nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒09‒18
39 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Effectiveness of Central Bank Forward Guidance under Inflation and Price-Level Targeting By Cole, Stephen J.
  2. Is the ECB unconventional monetary policy effective? By Inês Pereira
  3. Unconventional monetary policy in a small open economy By Margaux MacDonald; Michal Popiel
  4. Re-vitalizing Money Demand in the Euro Area: Still Valid at the Zero Lower Bound By Christian Dreger; Dieter Gerdesmeier; Barbara Roffia
  5. Monetary policy transmission in an open economy: new data and evidence from the United Kingdom By Cesa-Bianchi, Ambrogio; Thwaites, Gregory; Vicondoa, Alejandro
  6. Currency Misalignments in emerging and developing countries: reassessing the role of Exchange Rate Regimes By Cécile Couharde; Carl Grekou
  7. The Coevolution of Money Markets and Monetary Policy, 1815–2008 By Clemens Jobst; Stefano Ugolini
  8. Optimal Monetary Policy in a Collateralized Economy By Gary Gorton; Ping He
  9. Velocity in the Long Run: Money and Structural Transformation By Antonio Mele; Radoslaw Stefanski
  10. The Effect of Financial Regulation Mandate on Inflatin Bias: A Dynamic Panel Approach By Diana Lima; Ioannis Lazopoulos; Vasco Gabriel
  11. A Welfare Analysis of Macroprudential Policy Rules in the Euro Area By Jean-Christophe Poutineau; Gauthier Vermandel
  12. Regime Shifts in India's Monetary Policy Response Function. By Kumawat, Lokendra; Bhanumurthy, N. R.
  13. Money, Asset Prices and the Liquidity Premium By Lee, Seungduck
  14. Monetary Policy and Durable Goods By Miles Kimball; Christopher House; Christoph Boehm; Robert Barsky
  15. Spillovers of the ECB's non-standard monetary policy into CESEE economies By Alessio Ciarlone; Andrea Colabella
  16. The Impact of Alternative Transitions to Normalized Monetary Policy By Serguei Maliar; John Taylor; Lilia Maliar
  17. Unemployment Persistence, Inflation and Monetary Policy in A Dynamic Stochastic Model of the Phillips Curve By George Alogoskoufis
  18. Quantitative Easing in the Euro Area: The Dynamics of Risk Exposures and the Impact on Asset Prices. By R. S.J. Koijen; F. Koulischer; B. Nguyen; M. Yogo
  19. On shock symmetry in South America: New evidence from intra-Brazilian real exchange rates By Christian Rohe
  20. Population aging and the transmission of monetary policy to consumption By Arlene Wong
  21. Monetary policy, market structure and the income shares in the U.S By George C. Bitros
  22. A Lesson from the Great Depression that the Fed Might have Learned: A Comparison of the 1932 Open Market Purchases with Quantitative Easing By Michael Bordo; Arunima Sinha
  23. Recent Trends in Cross-currency Basis By Fumihiko Arai; Yoshibumi Makabe; Yasunori Okawara; Teppei Nagano
  24. Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy By Wenxin Du; Carolin E. Pflueger; Jesse Schreger
  25. Measuring the Natural Rate of Interest : International Trends and Determinants By Holston, Kathryn; Laubach, Thomas; Williams, John C.
  26. The Signaling Effect of Raising Inflation By Jean Barthélemy; Eric Mengus
  27. Quantitative Easing and the Liquidity Channel of Monetary Policy By Lucas Herrenbrueck
  28. Finance neutral potential output: an evaluation on an emerging market monetary policy context By J. Sebastián Amador-Torres
  29. Interest parity conditions during the classical gold standard (1880 -1914) - Evidence from the investment demand for bills of exchange in Europe By Nils Herger
  30. Capital Inflow Surges and Consequences By Ghosh, Atish R.; Qureshi, Mahvash S.
  31. The Impact of Macroeconomic News on the Euro-Dollar Exchange Rate By Alberto Caruso
  32. Endogenous Search, Price Dispersion, and Welfare By Liang Wang
  33. Networks and lending conditions: Empirical evidence from the Swiss franc money markets By Silvio Schumacher
  34. Random Categorization and Bounded Rationality By David Laidler
  35. Risk Management and the Money Multiplier By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  36. The theory of unconventional monetary policy By Farmer, Roger; Zabczyk, Pawel
  37. On the Efficiency of Monetary Equilibrium when Agents are Wary By Aloisio Araujo; Juan Pablo Gama-Torres; Rodrigo Novinski; Mario Pascoa
  38. Effects of Commodity Price Shocks on Inflation: A Cross-Country Analysis By SEKINE Atsushi; TSURUGA Takayuki
  39. Welfare Implications of the Term Structure of Returns: Should Central Banks Fill Gaps or Remove Volatility? By Pierlauro Lopez

  1. By: Cole, Stephen J. (Department of Economics Marquette University)
    Abstract: This paper examines the effectiveness of central bank forward guidance under inflation and price-level targeting monetary policies. The results show that the attenuation of the effects of forward guidance can be solved if a central bank switches from inflation targeting to price-level targeting. Output and inflation respond more favorably to forward guidance with price-level targeting than inflation targeting. A monetary policy rule that aggressively reacts to inflation and includes interest rate inertia narrows the performance gap between the two policy regimes. However, forward guidance with price-level targeting is still preferred to forward guidance with inflation targeting after performing multiple robustness checks.
