nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒10‒02
37 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy, Mortgages and Consumption: Evidence from Italy By Tullio Jappelli; Annalisa Scognamiglio
  2. Analyzing the impact of monetary policy on financial markets in Chile By Alicia García-Herrero; Eric Girardin; Hermann Esteban González
  3. Anchoring of inflation expectations in the euro area: recent evidence based on survey data By Łyziak, Tomasz; Paloviita, Maritta
  4. The great moderation in international capital flows: a global phenomenon? By McQuade, Peter; Schmitz, Martin
  5. The Plaza Accord, 30 Years Later By Frankel, Jeffrey
  6. Exchange rate floor and central bank balance sheets: Simple spillover tests of the Swiss franc By Adrien Alvero; Andreas M. Fischer
  7. Reserve Balances, the Federal Funds Market and Arbitrage in the New Regulatory Framework By Ayelen Banegas; Manjola Tase
  8. Inflation Persistence and Structural Breaks: The Experience of Inflation Targeting Countries and the US By Giorgio Canarella; Stephen M. Miller
  9. The ECB's asset purchase programme: an early assessment By Andrade, Philippe; Breckenfelder, Johannes; De Fiore, Fiorella; Karadi, Peter; Tristani, Oreste
  10. Net debt supply shocks in the euro area and the implications for QE By Blattner, Tobias; Joyce, Michael A. S.
  11. Did the Fed's Announcement of an Inflation Objective Influence Expectations? By Alan K. Detmeister; Daeus Jorento; Emily Massaro; Ekaterina V. Peneva
  12. The Depreciation of the Pound Post-Brexit: Could it have been Predicted? By Vasilios Plakandaras; Rangan Gupta; Mark E. Wohar
  13. The effectiveness of non-standard monetary policy measures: evidence from survey data By Altavilla, Carlo; Giannone, Domenico
  14. Classifying Exchange Rate Regimes: 15 Years Later By Levy-Yeyati, Eduardo; Sturzenegger, Federico
  15. How to Improve Inflation Targeting in Canada By Maurice Obstfeld; Kevin Clinton; Ondra Kamenik; Douglas Laxton; Yulia Ustyugova; Hou Wang
  16. Working Paper 228 - Overborrowing and Balance of Payments Imbalances in a Monetary Union By SY Mouhamadou
  17. Money, Asset Prices and the Liquidity Premium By Lee, Seungduck
  18. Does Fed policy reveal a ternary mandate? By Peek, Joe; Rosengren, Eric S.; Tootell, Geoffrey M. B.
  19. The Effect of Quantitative Easing on Lending Conditions By Laura Blattner; Luisa Farinha; Gil Nogueira
  20. The FOMC Meeting Minutes : An Assessment of Counting Words and the Diversity of Views By Ellen E. Meade; Nicholas A. Burk; Melanie Josselyn
  21. Advanced economy inflation: the role of global factors By Mikolajun, Irena; Lodge, David
  22. The euro area bank lending survey By Köhler-Ulbrich, Petra; Hempell, Hannah S.; Scopel, Silvia
  23. The unsecured interbank money market: A description of the Portuguese case By Sofia Saldanha
  24. Have FOMC minutes helped markets to predict FED funds rate changes? By Jung, Alexander
  25. Policy spillovers and synergies in a monetary union By Arce, Óscar; Hurtado, Samuel; Thomas, Carlos
  26. An Assessment of the Exchange Rate Pass-Through in Angola and Nigeria By Ana Lariau; Moataz El-Said; Misa Takebe
  27. The Effects of Forward Guidance in Three Macro Models By Hess Chung
  28. Global inflation forecasts By Jonathan Kearns
  29. China Pro-Growth Monetary Policy and Its Asymmetric Transmission By Chen, Kaiji; Waggoner, Daniel F.; Higgins, Patrick C.; Zha, Tao
  30. Inflation and Activity - Two Explorations and Their Monetary Policy Implications By Blanchard, Oliver; Cerutti, Eugenio; SUmmers, Lawrence
  31. Optimal-Control Monetary Policy in the FRB/US Model By Flint Brayton; Thomas Laubach; David L. Reifschneider
  32. Exchange rate pass-through: What has changed since the crisis? By Martina Jašová; Richhild Moessner; Előd Takáts
  33. Unconventional Monetary Policy in a Currency Union with Segmentation in the Market for Government Debt By Andreas Tischbirek
  34. On the value of virtual currencies By Wilko Bolt; Maarten van Oordt
  35. Has the exchange rate pass through recently declined in the euro area? By Özyurt, Selin
  36. Near-Money Premiums, Monetary Policy, and the Integration of Money Markets : Lessons from Deregulation By Mark Carlson; David C. Wheelock
  37. Bank interest rate setting in the euro area during the Great Recession By Camba-Méndez, Gonzalo; Durré, Alain; Mongelli, Francesco Paolo

  1. By: Tullio Jappelli (Università di Napoli Federico II and CSEF); Annalisa Scognamiglio (Università di Napoli and CSEF)
