nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒10‒16
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Do Fed Forecast Errors Matter? By Pao-Lin Tien; Tara M. Sinclair; Edward N. Gamber
  2. Daily Currency Interventions in Emerging Markets: Incorporating Reserve Accumulation By Murat Midiliç; Michael Frömmel
  3. Taylor Rules and the interest rate behavior in Algeria By Saloua Nassima Chaouche; Rachid Toumach
  4. Necessity as the mother of invention monetary policy after the crisis By Alan Blindera; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
  5. The Evolution of U.S. Monetary Policy: 2000 - 2007 By Michael T. Belongia; Peter N. Ireland
  6. The response of asset prices to monetary policy shocks: stronger than thought By Alessi, Lucia; Kerssenfischer, Mark
  7. Intraday Effect of News on Emerging European Forex Markets: An Event Study Analysis By Evzen Kocenda; Michala Moravcova
  8. Disinflation and the Phillips Curve: Israel 1986-2015 By Rafi Melnick; Till Strohsal;
  9. Nominal income versus Taylor-type rules in practice By Jonathan Benchimol; André Fourçans
  10. Monetary Policy and Macroprudential Policy: Rivals or Teammates? By Simona Malovana; Jan Frait
  11. Effects of Gold Reserve Policy of Major Central Banks on Gold Prices Changes By Oguzhan Ozcelebi; Metin Duyar
  12. Forecasting the Estonian rate of inflation using factor models By Nicolas Reigl
  13. The effects of a central bank's inflation forecasts on private sector forecasts: Recent evidence from Japan By Masazumi Hattori; Steven Kong; Frank Packer; Toshitaka Sekine
  14. Monetary policy for a bubbly world By Vladimir Asriyan; Luca Fornaro; Alberto Martin; Jaume Ventura
  15. Carry trades and monetary conditions By Falconio, Andrea
  16. The money demand in an open economy model with microeconomic foundations: An application to the CEE countries By Claudiu Tiberiu Albulescu; Dominique Pépin
  17. Monetary transmission mechanism with firm turnover By Lenno Uusküla
  18. Endogenous Market Formation and Monetary Trade: an Experiment By Avi Weiss; Gabriele Camera; Dror Goldberg
  19. Revisiting Gertler-Gilchrist Evidence on the Behavior of Small and Large Firms By Kudlyak, Marianna; Sanchez, Juan M.
  20. A Demand Theory of the Price Level By Marcus Hagedorn
  21. Forecasting Goods and Services Inflation in Sweden By Mossfeldt, Marcus; Stockhammar, Pär
  22. Macroprudential and Monetary Policies Interactions in a DSGE Model for Sweden By Francesco Columba; Jaqian Chen
  23. Central banks: From overburdening to decline? By Issing, Otmar
  24. Gimme a Break! Identification and Estimation of the Macroeconomic Effects of Monetary Policy Shocks in the U.S. By Emanuele Bacchiocchi; Efrem Castelnuovo; Luca Fanelli
  25. Conventional monetary policy and the degree of interest rate pass through in the long run: a non-normal approach By Dong-Yop Oh; Hyejin Lee; Karl David Boulware
  26. The validity of bank lending channel in Zimbabwe By Munyanyi, Musharavati Ephraim
  27. Modest Macroeconomic Effects of Monetary Policy Shocks during the Great Moderation: An Alternative Interpretation By Efrem Castelnuovo
  28. Short term Bayesian inflation forecasting for Tunisia By Dahem, Ahlem
  29. Time-series measures of core inflation By Edward N. Gamber; Julie K. Smith
  30. The loss of interest for the euro in Romania By Claudiu Albulescu; Dominique Pépin

  1. By: Pao-Lin Tien (Bureau of Economic Analysis); Tara M. Sinclair (The George Washington University); Edward N. Gamber (Congressional Budget Office)
    Abstract: There is a large literature evaluating the forecasts of the Federal Reserve by testing their rationality and measuring the size of their forecast errors. There is also a substantial literature and debate on the impact of the Fed’s monetary policy on the economy. We know little, however about the impact of the Fed’s forecast errors on economic outcomes. This paper constructs a measure of a forecast error shock for the Federal Reserve based on the assumption that the Fed follows a forward-looking Taylor rule. Given the effort the Fed puts towards producing forecasts that do not have an endogenous error component, we treat the Fed’s forecast errors as a shock, analogous to a monetary policy shock. Our shock, however, is different in that it is completely unintended by the monetary authority rather than simply unanticipated by the public. We follow Romer and Romer (2004) and investigate the effect of the forecast error shock on output and price movements. Our results suggest that although the absolute magnitude of the forecast error shock is large, the impact of the shock on the macroeconomy is quite small. This finding is robust across a range of different specifications. The maximum impact suggests a decline of less than 0.3 percent of real GDP and less than 0.4 percent of GDP deflator in response to a 100 basis point contractionary forecast error shock.
