nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒10‒09
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Uncertainty about Federal Reserve Policy and Its Transmission to Emerging Economies: Evidence from Twitter By Tillman, Peter
  2. Monetary policy, market structure and the income shares in the U.S By George C. Bitros
  4. The euro as an international currency By Agnès Bénassy-Quéré
  5. The European Payments Union and the origins of Triffin’s regional approach towards international monetary integration By Ivo Maes; Ilaria Pasotti
  6. Funding quantitative easing to target inflation By Ricardo Reis
  8. Benchmarking macroprudential policies: An initial assessment By Domenico Lombardi; Pierre L. Siklos
  9. Exchange rate Pass-through and Monetary Policy in Transition Economy: Evidence from Tunisia with disaggregated VAR Analysis By Dahem, Ahlem; Siala Guermazi, Fatma
  10. Inflation Expectations, Learning and Supermarket Prices: Evidence from Survey Experiments By Alberto Cavallo; Guillermo Cruces; Ricardo Perez-Truglia
  11. Unemployment Persistence, Inflation and Monetary Policy in A Dynamic Stochastic Model of the Phillips Curve By George Alogoskoufis
  12. Monetary Policy and Macroprudential Policy: Rivals or Teammates? By Simona Malovana; Jan Frait
  13. Who are the forerunners, economists or central bankers? By Ginafranco Tusset
  14. Do Inflation Expectations Granger Cause Inflation? By Stockhammar, Pär; Österholm, Pär
  15. The I Theory of Money By Brunnermeier, Markus K.; Sannikov, Yuliy
  16. Inflation in the euro area and why it matters By Jakob de Haan; Marco Hoeberichts; Renske Maas; Federica Teppa
  17. Global macroeconomic effects of exiting from unconventional monetary policy By Pietro Cova; Patrizio Pagano; Massimiliano Pisani
  18. Asset market response to monetary policy news from SNB press releases By Hüning, Hendrik
  19. Self-fulfilling deflations By Roberto Piazza
  20. Cross-border transmission of emergency liquidity By Kick, Thomas; Koetter, Michael; Storz, Manuela
  21. Has Inflation Targeting Become Less Credible? Oil Prices, Global Aggregate Demand and Inflation Expectations during the Global Financial Crisis By Sussman, Nathan; Zohar, Osnat
  22. The meaning of monetary stability By Pesenti, Amos
  23. Optimal monetary policy regime switches By Foerster, Andrew T.; Choi, Jason

  1. By: Tillman, Peter (Asian Development Bank Institute)
    Abstract: It is well known that a tightening or easing of the United States’ monetary policy affects financial markets in emerging economies. This paper argues that uncertainty about future monetary policy is a separate transmission channel. We focus on the taper tantrum episode in 2013, a period with an elevated uncertainty about monetary policy, and use a data set that contains 90,000 Twitter messages (“tweets”) on Federal Reserve tapering. Based on this data set, we construct a new index about monetary policy uncertainty using a list of uncertainty keywords. An advantage of this index is that it reflects uncertainty about a specific policy decision. An estimated vector autoregression (VAR) shows that uncertainty shocks lead to a fall in asset prices and a depreciation of local currencies. We also discuss the policy implications of this uncertainty channel of monetary policy transmission.
    Keywords: federal Reserve policy; monetary policy; monetary policy transmission; policy uncertainty; taper tantrum; uncertainty; uncertainty shocks; emerging economies; twitter
    JEL: E32 E44 E52
    Date: 2016–10–06
  2. 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, federal funds rate, income shares
    JEL: E19 E25 E40 E50
    Date: 2016–03
  3. By: Karolina Tura-Gawron (Gdansk University of Technology, Gdansk, Poland)
    Abstract: This article presents a comparative study of central paths’ projections of Consumer Price Index (CPI index), core inflation and monetary policy-relevant inflation measure (MPRI) in the central banks of Sweden, Norway and Czech Republic. The analysis refers to the possibility of using core and MPRI inflation projections as a tool (intermediate goal) for the implementation of Svensson’s concept of optimal inflation forecast targeting strategy (IFT) and determines what the chosen central banks are effectively targeting in practice. The study includes a reference of the central paths of the CPI, core inflation and MPRI inflation projections, based on the endogenous rate, to the inflation target. The analysis has allowed us to determine that the central paths of core inflation projections have converged with the inflation target as the time horizon became longer, but still remained medium-term. Such a result is not given for all of the CPI projections. The implications for the implementation of the Svensson’s concept of optimal IFT strategy are that a projection of core inflation may be a typical, operational tool which anchors inflation expectations; as such (as CPI projection), it should be published, treated and used as an intermediate goal of monetary policy.