    Abstract: Using the 2008-2014 Italian Survey of Household Income and Wealth (SHIW), we study whether the drop in interest rates following the Great Recession was associated with a reduction in mortgage payments for households with Adjustable Rate Mortgages (ARM) relative to those with Fixed Rate Mortgages (FRM). Preliminary results indicate that after the shock, consumption of ARM holders increases relative to FRM but the implied marginal propensity to consume (MPC) is not statistically different from zero. We suggest two explanations for the weak consumption response to the income shock. First, most mortgagors believed that the income shock was transitory, and that interest rates would likely increase in the future, implying a small effect on consumption. Second, the shock is offset partly by a reduction in income from financial assets owned by mortgagors. The paper has implications for the conduct of monetary policy interventions and the credibility of the future path of interest rates, pass-through of monetary policy through household balance sheets, and design of the mortgage market.
    Date: 2016–09–26
  2. By: Alicia García-Herrero; Eric Girardin; Hermann Esteban González
    Abstract: During the past few years, monetary policy communication has become a hot topic in as far as it seems to have become a very relevant way for central banks to guide markets, beyond actual monetary policy decisions.
    Keywords: Banks , Chile , Financial regulation , Latin America , Working Paper
    JEL: E52 E58 E43
    Date: 2016–08
  3. By: Łyziak, Tomasz; Paloviita, Maritta
    Abstract: The paper analyses the anchoring of inflation expectations of professional forecasters and consumers in the euro area. We study anchoring, defined as the central bank’s ability to manage expectations, by paying special attention to the impact of the ECB inflation target and ECB inflation projections on inflation expectations. Our analysis indicates that longer-term inflation forecasts have become somewhat more sensitive to shorter-term forecasts and to actual HICP inflation in the post-crisis period. We also find that the ECB inflation projections have recently become more important for short- and medium-term professional forecasts and at the same time the role of the ECB inflation target for those expectations has diminished. Overall, our analysis suggests that in recent years inflation expectations in the euro area have shown some signs of de-anchoring. JEL Classification: D84, E52, E58
    Keywords: anchoring, euro area, financial crisis, inflation expectations, survey data
    Date: 2016–08
  4. By: McQuade, Peter; Schmitz, Martin
    Abstract: This paper highlights a recent ‘great moderation’ in global capital flows, characterised by smaller volumes and lower volatility of cross-border transactions. However, there are substantial differences across countries and regions which we analyse by comparing the level of international capital flows observed in 2005-06, immediately prior to the onset of the global financial crisis, to the post-crisis period of 2013-14, when global flows arguably settled at a ‘new normal’. We find that since the pre-crisis period, gross capital inflows recovered more for economies with smaller pre-crisis external and internal imbalances, lower per capita income, improving growth expectations, a less severe impact of the global financial crisis and less stringent macroprudential policy. On the asset side, countries with a more accommodative monetary policy, a milder impact of the crisis and oil exporters managed to increase gross capital outflows in the post-crisis period. JEL Classification: F15, F21, F32
    Keywords: external imbalances, global financial crisis, international capital flows, monetary
    Date: 2016–08
  5. By: Frankel, Jeffrey (Harvard University)
    Abstract: The paper reviews an event of 30 years ago from the perspective of today: a successful G-5 initiative to reverse what had been a dangerously overvalued dollar. The "Plaza Accord" is best viewed not as the precise product of the meeting on September 22, 1985, but as shorthand for a historic change in US policy that began when James Baker became Treasury Secretary in January of that year. The change had the desired effect, bringing down the dollar and reducing the trade deficit. In recent years concerted foreign exchange intervention, of the sort undertaken by the G-7 in 1985 and periodically over the subsequent decade, has died out. Indeed the G-7 in 2013, fearing "currency manipulation," specifically agreed to refrain from intervention in a sort of "anti-Plaza accord." But the day will come when coordinated foreign exchange intervention is again appropriate.
