nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒09‒25
28 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. 'What is the Globalisation of Inflation? ' By Gantungalag Altansukha; Ralf Becker; George Bratsiotis; Denise R. Osborn
  2. Dynamics of the exchange rate in Tunisia By Ammar Samout; Nejia Nekâa
  3. Time-Varying Persistence of Inflation: Evidence from a Wavelet-based Approach By Heni Boubaker; Giorgio Canarella; Rangan Gupta; Stephen M. Miller
  4. Funding Quantitative Easing to Target Inflation By Reis, Ricardo
  5. Time-Frequency Relationship between Inflation and Inflation Uncertainty for the U.S.: Evidence from Historical Data By Claudiu Tiberiu Albulescu; Aviral Kumar Tiwari; Stephen M. Miller; Rangan Gupta
  6. The impact of uncertainty on professional exchange rate forecasts By Beckmann, Joscha; Czudaj, Robert
  7. Below the zero lower bound: A shadow-rate term structure model for the euro area By Lemke, Wolfgang; Vladu, Andreea L.
  8. Country Portfolios, Collateral Constraints and Optimal Monetary Policy By Senay, Ozge; Sutherland, Alan
  9. Modeling changes in U.S. monetary policy By Anh Nguyen; Efthymios Pavlidis; David Alan Peel
  10. The Federal Reserve's New Approach to Raising Interest Rates By Jane E. Ihrig; Ellen E. Meade; Gretchen C. Weinbach
  11. "Whatever it takes" is all you need: monetary policy and debt fragility By Russell Cooper; Antoine Camous
  12. Foreign exchange intervention and monetary policy design: a market microstructure analysis By Montoro, Carlos; Ortiz, Marco
  13. Measuring Monetary Policy Uncertainty : The Federal Reserve, January 1985-January 2016 By John H. Rogers; Bo Sun; Lucas F. Husted
  14. On Nash Equilibria in Speculative Attack Models By Ivan Pastine
  15. International Spillovers of Monetary Policy By John Ammer; Michiel De Pooter; Christopher J. Erceg; Steven B. Kamin
  16. Monetary Policy for a Bubbly World By Vladimir Asriyan; Luca Fornaro; Alberto Martin; Jaume Ventura
  17. Preference for Liquidity of Agents: An Analyse of Brasilian Case By LAGES, ANDRÉ MAIA GOMES; SANTOS, FABRÍCIO RIOS NASCIMENTO; FERREIRA, HUMBERTO BARBOSA
  18. Reassessing price adjustment costs in DSGE models By Sienknecht, Sebastian
  19. Microeconometric evidence on demand-side real rigidity and implications for monetary non-neutrality By Beck, Günter W.; Lein-Rupprecht, Sarah M.
  20. The Effectiveness of Monetary Policy in Small Open Economies; An Empirical Investigation By Keyra Primus
  21. The global Crisis and Unconventional Monetary Policy: ECB versus Fed By Carolina Tuckwell; António Mendonça
  22. The Risk of Returning to the Effective Lower Bound : An Implication for Inflation Dynamics After Lift-Off By Timothy S. Hills; Taisuke Nakata; Sebastian Schmidt
  23. How Quantitative Easing Works: Evidence on the Refinancing Channel By Marco Di Maggio; Amir Kermani; Christopher Palmer
  24. Inflation Persistence and Structural Breaks: The Experience of Inflation Targeting Countries and the US By Giorgio Canarella; Stephen M. Miller
  25. China Pro-Growth Monetary Policy and Its Asymmetric Transmission By Kaiji Chen; Patrick Higgins; Daniel F. Waggoner; Tao Zha
  26. Inflation Expectations in the Recovery from the Great Depression By Andrew Jalil; Gisela Rua
  27. Fixed wage contracts and monetary non-neutrality By Björklund, Maria; Carlsson, Mikael; Nordström Skans, Oskar
  28. Effect of Quantitative Easing on the Indian Economy: A Dynamic Stochastic General Equilibrium Perspective By Parantap Basu; Shesadri Banerjee

  1. By: Gantungalag Altansukha; Ralf Becker; George Bratsiotis; Denise R. Osborn
    Abstract: This paper studies the globalisation of CPI in ation by analysing core, energy and food components, testing for structural breaks in the relationships between domestic inflation and a corresponding country-specific foreign inflation series at the monthly frequency for OECD countries. The iterative methodology employed separates coefficient and variance breaks, while also taking account of outliers. We find that the overall pattern of globalisation in aggregate inflation is largely driven by convergence of the mean levels of the core component from the early 1990s, compatible with the introduction of inflation targeting in many countries of our sample. There is less evidence of increased synchronisation of shortrun movements in core than aggregate inflation, but an increased role for shortrun foreign energy inflation often contributes to the globalisation effect.
