show the impact of monetary policy on real activity across districts depends on banking sector conditions. Overall, our results indicate significant real effects of the bank lending channel in developing countries.
    Keywords: Monetary policy transmission; Bank leading channel; Bank balance sheet channel, Developing countries
    JEL: E42 E44 E52 E58
    Date: 2015–11–29
  22. By: Hommes, C.H. (University of Amsterdam); Massaro, D. (University of Amsterdam); Salle, I. (University of Amsterdam)
    Abstract: The global economic crisis of 2007-8 pushed many advanced economies into a liquidity trap, a macroeconomic scenario characterised by nominal rates at the zero lower bound (ZLB), low inflation and output below trend. We design an experiment to generate empirical evidence on the effectiveness of policies aimed at managing expectations against liquidity traps in a controlled laboratory environment where expectations are elicited directly from human subjects. Our results suggest that monetary policy alone is not sufficient to insulate the economy from the risk of falling into a liquidity trap, even if it preventively cuts the interest rate when inflation threatens to fall below a certain threshold. However, such policy augmented with a fiscal switching rule succeeds in avoiding and escaping liquidity trap episodes. We also measure larger-than-unity fiscal multipliers when monetary policy is constrained by the ZLB. Experimental results in different treatments are well explained by adaptive learning.
    Date: 2015
  23. By: Vladimir Asriyan; Luca Fornaro; Alberto Martín; Jaume Ventura
    Abstract: We propose a model of money, credit and bubbles, and use it to study the role of monetary policy in managing asset bubbles. In this model, bubbles pop up and burst, generating fluctuations in credit, investment and output. Two key insights emerge from the analysis. First, the growth rate of bubbles, which is driven by agents’ expectations, can be set in real or in nominal terms. This gives rise to a novel channel of monetary policy, as changes in the inflation rate affect the real growth rate of bubbles and their effect on economic activity. Crucially, this channel does not rely on contract incompleteness or price rigidities. Second, there is a natural limit on monetary policy’s ability to control bubbles: the zero-lower bound. When a bubble crashes, the economy may enter into a liquidity trap, a regime in which agents shift their portfolios away from bubbles - and the credit that they sustain - to money, reducing intermediation, investment and growth. We explore the implications of the model for the conduct of “conventional” and “unconventional” monetary policy, and we use the model to provide a broad interpretation of salient macroeconomic facts of the last two decades.
    Keywords: Bubbles, monetary policy, liquidity, traps, financial frictions
    JEL: E32 E44
    Date: 2016–09
  24. By: Luigi Paciello (EIEF); Claudio Michelacci (EIEF)
    Abstract: A central bank announcement of a future reduction in interest rates (Forward Guidance) can be contractionary in the short run, when, as in the European data, the credibility of the central bank is higher among creditors than among debtors. When creditors believe the announcement more than debtors do, the wealth losses that creditors expect to incur are larger than the gains that debtors expect to realize and aggregate net wealth is perceived to fall. Forward Guidance announcements can then misguide the economy towards a contractionary period caused by lack of aggregate demand. This is more likely when financial imbalances are large and when the perceived credibility of the central bank differs substantially among creditors and debtors, as at the time of the ECB announcement in July 2013. By using micro data for Italian provinces, we find that more confidence in the ECB announcement was deflationary in a creditor province while it was inflationary in a debtor one, which is consistent with a misguidance effect. By using an heterogeneous agents sticky prices model calibrated to match micro data on financial imbalances and perceived credibility of the ECB, we find that the announcement was overall deflationary in the Euro Area.