    JEL: F31 F33 N10
    Date: 2015–09
  6. By: Adrien Alvero (Columbia Business School); Andreas M. Fischer (Swiss National Bank)
    Abstract: This paper examines spillover and spillback effects of unconventional monetary policies conducted by the European Central Bank (ECB) and Swiss National Bank (SNB) on the exchange rate's distribution. The empirical setup examines the price response of EURCHF risk reversal to a change in ECB and SNB balance sheets, with a distinction for the period of the minimum exchange rate (fl oor). The analysis finds only weak evidence of spillover effects from the ECB, while the spillback effect from the SNB balance sheet is robust during the floor period.
    Date: 2016–09
  7. By: Ayelen Banegas; Manjola Tase
    Abstract: We study developments in reserve balances and the federal funds market in the context of two banking regulatory changes: the widening of the Federal Deposit Insurance Corporation (FDIC) assessment base and the introduction of the Basel III leverage ratio. Using a novel data set that includes FDIC fees and balance sheet data for depository institutions, we find that, as most foreign banks were not subject to the FDIC fee, they absorbed increasing amounts of reserve balances. Furthermore, foreign banks experienced positive and improving conditions for arbitraging between borrowing reserve balances in the federal funds market and earning interest on excess reserves by holding those reserves at the Federal Reserve Banks, contributing to an increase in federal funds borrowing by foreign banks relative to domestic banks. However, the implementation of the Basel III leverage ratio was associated with temporary declines in foreign bank federal funds borrowing at reporting dates.
    Keywords: Basel III ratios ; FDIC fees ; IOER arbitrage ; Reserve balances ; Federal funds market
    JEL: E49 E52 G28
    Date: 2016–09–01
  8. By: Giorgio Canarella (University of Nevada, Las Vegas); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut)
    Abstract: We investigate the empirics of persistence in the inflation series for 13 OECD countries that explicitly adopted an inflation targeting (IT) regime before 1992. We estimate persistence in the pre- and post-IT periods using the modified log periodogram proposed by Kim and Phillips (2006, 2000) and Phillips (2007) and test for equality across the two periods. Our findings indicate that all inflation series show no evidence of unit-root behavior over the entire sample, and in the respective pre- and post-IT periods. Mean reversion and stationarity as well as mean reversion and nonstationarity exist in the pre-IT period, while mean reversion and stationarity characterize the post-IT period. Inflation exhibits fractional integration behavior over the entire sample period, the pre-IT period, and, in most cases, also in the post-IT period. The adoption of inflation targeting coincides with a structural break in all inflation series and marks a decrease in the point estimates of inflation persistence in most countries. For only about half of the countries, however, we can formally reject the null hypothesis of equality of inflation persistence against the alternative that inflation persistence declines in the post-IT period. Significant variations and asymmetries exist in inflation persistence across the countries in the sample, suggesting that the IT regime does not equalize persistence across the IT countries.
    Keywords: persistence, modified log periodogram, inflation targeting, fractional integration
    JEL: C14 E31 C22
    Date: 2016–09
  9. By: Andrade, Philippe; Breckenfelder, Johannes; De Fiore, Fiorella; Karadi, Peter; Tristani, Oreste
    Abstract: This paper analyses the effects of the European Central Bank's expanded asset purchase programme (APP) on yields and on the macroeconomy, and sheds some light on its transmission channels. It shows, first, that the January 2015 announcement of the programme has significantly and persistently reduced sovereign yields on long-term bonds and raised the share prices of banks that held more sovereign bonds in their portfolios. This evidence is consistent with versions of the portfolio rebalancing channel acting through the removal of duration risk and the relaxation of leverage constraints for financial intermediaries. It then presents a stylised macroeconomic model that incorporates the aforementioned transmission channels. The model suggests that the macroeconomic impact of the programme can be expected to be sizable. JEL Classification: E44, E52, G12
    Keywords: reanchoring inflation expectations, transmission of large-scale asset purchases, unconventional monetary policy