    Keywords: Forward Guidance, In ation Targeting, Price-Level Targeting, Monetary Policy
    JEL: E30 E31 E50 E52 E58 E60
    Date: 2016–08
  2. By: Inês Pereira (Erasmus School of Economics)
    Abstract: After the financial crisis in 2008, many central banks began to use unconventional monetary policy in order to boost the effective transmission of monetary policy and to provide additional direct monetary stimulus to the economy. This study will make use of an event study to analyse the impact of those unconventional monetary policies implemented by the European Central Bank on nominal and real long-term interest rates. The long-term interest rates being considered are the 10-year government bond yield, the 5 and 10-year corporate bond yield (AAA and BBB) and the 5y5y swap forward rate for the Eurozone. The results show that unconventional monetary policy conducted by the ECB had a significant effect on real and nominal and long-term interest rates. This effect can be more persistent for a specific group of countries during some announcements, namely the 4th of September of 2014 announcement significantly lowered the 10-year government bond yield and BBB 5-year bond yield for Portugal and the remaining PIIGS.
    Keywords: Inflation expectations, Unconventional monetary policy, European Central Bank, Long-term interest rates, Event study
    JEL: G14 E42 E44
    Date: 2016–09
  3. By: Margaux MacDonald (Queen's University); Michal Popiel (Queen's University)
    Abstract: This paper investigates the effects of unconventional monetary policy in Canada. We use recently proposed methods to construct a shadow interest rate that captures monetary policy at the zero lower bound (ZLB) and estimate a small open economy Bayesian structural vector autoregressive (B-SVAR) model. Controlling for the US macroeconomic and monetary policy variables, we find that Canadian unconventional monetary policy increased Canadian output by 0.23% per month on average between April 2009 and June 2010. Our empirical framework also allows us to quantify the effects of US unconventional monetary policy, which raised US and Canadian output by 1.21% and 1.94% per month, respectively, on average over the 2008--2015 period.
    Keywords: small open economy, unconventional monetary policy, Bayesian structural VAR, zero lower bound, international monetary policy transmission
    JEL: E52 E58 F42
    Date: 2016–09
  4. By: Christian Dreger; Dieter Gerdesmeier; Barbara Roffia
    Abstract: The analysis of monetary developments have always been a cornerstone of the ECB’s monetaryanalysis and, thus, of its overall monetary policy strategy. In this respect, money demandmodels provide a framework for explaining monetary developments and assessing price stabilityover the medium term. It is a well-documented fact in the literature that, when interestrates are at the zero lower bound, the analysis of money stocks become even more importantfor monetary policy. Therefore, this paper re-investigates the stability properties of M3 demandin the euro area in the light of the recent economic crisis. A cointegration analysis isperformed over the sample period 1983 Q1 and 2015 Q1 and leads to a well-identified modelcomprising real money balances, income, the long term interest rate and the own rate of M3holdings. The specification appears to be robust against the Lucas critique of a policy dependentparameter regime, in the sense that no signs of breaks can be found when interest ratesreach the zero lower bound. Furthermore, deviations of M3 from its equilibrium level do notpoint to substantial inflation pressure at the end of the sample. Excess liquidity models turnout to outperform the autoregressive benchmark, as they deliver more accurate CPI inflationforecasts, especially at the longer horizons. The inclusion of unconventional monetary policymeasures does not contradict these findings.
    Keywords: Euro area money demand, inflation forecasts, unconventional monetary policy
    JEL: E41 E44 E52 G11 G15
    Date: 2016
  5. By: Cesa-Bianchi, Ambrogio (Bank of England); Thwaites, Gregory (Bank of England); Vicondoa, Alejandro (European University Institute)
    Abstract: This paper constructs a new series of monetary policy surprises for the United Kingdom and estimates their effects on macroeconomic and financial variables, employing a high-frequency identification procedure. First, using local projections methods, we find that monetary policy has persistent effects on real interest rates and breakeven inflation. Second, employing our series of surprises as an instrument in a SVAR, we show that monetary policy affects economic activity, prices, the exchange rate, exports and imports. Finally, we implement a test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks computed by Cloyne and Huertgen (2014), and find no evidence that either set of shocks contains any endogenous response to macroeconomic variables.
    Keywords: Monetary policy transmission; external instrument; high-frequency identification; structural VAR; local projections
    JEL: E31 E32 E43 E44 E52 E58
    Date: 2016–09–02
  6. By: Cécile Couharde; Carl Grekou
    Abstract: This paper re-examines empirically the relationship between exchange rate regimes and currency misalignments in emerging and developing countries. Using alternative de facto exchange rate regime classifications over the period 1980-2012, it finds strong evidence that performance of exchange rate regimes is conditional on the de facto classification. In particular, this paper shows that the effect of monetary arrangements on currency misalignments depends critically on the ability of these classification schemes to capture adequately dysfunctional monetary regimes.