    Date: 2016
  25. By: Mariusz Kapuściński
    Abstract: The aim of this study is to investigate the effects of monetary policy on financial asset prices in Poland. Following Gürkaynak et al. (2005) I test how many factors adequately explain the variability of short-term interest rates around MPC meetings, finding that there are two such factors. The first one has a structural interpretation as a “current interest rate change” factor and the second one as a “future interest rate changes” factor, with the latter related to MPC communication. Regression analysis shows that, controlling for foreign interest rates and global risk aversion, both MPC actions and communication matter for government bond yields, and that communication is more important for stock prices. Furthermore, the foreign exchange rate used to depreciate (appreciate) after MPC statements signalling tighter (easier) future monetary policy. However, the effect disappeared at the end of the sample. For most of the sample the exchange rate would appreciate (depreciate) or would not change in a statistically significant manner after an increase (a decrease) of the current interest rate. The results indicate that not only changes of the current interest rate but also MPC communication matters for financial asset prices in Poland. It has important implications for the conduct of monetary policy, especially in a low inflation and low interest rate environment.
    Keywords: monetary policy, financial asset prices, Poland.
    JEL: E51 G12
    Date: 2015
  26. By: Banegas, Ayelen; Montes-Rojas, Gabriel; Siga, Lucas
    Abstract: We study the links between monetary policy and mutual fund flows, and the potential risks to financial stability that might arise from such flows, using data over the 2000-14 period. We find that monetary policy can have a direct influence on the allocation decisions of mutual fund investors. In particular, we show that monetary policy shocks explain mutual fund flow dynamics and that the effect of these shocks differs by investment strategy. Results suggest that positive shocks to the path of monetary policy (unexpected tightening) are associated with persistent outflows from bond mutual funds. Conversely, a tighter-than-expected monetary policy path will cause net inflows into equity funds. In an industry that "mutualizes" redemption costs and where many funds may engage in liquidity transformation, our flow-performance analysis provides evidence of the potential existence of a first-mover advantage in less liquid segments of the market.
    Keywords: First-mover advantage ; Monetary policy ; Mutual fund flows
    JEL: G20 G23 E52
    Date: 2016–07–26
  27. By: Paul Hubert (OFCE, Sciences Po); Fabien Labondance (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: We explore empirically the theoretical prediction that waves of optimism or pessimism may have aggregate effects, in the context of monetary policy. We investigate whether the sentiment conveyed by ECB and FOMC policymakers in their statements affect the term structure of private short-term interest rate expectations. First, we quantify central bank tone using a computational linguistics approach. Second, we identify sentiment as exogenous shocks to these quantitative measures using an augmented narrative approach following the information friction literature. Third, we estimate the impact of sentiment on private agents’ expectations about future short-term interest rates using a high-frequency methodology and an ARCH model. We find that sentiment shocks increase private interest rate expectations around maturities of one and two years. We also find that this effect is non-linear and depends on the state of the economy and on the characteristics (precision, sign and size) of the sentiment signal.
    Keywords: Animal spirits, Optimism, Confidence, Central bank communication, Interest rate expectations, ECB, FOMC
    JEL: E43 E52 E58
    Date: 2016–07
  28. By: Andrea Fracasso; Rocco Probo
    Abstract: Long-term inflation expectations in the euro area remained well anchored during the global financial crisis and were therefore insensitive to the arrival of economic news. This article investigates the behaviour of expectations in the euro area during the most recent period and finds evidence that the de-anchoring of expectations started in December 2011 and never reversed. This is in line with the more aggressive stance held by the ECB in the following months as well as with the pattern of ECB Professional ForecastersÕ expectations.
    Keywords: Inflation expectations, ECB, Euro area, De-anchoring
    JEL: E31 E52 E58 C22
    Date: 2016
  29. By: Wilko Bolt; Maarten van Oordt
    Abstract: This paper develops an economic framework to analyze the exchange rate of virtual currency. Three components are important: first, the current use of virtual currency to make payments; second, the decision of forward-looking investors to buy virtual currency (thereby effectively regulating its supply); and third, the elements that jointly drive future consumer adoption and merchant acceptance of virtual currency. The model predicts that, as virtual currency becomes more established, the exchange rate will become less sensitive to the impact of shocks to speculators’ beliefs. This undermines the notion that excessive exchange rate volatility will prohibit widespread use of virtual currency.