    Date: 2016–09
  10. By: Blattner, Tobias; Joyce, Michael A. S.
    Abstract: This paper examines how shocks to the net supply of government bonds affect the euro area term structure of interest rates and the wider macroeconomy. To measure net debt supply we construct a new free-float measure, which adjusts total government debt of the four largest euro area economies for foreign official holdings and the maturity of the outstanding stock of debt. Using a small macro-finance BVAR model, we estimate that the ECB’s government bond purchases, as announced on 22 January 2015, reduced euro area 10-year bond yields, on average, by around 30bps in 2015 through the so-called duration channel. The impact on the output gap and inflation in 2016 is of the order of 0.2ppt and 0.3ppt respectively. Our estimates are likely to underestimate the overall impact of the ECB’s purchases on interest rates and inflation, as they exclude effects on credit risk and monetary policy expectations that may have compressed interest rates even further. JEL Classification: C5, E4, E5, G1
    Keywords: ECB, government debt, macroeconomy, Quantitative Easing, term structure
    Date: 2016–09
  11. By: Alan K. Detmeister; Daeus Jorento; Emily Massaro; Ekaterina V. Peneva
    Abstract: Economic theory suggests that inflation expectations are a key determinant of actual inflation.
    Date: 2015–06–08
  12. By: Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Greece); Rangan Gupta (Department of Economics, University of Pretoria, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha USA, and School of Business and Economics, Loughborough University)
    Abstract: The decision of the United Kingdom to leave the European Union (Brexit) after 43 years caused turmoil in exchange rate and global stock markets. More specifically, the pound relative to the dollar has lost close to 15 percent of its value in the weeks after the Brexit decision. In this paper we attempt to examine whether this sudden depreciation of the (pound-dollar) exchange rate is the reaction of market participants to the Brexit or whether the exodus of UK from the EU had little impact on the exchange rate. In doing so, we train linear and nonlinear econometric and machine learning models and evaluate out-of-sample forecasts of the exchange rate and its realized volatility in the pre- and post-Brexit period. We quantify uncertainty caused by the Brexit according to an index based on news related to economic uncertainty. We argue that in daily forecasting horizon our models adhere closely to the evolution of the exchange rate and that most of the depreciation is based on the uncertainty caused by the Brexit.
    Keywords: Brexit, Economic Uncertainty, Machine Learning
    JEL: F31 F37
    Date: 2016–09
  13. By: Altavilla, Carlo; Giannone, Domenico
    Abstract: We assess professional forecasters’ perceptions of the effects of the unconventional monetary policy measures announced by the US Federal Reserve after the collapse of Lehman Brothers. Using survey data, collected at individual level, we analyze the change in the forecasts for Treasury and corporate bond yields around the announcement dates of the non-standard measures. We find that forecasters expected bond yields to drop significantly for at least one year after the announcement of accommodative policies. JEL Classification: E58, E65
    Keywords: forward guidance, large scale asset purchases, operation twist, Quantitative Easing, survey of professional forecasters, tapering
    Date: 2016–08
  14. By: Levy-Yeyati, Eduardo (Harvard University); Sturzenegger, Federico (Torcuato di Tella University)
    Abstract: Levy Yeyati and Sturzenegger (2001, 2003, 2005) proposed an exchange rate regime classification based on cluster analysis to group countries according to the relative volatility of exchange rates and reserves, thereby shifting the focus from a de jure to de facto approach in the empirical analysis of exchange rate policy. This note extends the classification through 2014 and broadens the country sample, increasing the number of classified country-year observations from 3335 to 5616. Based on this extension, the note documents the main stylized facts in the 2000s, including the behavior of exchange rate policy around the global financial crisis, and the prevalence of floating regimes.