    Keywords: Federal Reserve, Taylor rule, forecast evaluation, monetary policy shocks
    JEL: E32 E31 E52 E58
    Date: 2016–09
  2. By: Murat Midiliç (Ghent University); Michael Frömmel (Ghent University)
    Abstract: This study considers international reserve management motivation of emerging market central banks in foreign exchange market interventions. Emerging market central banks use currency intervention as a policy tool against exchange rate movements and accumulate international reserves as an insurance against sudden-stops in capital flows. To account for both of these motivations, a model of infrequent interventions only with exchange rates is extended to include international reserves-to-gross domestic product (GDP) ratio at the daily frequency. Daily values of the ratio are forecast using the Mixed Data Sampling (MIDAS) model and exchange rate returns. The model is estimated by using the floating exchange rate regime period data of Turkey. Compared with the benchmark model, it is shown that the MIDAS model does a better job in the forecasting of the reserve-to-GDP ratio. In addition to that, there are breaks in the interventions policy in Turkey, and the extended intervention model performs better than the model only with exchange rates especially in predicting purchases of US Dollar.
    Keywords: currency intervention, international reserves, emerging markets, Turkey, mixed data sampling
    JEL: F31 E58 G15
  3. By: Saloua Nassima Chaouche (ENSSEA); Rachid Toumach (ENSSEA)
    Abstract: The Taylor rules represent a guideline for central bank while setting their monetary policy in the aim to ensure the macroeconomic stability. The estimated Taylor rule and McCallum rule can be considered as a benchmark explicit formula for the central bank to follow when making monetary policy decisions. The Taylor rules capture the essential of the monetary authority’s behavior, and determine the level of short term interest rates compatible with price stability, keeping the output at its potential level. The gap between the rule’s rate and the observed one is used as an indicator of the appropriatemonetary policy with respect to inflation targeting and output gap targeting. In this work, we tried to asses if the short term interest rates announced by the Algerian Central Bank, fit the different version of The Taylor rule. It is an attempt to assesses the operational performance of three version of the Taylor rules in Algeria over the period 1996–2011 using quarterly data, with a view to analytically informing the conduct of monetary policy. The different estimations showed that the Taylor rule can be somehow and in some version the appropriate predictor of interest rate behavior in Algeria.
    Keywords: Monetary policy, Taylor’s rule, Interest rate , Forward-looking , Smoothing Interest rate , Backward-looking
    JEL: A10 A00
  4. By: Alan Blindera; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
    Abstract: We ask whether recent changes in monetary policy due to the financial crisis will be temporary or permanent. We present evidence from two surveys-one of central bank governors, the other of academic specialists. We find that central banks in crisis countries are more likely to have resorted to new policies, to have had discussions about mandates, and to have communicated more. But the thinking has changed more broadly-for instance, central banks in non-crisis countries also report having implemented macro-prudential measures. Overall, we expect central banks in the future to have broader mandates, use macro-prudential tools more widely, and communicate more actively than before the crisis. While there is no consensus yet about the usefulness of unconventional monetary policies, we expect most of them will remain in central banks' toolkits, as governors who gain experience with a particular tool are more likely to assess thattool positively. Finally, the relationship between central banks and their governments might well have changed, with central banks "crossing the line" nmore often than in the past.
    Keywords: monetary policy; central banks; surveys
    JEL: E52 E58
    Date: 2016–10
  5. By: Michael T. Belongia; Peter N. Ireland
    Abstract: A vector autoregression with time-varying parameters is used to characterize changes in Federal Reserve policy that occurred from 2000 through 2007 and describe how they affected the performance of the U.S. economy. Declining coefficients in the model’s estimated policy rule point to a shift in the Fed’s emphasis away from stabilizing inflation over this period. More importantly, however, the Fed held the federal funds rate persistently below the values prescribed by this rule. Under this more discretionary policy, inflation overshot its target and the funds rate followed a path reminiscent of the "stop-go" pattern that characterized Fed behavior prior to 1979.