    Keywords: Asset Pricing, E-Money, Exchange rates
    JEL: E42 E51 F31 G1
    Date: 2016
  30. By: Roberto Robatto (University Wisconsin Madison); Pierpaolo Benigno (LUISS Guido Carli)
    Abstract: Can creation of private money by financial intermediaries fulfill the liquidity needs of the economy? The answer is no if the market is run only by forces of free competition. Multiple equilibria are possible: equilibria with complete satiation of liquidity and absence of default coexists with ones characterized by shortages and partial default. In this framework, capital requirements, distortions to demand or supply of private money, and the role of public liquidity are investigated.
    Date: 2016
  31. By: Yellen, Janet L. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2016–08–30
  32. By: Prachi Mishra; Peter J Montiel; Rajeswari Sengupta
    Abstract: We examine the strength of monetary transmission in India, using a conventional structural VAR methodology. We find that a tightening of monetary policy is associated with a significant increase in bank lending rates and conventional effects on the exchange rate, though pass-through to lending rates is only partial and exchange rate effects are weak. We could find no significant effects on real output or the inflation rate. Though the message for the effectiveness of monetary transmission in India is therefore mixed, our results for India are more favorable than is often found for other developing countries.
    Keywords: Monetary transmission mechanism;India;Banks;Loans;Monetary policy;Inflation targeting;Developing countries;Vector autoregression;Econometric models;monetary policy, bank lending, India
    Date: 2016–08–08
  33. By: Asif Mahmood (State Bank of Pakistan); Muhammad Zuhair Munawar (State Bank of Pakistan)
    Abstract: In this paper we perform a textual analysis of monetary policy statements issued during the past ten years by State Bank of Pakistan and compare them with policy reviews of seven selected central banks from regional, emerging and advanced economies. Broadly, we divided our analysis into three parts. In the first part, we attempt to estimate the contribution of macroeconomic contents in the monetary policy analysis of selected central banks. The second part deals with the decomposition of macroeconomic contents in driving the policy decisions. In the last section, we attempt to measure the forward-looking content in the monetary policy reviews and also their predictive power. Key findings suggest that, across the sample, trends in inflation and developments in external sector play an important role in driving the monetary policy stance. Also, it is found that the inflation targeting central banks have more forward-looking content in their policy reviews than non-inflation targeters. On the basis of empirical estimation, the former central banks are also found to be more proactive in adjusting the policy stance to given macroeconomic conditions and their outlook.
    Keywords: monetary policy, central bank, communication
    JEL: E52 E58
    Date: 2016–08
  34. By: Andreas Jobst; Huidan Lin
    Abstract: More than two years ago the European Central Bank (ECB) adopted a negative interest rate policy (NIRP) to achieve its price stability objective. Negative interest rates have so far supported easier financial conditions and contributed to a modest expansion in credit, demonstrating that the zero lower bound is less binding than previously thought. However, interest rate cuts also weigh on bank profitability. Substantial rate cuts may at some point outweigh the benefits from higher asset values and stronger aggregate demand. Further monetary accommodation may need to rely more on credit easing and an expansion of the ECB’s balance sheet rather than substantial additional reductions in the policy rate.