    JEL: F30 F33
    Date: 2016–06
  15. By: Maurice Obstfeld; Kevin Clinton; Ondra Kamenik; Douglas Laxton; Yulia Ustyugova; Hou Wang
    Abstract: Routine publication of the forecast path for the policy interest rate (i.e. “conventional forward guidance†) would improve the transparency of monetary policy. It would also improve policy effectiveness through its influence on expectations, particularly when there is a risk of low inflation, and the policy rate is constrained by the effective lower bound. Model simulations indicate that a potent macroeconomic strategy, for returning the Canadian economy to potential, combines conventional forward guidance with a fiscal stimulus. As a response to the effective lower bound constraint, and the decline in the world equilibrium real interest rate, this strategy is preferable to raising the inflation target.
    Date: 2016–09–26
  16. By: SY Mouhamadou (African Development Bank)
    Date: 2015–11–11
  17. 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
  18. By: Peek, Joe (Federal Reserve Bank of Boston); Rosengren, Eric S. (Federal Reserve Bank of Boston); Tootell, Geoffrey M. B. (Federal Reserve Bank of Boston)
    Abstract: This paper examines the role of financial instability in setting monetary policy. The paper begins with a model that examines the interaction of monetary and regulatory policy. It then empirically tests whether financial instability has affected monetary policy. One important innovation is to construct a measure of financial instability directly related to the FOMC financial instability concerns expressed in FOMC meeting transcripts. We find that, even after controlling for forecasts of inflation and unemployment, the word counts of terms related to financial instability do correlate with monetary policy decisions. Thus, the FOMC not only “talks the talk” about financial stability, but it “walks the walk.”
    JEL: E44 E52 E58
    Date: 2016–09–01
  19. By: Laura Blattner; Luisa Farinha; Gil Nogueira
    Abstract: We analyze the effect of the ECB's Quantitative Easing program (Expanded Asset Purchase Program - EAPP) on bank lending using security-level bank balance sheet data combined with a comprehensive dataset on new loans in Portugal. Our identification relies on the fact that only a subset of Portuguese banks was exposed to EAPP via prior holdings of EAPP-eligible securities and origination of eligible ABS and covered bonds. Using a difference-in-differences specication with borrower and bank xed effects, we find that lending rates to the same borrower drop by 64 b.p. at banks exposed to QE relative to banks not exposed to QE. Loan volumes to existing corporate clients grow by one percentage point faster at exposed banks relative non-exposed banks. This result is robust to including both bank and borrower*time fixed effects, as well as a wide range of loan and borrower characteristics. At the extensive margin, the probability of credit approval to a new corporate client is about 1 percentage point higher at exposed banks post-QE announcement.
    JEL: E43 E44 E52 G21 G28
    Date: 2016
  20. By: Ellen E. Meade; Nicholas A. Burk; Melanie Josselyn
    Abstract: The Federal Reserve's communications with the public have evolved substantially since the early 1990s.
    Date: 2015–05–26
  21. By: Mikolajun, Irena; Lodge, David
    Abstract: A number of studies document the prominent role of global factors in domestic inflation developments (e.g. Borio and Filardo, 2007; Ciccarelli and Mojon, 2010). In this paper we investigate global dimensions of advanced economy inflation. We estimate open-economy Phillips curves for 19 advanced economies. We include backwardand forward-looking survey measures of inflation expectations and augment Phillips curves with global factors including global economic slack, global inflation and commodity prices. Our results provide little support for the existence of direct effects of global economic slack on domestic inflation. Moreover, the results suggest that the importance of global inflation in forecasting domestic inflation has its roots solely in its ability to capture slow-moving trends in inflation rates. In the Phillips curve context much the same role is performed by domestic forward-looking inflation expectations. With the exception of commodity prices therefore our results reveal little reason to include global factors into traditional reduced form Phillips curves. JEL Classification: E31, E32, E37
    Keywords: advanced economies, forecasting, global economic slack, global inflation, inflation, Phillips curve
    Date: 2016–08
  22. By: Köhler-Ulbrich, Petra; Hempell, Hannah S.; Scopel, Silvia