    Keywords: core inflation, inflation projection, inflation targeting regime, inflation forecast
    JEL: E58 E52 E59
    Date: 2016–02
  4. By: Agnès Bénassy-Quéré (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The euro, in spite of having many of the required attributes put forward by the theoretical literature and past experience, has failed to fulfill all the criteria that would enable it to rival the dollar as an international currency. This does not mean that the euro cannot achieve a status similar to that of the dollar; however, the window of opportunity may not last much more than a decade before the renminbi overtakes the euro. European monetary unification has never explicitly sought for its currency to gain an international status. This makes sense insofar as the key elements required for the euro to expand internationally are also those to be pursued internally: GDP growth; a fiscal backing to the single currency; a deep, liquid and resilient capital market; and a unified external representation of the euro area.
    Keywords: currency internationalization,euro
    Date: 2015–03
  5. By: Ivo Maes (Economics and Research Department, NBB, Robert Triffin Chair, Université catholique de Louvain, and ICHEC Brussels Management School); Ilaria Pasotti (Catholic University of Milan)
    Abstract: Robert Triffin (1911-1993) played an important role in the international monetary debates in the postwar period. He was known as one of the main advocates of a multipolar international monetary system. In this paper we analyse the origins of riffin’s “regional” approach towards international monetary integration. We argue that Triffin’s experience with the European Payments Union (EPU)played hereby a crucial role. Triffin was not only an “architect” of the EPU, but the EPU also led to an important shift in Triffin’s view of the geography of the international monetary system. Before his work on the EPU, Triffin thought of the international economy as composed of two geographical entities: national economies and the world economy. With his work on the EPU he introduced a third geographical entity: the region. The EPU would so be at the basis of Triffin’s advocacy of a regional approach towards international monetary integration. Moreover, while Triffin was initially quite positive on the IMF, he became, through his EPU experience, more critical of the IMF and its worldwide approach.
    Keywords: Triffin, European Payments Union (EPU), international monetary system (IMS)
    JEL: A11 B31 F02 F33 F36 N24
    Date: 2016–09
  6. By: Ricardo Reis
    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 e↵ect 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.
    JEL: F3 G3
    Date: 2016–09
  7. By: Karolina Tura-Gawron (Gdansk University of Technology, Gdansk, Poland)
    Abstract: Modern monetary policy focuses on credibility and shaping consumers’ inflation expectations. According to the concept of inflation forecast targeting (IFT), inflation forecasts play a crucial role in the instrument rate decision-making process and may be a specific intermediate target. The aim of the study is to analyse the credibility of inflation forecasts published by the central banks of England, Sweden and Norway. The article presents the proposition of an inflation forecast credibility index. The inflation forecasts’ credibility index may be calculated for all types of inflation forecasts made by central banks, which implement an inflation targeting (IT) regime. It consists of three main elements: the accuracy of the forecasts, the similarity of the forecasts and the inflation forecast deviations from the inflation target. The credibility index has been calculated for the inflation forecasts made by central banks of England, Sweden and Norway. The research conducted shows that most of the inflation forecasts published in selected central banks were credible.
    Keywords: inflation forecasts targeting, inflation forecast, inflation forecast credibility index, inflation expectations
    JEL: E58 E52 E47
    Date: 2016–02
  8. By: Domenico Lombardi; Pierre L. Siklos
    Abstract: In recognition of the severe consequences of the recent international financial crisis, the topic of macroprudential policy has elicited considerable research effort. The present study constructs, for 46 economies around the globe, an index of the capacity to deploy macroprudential policies. Building on elements that have been the subject of recent research, we develop an index that aims to represent the essence of what constitutes a macroprudential regime. Specifically, the index quantifies: (1) how existing macroprudential frameworks are organized; and (2) how far a particular jurisdiction is from reaching the goals established by the Group of Twenty (G20) and the Financial Stability Board (FSB). The latter is a benchmark that has not been considered in the burgeoning literature that seeks to quantify the role of macroprudential policies.
