nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒12‒04
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Words Matter: Assessing the Role of Money versus Interest Rate in Pakistan By Zafar Hayat; Muhammad Nadim Hanif
  2. The evolution of inflation expectations in euro area markets By Ricardo Gimeno; Eva Ortega
  3. The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations By Marcelo Rezende; Mary-Frances Styczynski; Cindy M. Vojtech
  4. The Tools and Transmission of Federal Reserve Monetary Policy in the 1920s By Mark Carlson; Burcu Duygan-Bump
  5. A Classical View of the Business Cycle By Michael T. Belongia; Peter N. Ireland
  6. Gradualism and liquidity traps By Nakata, Taisuke; Schmidt, Sebastian
  7. Macroprudential Policy: Promise and Challenges By Enrique G. Mendoza
  8. Mending the broken link: heterogeneous bank lending and monetary policy pass-through By Altavilla, Carlo; Canova, Fabio; Ciccarelli, Matteo
  9. A Shadow Rate New Keynesian Model By Jing Cynthia Wu; Ji Zhang
  10. Measuring Cross Country Monetary Policy Uncertainty By Lucas F. Husted; John H. Rogers; Bo Sun
  11. Assessing Monetary Policy Effectiveness in Rich Data Environment By Muhammad Nadim Hanif; Javed Iqbal
  12. Cross-Country Evidence on Monetary Policy Autonomy: A Markov Regime Switching Approach By Hang Zhou
  13. US-euro area term structure spillovers, implications for central banks By Nyholm, Ken
  14. Collateral, Central Bank Repos, and Systemic Arbitrage By Fecht, Falko; Nyborg, Kjell G; Rocholl, Jorg; Woschitz, Jiri
  15. "Monetary Policy and Covered Interest Parity in the Post GFC Period: Evidence from the Australian Dollar and the NZ Dollar" By Shin-ichi Fukuda; Mariko Tanaka
  16. The Effect of Monetary Policy Shocks in the United Kingdom: an External Instruments Approach By Francesco Zanetti; Wei Li
  17. A Model of the International Monetary System By Emmanuel Farhi; Matteo Maggiori
  18. Structural VAR analysis of monetary transmission mechanism and central bank’s response to equity volatility shock in Taiwan By Lo, Chi-Sheng
  19. Bitcoin 1, Bitcoin 2, ... : An experiment in privately issued outside monies By Garratt, Rodney; Wallace, Neil
  20. Interaction between monetary policy and bank regulation: theory and European practice By Eddie Gerba; Corrado Macchiarelli
  21. Time-varying volatility, financial intermediation and monetary policy By Eickmeier, Sandra; Metiu, Norbert; Prieto, Esteban
  22. Is The Monetarist Arithmetic Unpleasant? By Martín Uribe
  23. Turnover Liquidity and the Transmission of Monetary Policy By Shengxing Zhang; Ricardo Lagos
  24. Changing dynamics at the zero lower bound By Gregor Bäurle; Daniel Kaufmann; Sylvia Kaufmann; Rodney W. Strachan
  25. Aggregate Liquidity Management By Keister, Todd; Sanches, Daniel R.
  26. Risk Premia at the ZLB: a macroeconomic interpretation By Phuong Ngo; Francois Gourio
  27. Inflation and the Dispersion of Component Price Indices: A Case for Four Percent Solution By Sartaj Rasool Rather; S. Raja Sethu Durai; M. Ramachandran
  28. Archival data of financial analysts' earnings forecasts in the Euro zone: problems with euro conversions By Sébastien Galanti
  29. The Effect of ECB Forward Guidance on Policy Expectations By Paul Hubert; Fabien Labondance
  30. Central Bank Sentiment and Policy Expectations By Paul Hubert; Fabien Labondance
  31. Unconventional Monetary Policy and the Safety of the Banking System By Martine Quinzii
  32. International Banking and Transmission of the 1931 Financial Crisis By Accominotti, Olivier
  33. Current Account Dynamics and Monetary Policy Transmission in South Africa By J. Paul Dunne; Christine S. Makanza
  34. The impact of disasters on inflation By Parker, Miles

  1. By: Zafar Hayat (State Bank of Pakistan); Muhammad Nadim Hanif (State Bank of Pakistan)
    Abstract: We empirically examine the role of monetary aggregate(s) vis-à-vis short term interest rate as monetary policy instruments, and the impact of State Bank of Pakistan’s transformation towards the latter on their relative effectiveness in terms of inflation in Pakistan. Using indicators of ‘persistent changes’ in the underlying behaviors of variables of interest, we found that broad money consistently explains inflation in (i) monetary, (ii) transitory and (iii) interest rate regimes. Though its role has receded whilst moving from the transition to the interest rate regime, the interest rate instrument seems to be positively related to inflation, a phenomenon commonly known as price puzzle. There is need to explore it further. In light of these findings, we recommend that the role of money should not be completely de-emphasized while moving towards flexible inflation targeting regime as planned.