    Date: 2016
  2. By: Ammar Samout (Faculty of Economics and management, University of Sfax); Nejia Nekâa (Faculty of Economics and management, University of Sfax)
    Abstract: The exchange rates are at the heart of international economic relations and are an integral part of the everyday landscape of economic agents. The Tunisia like the other country is faced with the problem of determination of the rate of exchange that will allow him to achieve the major balances internal and external. The objective of this research is to explain the rate of exchange to the assistance of a number of explanatory variables to enable managers of the economic policy to appreciate in the time their contribution to economic activity. It is clear from the results of this research that have a positive influence on the equilibrium exchange rate while the external capital and the budgetary deficit have a significant negative impact on the equilibrium exchange rate.
    Keywords: monetary mass,Exchange rate,budget deficit,exchange term
    Date: 2016–07–04
  3. By: Heni Boubaker (IPAG Lab); Giorgio Canarella (University of Nevada, Las Vegas); Rangan Gupta (University of Pretoria); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: We propose a new long-memory model with a time-varying fractional integration parameter, evolving non-linearly according to a Logistic Smooth Transition Autoregressive (LSTAR) specification. To estimate the time-varying fractional integration parameter, we implement a method based on the wavelet approach, using the instantaneous least squares estimator (ILSE). The empirical results show the relevance of the modeling approach and provide evidence of regime change in inflation persistence that contributes to a better understanding of the inflationary process in the US. Most importantly, these empirical findings remind us that a "one-size-fits-all" monetary policy is unlikely to work in all circumstances.
    Keywords: Time-varying long-memory, LSTAR model, MODWT algorithm, ILSE estimator
    JEL: C13 C22 C32 C54 E31
    Date: 2016–09
  4. By: Reis, Ricardo
    Abstract: The study of quantitative easing (QE) policies has so far focussed on which assets the central bank should buy, and on how it can pursue its targets for real and financial stability. This paper emphasizes instead the funding of QE by central bank liabilities, with an eye on achieving the inflation target. Looking backwards, it shows evidence that post-QE1, the U.S. banking sector became saturated with reserves, so the central bank can control the size of the balance sheet independently of its interest-rate policy. Using options data for U.S. inflation, it shows that while QE1 had an effect on expected inflation, further rounds of QE did not. Looking forward, it estimates the feasibility of keeping the liabilities of the central bank at a high level in terms of a solvency upper bound. Finally, it argues that the central bank's interest-rate policy is not out of ammunition when it comes to targeting inflation, since there are radical proposals on the composition of its liabilities, their maturity and the way to remunerate them that could be employed.
    Keywords: Event studies; Large scale asset purchases; Monetarism; Monetary policy
    JEL: E44 E52 E58
    Date: 2016–09
  5. By: Claudiu Tiberiu Albulescu (Politehnica University of Timisoara); Aviral Kumar Tiwari (IBS Hyderabad, IFHE University); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Rangan Gupta (University of Pretoria)
    Abstract: We provide new evidence on the relationship between inflation and its uncertainty in the U.S. on an historical basis, covering the period 1775-2014. First, we use a bounded approach for measuring inflation uncertainty, as proposed by Chan et al. (2013), and we compare the results with the Stock and Watson (2007) method. Second, we employ the wavelet methodology to analyze the co-movements and causal effects between the two series. Our results provide evidence of a relationship between inflation and its uncertainty that varies across time and frequency. First, we show that in the medium- and long-runs, the Freidman–Ball hypothesis holds when the measure of uncertainty is unbounded, while if the opposite applies, the Cukierman–Meltzer reasoning prevails. Second, we discover mixed evidence about the inflation–uncertainty nexus in the short-run, findings which explain the mixed results reported to date in the empirical literature.
