nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒11‒13
eighteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Price Dispersion and Inflation Persistence By Kurozumi, Takushi; Van Zandweghe, Willem
  2. Non-standard monetary policy, asset prices and macroprudential policy in a monetary union By Lorenzo Burlon; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  3. Deflation probability and the scope for monetary loosening in the United Kingdom By Haberis, Alex; Masolo, Riccardo; Reinold, Kate
  4. The Power of Unconventional Monetary Policy in a Liquidity Trap By Masayuki Inui; Sohei Kaihatsu
  5. I propose a model in which uncertainty about the value of ex-post payoffs drives a wedge - a short-term bond premium - between an observed short-term benchmark interest rate and the unobserved discount rate, that is used to allocate consumption over time. The model helps to explain disconnect between exchange rates and interest rate fundamentals; disconnect between measures of risk that price bonds and measures of risk that price currencies; and why exchange rates are "too smooth" relative to the volatile discount rates implied by equity premia. In the model with risk, the exchange rate response to monetary policy is observationally similar, whether monetary policy moves the discount rate or the bond market premium. Between policy changes, interest rate stabilisation (i) isolates the currency from variation in the discount rate; and (ii) shifts the expression of bond risk from bond yields to the currency premium. Those tradeoffs provide a risk-based interpretation of the monetary policy trilemma. By Anella Munro
  6. Monetary Policy and the Stock Market: Time-Series Evidence By Michael Weber; Andreas Neuhierl
  7. Supplementary Paper Series for the "Comprehensive Assessment" (3): Policy Effects since the Introduction of Quantitative and Qualitative Monetary Easing (QQE) -- Assessment Based on Bank of Japan's Large-scale Macroeconomic Model (Q-JEM) -- By Kazutoshi Kan; Yui Kishaba; Tomohiro Tsuruga
  8. Should Central Banks Care About Fiscal Rules? By Eric M. Leeper
  9. Putting Money to Work: Monetary Policy in a Low Interest Rate Environment By Steve Ambler
  10. Unsurprising shocks: information, premia, and the monetary transmission By Miranda-Agrippino, Silvia
  11. The shadow rate as a predictor of real activity and inflation: Evidence from a data-rich environment By Hännikäinen Jari
  12. A Survey of the Empirical Literature on U.S. Unconventional Monetary Policy By Bhattarai, Saroj; Neely, Christopher J.
  13. The Effect of ECB Forward Guidance on Policy Expectations By Paul Hubert; Fabien Labondance
  14. Optimal Inflation to Reduce Inequality By Lorenzo, Menna; Patrizio, Tirelli;
  15. Ben Bernanke in Doha: The effect of monetary policy on optimal tariffs By Lechthaler, Wolfgang
  16. An Unconventional Approach to Evaluate the Bank of England's Asset Purchase Program By Matthias Neuenkirch
  17. Inflation in Pakistan: Money or Oil Prices By Mehak Moazam; M. Ali Kemal
  18. Confidence Cycles and Liquidity Hoarding By Volha Audzei

  1. By: Kurozumi, Takushi; Van Zandweghe, Willem (Federal Reserve Bank of Kansas City)
    Abstract: Persistent responses of inflation to monetary policy shocks have been difficult to explain by existing models of the monetary transmission mechanism without embedding controversial intrinsic inertia of inflation. This paper addresses this issue using a staggered price model with trend inflation, a smoothed-off kink in demand curves, and a fixed cost of production. {{p}} In this model, inflation exhibits a persistent response to a policy shock even in the absence of its intrinsic inertia, because the kink causes a measure of price dispersion, which is intrinsically inertial, to become a key source of inflation persistence under the positive trend inflation rate. {{p}} JEL Classification: E31, E52
    Keywords: Disinflation; Inflation; Monetary policy; Prices; Fixed production cost
    JEL: E31 E52
    Date: 2016–10–01
  2. By: Lorenzo Burlon (Bank of Italy); Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic and financial effects of the Eurosystem’s Asset Purchase Programme (APP) and its interaction with a member country’s macroprudential policy. We assume that some households in a euro-area (EA) country are subject to a borrowing constraint, and that their local real estate acts as the collateral. In order to highlight the interaction between the APP and region-specific macroprudential policies, we simulate a situation in which, as the APP is carried out, households in one EA region develop overly optimistic expectations about local real estate prices. We report four main findings. First, a relatively large loan-to-value (LTV) ratio in one region can greatly amplify the expansionary effect of the union-wide non-standard monetary policy measures on domestic households’ borrowing. Second, while the APP is being implemented, an increase in households’ borrowing in one region can be further magnified by the combination of a high LTV ratio and overly optimistic expectations. Third, region-specific macroprudential measures can stabilize private sector borrowing with limited negative effects on economic activity. Fourth, our results hold also in the case of area-wide overly optimistic expectations.
    Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound, macroprudential policy
    JEL: E43 E52 E58
    Date: 2016–10
  3. By: Haberis, Alex (Bank of England); Masolo, Riccardo (Bank of England); Reinold, Kate (Bank of England)
    Abstract: In this paper, we use an estimated DSGE model of the UK economy to investigate perceptions of the effectiveness of monetary policy since the onset of the 2007–08 financial crisis in a number of measures of deflation probability — the Survey of Economic Forecasts, financial-market option prices, and the Bank of England's Monetary Policy Committee’s (MPC) forecasts. To do so, we use stochastic simulations of the model to generate measures of deflation probability in which the effectiveness of monetary policy to offset deflationary shocks is affected by different assumptions about the existence and level of a lower bound on policy rates. We find that measures of deflation probability are consistent with the perception that the MPC was not particularly constrained in its ability to offset deflation shocks in the post-crisis period.
    Keywords: Deflation; forecasting and simulation; models and applications; interest rates; monetary policy
    JEL: E31 E37 E43 E47 E52
    Date: 2016–11–04
  4. By: Masayuki Inui (Bank of Japan); Sohei Kaihatsu (Bank of Japan)
    Abstract: In this study, we examine what unconventional monetary policy measures are effective in escaping from a liquidity trap. We develop a heterogeneous agent New Keynesian model with uninsurable income uncertainty and a borrowing constraint. We show that adverse effects of income uncertainty deteriorate in the liquidity trap, which crucially undermines the transmission mechanism of unconventional monetary policy through an increase in precautionary savings. We then draw the following implications: (1) decreasing risk premiums by quantitative easing (QE) is more effective than forward guidance (FG) in the liquidity trap; (2) when the liquidity trap becomes deeper, central banks should conduct QE with sufficiently rapid pace of asset purchases; and (3) the combination of QE and FG yields synergy effects that strengthen the power to escape from the liquidity trap through mitigating precautionary saving motives.
    Keywords: unconventional monetary policy; liquidity trap; uninsurable income uncertainty; incomplete market; quantitative easing; forward guidance
    JEL: E21 E31 E52 E58
    Date: 2016–11–11
  5. By: Anella Munro (Reserve Bank of New Zealand)
    Date: 2016–10
  6. By: Michael Weber (University of Chicago Booth School of Business); Andreas Neuhierl (Mendoza College of Business, University of Notre Dame)
    Abstract: We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings. Â
    Keywords: Return Predictability, Policy Speeches, Expected Returns, Macro News
    JEL: E31 E43 E44 E52 E58 G12
    Date: 2016
  7. By: Kazutoshi Kan (Bank of Japan); Yui Kishaba (Bank of Japan); Tomohiro Tsuruga (Bank of Japan)
    Abstract: Three and a half years or so have passed since the Bank of Japan introduced Quantitative and Qualitative Monetary Easing (QQE) in April 2013. This paper presents a simulation exercise based on the Bank of Japan's large-scale macroeconomic model (Q-JEM) to assess the impact of policies since the introduction of QQE on Japan's economic activity and prices. In this exercise, we consider hypothetical scenarios assuming that QQE and subsequent easing measures had not been introduced, and conduct counterfactual simulations to examine how the Japanese economy and prices would have evolved under these scenarios. In this setting, we estimate the policy effects as the difference between the actual data and the counterfactual paths. We use two different starting points for the simulation: the introduction of QQE in Q2 2013, and the quarter before the introduction of QQE, when the Bank introduced its inflation target and markets may have anticipated a major policy change. Moreover, for each of the two different starting points, we consider two different cases in terms of what is regarded as part of the monetary policy shock brought about by QQE and subsequent policy measure. Specifically, in the first case, the monetary policy shock includes only the decline in real interest rates, and changes in exchange rates and stock prices are regarded as consequences of the policy shock only to the extent that they are explained within the model. In the second case, it includes all the changes in exchange rates and stock prices (beyond those predicted by the model). The simulation results indicate that in three out of the four scenarios, the year-on-year rate of change in the CPI (all items less fresh food and energy) would have stayed negative or close to zero percent without the introduction of QQE and subsequent policy measures.