    JEL: C32 E31 E32 E37 E52 E58
    Date: 2016–09
  6. By: Alessi, Lucia; Kerssenfischer, Mark
    Abstract: Mainstream macroeconomic theory predicts a rapid response of asset prices to monetary policy shocks, which conventional empirical models are unable to reproduce. We argue that this is due to a deficient information set: Forward-looking economic agents observe vastly more information than the handful of variables included in standard VAR models. Thus, small-scale VARs are likely to suffer from nonfundamentalness and yield biased results. We tackle this problem by estimating a Structural Factor Model for a large euro area dataset. We find quicker and larger effects of monetary policy shocks, consistent with mainstream theory and the observed large swings in asset prices. Our results point to stronger financial stability consequences of an exogenous monetary policy tightening, also in the form of a quicker than expected unwinding of QE, than commonly thought. JEL Classification: C32, E43, E44, E52
    Keywords: Asset Prices, Monetary Policy, Nonfundamentalness., Structural Factor Models
    Date: 2016–09
  7. By: Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; CES, Munich, Germany; IOS, Regensburg, Germany); Michala Moravcova (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: We analyze the impact of Eurozone/Germany and U.S. macroeconomic news announcements and the communication of the monetary policy settings of the ECB and the Fed on the forex markets of new EU members. We employ an Event Study Methodology to analyze intra-day data from 2011–2015. Our comprehensive analysis of the wide variety of macroeconomic information during the post-GFC period shows that: (i) macroeconomic announcements affect the value of the new-EU-country exchange rates, (ii) the origin of the announcements matters, (iii) the type of announcement also matters, (iv) different types of news (good, bad, or neutral) result in different reactions, (v) markets react not only after the news release but also before, (vi) when the U.S. dollar is a base currency the impact of the news is larger than in case of the euro, (vii) announcements on ECB monetary policy result in stronger effects than those of the Fed, and (viii) temporary inefficiencies are present on the new-EU-country forex markets.
    Keywords: foreign exchange markets; intraday data; abnormal returns; event study; macroeconomic announcements; monetary policy settings; European Union; new EU members
    JEL: C52 F31 F36 G15 P59
    Date: 2016–09
  8. By: Rafi Melnick; Till Strohsal;
    Abstract: A Phillips Curve (PC) framework is utilized to study the challenging post-1985 disinflation process in Israel. The estimated PC is stable and has forecasting power. Based on endogenous structural break tests we find that actual and expected inflation are co-breaking. We argue that the step-like development of inflation is in line with shocks and monetary policy that changed inflationary expectations. The disinflation process was long, and a long-term commitment by both the Central Bank and the government was required. Credibility was achieved gradually and the transition from the last step of 10% to 2% inflation was accomplished by introducing an inflation targeting regime.
    Keywords: Phillips Curve, Expected Inflation, Opportunistic Disinflation, Multiple Breakpoint Tests, Inflation Targeting
    JEL: E31 E52 E58 C22
    Date: 2016–10
  9. By: Jonathan Benchimol (BoI - Bank of Israel); André Fourçans (ESSEC - ESSEC Business School - Essec Business School - Economics Department - Essec Business School)
    Abstract: Since the beginning of the financial crisis, a lively debate has emerged regarding which monetary policy rule the Fed (and other central banks) should follow, if any. To clarify this debate, several questions must be answered. Which monetary policy rule best the historical data? Which monetary policy rule best minimizes economic uncertainty and the Feds loss function? Which rule is best in terms of household welfare? Among the different rules, are NGDP growth or level targeting rules a good option, and when? Do they perform better than Taylor-type rules? To answer these questions, we use Bayesian estimations to test the Smets and Wouters (2007) model under nine different monetary policy rules with US data from 1955 to 2015 and over three different sub-periods. We find that when considering only the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules, whatever the period. However, if other criteria are considered, the central banks objectives are not consistently met by a single rule for all periods.