    Keywords: historical inflation rate, uncertainty, continuous wavelet transform, bounded series, U.S.
    JEL: C22 E31 N11 N12
    Date: 2016–09
  6. By: Beckmann, Joscha; Czudaj, Robert
    Abstract: This paper analyzes the role of uncertainty on both exchange rate expectations and forecast errors of professionals for four major currencies based on survey data provided by FX4casts. We consider economic policy, macroeconomic, and financial uncertainty as well as disagreement among CPI inflation forecasters to account for different dimensions of uncertainty. Based on a Bayesian VAR approach, we observe that effects on forecast errors of professionals turn out to be more significant compared to the adjustment of exchange rate expectations. Our findings are robust to different forecasting horizons and point to an unpredictable link between exchange rates and fundamentals. Furthermore, we illustrate the importance of considering common unpredictable components for a large number of variables. We also focus on the post-crisis period and the relationship between uncertainty and disagreement among exchange rate forecasters and identify a strong relationship between them.
    Abstract: Dieser Beitrag analysiert die Bedeutung von Unsicherheit für professionelle Wechselkurserwartungen und die resultierenden Prognosefehler für vier große Währungen auf Basis von Umfragedaten von FX4casts. Wir betrachten politische, makroökonomische und finanzielle Unsicherheit sowie die Inflationsunsicherheit als unterschiedliche Dimensionen von Unsicherheit. Basierend auf einem Bayesianischen VAR-Modell finden wir, dass eine Steigerung von Unsicherheit oftmals den Prognosefehler erhöht. Die Auswirkungen auf die Prognosefehler sind im Vergleich zu der Anpassung der Wechselkurserwartungen wesentlich bedeutsamer. Die Ergebnisse sind robust über unterschiedliche Prognosehorizonte und bestätigen einen nicht prognostizierbaren Zusammenhang zwischen Wechselkursen und Fundamentaldaten. Erwartungsunsicherheit ist zudem insbesondere nach der Finanzkrise stark mit den Unsicherheitsmaßen korreliert.
    Keywords: Bayesian VAR,exchange rates,expectations,forecast,uncertainty
    JEL: F31 F37
    Date: 2016
  7. By: Lemke, Wolfgang; Vladu, Andreea L.
    Abstract: We propose an arbitrage-free shadow-rate term structure model to analyze the euro-area yield curve from 1999 to mid-2015, when bond yields turned negative at various maturities. In the model the 'shadow rate' can reach any positive or negative level, while the actual one-month rate cannot fall below some lower bound perceived by market participants. This bound is estimated to have first ranged marginally above zero, before falling to -11 bps in September 2014. We show analytically that the lower bound itself can be interpreted as a 'policy parameter' and interpret the September 2014 ECB rate cut from this perspective. Our model improves upon a standard Gaussian affine model by providing a better match with survey forecasts of short-term rates during the low-rate period and by capturing the decline in yield volatility. The model implies that since mid-2012, the median horizon after which future short rates are expected to return to 25 bps has ranged between 18 and 62 months. However, the liftoff timing, as well as the quantification of forward premia, is highly sensitive to the level of the lower bound.
    Keywords: term structure of interest rates,lower bound,nonlinear state-space model,monetary policy expectations
    JEL: C32 E43 E52
    Date: 2016
  8. By: Senay, Ozge; Sutherland, Alan
    Abstract: Recent literature shows that, when international financial trade is absent, optimal policy deviates significantly from strict inflation targeting, but when there is trade in equities and bonds, optimal policy is close to strict inflation targeting. A separate line of literature shows that collateral constraints can imply that cross-border portfolio holdings act as a shock transmission mechanism which significantly undermines risk sharing. This raises an important question: does asset trade in the presence of collateral constraints imply a greater role for monetary policy as a risk sharing device? This paper finds that the combination of asset trade with collateral constraints does imply a potentially large welfare gain from optimal policy (relative to inflation targeting). However, the welfare gain of optimal policy is even larger when there is no international asset trade (but collateral constraints bind within each country). In other words, the risk sharing role of asset trade tends to reduce the welfare gains from policy optimisation even when collateral constraints act as a shock transmission mechanism. This is true even when there are large and persistent collateral constraint shocks.