    Keywords: Inflation; Inflation expectation; Macroeconomic model; Unconventional monetary policy; Asset purchase; Quantitative easing
    JEL: E17 E37 E52 E58
    Date: 2016–11–07
  8. By: Eric M. Leeper
    Abstract: This essay aims to explain the nature of monetary and fiscal policy interactions and how those interactions could inform the fiscal rules that countries choose to follow. It makes two points: (1) monetary policy control of inflation requires appropriate fiscal backing; (2) European fiscal frameworks appear unlikely to provide the necessary fiscal backing.
    JEL: E31 E5 E62 E63
    Date: 2016–11
  9. By: Steve Ambler
    Keywords: Monetary Policy
    JEL: E43 E52 E58
    Date: 2016–11
  10. By: Miranda-Agrippino, Silvia (Bank of England)
    Abstract: Central banks’ decisions are a function of forecasts of macroeconomic fundamentals. Because private sector forecasts are not bound to be equal to central banks’ forecasts, what markets label as unexpected may or may not be unanticipated by the central bank. Monetary surprises can thus incorporate anticipatory effects if market participants fail to correctly account for the systematic component of policy when they are surprised by an interest rate decision. Depending on how market participants perceive the policy decision, their economic projections and the associated risk compensations move in opposite directions, and do so at the time of the announcement. Hence, and regardless of the width of the measurement window, monetary surprises capture more than just the monetary policy shock, and their use as external instruments for identification is potentially compromised. Monetary ‘surprises’ are dependent on, and shown to be predictable by both central banks’ forecasts and past information available to market participants prior to the announcement. A New-Keynesian framework sketches the intuition. The resulting distortions in the estimated impulse response functions can be dramatic, both qualitatively and quantitatively. A new set of monetary surprises, free of anticipatory effects and unpredictable by past information, are shown to retrieve transmission coefficients to a monetary policy shock consistent with macroeconomic theory even in informationally deficient VARs.
    Keywords: Monetary surprises; identification with external instruments; monetary policy; expectations; information asymmetries; event study; proxy SVAR
    JEL: C36 E44 E52 G14
    Date: 2016–11–04
  11. By: Hännikäinen Jari (School of Management, University of Tampere)
    Abstract: This paper examines the predictive content of the shadow rates for U.S. real activity and inflation in a data-rich environment. We find that the shadow rates contain substantial out-of-sample predictive power for inflation in non-zero lower bound and zero lower bound periods. In contrast, the shadow rates are uninformative about future real activity.
    Keywords: shadow rate, zero lower bound, unconventional monetary policy, forecasting, data-rich environment
    JEL: C53 E37 E43 E44 E58
    Date: 2016–06
  12. By: Bhattarai, Saroj (University of Texas at Austin); Neely, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: This paper reviews and critically evaluates the empirical literature on the effects of U.S. unconventional monetary policy on both financial markets and the real economy. In order to understand how such policies could work, we also briefly review the literature on the theory of such policies. We show that event studies provide very strong evidence that U.S. unconventional policy announcements have strongly influenced international bond yields, exchange rates, and equity prices in the desired manner. In addition, such studies indicate that such policies curtailed market perceptions of extreme events. Calibrated modeling and vector autoregressive (VAR) exercises strongly suggest that these policies significantly improved macroeconomic outcomes, raising U.S. GDP and CPI, through these changes in asset prices. Both event studies and VARs imply positive international spillovers of such policies.
    Keywords: Quantitative easing; event study; unconventional monetary policy; zero lower bound
    JEL: E51 E58 E61 F31 G12
    Date: 2016–11–28
  13. By: Paul Hubert (OFCE, Sciences Po); Fabien Labondance (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: This paper investigates the instantaneous and dynamic effects of ECB forward guidance announcements on the term structure of private short-term interest rate expectations. We estimate the static and dynamic impact of forward guidance on private agents’ expectations about future short-term interest rates using a high-frequency methodology and an ARCH model, complemented with local projections. We find that ECB forward guidance announcements decrease most of the term structure of private short-term interest rate expectations, this being robust to several specifications. The effect is stronger on longer maturities and persistent.