    Abstract: The euro area bank lending survey (BLS) serves as an important tool in the analysis of bank lending conditions in the euro area and across euro area countries, providing otherwise unobservable qualitative information on bank loan demand and supply from/to euro area enterprises and households. Since its introduction in 2003, the BLS has received growing attention and has become of key importance for the analysis and assessment of bank lending conditions in the euro area and at the national level. In particular in the context of the financial crisis, the BLS was used to gather additional information on the impact of the crisis and of the ECB’s monetary policy measures on banks’ funding situation and bank lending conditions. Following a description of the design and development of the BLS, this paper focuses on the analysis of bank lending supply and demand in the euro area and on their contributing factors. The results of the BLS are put into a wider economic perspective by relating them to other macroeconomic and financial variables. Analyses based on individual bank replies complement the picture further by providing more granular evidence on loan developments. In addition, an overview of the use of the euro area BLS as an analytical tool for investigating bank lending conditions in the euro area is presented. JEL Classification: E44, E5, G21
    Keywords: bank lending conditions, euro area, loan demand, loan supply, monetary policy, monetary policy transmission
    Date: 2016–09
  23. By: Sofia Saldanha
    Abstract: Money markets were severely impaired by the financial and subsequent sovereign debt crises. Although the euro money market has been studied substantially, little has been done for the particular case of Portugal. This thesis investigates how the Portuguese part of the euro unsecured interbank money market was affected by the two consecutive crises. I constructed and adapted a Furfine-based algorithm to identify the loans traded and settled in TARGET2, in which a least one of the counterparties is a Portuguese bank. Identified loans have overnight and one-week maturities. Data shows a clear trend towards a closed interbank money market. In addition, there is a visibly significant reduction in the number of times banks trade in the market, accompanied by a parallel drop in volumes transacted. Finally, I find that interest rates rise above the benchmark and those in the domestic market are persistently higher than rates agreed upon through cross-border operations.
    JEL: E58 G21
    Date: 2016
  24. By: Jung, Alexander
    Abstract: This paper examines whether the release of minutes of the Federal Open Market Committee (FOMC) has provided markets with systematic clues about its future policy rates. We explain the future fed funds rate changes using Ordered Probit models (sample 1996 to 2008). We find that timely FOMC meeting minutes have provided assurance to markets about the most likely path of future interest rates. Though, their release did not cause markets to fundamentally revise their expectations on future policy decisions. The paper also discusses lessons from the Fed experience for the ECB and other central banks. JEL Classification: C34, E52, E58
    Keywords: communication, FOMC minutes, monetary policy, ordered Probit, predictability
    Date: 2016–09
  25. By: Arce, Óscar; Hurtado, Samuel; Thomas, Carlos
    Abstract: We provide a general equilibrium framework for analyzing the effects of supply and demand side policies, and the potential synergies between them, in an asymmetric monetary union that faces a liquidity trap and a slow deleveraging process in its ‘periphery‘. We find that the joint implementation of pro-competition structural reforms in the periphery, a fiscal expansion in the core, and forward guidance about the future path of nominal interest rates produces positive synergies between the three policies: forward guidance re-inforces the expansionary effects of country-specific policies, and the latter in turn improve the effectiveness of forward guidance. Our results provide a case for complementing current unconventional monetary stimuli in the euro area with national efforts on the structural reform and fiscal fronts. JEL Classification: E44, E63, D42
    Keywords: deleveraging, monetary union, structural reforms, synergies, zero lower bound
    Date: 2016–08
  26. By: Ana Lariau; Moataz El-Said; Misa Takebe
    Abstract: This paper estimates the exchange rate pass-through to consumer price inflation in Angola and Nigeria, with particular emphasis on the changes of the pass-through over time. Even though the two countries share smilar dependence on oil exports, this paper reveals different results. For Angola, the long-run exchange rate pass-through to prices is high, though it has weakened in recent years reflecting the de-dollarization of the economy. In Nigeria, there is no stable long-run relationship between the exchange rate and prices, and changes in the exchange rate do not have a significant pass-through effect on inflation. However, the passthrough effect on core inflation is significant.