    Keywords: Collateral constraints; Country portfolios; Financial market structure; Optimal monetary policy
    JEL: E52 E58 F41
    Date: 2016–09
  9. By: Anh Nguyen; Efthymios Pavlidis; David Alan Peel
    Abstract: The monetary economics literature has highlighted four issues that are important in evaluating U.S. monetary policy since the late 1960s: (i) time variation in policy parameters, (ii) asymmetric preferences, (iii) revisions to economic data, and (iv) heteroskedasticity. This paper, for the first time, estimates a Taylor rule model that addresses these four issues simultaneously. Our findings suggest that U.S. monetary policy has experienced substantial changes in terms of both the response to inflation and to real economic activity, as well as changes in preferences. These changes cannot be captured adequately by a single structural break at the late 1970s, as has been commonly assumed in the literature, and play a non-trivial role in economic performance.
    Keywords: Real-time data, Asymmetric objective, Stochastic volatility, Time-varying parameter model, Taylor rule, Monetary policy rules, Particle filter
    JEL: C32 E52 E58
    Date: 2016
  10. By: Jane E. Ihrig; Ellen E. Meade; Gretchen C. Weinbach
    Abstract: At its December 2015 meeting, the Federal Open Market Committee (FOMC)--the Federal Reserve's monetary policy committee--raised its target range for the federal funds rate by 25 basis points, marking the end of an extraordinary seven-year period during which the federal funds target range was held near zero to support the recovery of the U.S. economy from the worst financial crisis and recession since the Great Depression.
    Date: 2016–02–12
  11. By: Russell Cooper (Pennsylvania State University); Antoine Camous (University of Mannheim)
    Abstract: The valuation of government debt is subject to strategic uncertainty. Pessimistic lenders, fearing default, bid down the price of debt, leaving a government with a higher debt burden. This increases the likelihood of default and thus confirming the pessimism of lenders. Can monetary interventions mitigate debt fragility? With one-period commitment to a state contingent policy, the monetary authority can indeed overcome strategic uncertainty. Under discretion, debt fragility remains unless reputation effects are sufficiently strong. Simpler forms of interventions, such as an inflation target, cannot eliminate debt fragility
    Date: 2016
  12. By: Montoro, Carlos (Banco Central de Reserva del Perú; Concejo Fiscal (CF)); Ortiz, Marco (Banco Central de Reserva del Perú)
    Abstract: In this paper we extend a new Keynesian open economy model to include risk-averse FX dealers and FX intervention by the monetary authority. These ingredients generate deviations from the uncovered interest parity (UIP) condition. More precisely, in this setup portfolio decisions of the dealers add endogenously a time variant risk-premium element to the traditional UIP that depends on FX intervention by the central bank and FX orders by foreign investors. We analyse the effectiveness of different strategies of FX intervention (e.g.,unanticipated operations or via a preannounced rule) to affect the volatility of the exchange rate and the transmission mechanism of the interest rate. Our findings are as follows: (i) FX intervention has a strong interaction with monetary policy in general equilibrium; (ii) FX intervention rules can have stronger stabilisation power than discretion in response to shocks because they exploit the expectations channel; and (iii) there are some trade-offs in the use of FX intervention, since it can help to isolate the economy from external financial shocks, but it prevents some necessary adjustments on the exchange rate as a response to nominal and real external shocks.
    Keywords: Foreign exchange Microestructure, Exchange rate dynamics, Exchange Rate Intervention, Monetary policy, Information Heterogeneity
    JEL: E4 E5 F3 G15
    Date: 2016–09
  13. By: John H. Rogers; Bo Sun; Lucas F. Husted
    Abstract: In this note we focus on the U.S. over the period January 1985 to January 2016, but have also constructed measures over a longer time period and for other central banks/economies.