    Keywords: Currency misalignments; Exchange rate regimes; Emerging and developing countries.
    JEL: C23 F31 F33
    Date: 2016
  7. By: Clemens Jobst (OeNB - The Oesterreichische Nationalbank - The Oesterreichische Nationalbank); Stefano Ugolini (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2 - Université Toulouse 2 - Institut d'Études Politiques [IEP] - Toulouse - École Nationale de Formation Agronomique - ENFA)
    Abstract: Money market structures shape monetary policy design, but the way central banks perform their operations also has an impact on the evolution of money markets. This is important, because microeconomic differences in the way the same macroeconomic policy is implemented may be non-neutral. In this paper, we take a panel approach in order to investigate both directions of causality. Thanks to three newly-collected datasets covering ten countries over two centuries, we ask (1) where, (2) how, and (3) with what results interaction between money markets and central banks has taken place. Our findings allow establishing a periodization singling out phases of convergence and divergence. They also suggest that exogenous factors – by changing both money market structures and monetary policy targets – may impact coevolution from both directions. This makes sensible theoretical treatment of the interaction between central bank policy and market structures a particularly complex endeavor.
    Keywords: Central banking,Money markets,Monetary policy implementation
    Date: 2016–06
  8. By: Gary Gorton; Ping He
    Abstract: In the last forty or so years the U.S. financial system has morphed from a mostly insured retail deposit-based system into a system with significant amounts of wholesale short-term debt that relies on collateral, and in particular Treasuries, which have a convenience yield. In the new economy the quality of collateral matters: when Treasuries are scarce, the private sector produces (imperfect) substitutes, mortgage-backed and asset-backed securities (MBS). When the ratio of MBS to Treasuries is high, a financial crisis is more likely. The central bank’s open market operations affect the quality of collateral because the bank exchanges cash for Treasuries (one kind of money for another). We analyze optimal central bank policy in this context as a dynamic game between the central bank and private agents. In equilibrium, the central bank sometimes optimally triggers recessions to reduce systemic fragility.
    JEL: E02 E42 E44 E5 E52
    Date: 2016–09
  9. By: Antonio Mele (University of Surrey); Radoslaw Stefanski (University of St. Andrews and University of Oxford)
    Abstract: Monetary velocity declines as economies grow. We argue that this is due to the process of structural transformation - the shift of workers from agricultural to non-agricultural production associated with rising income. A calibrated, two-sector model of structural transformation with monetary and non-monetary trade accurately generates the long run monetary velocity of the US between 1869 and 2013 as well as the velocity of a panel of 92 countries between 1980 and 2010. Three lessons arise from our analysis: 1) Developments in agriculture, rather than non-agriculture, are key in driving monetary velocity; 2) Inflationary policies are disproportionately more costly in richer than in poorer countries; and 3) Nominal prices and inflation rates are not ‘always and everywhere a monetary phenomenon’: the composition of output influences money demand and hence the secular trends of price levels.
    JEL: O1 O4 E4 E5 N1
    Date: 2016–07
  10. By: Diana Lima (Central Bank of Portugal); Ioannis Lazopoulos (University of Surrey); Vasco Gabriel (University of Surrey)
    Abstract: Central banks in charge of banking regulation are less aggressive in their inflation mandate since tight monetary policy conditions could have an adverse effect on the stability of the banking system. Due to the conflict between the two mandates, it has been argued that banking supervisory powers should be assigned to an independent authority to avoid ination bias and enhance social welfare. The rst part of the paper develops a theoretical model that assesses the interaction between different policy transmission channels, namely the credit channel and the banks' balance sheet channel. Focusing on a mandate where central banks are also responsible for banking supervision, cases where the price and financial stabilisation objectives are complementary or conflicting are identfied, highlighting the role of policy instruments and types of macroeconomic shocks on welfare. The second part of the paper empirically assesses whether central banks' combined mandates lead to an inflation bias problem using panel data for 25 industrialised countries from 1975 to 2012. The estimation results show that, once we control for relevant policy and institutional factors (such as the presence of inflation targeting and deposit insurance schemes), the separation of banking supervision and monetary policy does not have a significant effect on inflation outcomes.
    Date: 2016–05
  11. By: Jean-Christophe Poutineau (CREM - Centre de Recherche en Economie et Management - UR1 - Université de Rennes 1 - Université de Caen Basse-Normandie - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (PSL - PSL Research University, LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: In an estimated DSGE model of the European Monetary Union that accounts for financial differences between core and peripheral countries, we find that country-adjusted macroprudential measures lead to significant welfare gains with respect to a uniform macroprudential policy rule that reacts to union wide financial developments. However, peripheral countries are the winners from the implementation of macroprudential measures while core countries incur welfare losses, thus questioning the interest of adopting coordinated macroprudential measures with peripheral countries.