    Keywords: Monetary policy, NGDP targeting, Taylor rule, DSGE model
    Date: 2016–07–04
  10. By: Simona Malovana (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Jan Frait (University of Finance and Administration, Prague, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)
    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
  11. By: Oguzhan Ozcelebi (Istanbul University); Metin Duyar (Nevsehir Hacı Bektas Veli University)
    Abstract: Central banks which are responsible for minting and monetary policy implementations are the institutions carry out sensitive policies for the healthy functioning of the economy. Policies implemented by central banks and its existing institutional structures cannot be dissociated from the political and social development of the country they live in, and the whole of economic policy. In recent years, with increasing pace of globalization, the mobility of international financial markets increased and this effect has extended the decisions of the central bank from national markets to international markets. In this study, we studied the possible impacts of changes in the share of gold in central banks’ reserves on gold prices proving empirical evidence from the USA, the Euro area, China and Russia. According to Causality and Forecast Error Variance Decomposition analysis deriving from VEC model, reserve polices of central banks of these countries has considerable effects on variations in gold price in the long-term. Empirical findings reveal the importance of the size of balance sheet of central banks, while it is also stressed that growth potential of economies and investment opportunities are crucial issues in terms storing reserves in terms of gold.
    Keywords: Dynamics of Gold Prices, Central Banks, the USA, the Euro area, China and Russia
    JEL: E44 E58 F30
  12. By: Nicolas Reigl
    Abstract: The paper presents forecasts of the headline and core inflation in Estonia with factor models in a recursive pseudo out-of-sample framework. The factors are constructed with a principal component analysis and are then incorporated into vector autoregressive forecasting models. The analyses show that certain factor-augmented vector autoregressive models improve upon a simple univariate autoregressive model but the forecasting gains are small and not systematic. Models with a small number of factors extracted from a large dataset are best suited for forecasting headline inflation. In contrast models with a larger number of factors extracted from a small dataset outperform the benchmark model in the forecast of Estonian headline and, especially, core inflation
    Keywords: Factor models, factor-augmented vector autoregressive models, factor analysis, principal components, inflation forecasting, forecast evaluation, Estonia
    JEL: C32 C38 C53
    Date: 2016–10–10
  13. By: Masazumi Hattori; Steven Kong; Frank Packer; Toshitaka Sekine
    Abstract: How central banks can best communicate to the market is an increasingly important topic in the central banking literature. With ever greater frequency, central banks communicate to the market through the forecasts of prices and output with the purposes of reducing uncertainty; at the same time, central banks generally rely on a publicly stated medium-term inflation target to help anchor expectations. This paper aims to document how much the release of the forecasts of one major central bank, the Bank of Japan (BOJ), has influenced private sector expectations of inflation, and whether the degree of influence depends to any degree on the adoption of an inflation target (IT). Consistent with earlier studies, we find the central bank's forecasts to be quite influential on private sector forecasts. In the case of next year forecasts, their impact continues into the IT regime. Thus, the difficulties of aiming at an inflation target from below do not necessarily diminish the influence of the central bank's inflation forecasts.
    Keywords: central bank communication, Bank of Japan, inflation forecast, inflation targeting
    Date: 2016–09
  14. 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 in ation rate affect the real growth rate of bubbles and their effect on economic activity. Crucially, this channel does not rely on contract incompleteness or price rigidities. Second, there is a natural limit on monetary policy's ability to control bubbles: the zero-lower bound. When a bubble crashes, the economy may enter into a liquidity trap, a regime in which agents shift their portfolios away from bubbles - and the credit that they sustain - to money, reducing intermediation, investment and growth. We explore the implications of the model for the conduct of "conventional" and "unconventional" monetary policy, and we use the model to provide a broad interpretation of salient macroeconomic facts of the last two decades.
    Keywords: bubbles, monetary policy, liquidity traps, financial frictions.
    JEL: E32 E44 O40
    Date: 2016–07
  15. By: Falconio, Andrea
    Abstract: This paper investigates the relation between monetary conditions and the excess returns arising from an investment strategy that con- sists of borrowing low-interest rate currencies and investing in currencies with high interest rates, so-called "carry trade". The results indicate that carry trade average excess return, Sharpe ratio and 5% quantile differ substantially across expansive and restrictive conventional mone- tary policy before the onset of the recent financial crisis. By contrast, the considered parameters are not affected by unconventional monetary policy during the financial crisis. JEL Classification: F31, G15, E52
    Keywords: carry trade, monetary conditions, volatility
    Date: 2016–10
  16. By: Claudiu Tiberiu Albulescu (UPT - Politehnica University of Timisoara - Politehnica University of Timisoara); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: The aim of this paper is to investigate the degree of currency substitution between the currencies of CEE countries and the euro. As a novelty, we develop a model with microeconomic foundations, which underlines the difference between the currency substitution and the money demand sensitivity to exchange rate variations. More precisely, we posit that the currency substitution is related to themoney demand sensitivity to the interest rate spread between the CEE countries and the euro area. In addition, we showthat the existence of a channel throughout the exchange rate has implications on the money demand, even in the absence of a currency substitution effect. This model can be successfully applied to countries where an international currency offers liquidity services to the domestic agent, and where afterwards it is parameterized in order to empirically test the long-run money demand based on two complementary cointegration equations. The opportunity cost of holding the money, as well as the scale variable represented by household consumption or output, explain the long-run money demand in CEE countries. Our results are robust regarding the use of DOLS or FMOLS estimators, andregarding the employment of the broad and the narrow money for computing the money demand.