    Date: 2016–04–11
  14. By: Ivan Pastine
    Abstract: Since a fixed exchange rate regime is a fixed price system, there is no theoretical reason to presume that the foreign exchange market clears, particularly during a speculative attack. This paper shows that equilibria where we allow for the possibility of such corner solutions are a superset of the previously examined “market-clearing” equilibria. The timing of the balance-of-payments crisis is no longer predictable in the same sense – multiple equilibria exist even in the very simplest speculative attack model.
    Keywords: Balance-of-payments crises; Fixed exchange rate breakdown
    JEL: F31 E58
    Date: 2016–09
  15. By: John Ammer; Michiel De Pooter; Christopher J. Erceg; Steven B. Kamin
    Abstract: This note presents a broad-brush overview of some of the salient issues on this topic and provides our sense of the answers to some key questions. We start by sketching out a simple framework for understanding how monetary policy actions spill over to other economies. The note then describes some back-of-the-envelope estimates of how U.S. monetary policy actions are transmitted overseas that we corroborate using a large-scale policy model (SIGMA). Finally, we discuss the implications of monetary policy spillovers for global economic stability, including the challenges posed by those spillovers for some countries with multiple policy objectives.
    Date: 2016–02–08
  16. By: Vladimir Asriyan; Luca Fornaro; Alberto Martin; 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.
    JEL: E32 E44 O40
    Date: 2016–09
    Abstract: This work is meant to show the relevance of the role of money in explaining regional disparities. Points out that before the currency and the banks are incorporated theories of regional development, had two views on regional development, founded on a convergence of unequal growth and divergence in another, where the rates would become increasingly unequal. The literature on the regional economy have given little attention to financial variables and their role in regional development. In this context, the currency has received secondary treatment in the analysis of the regional economy, perhaps in the belief of some theorists in the neutrality of money in the long run, or others who have relied on the assumption of perfect interregional mobility of capital. However, this perspective has been changing in recent years, particularly in post-Keynesian agenda. Thus, we intend to examine the behavior of the public regarding the preference for liquidity in the face of regional characteristics and the financial instability and therefore demonstrate their relevance to explain the differences in regional economic development. To analyze the decision to demand money was used educational and behavioral aspects. The hypothesis that there is a financial concentration in regions with a lower liquidity preference was ratified. For this, the study was developed based on the analysis of units of the Brazilian federation. The database of the Central Bank, and Datasus allowed the use of the formula suggested by the literature pertinent to the theme
    Keywords: uncertainty, regional development, banks, Brazilian economy, interest rates
    JEL: E43 E58 P25 R11 R12
    Date: 2016–07
  18. By: Sienknecht, Sebastian
    Abstract: Indexation theories have become standard for inflation persistence in DSGE models (Smets and Wouters (2003, 2007)). However, these theories overlook an important stylized fact of U.S. business cycles: high fluctuations in the first difference of inflation. I find that this pattern can be captured by adjustment costs precisely from the first difference of inflation (Pesaran (1991) labels this difference as a "speed change"). I estimate four DSGE models differing in their rigidity assumption and find that a framework with inflation-based adjustment costs has the highest probability to fit U.S. data.
    Keywords: Phillips curve; Economic fluctuations; Estimation.
    JEL: C51 E31 E32
    Date: 2016–03–25
  19. By: Beck, Günter W.; Lein-Rupprecht, Sarah M.
    Abstract: To model the observed slow response of aggregate real variables to nominal shocks, most macroeconomic models incorporate real rigidities in addition to nominal rigidities. One popular way of modelling such a real rigidity is to assume a non-constant demand elasticity. By using a homescan data set for three European countries, including prices and quantities bought for a large number of goods, in addition to consumer characteristics, we provide estimates of price elasticities of demand and on the degree of demand-side real rigidities. We find that price elasticites of demand are about 4 in the median. Furthermore, we find evidence for demand-side real rigidities. These are, however, much smaller than what is often assumed in macroeconomic models. The median estimate for demand-side real rigidity, the super-elasticity, is in a range between 1 and 2. To quantitatively assess the implications of our empirical estimates, we calibrate a menu-cost model with the estimated super-elasticity. We find that the degree of monetary non-neutrality doubles in the model including demand-side real rigidity, compared to the model with only nominal rigidity, suggesting a multiplier effect of around two. However, the model can explain only up to 6% of the monetary non-neutrality observed in the data, implying that additional multipliers are necessary to match the behavior of aggregate variables.