    Keywords: Bayesian Estimation,DSGE Two-Country Model,Macroprudential policy,Euro Area,Financial Accelerator
    Date: 2016–05–12
  12. By: Kumawat, Lokendra (Ramjas College, Delhi University); Bhanumurthy, N. R. (National Institute of Public Finance and Policy)
    Abstract: The objectives of monetary policy have always been a topic of intensive debate. This debate has resurfaced during the past few years. In India too monetary policy-making appears to have undergone significant change during the last two decades and has also been responding to changing macroeconomic environment. Against this backdrop an attempt has been made in this paper to model the monetary policy response function for India, for the period April 1996 to July 2015. Using 91-day Treasury bill rate as the policy rate, we find that the monetary policy has been responsive to inflation rate, output gap and exchange rate changes during this period. We find substantial time-varying behavior in the reaction function. The regime shift tests show that the transition is driven by inflation gap as well as exchange rate changes. Highly complex nature of dynamics of interest rate does not allow us to estimate many models, but the models estimated show that the monetary policy responds to inflation gap as well as exchange rate changes. Another important finding is that there is a high degree of inertia in the policy rates.
    Keywords: Monetary policy ; reaction function ; smooth transition regression ; India.
    JEL: E52 C22
    Date: 2016–09
  13. 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
  14. By: Miles Kimball (University of Michigan); Christopher House (University of Michigan); Christoph Boehm (University of Michigan); Robert Barsky (Department of Economics)
    Abstract: We analyze monetary policy in a New Keynesian model with durable and non-durable goods, each with a separate degree of price rigidity. Durability has profound implications for the business cycle properties of the model and its response to interest rate interventions. Since utility depends on the service flow from the stock of durables, the flow demand for new durables is inherently sensitive to temporary changes in the relevant real interest rate. For a sufficiently long-lived “ideal†durable, we obtain an intriguing variant of the well-known “divine coincidence —in this case, the output gap depends only on inflation in the durable goods sector. We use numerical methods to verify the robustness of this analytical result for a broader class of model parameterizations. We then analyze the optimal Taylor rule for this economy. If the monetary authority places a high weight on stabilizing aggregate inflation then it is optimal to respond to sectoral inflation in direct proportion to the sectoral shares of economic activity. However, if the monetary authority wants to stabilize the aggregate output gap, it puts disproportionate weight on inflation in durable goods prices.
    Date: 2016
  15. By: Alessio Ciarlone (Banca d'Italia); Andrea Colabella (Banca d'Italia)
    Abstract: In this paper we provide evidence that the effects of the ECB’s asset purchase programmes spill over into CESEE countries, contributing to easing their financial conditions both in the short and in the long term through different transmission channels. In the short term, a number of variables in CESEE financial markets appear to respond to news related to the ECB’s non-standard policies by moving in the expected direction. Over a longer-term horizon, we found that cross-border portfolio and banking capital flows towards CESEE economies have been ffected by both the announcement and the actual implementation of the ECB’s asset purchase programmes, pointing to the existence of a portfolio rebalancing and a banking liquidity channel.
    Keywords: unconventional monetary policy, ECB, Central and Eastern Europe, international spillovers, event study
    JEL: C32 C33 E52 E58 F32 F36
    Date: 2016–09
  16. By: Serguei Maliar (Santa Clara University); John Taylor (Stanford University); Lilia Maliar (Stanford University)
    Abstract: We investigate the effects of a regime shift in monetary policy on macroeconomic variables and welfare in the context of a model with staggered price setting and a Taylor rule. The studied economy is nonstationary because the parameters in the Taylor rule may change over time. We analyze how such time-dependent monetary policy can affect economy. In particular, the EFP allows us to study questions like "Should the Fed normalize policy now or later?"; "Should the Fed normalize policy gradually or all at once?"; and , "Should the Fed announce the regime shift publicly in advance?". We also assess the effects of anchoring inflation expectations of economic agents. Finally, we consider the effects of the zero lower bound (ZLB) on nominal interest rates, and we analyze and compare different transitions out of the ZLB
    Date: 2016
  17. By: George Alogoskoufis (Athens University of Economics and Business)
    Abstract: This paper puts forward an alternative “new Keynesian” dynamic stochastic general equilibrium model of aggregate fluctuations. The model is characterized by one period nominal wage contracts and endogenous persistence of deviations of unemployment from its natural rate. Aggregate fluctuations are analyzed under both a Taylor nominal interest rate rule and under the assumption of optimal discretionary monetary policy. Under both types of monetary policy, the persistence of unemployment results in persistent inflation as the central bank responds to deviations of unemployment from its natural rate. Econometric evidence from the United States since the 1890s cannot reject the main predictions of the model.