    Keywords: Exchange rate pass-through;Angola;Nigeria;Inflation;Oil prices;Consumer price indexes;Nominal effective exchange rate;Import prices;Cross country analysis;Exchage rate path-through, monetary policy, inflation, Sub-Sahara Africa, oil-producing countries.
    Date: 2016–09–20
  27. By: Hess Chung
    Abstract: With the federal funds rate at its effective zero lower bound since the end of 2008, much attention has been focused on estimating the effects of "unconventional" monetary policy actions, such as large-scale asset purchases or explicit forward guidance concerning the future path of the funds rate.
    Date: 2015–02–26
  28. By: Jonathan Kearns
    Abstract: Inflation co-moves across countries and several papers have shown that lags of this common inflation can help to forecast country inflation. This paper constructs forecasts of common (or 'global') inflation using survey forecasts of country inflation. These forecasts of global inflation have predictive power for global inflation at a medium horizon (12 months) but not at a longer horizon. Global inflation forecasts, and forecast errors, are correlated with survey forecasts and errors of oil and food prices, and global GDP growth, but not financial variables. For some countries, forecasts of global inflation improve the accuracy of forecasting regressions that include survey forecasts of country inflation. In-sample fit and out-of-sample forecasting exercises suggest that forecasts of global inflation generally contain more information for forecasting country inflation than do lags of global inflation. However, for most countries, lagged or forecast global inflation does not improve the accuracy of survey forecasts of country inflation. Whatever information global inflation may include about country inflation, for most countries it seems that survey forecasts of country inflation have historically already incorporated that information.
    Keywords: Global inflation, inflation forecasts, survey forecasts
    Date: 2016–09
  29. By: Chen, Kaiji (Emory University); Waggoner, Daniel F. (Federal Reserve Bank of Atlanta); Higgins, Patrick C. (Federal Reserve Bank of Atlanta); Zha, Tao (Federal Reserve Bank of Atlanta)
    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.
    Keywords: monetary transmission; endogenous switching; central government; institutional rigidities; GDP growth target; lower growth bound; nonlinear VAR; systematic monetary policy; policy shocks; heavy industries; investment; bank loans; lending channel
    JEL: C13 C3 E02 E5
    Date: 2016–09–01
  30. By: Blanchard, Oliver (Peterson Institute for International Economics); Cerutti, Eugenio (IMF); SUmmers, Lawrence (Harvard University)
    Abstract: We explore two issues triggered by the crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s, but has remained roughly stable since then. We draw implications of our findings for monetary policy.
    Date: 2015–11
  31. By: Flint Brayton; Thomas Laubach; David L. Reifschneider
    Abstract: The question of how best to conduct monetary policy has been studied by economists for a long time. Over the past 25 years or so, attention has focused on systematic approaches to setting the short-term interest rate in a manner that effectively balances policymaker objectives.
    Date: 2014–11–21
  32. By: Martina Jašová; Richhild Moessner; Előd Takáts
    Abstract: We study how exchange rate pass-through to CPI inflation has changed since the global financial crisis. We have three main findings. First, exchange rate pass-through in emerging economies decreased after the financial crisis, while exchange rate pass-through in advanced economies has remained relatively low and stable over time. Second, we show that the declining pass-through in emerging markets is related to declining inflation. Third, we show that it is important to control for non-linearities when estimating exchange rate pass-through. These results hold for both short-run and long-run pass-through and remain robust to extensive changes in the specifications.
    Keywords: Exchange rate pass-through, inflation
    Date: 2016–09
  33. By: Andreas Tischbirek
    Abstract: The literature on large-scale purchases of government debt emphasises the importance of bond market segmentation along the maturity dimension for their transmission. This study investigates how another form of segmentation that we observe, the segmentation of government bond markets across countries, can be exploited by the central bank of a currency union in which fiscal coordination is not attainable. Under general conditions, government bond purchases which lower bond yields have first-order effects through a fiscal channel, even in the absence of the heterogeneity in investment opportunities found in Chen et al. (2012). The total effect on aggregate demand can be broken down into an "income-from-debt-issuance effect" and a "primary-surplus effect". If there is cross-country segmentation in bond markets and home bias in government spending, the central bank is able to use government bond purchases to control the terms of trade and achieve asymmetric degrees of stimulus across the members of the currency union without a transfer of resources. I characterise the welfare-optimising mix of conventional and unconventional monetary policy in this scenario and give an upper bound on the welfare benefi ts from using the unconventional tool.