    Keywords: Central banks, Financial Stability Board, index, macroprudential policy, policy framework
    JEL: E32 E42 E58 E02 F02
    Date: 2016–09
  9. By: Dahem, Ahlem; Siala Guermazi, Fatma
    Abstract: The issue of exchange rate pass-through has raised interest in international economy, a necessary step for adopting an adequate monetary policy, which accentuated in 2000 given its impacts on the monetary policy. Yet, on the academic level, research attempts at studying small open economy in a transitory period, e.g. Tunisia, seem to bring about only a few responses. Relying on monthly and quarterly data, from 2000 to 2015, this paper keeps up with SVAR modeling and price chain study, but through two different approaches: a direct aggregate approach that aims at checking the direct impact of exchange rate transmissions on the global prices, and a disaggregate approach that aims at analyzing the exchange rate degree of transmission on the various components of consumer price. To our knowledge, this study is the first attempt at exchange rate pass-through estimation through a disaggregate approach for the consumer price indexe. The main preliminary findings show that the total exchange rate pass-through is about 20% after 2011. Specifically, 10% of pass-through on the administered prices. More accurately, there is a 6% of pass-through degree for food administered prices as well as 7% of pass-through degree for energy prices (after 2011 revolution date), which contradicts the prevailing theory that admits the inexistence of pass-through for administered prices. On the whole, our findings confirm the importance of a disaggregate analysis for studying exchange rate pass-through, and can help policy makers in Tunisia to adopt the appropriate strategies for implementing monetary policy and containing inflation.
    Keywords: Exchange Rate Pass-through – Monetary policy – Emerging Market – Disaggregated analysis
    JEL: C32 E31 E41 E52 F31 F41 O55
    Date: 2016–09–30
  10. By: Alberto Cavallo; Guillermo Cruces; Ricardo Perez-Truglia
    Abstract: Information frictions play a central role in the formation of household inflation expectations, but there is no consensus about their origins. We address this question with novel evidence from survey experiments. We document two main findings. First, individuals in lower-inflation contexts have significantly weaker priors about the inflation rate. This finding suggests that rational inattention may be an important source of information frictions. Second, cognitive limitations also appear to be a source of information frictions: even when information about inflation statistics is made readily available, individuals still place a significant weight on less accurate sources of information, such as their memories of the price changes of the supermarket products they purchase. We discuss the implications of these findings for macroeconomic models and policy-making.
    Date: 2016
  11. 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
  12. By: Simona Malovana; Jan Frait
    Abstract: This paper sheds some light on situations in which monetary and macroprudential policies may interact (and potentially get into conflict) and contributes to the discussion about the coordination of those policies. Using data for the Czech Republic and five euro area countries we show that monetary tightening has a negative impact on the credit-to-GDP ratio and the non-risk-weighted bank capital ratio (i.e. a positive impact on bank leverage), while these effects have strengthened considerably since mid-2011. This supports the view that accommodative monetary policy contributes to a build-up of financial vulnerabilities, i.e. it boosts the credit cycle. On the other hand, the effect of the higher bank capital ratio is associated with some degree of uncertainty. For these and other reasons, coordination of the two policies is necessary to avoid an undesirable policy mix preventing effective achievement of the main objectives in the two policy areas.
    Keywords: Bayesian estimation, financial stability, macroprudential policy, monetary policy, time-varying panel VAR model
    JEL: E52 E58 E61 G12 G18
    Date: 2016–09
  13. By: Ginafranco Tusset (University of Padova)
    Abstract: Is it possible to tell whether central banks’ choices are grounded on monetary theories or whether the theories derive from what central bankers have already experimented? This study delves into this issue by adopting an approach that is novel for at least two reasons. First, it involves a lexical comparison between the textual content used by central banks and in economic articles. Second, this comparison is drawn using quantitative tools. In short, the variables measured here are words and segments of text that were submitted to a statistical analysis to identify trends and behaviors in central bankers and economists that would otherwise not be immediately apparent.
    Keywords: Monetary forerunners, Central bankers’ speeches, Monetary approaches, Quantitative history of economic thought.