    Keywords: Aggregate Fluctuations, Unemployment Persistence, Inflation, Monetary Policy, Insiders Outsiders, Natural Rate
    JEL: E3 E4 E5
    Date: 2016–03
  18. By: R. S.J. Koijen; F. Koulischer; B. Nguyen; M. Yogo
    Abstract: We use new data on security-level portfolio holdings of institutional investors and households in the euro area to understand the impact of the ongoing asset purchase programme of the European Central Bank (ECB) on the dynamics of risk exposures and on asset prices. We develop a tractable measurement framework to quantify the dynamics of euro-area duration, sovereign and corporate credit, and equity risk exposures as the programme evolves. We propose an instrumental-variables estimator to identify the impact of central bank purchases on sovereign bonds on sovereign bond yields. Our results suggest that the foreign sector sells most in response to the programme, followed by banks and mutual funds, while the purchases of insurance companies and pension funds are positively related to purchases by the ECB.
    Keywords: Quantitative Easing, Flow of Risk, Portfolio Rebalancing, Risk Concentration.
    JEL: E52 E58 G2 G15
    Date: 2016
  19. By: Christian Rohe
    Abstract: I analyze the symmetry of economic shocks in South America by comparing the volatility of unexpected changes in bilateral real exchange rates within an existing monetary union, the intra-Brazilian currency area, with the volatility found in real exchange rates between Brazilian regions and nine South American countries for the 1994-2013 time period. My results show that shocks across South America are substantially less symmetric than shocks within Brazil, indicating potentially high costs if a continent-wide monetary union should eliminate nominal exchange rate exibility between countries.
    Keywords: Optimum currency area, Real exchange rates, Monetary union
    JEL: F31 F33 O54
    Date: 2016–08
  20. By: Arlene Wong (Northwestern University)
    Abstract: Previous work has documented that housing and refinancing decisions play an important role in shaping the aggregate and cross-sectional consumption elasticities to interest rate shocks. New home purchases and refinances can then affect durable and non-durable consumption through the associated fluctuations in disposable income and the complementarity between housing and consumption. In this paper, we examine the transmission of monetary policy through housing debt. Specifically, we use detailed micro data to study the mortgage channel that links monetary policy with household borrowing and consumption expenditure. Specifically, we quantify the heterogeneity across borrowers and state-dependency in the pass-through of interest rate shocks to consumption over the Federal Reserve Bank’s interest rate cycle.
    Date: 2016
  21. By: George C. Bitros (Athens University of Economics and Business)
    Abstract: This paper investigates whether the monetary policy and the market structure have anything to do with the declining share of labor in the U.S in recent decades. For this purpose: (a)a dynamic general equilibrium model is constructed and used in conjunction with data over the 2000-2014 period to compute the income shares; (b) the latter are compared to those reported from various sources for significant differences , and (c) the influence of monetary policy is subjected to several statistical tests. With comfortable margins of confidence it is found that the interest rate the Federal Open Market Committee charges for providing liquidity to the economy is related positively with the shares of labor and profits and negatively with the share of interest. What these findings imply is that, by moving opposite to the equilibrium real interest rate, the relentless reduction of the federal funds rate since the 1980s may have contributed to the decline in the equilibrium share of labor, whereas the division of the equilibrium non-labor income between interest and profits has been evolving in favor of the former, because according to all indications the stock of producers’ goods in the U.S has been aging. As for the market structure,it is found that even if firms had and attempted to exercise monopoly power, it would be exceedingly difficult to exploit it because the demand of consumers’ goods is significantly price elastic. Should these results be confirmed by further research, they would go a long way towards explaining the deceleration of investment and economic growth.
    Keywords: Useful life of capital, Equilibrium real interest, Eederal funds rate, Income shares
    JEL: E19 E25 E40 E50
    Date: 2016–03
  22. By: Michael Bordo; Arunima Sinha
    Abstract: We examine the first QE program through the lens of an open-market operation under taken by the Federal Reserve in 1932, at the height of the Great Depression. This program entailed large purchases of medium- and long-term securities over a four-month period. There were no prior announcements about the size or composition of the operation, how long it would be put in place, and the program ended abruptly. We use the narrative record to conduct an event study analysis of the operation using the weekly-level Treasury holdings of the Federal Reserve in 1932, and the daily term structure of yields obtained from newspaper quotes. The event study indicates that the 1932 program dramatically lowered medium- and long-term Treasury yields; the declines in Treasury Notes and Bonds around the start of the operation were as large as 114 and 42 basis points respectively. We then use a segmented markets model to analyze the channel through which the open-market purchases affected the economy, namely the portfolio composition and signaling effects. Quarterly data from 1920-32 is used to estimate the model with Bayesian methods. We find that the significant degree of financial market segmentation in this period made the historical open market purchase operation more effective than QE in stimulating output growth. Had the Federal Reserve continued its operations and used the announcement strategy of the QE operation, the Great Contraction could have been attenuated earlier.