    Keywords: Unconventional Monetary Policy, Quantitative Easing, Policy Coordination, Monetary Union, Market Segmentation
    JEL: E50 E52 E58 F45
    Date: 2016–09
  34. 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). 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: virtual currencies; exchange rates; payment systems; speculation; bitcoin
    JEL: E42 E51 F31 G1
    Date: 2016–09
  35. By: Özyurt, Selin
    Abstract: This study investigates the degree and speed of the exchange rate pass through (ERPT) into extra-euro area import prices for the euro area aggregate and the five largest countries. Based on quarterly frequency data, the analysis covers the period 1996Q1-2015Q2. Two alternative measures of the nominal exchange rate are used: the NEER of the euro against 38 partners and the EUR/USD bilateral exchange rate. The results show that the pass through is only “partial” in the euro area, most probably reflecting slow nominal price adjustments and the pricing-to-market behaviour of firms. We find clear evidence that the degree of pass through has been declining over the past two decades. Interestingly, the period of strong fall of pass through coincides with the increasing share of the emerging countries in world trade and the accession of China to the WTO. Looking at the largest euro area countries, we find striking heterogeneities in the degree but also in the speed of the ERPT. The lowest degree of pass through of a change in NEER is found for Germany while it is the highest for Italy. In addition, unlike the other large euro area countries, we do not find evidence for Italy of a decline in the degree of pass through over time. In a monetary union, such differences may signal large heterogeneities in domestic markets structures. JEL Classification: E31, F3, F41
    Keywords: euro area, Exchange rate pass-through, Import prices, Pricing to market
    Date: 2016–09
  36. By: Mark Carlson; David C. Wheelock
    Abstract: The 1960s and 1970s witnessed rapid growth in the markets for new money market instruments, such as negotiable certificates of deposit (CDs) and Eurodollar deposits, as banks and investors sought ways around various regulations affecting funding markets. In this paper, we investigate the impacts of the deregulation and integration of the money markets. We find that the pricing and volume of negotiable CDs and Eurodollars issued were influenced by the availability of other short-term safe assets, especially Treasury bills. Banks appear to have issued these money market instruments as substitutes for other types of funding. The integration of money markets and ability of banks to raise funds using a greater variety of substitutable instruments has implications for monetary policy. We find that, when deregulation reduced money market segmentation, larger open market operations were required to produce a given change in the federal funds rate, but that the pass through of changes in the funds rate to other market rates was also greater.
    Keywords: Deregulation ; Eurodollars ; Market integration ; Monetary policy implementation ; Money markets ; Regulation Q
    JEL: E50 G18 N22
    Date: 2016–06
  37. By: Camba-Méndez, Gonzalo; Durré, Alain; Mongelli, Francesco Paolo
    Abstract: This paper sheds light on how recent financial tensions in the euro area were ultimately reflected in bank interest rate setting. We make two new contributions. First, we develop a theoretical model capturing banks financing and the rate setting choices. Banks in the model can finance themselves through deposits, on the money market and/or by issuing bonds. Second, we assemble a novel database and put our model to test. Our model extends that of Gambacorta (2004), as we formalise banks' decision to issue debt endogenously. Gambacorta's analysis was conducted for Italian banks and did not include the recent financial crisis. Instead, we focus our analysis on the Great Recession period (July 2007 to October 2014) and euro area banks. From a monetary policy perspective, both our theoretical model and the empirical results provide useful information on the impact of some of the measures introduced by the ECB during the financial crisis. First, the ECB introduced specific measures to alleviate tensions in money markets. To the extent that these measures fostered stability in money markets, and reduced the volatility of money market rates, this paper shows that they were also channelled to bank rates. Second, the ECB also introduced measures to address tensions in bond markets. Our results also show that having access to debt financing has important implications for bank rate setting. JEL Classification: C32, E43,E52, E58, G01
    Keywords: bank financing, bank interest rate setting, non-standard monetary policy and euro area crisis
    Date: 2016–09

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