    Keywords: CEE countries ,cointegration,open economy model,currency substitution,money demand
    Date: 2016–07–20
  17. By: Lenno Uusküla
    Abstract: An expansionary monetary policy shock increases the entry rate and the number of firms in the US. A pure sticky price model predicts that the number of firms in the economy should go down after a monetary expansion, but this prediction is at odds with the empirical findings. In marked contrast, the cost channel mechanism generates an increase in the number of firms that is consistent with the data. A key insight is that the greater price stickiness is, the stronger the cost channel needs to be to generate firm dynamics that are consistent with the data.
    Keywords: monetary transmission, cost channel, sticky prices, firm turnover
    JEL: E32 C32
    Date: 2016–10–10
  18. By: Avi Weiss (Bar-Ilan University); Gabriele Camera; Dror Goldberg
    Abstract: The theory of money typically ignores the fact that the mode of market interaction arises endogenously, and simply assumes a decentralized, bilateral exchange process. However, endogenizing the organization of trade is critical for understanding the conditions that lend themselves to the development of money as a mode of exchange. To study this, we develop a “travelling game” to study the spontaneous emergence of different systems of exchange theoretically and experimentally. Players located on separate “islands” can either stay and trade on their island, or pay a cost to trade elsewhere. Earnings rise with the frequency of trade but fall with the frequency of travel. Decentralized and centralized markets can both emerge in equilibrium. The latter maximize consumption frequencies and are socially efficient; the former minimize travel cost and require the use of a medium of exchange. In the laboratory, a centralized market more frequently emerges when subjects perform diversified economic tasks, and when they interact in large groups and cannot be sure whether they will meet the same counterpart in later periods. The experiment shows that to understand the emergence of monetary systems it is important to amend the theory of money such that the market structure is endogenized.
    Keywords: endogenous institutions, macroeconomic experiments, matching, coordination, markets, money.
    JEL: E4 E5 C9 C92
    Date: 2016–08
  19. By: Kudlyak, Marianna (Federal Reserve Bank of San Francisco); Sanchez, Juan M. (Federal Reserve Bank of St. Louis)
    Abstract: Gertler and Gilchrist (1994) provide evidence for the prevailing view that adverse shocks are propagated via credit constraints of small firms. We revisit the behavior of small versus large firms during the episodes of credit disruption and recessions in the sample extended to cover the 2007-09 economic crisis. We find that large firms’ short-term debt and sales contracted relatively more than those of small firms during the 2007-09 episode. Furthermore, the short-term debt of large firms also contracted relatively more in the previous tight money episodes if one takes into account the longer period that it takes for large firms’ debt to reach its post-shock trough. Our findings challenge the view that propagation of shocks in the economy takes place via credit constraints of small firms.
    JEL: E32 E51 E52
    Date: 2016–10–12
  20. By: Marcus Hagedorn (Universitetet i Oslo)
    Abstract: In this paper I propose a theory of a globally unique price level based on the simple idea that the price equates demand with supply in the goods market. Monetary policy through setting nominal interest rates, e.g. an interest rate peg, and fiscal policy, which satisfies the present value budget constraint at all times, jointly determine the price level. In contrast to the conventional view the long run inflation rate is, in the absence of output growth, equal to the growth rate of nominal government spending which is controlled by fiscal policy. This new theory where nominal government spending anchors aggregate demand and therefore current and future prices suggests a different perspective on the fiscal and monetary transmission mechanism, on policy coordination, on policies at the zero-lower bound and on U.S. inflation history.