    JEL: E5 N1
    Date: 2016–08
  23. By: Fumihiko Arai (Bank of Japan); Yoshibumi Makabe (Bank of Japan); Yasunori Okawara (Bank of Japan); Teppei Nagano (Bank of Japan)
    Abstract: The cross-currency basis, which is the basis spread added mainly to the U.S. dollar London Interbank Offered Rate (USD LIBOR) when the USD is funded via foreign exchange (FX) swaps using the Japanese yen or the euro as a funding currency, has been widening globally since the beginning of 2014. This development is driven by (1) increased demands for U.S. dollars resulting from a divergence in the monetary policy between the U.S. and other advanced countries, (2) global banks' reduced appetite for market-making and arbitrage due to regulatory reforms, and (3) the decrease in the supply of U.S. dollars from foreign reserve managers/sovereign wealth funds against the background of declines in commodity prices and emerging currency depreciations.
    Date: 2016–09–09
  24. By: Wenxin Du; Carolin E. Pflueger; Jesse Schreger
    Abstract: Nominal debt provides consumption-smoothing benefits if it can be inflated away during recessions. However, we document empirically that countries with more countercyclical inflation, where nominal debt provides better consumption-smoothing, issue more foreign-currency debt. We propose that monetary policy credibility explains the currency composition of sovereign debt and nominal bond risks in the presence of risk-averse investors. In our model, low credibility governments inflate during recessions, generating excessively countercyclical inflation in addition to the standard inflationary bias. With countercyclical inflation, investors require risk premia on nominal debt, making nominal debt issuance costly for low credibility governments. We provide empirical support for this mechanism, showing that countries with higher nominal bond-stock betas have significantly larger nominal bond risk premia and borrow less in local currency.
    JEL: E4 F3 G12 G15
    Date: 2016–09
  25. By: Holston, Kathryn; Laubach, Thomas; Williams, John C.
    Abstract: U.S. estimates of the natural rate of interest – the real short-term interest rate that would prevail absent transitory disturbances – have declined dramatically since the start of the global financial crisis. For example, estimates using the Laubach-Williams (2003) model indicate the natural rate in the United States fell to close to zero during the crisis and has remained there through the end of 2015. Explanations for this decline include shifts in demographics, a slowdown in trend productivity growth, and global factors affecting real interest rates. This paper applies the Laubach-Williams methodology to the United States and three other advanced economies – Canada, the Euro Area, and the United Kingdom. We find that large declines in trend GDP growth and natural rates of interest have occurred over the past 25 years in all four economies. These country-by-country estimates are found to display a substantial amount of comovement over time, suggesting an important role for global factors in shaping trend growth and natural rates of interest.
    Keywords: Kalman filter; Monetary policy rules; Natural rate of output; Trend growth
    JEL: C32 E43 E52 O40
    Date: 2016–08–19
  26. By: Jean Barthélemy (Département d'économie); Eric Mengus (HEC Paris - Recherche - Hors Laboratoire)
    Abstract: This paper argues that central bankers should raise inflation when anticipating liquidity traps to signal their credibility to forward guidance policies. As stable inflation in normal times either stems from central banker's credibility, e.g. through reputation, or from his aversion to inflation, the private sector is unable to infer the central banker's type from observing stable inflation, jeopardizing the efficiency of forward guidance policy. We show that this signaling motive can justify level of inflation well above 2% but also that the low inflation volatility during the Great Moderation was insufficient to ensure fully efficient forward guidance when needed.
    Keywords: Forward guidance; Inflation; Signaling
    JEL: E31 E52 E65
    Date: 2016–08
  27. By: Lucas Herrenbrueck (Simon Fraser University)
    Abstract: How do central bank purchases of illiquid assets affect interest rates and the real economy? In order to answer this question, I construct a parsimonious and very flexible general equilibrium model of asset liquidity. In the model, households are heterogeneous in their asset portfolios and demand for liquidity, and asset trade is subject to frictions. I find that open market purchases of illiquid assets are fundamentally different from helicopter drops: asset purchases stimulate private demand for consumption goods at the expense of demand for assets and investment goods, while helicopter drops do the reverse. A temporary program of quantitative easing can therefore cause a "hangover" of elevated yields and depressed investment after it has ended. When assets are already scarce, further purchases can crowd out the private flow of funds and cause high real yields and disinflation, resembling a liquidity trap. In the long term, lowering the stock of government debt reduces the supply of liquidity but increases the capital-output ratio, with ambiguous consequences for output itself.