    JEL: B23 B59 E58
    Date: 2016–09
  14. By: Stockhammar, Pär (National Institute of Economic Research); Österholm, Pär (Örebro University, School of Business)
    Abstract: In this paper, we investigate whether survey measures of inflation expectations in Sweden Granger cause Swedish CPI-inflation. This is done by studying the precision of out-of-sample forecasts from Bayesian VAR models using a sample of quarterly data from 1996 to 2016. It is found that the inclusion of inflation expectations in the models tends to improve forecast precision. However, the improvement is typically small enough that it could be described as economically irrelevant. One exception can possibly be found in the expectations of businesses in the National Institute of Economic Research’s Economic Tendency Survey; when included in the models, these improve forecast precision in a meaningful way at short horizons. Taken together, it seems that the inflation expectations studied here do not provide a silver bullet for those who try to improve VAR-based forecasts of Swedish inflation. The largest benefits from using these survey expectations may instead perhaps be found among analysts and policy makers; they can after all provide relevant information concerning, for example, the credibility of the inflation target or challenges that the central bank might face when conducting monetary policy.
    Keywords: Bayesian VAR; Granger causality; Out-of-sample forecasts
    JEL: C32 F43
    Date: 2016–10–03
  15. By: Brunnermeier, Markus K. (Princeton University); Sannikov, Yuliy (Princeton University)
    Abstract: A theory of money needs a proper place for financial intermediaries. Intermediaries create inside money and their ability to take risks determines the money multiplier. In downturns, intermediaries shrink their lending activity and fire-sell assets. Moreover, they create less inside money, exactly at a time when the demand for money rises. The resulting Fisher disinflation hurts intermediaries and other borrowers. The initial shock is amplified, volatility spikes and risk premia rise. Monetary policy is redistributive. An accommodative monetary policy, focused on the assets held by constrained agents, recapitalizes balance sheet-impaired sectors in downturns and hence mitigates these destabilizing adverse feedback effects. However, monetary policy also creates moral hazard in the sense that it cannot provide insurance and control risk-taking separately. Hence, macroprudential policy that controls leverage attains higher welfare than monetary policy alone.
    Date: 2016–01
  16. By: Jakob de Haan; Marco Hoeberichts; Renske Maas; Federica Teppa
    Abstract: This study provides an overview of the academic and policy debates about inflation. It is written in a non-technical way. We aim to explain the role of inflation in monetary policy making for a broad audience. Why do central banks care about inflation? How is inflation measured? Why are inflation expectations so important for monetary policymakers? How are inflation expectations measured? What can central banks do to realize their objective of price stability? These issues are all addressed in the present study, with a focus on the euro area.
    Date: 2016–09
  17. By: Pietro Cova (Banca d'Italia); Patrizio Pagano (The World Bank); Massimiliano Pisani (Banca d'Italia)
    Abstract: This paper evaluates the international macroeconomic spillovers from the Eurosystem’s expanded Asset Purchase Programme (APP) under alternative assumptions as regards (i) the unwinding of the asset positions accumulated under the APP and (ii) the normalization of the US monetary policy stance. We simulate a dynamic general equilibrium model of the world economy, calibrated to the Euro area (EA), the US, China, Japan, and the ‘rest of the world’ (RW). Our results are as follows. First, APP expansionary spillovers are dampened if the Eurosystem brings forward the unwinding of its bond holdings because of the lower increase in EA aggregate demand and, therefore, EA imports. The RW is the region most affected because it has the greatest trade integration with the EA. Second, if the US monetary authority announces that it will hold the policy rate constant for a shorter period of time – which dampens the increase in US aggregate demand and, therefore, US imports from the EA – then US spillovers to the EA, while still expansionary, as in the case of a slower normalization of the monetary policy stance, are more modest.
    Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound
    JEL: E43 E44 E52 E58
    Date: 2016–09
  18. By: Hüning, Hendrik
    Abstract: This paper analyses the effects of Swiss National Bank (SNB) communication on asset prices. It distinguishes between different monetary policy news contained in press releases following a monetary policy decision. Employing a latent variable approach and event-study methods, I find that medium- and long-term bond yields respond to changes in the communicated inflation and GDP forecasts as well as to the degree of pessimism expressed in press releases. Exchange rates mainly react to changes in the GDP forecast while stocks do not react to SNB communication on monetary policy announcement days. Additionally, short-term expectations about the future path of the policy rate are driven by the communicated inflation forecast. The results underline the role of qualitative news next to quantitative forecasts in influencing market expectations and asset prices.