    Keywords: Monetary policy instruments, price puzzle, ARDL, Pakistan
    JEL: E31 E52
    Date: 2016–11
  2. By: Ricardo Gimeno (Banco de España); Eva Ortega (Banco de España)
    Abstract: This paper explores the behaviour of inflation expectations across countries that share their monetary policy, in particular those of the European Monetary Union. We investigate the possible common features at the various horizons, as well as differentials across euro area countries. A multi-country dynamic factor model based on Diebold et al. (2008), where we also add a liquidity risk component, is proposed and estimated using daily data from inflation swaps for Spain, Italy, France, Germany and the euro area as a whole, and for a wide range of horizons. It allows us to calculate the proportion of common vs country-specific components in the term structure of inflation expectations. We find sizable differences in inflation expectations across the main euro area countries only at short maturities, while in general a common component predominates throughout the years, especially at long horizons. The common long-run level of infl ation expectations is estimated to have fallen since late 2014, while an increased persistence of lower expected inflation and for longer horizons is estimated from 2012. There has been no reversal in either of these characteristics following the announcement and implementation of the ECB’s unconventional monetary policy measures.
    Keywords: inflation expectations; monetary union; inflation-linked swaps; multicountry dynamic factor model; liquidity risk premium.
    JEL: E31 C32 G13
    Date: 2016–11
  3. By: Marcelo Rezende; Mary-Frances Styczynski; Cindy M. Vojtech
    Abstract: We estimate the effects of the liquidity coverage ratio (LCR), a liquidity requirement for banks, on the tenders that banks submit in Term Deposit Facility operations, a Federal Reserve tool created to manage the quantity of bank reserves. We identify these effects using variation in LCR requirements across banks and a change over time that allowed term deposits to count toward the LCR. Banks subject to the LCR submit tenders more often and submit larger tenders than exempt banks when term deposits qualify for the LCR. These results suggest that liquidity regulation affects bank demand in monetary policy operations.
    Keywords: Liquidity Coverage Ratio ; Term Deposit Facility ; Monetary Policy ; Excess Reserves ; Basel III
    JEL: E52 E58 G21 G28
    Date: 2016–10–24
  4. By: Mark Carlson; Burcu Duygan-Bump
    Abstract: This note describes the tools used by the Federal Reserve (Fed) to implement monetary policy in the 1920s and the degree to which changes in these tools were transmitted to private money markets. In doing so, we hope to provide some historical perspective to the renewed debate around monetary policy frameworks and toolkits.
    Date: 2016–11–22
  5. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: In the 1920s, Irving Fisher extended his previous work on the Quantity Theory to describe how, through an early version of the Phillips Curve, changes in the price level could affect both output and unemployment. At the same time, Holbrook Working designed a quantitative rule for achieving price stability through control of the money supply. This paper develops a structural vector autoregressive time series model that allows these "classical" channels of monetary transmission to operate alongside, or perhaps even instead of, the now-more-familiar interest rate channels of the canonical New Keynesian model. Even with Bayesian priors that intentionally favor the New Keynesian view, the United States data produce posterior distributions for the model's key parameters that are more consistent with the ideas of Fisher and Working. Changes in real money balances enter importantly into the model's aggregate demand relationship, while growth in Divisia M2 appears in the estimated monetary policy rule. Contractionary monetary policy shocks reveal themselves through persistent declines in nominal money growth instead of rising nominal interest rates. These results point to the need for new theoretical models that capture a wider range of channels through which monetary policy affects the economy and suggest that, even today, the monetary aggregates could play a useful role in the Federal Reserve's policymaking strategy.