    Date: 2016
  21. By: Mossfeldt, Marcus (National Institute of Economic Research); Stockhammar, Pär (National Institute of Economic Research)
    Abstract: In this paper, we make use of a Bayesian VAR (BVAR) model to con-duct an out-of-sample forecast exercise for goods and services inflation in Sweden. Our interest in goods and services prices stems from the fact that they make up over 70 per cent of the CPI index and that they are more directly affected by the macroeconomic development than other parts of the CPI. We find that the BVAR models generally outperform both univariate models for goods and services inflation, as well as forecasts made by the National Institute of Economic Research in Sweden. This might indicate that Faust and Wright’s (2013) rather negative conclusion that inflation models cannot beat judgmental forecasts and inflation expectations might be wrong, at least in the case of Sweden.
    Keywords: Bayesian VAR; Inflation; Out-of-sample forecasting precision
    JEL: C53 E31
    Date: 2016–10–12
  22. By: Francesco Columba (Bank of Italy); Jaqian Chen (IMF)
    Abstract: We analyse the effects and the interactions of macroprudential and monetary policies with an estimated dynamic stochastic general equilibrium (DSGE) model tailored to Sweden. Households are constrained by a loan-to-value ratio and mortgages are amortized. Government grants mortgage interest payment deductions. Lending rates are affected by mortgage risk weights. We find that to curb the household debt-to-income ratio demand-side macroprudential measures are more effective and less costly in terms of foregone consumption than monetary policy. A tighter macroprudential stance is also welfare improving, by promoting lower consumption volatility in response to shock, especially when combining different instruments, whose sequence of implementation is key.
    Date: 2016
  23. By: Issing, Otmar
    Abstract: "Institutional Overburdening" to a large extent was a consequence of the "Great Moderation". This term indicates that it was a period in which inflation had come down from rather high levels. Growth and employment were at least satisfying and variability of output had substantially declined. It was almost unavoidable that as a consequence expectations on future actions of central banks and their ability to control the economy reached an unprecedented peak which was hardly sustainable. Institutional overburdening has two dimensions. One is coming from exaggerated expectations on what central banks can achieve ("expectational overburdening"). The other dimension is "operational overburdening" i.e. overloading the central bank with more and more responsibilities and competences.
    Keywords: Central Banking,ECB,Monetary Policy
    Date: 2016
  24. By: Emanuele Bacchiocchi (Department of Economics, Business and Quantitative Methods (DEMM), University of Milan); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; Department of Economics, The University of Melbourne; and Department of Economics and Management, University of Padova); Luca Fanelli (Department of Statistical Sciences, School of Economics, Management and Statistics, University of Bologna)
    Abstract: We employ a non-recursive identification scheme to identify the effects of a monetary policy shock in a Structural Vector Autoregressive (SVARs) model for the U.S. post-WWII quarterly data. The identification of the shock is achieved via heteroskedasticity, and different on-impact macroeconomic responses are allowed for (but not imposed) in each volatility regime. We show that the impulse responses obtained with the suggested non-recursive identification scheme are quite similar to those conditional on a recursive VAR estimated with pre-1984 data. In contrast, recursive vs. non-recursive identification schemes return different short-run responses of output and investment during the Great Moderation. Robustness checks dealing with a different definition of investment, an alternative breakpoint, and federal funds futures rates as an indicator of the monetary policy stance are documented and discussed.
    Keywords: Structural break, recursive and non-recursive VARs, identification, monetary policy shocks, impulse responses
    JEL: C32 C50 E52
    Date: 2016–10
  25. By: Dong-Yop Oh (Department of Information Systems, University of Texas Rio Grande Valley); Hyejin Lee (Department of Information Systems, University of Texas Rio Grande Valley); Karl David Boulware (Department of Economics, Wesleyan University)
    Abstract: We investigate the long-run pass through of the federal funds rate to the prime rate from February 1987 to February 2015. Unlike previous studies that rely on conventional cointegration tests, this study employs cointegration tests based on the “residual augmented least squares” (RALS). The RALS cointegration tests have been shown to gain power when using a linear model in the presence of non-normal errors. The results indicate a significant cointegrating relation between the federal funds rate and the prime rate with incomplete interest rate pass through.