    Date: 2016
  28. By: J. Sebastián Amador-Torres (Banco de la República de Colombia)
    Abstract: In this paper output gaps that include financial cycle information are evaluated against models used in policy analysis by the Colombian central bank. Employing this dataset is no trivial matter, since policy related models are the only relevant yardstick, and emerging economies (such as Colombia) have been historically more vulnerable to financial imbalances. Unlike previous works, finance neutral gaps were evaluated in a monetary policy context exactly as it is routinely performed by a central bank. The distribution of output gap revisions is analyzed, and a metric to compare real time robustness across models is developed. This metric constitutes a novel way to summarize the distribution of real time uncertainty around output gaps, and policy makers should employ it to compare different methods. Also the real time policy performance of finance neutral gaps is studied, separating suggested ex-post from operational ex-ante usefulness. Results suggest finance neutral gaps are neither more robust in real time nor more operationally useful than the benchmark estimates. This implies that policy makers should consider uncertainty to the extent that it affects the estimations real time forecasting capabilities. Classification JEL: E44, E47, E52, E37, C53
    Keywords: Potential output, financial cycle, real-time data, monetary policy, emerging economy
    Date: 2016–09
  29. By: Nils Herger (Study Center Gerzensee, Switzerland.)
    Abstract: This paper examines several versions of the (covered and uncovered) interest parity condition that arguably held as regards the investment demand for bills of exchange during the classical gold standard (1880 - 1914). Contemporaneous guide books about the foreign exchanges report that close connections between the exchange and interest (or discount) rates arose mainly between London and the major financial centres on the European continent. As implied by the interest parity condition, and in particular when future exchange rate movements were covered via a suitable long-bill transaction, weekly data suggest indeed that between Paris, Amsterdam, Berlin and London, the return from discounting bills of exchange in the local money market was roughly equivalent to the (exchange rate adjusted) return from investing in foreign bills.
    Keywords: Covered interest parity condition; Exchange rates; Gold standard; Uncovered interest parity condition
    JEL: F31 N13 N23
    Date: 2016
  30. By: Ghosh, Atish R. (Asian Development Bank Institute); Qureshi, Mahvash S. (Asian Development Bank Institute)
    Abstract: While capital flows to emerging markets bring numerous benefits, they are also known to create macroeconomic imbalances (economic overheating, currency overvaluation) and increase financial vulnerabilities (domestic credit growth, bank leverage, foreign currency-denominated lending). But are all inflows the same? In this paper, we examine whether the source of the inflow—residents repatriating foreign assets or nonresidents investing in the country—or the type of inflow (foreign direct investment, portfolio, other investment) makes any difference to the consequences of the capital flow. Our results, based on a sample of 53 emerging markets over 1980–2013, show that when it comes to the source of the inflow, the macroeconomic and financial-stability consequences of flows driven by residents (asset flows) and nonresidents (liability flows) are broadly similar in economic terms. Formal statistical tests, however, suggest that liability flows are more prone to causing economic overheating and domestic credit expansion than asset flows. On the types of inflows, we find that compared to direct investment, portfolio debt and other investment flows are associated with larger macroeconomic imbalances and financial vulnerabilities. We conclude that policy should try to mitigate the untoward consequences of inflows, and shift their composition from risky to safer forms of liabilities.
    Keywords: capital flow; emerging markets; macroeconomics; economic overheating; credit expansion; currency; overvaluation; domestic credit; bank leverage; foreign currency; lending; FDI; foreign direct investment; investment; financial stability; asset flow; liability flow; portfolio debt
    JEL: F21 F32 F38 F41 F42 F62
    Date: 2016–09–15
  31. By: Alberto Caruso
    Abstract: This paper studies the effect of macroeconomic "news" (market now-cast errors related to the flow of data releases on macroeconomic fundamentals) on the daily USD/EUR exchange rate. I consider a large number of real-time macroeconomic announcements from both the US and the euro-zone, and the related market expectations as reported by Bloomberg. For the euro-zone I also study country level announcements for the four biggest economies (Germany, France, Italy, Spain). The results for the whole sample (1999-2012) show that both the "news" associated with euro-zone releases and those associated with US ones have a significant impact on the USD/EUR exchange rate. However, the effect of the euro-zone "news" has become larger since the 2008 crisis and it is now more sizeable than that of the US "news".
    Keywords: macroeconomic news; exchange rate; event studies; real-time data
    JEL: E44 E47 F31 G14
    Date: 2016–09
  32. By: Liang Wang (Assistant Professor at the University of Hawaii Manoa; University of Hawaii at Manoa, Department of Economics, University of Hawaii Economic Research Organization)
    Abstract: This paper studies the welfare cost of ináation in a frictional monetary economy with endogenous consumer search. Equilibrium entails price dispersion, where sellers compete for buyers by posting prices. We identify three channels through which inflation affects welfare. The real balance channel is the source of welfare loss. Its interaction with the price posting channel generates a welfare cost larger than Lucas (2000). The search channel reduces the welfare cost by more than one half through general equilibrium effect. The aggregate effect of these three channels on welfare is non-monotonic. Additionally, the welfare cost of ináation áuctuations is negligible.
    Keywords: Consumer Search, Inflation, Price Dispersion, Welfare
    JEL: E31 E40 E50 D83
  33. By: Silvio Schumacher
    Abstract: This paper provides an empirical analysis of the network characteristics of two interrelated interbank money markets and their impact on overall market conditions. Based on transaction data from the unsecured and secured Swiss franc money markets, the trading network structures are assessed before, during and after the financial market crisis. It can be shown that banks in the unsecured market are connected to a lower number of counterparties but rely heavily on reciprocal and clustered trading relationships. The corresponding network structure likely favored the exchange of liquidity prior to the financial market crisis but also might have led to a lower resilience of the unsecured market. There is empirical evidence that conditions in both sub-markets were significantly driven by the individual network position of banks. The network topology likely affected the shift observed from unsecured to secured lending and the increase in risk premia for unsecured lending during the financial market crisis. This paper therefore provides further evidence on the functioning of interbank money markets and, especially, on the impact of market participants interconnectedness.