    Keywords: Negative interest rates;Euro Area;Interest rate policy;Banks;Profits;Monetary transmission mechanism;Unconventional monetary policy instruments;European Central Bank;negative rates, NIRP, unconventional monetary policy, monetary transmission
    Date: 2016–08–10
  35. By: International Monetary Fund. Asia and Pacific Dept
    Abstract: Asean-5 Cluster Report-Evolution of Monetary Policy Frameworks
    Keywords: Monetary policy;Association of Southeast Asian Nations;Central banks;Business cycles;Capital outflows;Cross country analysis;Indonesia;Singapore;Malaysia;Thailand;Philippines;
    Date: 2016–06–30
  36. By: Gabriele Camera (Chapman University and University of Basel); Dror Goldberg (The Open University of Israel); Avi Weiss (Bar-Ilan University and Taub Center for Social Policy Research of Israel and IZA)
    Abstract: The theory of money assumes decentralized bilateral exchange and excludes centralized multilateral exchange. However, endogenizing the exchange process is critical for understanding the conditions that support the use of money. We develop a “travelling game” to study the spontaneous emergence of decentralized and centralized exchange, theoretically and experimentally. Players located on separate “islands” can either trade locally, or pay a cost to trade elsewhere, so decentralized and centralized markets can both emerge in equilibrium. The latter maximize trade meetings and are socially efficient; the former minimize trade costs through the use of money. In the laboratory, centralized exchange more frequently emerges when subjects perform diversified economic tasks, but also when they interact in large groups. This shows that to understand the emergence of money it is important to amend the theory of money such that the market structure is endogenized.
    Keywords: endogenous institutions, macroeconomic experiments, matching, coordination, markets, money
    JEL: E4 E5 C9 C92
    Date: 2016
  37. By: Vladimir Klyuev; To-Nhu Dao
    Abstract: This paper examines exchange rate behavior in the ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand). It finds that for the last 10 years there is no evidence that their central banks target particular exchange rate levels against any currency or basket. Thus, contrary to some assertions, they do not belong to a U.S. dollar club, a Japanese yen club, a Chinese renminbi club, or an ASEAN club. At the same time, they clearly try to smooth short-term volatility, particularly vis-Ã -vis the U.S. dollar. The degree of smoothing declined noticeably after the Asian Financial Crisis and less obviously after the Global Financial Crisis, with heterogeneity across countries. Short-term smoothing without level targeting does not interfere with monetary policies aimed at price stability.
    Keywords: Exchange rate policy;Indonesia;Malaysia;Philippines;Singapore;Thailand;Association of Southeast Asian Nations;Exchange rates;Monetary policy;Cross country analysis;Exchange rate regimes; exchange rate volatility; fear of floating; currency blocks; ASEAN
    Date: 2016–08–08
  38. By: Hommes, C.H. (University of Amsterdam); Lustenhouwer, J. (University of Amsterdam)
    Abstract: We derive policy implications for an inflation targeting central bank, who’s credibility is endogenous and depends on its past ability to achieve its targets. We do this in a New Keynesian framework with heterogeneous agents and boundedly rational expectations. Our assumptions about expectation formations are more in line with expectations observed in survey data and laboratory experiments than the fairly restrictive rational expectations hypothesis. We find that the region of allowed policy parameters is strictly larger under heterogeneous expectations than under rational expectations. Furthermore, with theoretically optimal monetary policy, global stability of the fundamental steady state can be achieved, implying that the system always converges to the targets of the central bank. This result however no longer holds when the zero lower bound (ZLB) on the nominal interest rate is accounted for. Self-fulfilling deflationary spirals can then occur, even under optimal policy. The occurrence of these liquidity traps crucially depends on the credibility of the central bank. Deflationary spirals can be prevented with a high inflation target, aggressive monetary easing, or a more aggressive response to inflation.
    Date: 2015
  39. By: Michal Brzoza-Brzezina
    Abstract: This paper compares the consequences of hitting the zero lower bound in small open and large closed economies. I costruct a two-economy New Kenynesian model and calibrate it so that one economy is small and open and the second large and closed. Then I conduct a number of experiments assuming that the zero lower bound binds for one or the other economy. At the ZLB bad shocks are amplified and good shocks dampened. I show that these modifications are much stronger in the large than in the small economy. As a result the large economy may suffer more at the ZLB.