    Keywords: demand curve,price elasticity,super-elasticity,price-setting,monetary non-neutrality
    JEL: E30 E31 E50 D12 C3
    Date: 2016
  20. By: Keyra Primus
    Abstract: This paper examines the relative effectiveness of the use of indirect and direct monetary policy instruments in Barbados, Jamaica and Trinidad and Tobago, by estimating a restricted Vector Autoregressive model with Exogenous Variables (VARX). The study assumes that the central bank conducts monetary policy using a Taylor-type rule and it evaluates the effects of a reserve requirement policy. The results show that although a positive shock to the policy interest rate has a direct effect on commercial banks' interest rates, there is a weak transmission to the real variables. Furthermore, an increase in the required reserve ratio is successful in reducing private sector credit and excess reserves, while at the same time alleviating pressures on the exchange rate. The findings therefore indicate that central banks in small open economies should consider using reserve requirements as a complement to interest rate policy, to achieve their macroeconomic objectives.
    Date: 2016–09–16
  21. By: Carolina Tuckwell; António Mendonça
    Abstract: In the aftermath of the global economic and financial crisis, which broke-out in 2007, the major central banks started implementing so-called unconventional monetary policy measures. Following a fundamentally qualitative methodology, the aim of this paper is to compare the unconventional measures adopted by the ECB and the Fed, assessing their characteristics and also their impacts on the economy.
    JEL: E52 E58
    Date: 2016–04
  22. By: Timothy S. Hills; Taisuke Nakata; Sebastian Schmidt
    Abstract: In this note, we analyze an implication of the effective lower bound (ELB) risk--the possibility that adverse shocks will force policymakers in the future to lower the policy rate to the ELB--on inflation dynamics after liftoff.
    Date: 2016–02–12
  23. By: Marco Di Maggio; Amir Kermani; Christopher Palmer
    Abstract: Despite massive large-scale asset purchases (LSAPs) by central banks around the world since the global financial crisis, there is a lack of empirical evidence on whether and how these programs affect the real economy. Using rich borrower-linked mortgage-market data, we document that there is a “flypaper effect” of LSAPs, where the transmission of unconventional monetary policy to interest rates and (more importantly) origination volumes depends crucially on the assets purchased and degree of segmentation in the market. For example, QE1, which involved significant purchases of GSE-guaranteed mortgages, increased GSE-eligible mortgage originations significantly more than the origination of GSE-ineligible mortgages. In contrast, QE2's focus on purchasing Treasuries did not have such differential effects. We find that the Fed's purchase of MBS (rather than exclusively Treasuries) during QE1 resulted in an additional $600 billion of refinancing, substantially reduced interest payments for refinancing households, led to a boom in equity extraction, and increased refinancing mortgagors’ consumption by an additional $76 billion. This de facto allocation of credit across mortgage market segments, combined with sharp bunching around GSE eligibility cutoffs, establishes an important complementarity between monetary policy and macroprudential housing policy. Our counterfactual simulations estimate that relaxing GSE eligibility requirements would have significantly increased refinancing activity in response to QE1, including a 20% increase in equity extraction by households. Overall, our results imply that central banks could most effectively provide unconventional monetary stimulus by supporting the origination of debt that would not be originated otherwise.