    Keywords: Repo transaction, unsecured interbank money market, financial market turmoil, financial stability, Switzerland
    JEL: E42 E43 E58 G01 G12 G21 L14
    Date: 2016
  34. By: David Laidler (University of Western Ontario)
    Abstract: The problems posed by monetary policy cannot be dealt with by legislating enduring policy rules. With the passage of time, economic understanding does not systematically converge ever more closely on a “true” model of the economy, a process which is now sufficiently far along that our current ideas can form the basis for designing such measures. Rather, economic ideas evolve unsteadily and unpredictably and disagreement about them is routine. They influence the behaviour of the economy and they are influenced by it as they develop, requiring policy principles to adapt as well. Monetary policy thus poses problems that cannot be solved once and for all, but must be coped with continuously.
    Keywords: Monetary Policy; Rules versus Discretion; Gold Standard; Revolutions in Macroeconomics
    JEL: E5 B1 B2
    Date: 2016
  35. By: Tatiana Damjanovic (Durham Business School); Vladislav Damjanovic (Durham Business School); Charles Nolan (Adam Smith Business School, University of Glasgow)
    Abstract: The conventional model of bank liquidity risk management predicts a negative relation between the risk free rate and the money multiplier. We extend that model to reflect credit, or loan book, risk. We find that credit risk model predicts a positive correlation between the risk free rate and the money multiplier, other things constant. In the pre-financial crisis period the liquidity risk view fits the data better whilst in the post-crisis period, the credit risk management model is more appropriate in explaining the relationship between the money multiplier and the risk free rate. In addition, the model implies that the money multiplier should increase with stock market return and decline with its volatility. We provide evidence that this is indeed the case
    Keywords: Credit risk management, Excess reserves, Money multiplier.
    Date: 2016–06
  36. By: Farmer, Roger (UCLA, Department of Economics); Zabczyk, Pawel (Bank of England)
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    Keywords: Unconventional monetary policy; qualitative easing; central bank balance sheet; portfolio balance effects
    JEL: E02 G11 G21
    Date: 2016–09–02
  37. By: Aloisio Araujo (IMPA); Juan Pablo Gama-Torres (IMPA); Rodrigo Novinski (Faculdades Ibmec); Mario Pascoa (University of Surrey)
    Abstract: Wary agents tend to neglect gains at distant dates but not the losses that occur at those far away dates. For these agents, Ponzi schemes are not the only improving schemes compatible with non-arbitrage pricing. However, ecient allocations can be sequentially implemented by allocating money and then, at subsequent dates, taxing savings plans whose open end bene ts to wary agents outweigh the cost of carrying on cash. The allocative role of money does not disappear over time and the transversality condition allows for consumers to have limiting long positions. Money supply does not have to go to zero and, actually, there are equilibria where it does not. We address also why at money does not lose its value when Lucas trees are available.
    Date: 2016–03
  38. By: SEKINE Atsushi; TSURUGA Takayuki
    Abstract: Since the 2000s, large fluctuations in commodity prices have become a concern among policymakers regarding price stability. This paper investigates the effects of commodity price shocks on headline inflation with a monthly panel consisting of 144 countries. We show that the effects of commodity price shocks on inflation are transitory. While the effect on the level of consumer prices varies across countries, the transitory effects are fairly robust, suggesting a low risk of the so-called second-round effect on inflation. Employing the smooth transition autoregressive models that use past inflation as the transition variable, we also explore the possibility that the effect of commodity price shocks could be persistent, depending on inflation regimes. In this specification, commodity price shocks may not have transitory effects when a country's currency is pegged to the U.S. dollar. However, the effect remains transitory in countries with exchange rate flexibility. JEL Classification: E31, E37, Q43
    Keywords: Commodity prices, inflation, pass-through, local projections, smooth transition
    Date: 2016–07
  39. By: Pierlauro Lopez (Banque de France)
    Abstract: The welfare cost of economic uncertainty has a term structure that is a simple transformation of the term structures of the equity premium and interest rates. Twenty years of financial market data suggest a term structure of welfare costs that is downward-sloping on average and during downturns. This evidence offers guidance in selecting a model to study the benefits of greater consumption stability from a structural perspective. A model with nominal rigidities and nonlinear external habits can rationalize the evidence and motivates the competitive level and volatility of consumption as inefficient. The model is observationally equivalent to a standard New Keynesian model with CRRA utility but the optimal policy prescription is overturned; in the model the central bank should focus on removing consumption volatility rather than on filling the gap between consumption and its flexible-price counterpart.
    Date: 2016

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