    Keywords: zero lower bound, small open economy, amplification of shocks
    JEL: E43 E52
    Date: 2016–06
  40. By: Serdar Ozkan (University of Toronto); Kurt Mitman (Stockholm University); Fatih Karahan (Federal Reserve Bank of New York); Aaron Hedlund (University of Missouri)
    Abstract: We investigate the role of housing and mortgage debt in the transmission of monetary policy to household consumption and the aggregate economy. In order to do so, we develop a heterogenous agents model with a frictional housing market, nominal long-term borrowing, default, and price rigidities. The model is able to capture rich heterogeneity in home ownership and leverage. Endogenous cyclical movements in house prices as well as counter-cyclical dynamics in the liquidity of housing allows us to explore the various indirect mechanisms through which monetary policy affects consumption. Nominal long-term mortgage debt implies that changes in monetary policy will result in redistribution between lenders and borrowers. Further, a contractionary monetary policy shock raises the cost of borrowing which reduces liquidity in the housing market, depresses house prices and feeds back into increasing the cost of borrowing. We find that this amplification channel disproportionally affects households with high leverage and high marginal propensities to consume. Finally, we investigate how booms and busts in the housing market asymmetrically affect the efficacy of monetary policy.
    Date: 2016
  41. By: Benchimol, Jonathan (Bank of Israel); Fourçans, André (Essec Business School)
    Abstract: Since the beginning of the financial crisis, a lively debate has emerged regarding which monetary policy rule the Fed (and other central banks) should follow, if any. To clarify this debate, several questions must be answered. Which monetary policy rule best the historical data? Which monetary policy rule best minimizes economic uncertainty and the Fed’s loss function? Which rule is best in terms of household welfare? Among the different rules, are NGDP growth or level targeting rules a good option, and when? Do they perform better than Taylor-type rules? To answer these questions, we use Bayesian estimations to test the Smets and Wouters (2007) model under nine different monetary policy rules with US data from 1955 to 2015 and over three different sub-periods. We find that when considering only the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules, whatever the period. However, if other criteria are considered, the central bank’s objectives are not consistently met by a single rule for all periods.
    Keywords: Monetary policy; NGDP targeting; Taylor rule; DSGE model
    JEL: E32 E52 E58
    Date: 2016–07–04
  42. By: Wai-Yip Alex Ho; Chun-Yu Ho
    Abstract: We find that from 1995 to 2002 in China, the dispersion of wealth decreased, the moneywealth ratio increased for all wealth levels and the aggregate money-output ratio increased. We develop a two-asset dynamic general equilibrium model in which households face a portfolio adjustment cost and a borrowing constraint. We find that financial development lowers the dispersion of wealth by reducing the precautionary motive of households. In addition, tight monetary policies increase the value of money and thus increase the moneywealth ratio for all wealth levels and the aggregate money-output ratio.
    Keywords: Inflation;China;Financial markets;Income distribution;Transition economies;Econometric models;Inflation, Borrowing Constraint, Adjustment Cost, Heterogeneous Agents, Wealth Distribution
    Date: 2016–07–06
  43. By: Carlos Caceres; Yan Carriere-Swallow; Bertrand Gruss
    Abstract: Is the Mundell-Fleming trilemma alive and well? International co-movement of asset prices takes place alongside synchronized business cycles, complicating the identification of financial spillovers and assessments of monetary policy autonomy. A benchmark for interest rate comovement is to impose the null hypothesis that central banks respond only to the outlook for domestic inflation and output. We show that common approaches used to estimate interest rate spillovers tend to understate the degree of monetary autonomy enjoyed by small open economies with flexible exchange rates. We propose an empirical strategy that partials out those spillovers that are associated with impaired monetary autonomy. Using this approach, we revisit the predictions of the trilemma and find more compelling evidence that flexible exchange rates deliver monetary autonomy than prior work has suggested.
    Keywords: Economic conditions;Small open economies;Monetary policy;Central bank autonomy;Central banking and monetary issues;Spillovers;Vector autoregression;Econometric models;Monetary policy; monetary conditions; autonomy; global financial cycle.
    Date: 2016–06–08

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