    JEL: E21 E58 E65 G01 G18 G21 R28
    Date: 2016–09
  24. By: Giorgio Canarella (University of Nevada, Las Vegas); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: This paper reports on a sequential three-stage analysis of inflation persistence using monthly data from 11 inflation targeting (IT) countries and, for comparison, the US, a non IT country with a history of credible monetary policy. First, we estimate inflation persistence in a rolling-window fractional integration setting using the semiparametric estimator suggested by Phillips (2007). Second, we use tests for unknown structural breaks as a means to identify effects of the regime switch and the global financial crisis on inflation persistence. We use the sequences of estimated persistence measures from the first stage as dependent variables in the Bai and Perron (2003) structural break tests. These results suggest that four countries (Canada, Iceland, Mexico, and South Korea) experience a structural break in inflation persistence that coincide with the implementation of the IT regime, and three IT countries (Sweden, Switzerland, and the UK), as well as the US experience a structural break in inflation persistence that coincides with the global financial crisis. Finally, we reapply the Phillips (2007) estimator to the subsamples defined by the breaks. We find that in most cases the estimates of inflation persistence switch from mean-reversion nonstationarity to mean-reversion stationarity.
    Keywords: inflation persistence; inflation targeting; fractional integration; rolling window estimation; structural breaks
    JEL: C14 E31 C22
    Date: 2016–09
  25. By: Kaiji Chen; Patrick Higgins; Daniel F. Waggoner; Tao Zha
    Abstract: China monetary policy, as well as its transmission, is yet to be understood by researchers and policymakers. In the spirit of Taylor (1993, 2000), we develop a tractable framework that approximates practical monetary policy of China. The framework, grounded in relevant institutional elements, allows us to quantify the policy effects on output and prices. We find strong evidence that monetary policy is designed to support real GDP growth mandated by the central government while resisting inflation pressures and that contributions of monetary policy shocks to the GDP fluctuation are asymmetric across different states of the economy. These findings highlight the role of M2 growth as a primary instrument and the bank lending channel to investment as a key transmission mechanism for monetary policy. Our analysis sheds light on institutional constraints on a gradual transition from M2 growth to the nominal policy interest rate as a primary instrument for monetary policy.
    JEL: C13 C3 E02 E5
    Date: 2016–09
  26. By: Andrew Jalil; Gisela Rua
    Abstract: In this note, we draw on our recent research on the role of inflation expectations in the recovery from the Great Depression of the 1930s (Jalil and Rua, 2016a and 2016b) to provide insights into the actions that can successfully shift inflation expectations and stimulate economic recovery.
    Date: 2016–08–30
  27. By: Björklund, Maria (Uppsala university); Carlsson, Mikael (Uppsala universitet and Sveriges Riksbank); Nordström Skans, Oskar (Uppsala universitet)
    Abstract: We study the importance of wage rigidities for the monetary policy transmission mechanism. Using uniquely rich micro data on Swedish wage negotiations, we isolate periods when the labor market is covered by fixed wage contracts. Importantly, negotiations are coordinated in time but their seasonal patterns are far from deterministic. Using a VAR model, we document that monetary policy shocks have a substantially larger impact on production during fixed wage episodes as compared to the average response. The results are not driven by the periodic structure, nor the seasonality, of the renegotiation episodes.
    Keywords: monetary policy; wages; nominal rigidities; micro data
    JEL: E23 E24 E58 J41
    Date: 2016–09–08
  28. By: Parantap Basu (Durham Business School); Shesadri Banerjee (National Council of Applied Economic Research (NCAER))
    Abstract: The effect of external Quantitative Easing (QE) on a small open economy such as India is analyzed using a dynamic stochastic general equilibrium (DSGE) model. The modelling is motivated by some broad empirical regularities of the Indian economy during the pre and post QE periods. QE is modelled as a negative foreign interest rate shock with a mean reverting pattern. The mean reversion reáects the phasing out of the QE operation. In addition, we analyze the "news" effect of the tapering out phase of QE. Our model has standard frictions which include limited asset market participation of agents, home bias in consumption and nominal frictions in terms of staggered price settings. Monetary policy is modelled by the forward looking ináation targeting Taylor rule. The model explores a novel transmission channel of QE via the terms of trade measured by the ratio of import to export prices. We show that the impact and news e§ects of QE work through the terms of trade via the uncovered interest parity condition. Our model reproduces two prominent features of the Indian data: (i) initial decline of the terms of trade followed by a sharp reversal, and (ii) divergent behaviour of foreign and domestic interest rates. The model is broadly consistent with other empirical regularities including a deflationary spell in the Indian economy after 2012
    Keywords: Quantitative Easing, India.
    Date: 2015–03

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