    Keywords: Central bank communication, Short-term interest rate expectations, OIS
    JEL: E43 E52 E58
    Date: 2016–10
  14. By: Lorenzo, Menna; Patrizio, Tirelli;
    Abstract: A popular argument in favour of price stability is that the inflation-tax burden would disproportionately fall on the poor because wealth is unevenly distributed and portfolio composition of poorer households is skewed towards a larger share of money holdings. We reconsider the issue in a DSGE model characterized by limited participation to the market for interest bearing assets (LAMP). We show that a combination of higher in ation and lower income taxes reduces inequality. When we calibrate the share of constrained agents to fit the wealth Gini index for the US, the optimal inflation rate is above 4%. This result is robust to alternative foundations of money demand equations.
    Keywords: in ation, monetary and fiscal policy, Ramsey plan, inequality
    JEL: E52 E58 J51 E24
    Date: 2016–11–01
  15. By: Lechthaler, Wolfgang
    Abstract: Trade liberalization can imply slow and long adjustment processes. Taking account of these adjustment processes can change the evaluation of trade policy, especially when policy makers care more about the next couple of years than the infinite future. In this paper I analyze the setting of tariffs in a two-country model taking account of adjustment processes with special emphasis on the effects of nominal price rigidity and monetary policy. I show that nominal price rigidity induces policy makers with a short planning horizon to set lower tariffs because it enhances the short run boom following a cut in tariffs. Monetary policy that aggressively fights deviations from its inflation target leads to even lower tariffs.
    Keywords: tariffs,dynamic trade model,monetary policy
    JEL: E52 F11 F12 F13
    Date: 2016
  16. By: Matthias Neuenkirch
    Abstract: Empirical papers analysing the transmission of (unconventional) monetary policy typically rely on a vector autoregressive framework. In this paper, I complement these studies and employ a matching approach to examine the impact of the Bank of England's asset purchase program on macroeconomic quantities in the UK. My sample covers the period March 2001-December 2015 and five small open inflation targeting economies. Using entropy balancing, I create a synthetic control group comprised of credible counterfactuals for the sample of observations subject to the asset purchase program. My key results are that a 100 bn GBP increase in asset purchases has a significant and positive effect on GDP growth with a peak effect of 0.66-0.69 percentage points (pp) after 30 months. The same increase leads to a reduction in the inflation gap with a peak effect between -0.77 and -0.94 pp after 30 months. An in-depth analysis reveals that the latter finding is not driven by the choice of the empirical methodology. In contrast, I find that the returns on asset purchases are decreasing (i) over time and (ii) with the level of asset purchases. This causes the impact of asset purchases on the inflation gap to eventually become negative.
    Keywords: Asset Purchases, Bank of England, Entropy Balancing, Matching, Quantitative Easing, Treatment Effects, Unconventional Monetary Policy
    JEL: E52 E58
    Date: 2016
  17. By: Mehak Moazam (Pakistan Institute of Development Economics, Islamabad); M. Ali Kemal (Pakistan Institute of Development Economics, Islamabad)
    Abstract: The study attempted to investigate the determinants of inflation in case of Pakistan and to check the validity of monetarist stance that inflation is always and everywhere a monetary phenomenon by investigating the impact of oil prices, M2 and GDP on prices. The descriptive analysis shows there is strong correlation between money supply and prices and also between GDP and prices while the correlation between oil prices and CPI is (0.60) less as compare to other variables. The important finding of the paper is that oil prices have short run impact on inflation whereas money supply is the long run determinant of inflation in case of Pakistan.
    Date: 2016
  18. By: Volha Audzei
    Abstract: Market confidence has proved to be an important factor during past crises. However, many existing general equilibrium models do not account for agents' expectations, market volatility, or overly pessimistic investor forecasts. In this paper, we incorporate a model of the interbank market into a DSGE model, with the interbank market rate and the volume of lending depending on market confidence and the perception of counterparty risk. In our model, a credit crunch occurs if the perception of counterparty risk increases. Our results suggest that changes in market confidence can generate credit crunches and contribute to the depth of recessions. We then conduct an exercise to mimic some central bank policies: targeted and untargeted liquidity provision, and reduction of the policy rate. Our results indicate that policy actions have a limited effect on the supply of credit if they fail to influence agents' expectations. Interestingly, a policy of a low policy rate worsens recessions due to its negative impact on banks' revenues. Liquidity provision stimulates credit slightly, but its efficiency is undermined by liquidity hoarding.
    Keywords: DSGE, expectations, financial intermediation, liquidity provision
    JEL: E22 E32 G01 G18
    Date: 2016–10

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