    Keywords: monetary policy communication,asset markets
    JEL: E43 E52 G12
    Date: 2016
  19. By: Roberto Piazza (Banca d'Italia)
    Abstract: What types of monetary and fiscal policy rules produce self-fulfilling deflationary paths that are monotonic and empirically relevant? This paper presents simple theoretical conditions that guarantee the existence of these paths in a general equilibrium model with sticky prices. These sufficient conditions are weak enough to be satisfied by most monetary and fiscal policy rules. A quantification of the model which combines a real shock à la Hayashi and Prescott (2002) with a simultaneous sunspot that deanchors inflation expectations matches the main empirical features of the Japanese deflationary process during the “lost decade”. The results also highlight the key role of the assumption about the anchoring of inflation expectations for the size of fiscal multipliers and, in general, for any policy analysis.
    Keywords: deflation, liquidity trap, deanchoring, inflation target, sunspot
    JEL: E31 E40 E43
    Date: 2016–09
  20. By: Kick, Thomas; Koetter, Michael; Storz, Manuela
    Abstract: We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures of international banks, we can identify banks in Germany with access to U.S. facilities via internal capital markets. Using proprietary interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of German banks with access. Short-term loan rates charged to German corporates also decline, albeit with lags between two and four months. These spillover effects of U.S. monetary policy are confined to short-term rates.
    Keywords: monetary policy transmission,emergency liquidity,internal capital markets,interest rates
    JEL: E52 E58 F23 F38 G01 G21
    Date: 2016
  21. By: Sussman, Nathan; Zohar, Osnat
    Abstract: Following the onset of the global financial crisis (2008) we witness a strengthening of the correlation between crude oil prices and medium-term inflation expectations. Using the first principal component of commodity prices as a measure for global aggregate demand, we decompose oil prices into a global demand factor and idiosyncratic factors that include supply side effects and weather conditions. The decomposition of oil prices allows us to show that since the crisis, global five-year breakeven inflation rates react quite strongly to global aggregate demand conditions embedded in oil prices. The result suggests that market participants perceive inflation targeting as either less effective around the effective lower bound or less aggressive when inflation deviates below target. Alternatively, it may be that in recent years monetary authorities have additional considerations such as macro-prudential issues.
    Keywords: anchoring; credibility; inflation expectations; inflation targeting; Monetary policy; oil prices
    JEL: E31 E32 E52 E58
    Date: 2016–09
  22. By: Pesenti, Amos
    Abstract: The conventional approach to monetary stability is not so much different from that related to price stability. As such, it simply supposes that the aggregation of prices in the marketplace is necessary and sufficient for determining the presence of inflation (or deflation) in the economy. However, investigating monetary stability according to this microeconomic approach leads to confusion since the aggregation of price data, as suggested in this paper, does not explain the source of inflationary (or deflationary) pressure on overall prices. Consequently, price instability does not necessarily imply the existence of monetary instability, and vice versa. Hence, this paper, besides presenting a new macroeconomic approach to monetary stability, explains the true source of upward (or downward) pressure on overall prices and then provides policy recommendations to prevent monetary instability.
    Keywords: banking; consumer price index; deflation; inflation; monetary stability; money; payments; price stability
    JEL: E10 E20 E31 E42 E51 E52
    Date: 2016–10–03
  23. By: Foerster, Andrew T. (Federal Reserve Bank of Kansas City); Choi, Jason (Federal Reserve Bank of Kansas City)
    Abstract: Given regime switches in the economy’s growth rate, optimal monetary policy rules may respond by switching policy parameters. These optimized parameters differ across regimes and from the optimal choice under fixed regimes, particularly in the inflation target and interest rate inertia. Optimal switching rules produce welfare gains relative to constant rules, with switches in the implicit real interest rate used for policy and the degree of interest rate inertia producing the largest gains. However, gains from switching rules decrease if the monetary authority trades-off the probability of low rates, or if it may misidentify the regime.
    Keywords: Growth rate; Optimal policy; Regime switching; Taylor rule; Inflation target
    JEL: C63 E31 E52
    Date: 2016–08–01

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