    Keywords: ATT/WTO, Monetary policy, interest rate pass through, cointegration analysis, non-normal errors, RALS
    JEL: E52 E43 E58 C12 C22
    Date: 2016–09
  26. By: Munyanyi, Musharavati Ephraim
    Abstract: This paper seeks examine the validity of the bank lending channel in Zimbabwe. It estimates the relative impact of this channel on key economic variables such as, economic growth and inflation by covering the period from 1970 to 2014. For this purpose, Vector Autoregression (VAR) approach is employed. Impulse Response Functions are also generated to confirm the response of a shock in bank lending upon itself and other variables (economic growth and inflation). The result findings indicate that bank lending channel does not have a significant role in monetary transmission mechanism of Zimbabwe. The results imply that the bank lending channel should be improved through for example, tightening creditworthiness standards, revamping accounting standards and bank credit assessment capabilities, as well as setting up an effective judicial system to improve banks’ ability to enforce on collateral.
    Keywords: Economic Growth, Bank lending channel, VAR
    JEL: E52
    Date: 2016–10–06
  27. By: Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne; Department of Economics, The University of Melbourne; and Department of Economics and Management, University of Padova)
    Abstract: Cholesky-VAR impulse responses estimated with post-1984 U.S. data predict modest macroeconomic reactions to monetary policy shocks. We interpret this evidence by employing an estimated medium-scale DSGE model of the business cycle as a DataGenerating Process in a Monte Carlo exercise in which a Cholesky-VAR econometrician is asked to estimate the effects of an unexpected, temporary increase in the policy rate. Our structural DSGE model predicts conventional macroeconomic reactions to a policy shock. In contrast, our Monte Carlo VAR results replicate our evidence obtained with actual U.S. data. Hence, modest macroeconomic effects may very well be an artifact of Cholesky-VARs. A combination of supply and demand shocks may be behind the inability of Cholesky-VARs to replicate the actual macroeconomic responses. The difference in the VAR responses obtained with Great Inflation vs. Great Moderation data may be due to instabilities in the parameters related to households’ and firms’ programs, more than to a more aggressive systematic monetary policy. A Monte Carlo assessment of sign restrictions as an alternative identification strategy is also proposed.
    Keywords: Monetary policy shocks, Cholesky identification, VARs, Dynamic Stochastic General Equilibrium models, Monte Carlo simulations
    JEL: C3 E3
    Date: 2016–10
  28. By: Dahem, Ahlem
    Abstract: In order to explain clearly inflation forecasting and the dynamic of Tunisian prices, this paper uses two econometric approaches, the Standard VAR and Bayesian VAR (BVAR), to assess three models for predicting inflation, the mark-up model, the monetary model and Phillips curve over the period 1990 Q1 – 2013 Q4. In order to compare predictions, an out-of-sample estimation was conducted. We used the structural break test of Bai & Perron (1998, 2003) and the RMSE criterion for both inflation indices: CPI and PPI. We found that the Bayesian VECM mark-up model is best suited to forecast inflation for Tunisia. Our conclusions corroborate the literature of Bayesian VAR forecasting. Our findings indicate that the models which incorporate more economic information outperform the benchmark autoregressive models (AR (1) and AR (2)). The results reveal that forecasting with the BVECM markup model leads to a reduction in forecasting error compared to the other models. The results of the study are relevant to decision-makers to predict inflation in the short- and long-terms in Tunisia and may help them adopt the appropriate strategies to contain inflation.
    Keywords: Bayesian VAR - Bayesian VECM - Inflation forecasting - Mark-up Model - Monetary Model - Phillips Curve
    JEL: C11 C51 C53 E31 E37
    Date: 2015–09–01
  29. By: Edward N. Gamber (Congressional Budget Office); Julie K. Smith (Lafayette College)
    Abstract: Most papers examining the measurement of core inflation, such as the weighted median, have focused on cross-section information in the disaggregated inflation data. This paper improves on the literature by introducing new measures, based on a definition of core inflation as the best predictor of future inflation that exploits the time-series information in the disaggregated inflation data. Exploiting the time-series information in disaggregated or component inflation data produces better forecasts. Additionally, the best new measure comes from jointly estimating the optimal weights instead of imposing weights based on the persistence of the components or the underlying factors estimated by principal components.
    Keywords: Core inflation, inflation, forecasting, disaggregated components, principal components
    JEL: E31 E37
    Date: 2016–09
  30. By: Claudiu Albulescu (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: We generalize a money demand micro-founded model to explain Romanians' recent loss of interest for the euro. We show that the reason behind this loss of interest is a severe decline in the relative degree of the euro liquidity against that of the Romanian leu.
    Keywords: money demand,open economy model,currency substitution,Romania
    Date: 2016–09–06

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