    Keywords: Bayesian vector autoregression, Divisia monetary aggregate, Monetary transmission mechanism, New Keynesian model, Quantity Theory of money
    JEL: B12 E31 E32 E41 E43 E52
    Date: 2016–11–01
  6. By: Nakata, Taisuke; Schmidt, Sebastian
    Abstract: Modifying the objective function of a discretionary central bank to include an interest-rate smoothing objective increases the welfare of an economy where large contractionary shocks occasionally force the central bank to lower the policy rate to its effective lower bound. The central bank with an interest-rate smoothing objective credibly keeps the policy rate low for longer than the central bank with the standard objective function does. Through expectations, the temporary overheating of the economy associated with such low-for-long interest rate policy mitigates the declines in inflation and output when the lower bound constraint is binding. In a calibrated model, we find that the introduction of an interest-rate smoothing objective can reduce the welfare costs associated with the lower bound constraint by more than half. JEL Classification: E52, E61
    Keywords: gradualism, inflation targeting, interest-rate smoothing, liquidity traps, zero lower bound
    Date: 2016–11
  7. By: Enrique G. Mendoza
    Abstract: Macroprudential policy holds the promise of becoming a powerful tool for preventing financial crises. Financial amplification in response to domestic shocks or global spillovers and pecuniary externalities caused by Fisherian collateral constraints provide a sound theoretical foundation for this policy. Quantitative studies show that models with these constraints replicate key stylized facts of financial crises, and that the optimal financial policy of an ideal constrained-efficient social planner reduces sharply the magnitude and frequency of crises. Research also shows, however, that implementing effective macroprudential policy still faces serious hurdles. This paper highlights three of them: (i) complexity, because the optimal policy responds widely and non-linearly to movements in both domestic factors and global spillovers due to regime shifts in global liquidity, news about global fundamentals, and recurrent innovation and regulatory changes in world markets, (ii) lack of credibility, because of time-inconsistency of the optimal policy under commitment, and (iii) coordination failure, because a careful balance with monetary policy is needed to avoid quantitatively large inefficiencies resulting from violations of Tinbergen’s rule or strategic interaction between monetary and financial authorities.
    JEL: E44 E5 F34 F4 G01 G28
    Date: 2016–11
  8. By: Altavilla, Carlo; Canova, Fabio; Ciccarelli, Matteo
    Abstract: We analyse the pass-through of monetary policy measures to lending rates to firms and households in the euro area using a unique bank-level dataset. Bank balance sheet characteristics such as the capital ratio and the exposure to sovereign debt are responsible for the heterogeneity of pass-through of conventional monetary policy changes. The location of a bank is instead irrelevant. Non-standard measures normalized the capacity of banks to grant loans resulting in a significant compression in lending rates. Banks with a high level of non-performing loans and a low capital ratio were the most responsive to the measures. Finally, we quantify the effects of non-standard policies on the real economic activity using a standard macroeconomic model and find that in absence of these measures both inflation and output would have been significantly lower. JEL Classification: C3, E4, E5, G2
    Keywords: bank balance sheet characteristics, monetary policy pass-through
    Date: 2016–11
  9. By: Jing Cynthia Wu; Ji Zhang
    Abstract: We propose a New Keynesian model with the shadow rate, which is the federal funds rate during normal times. At the zero lower bound, we establish empirically the negative shadow rate summarizes unconventional monetary policy with its resemblance to private interest rates, the Fed's balance sheet, and Taylor rule. Theoretically, we formalize our shadow rate New Keynesian model with QE and lending facilities. Our model generates data-consistent results: a negative supply shock is always contractionary. It also salvages the New Keynesian model from the zero lower bound induced structural break.
    JEL: E12 E52 E58 E63
    Date: 2016–11
  10. By: Lucas F. Husted; John H. Rogers; Bo Sun
    Abstract: In previous work, we constructed a news-based index of U.S. monetary policy uncertainty (MPU) that captures the degree of uncertainty the public perceives about Federal Reserve policy actions and their consequences. In this note, we extend that work to Canada, the Euro Area, Japan, and United Kingdom.
    Date: 2016–11–23
  11. By: Muhammad Nadim Hanif (State Bank of Pakistan); Javed Iqbal (State Bank of Pakistan)
    Abstract: We assess impact of monetary policy actions upon inflation in a country while considering changes in global commodity prices in rich data environment. We apply Factor Augmented Bayesian Structural Vector Autoregression (FABSVAR) methodology of Bernanke et al (2005) upon Pakistan’s monthly data for July 1992-June 2015. Unlike Bernanke et al (2005), we combine variables of similar nature in groups to extract factors. We think putting all sorts of variables in one group impairs the factor extraction. Moreover, rather than working only with the response of variable of interest (inflation in this study) to shocks in factors under consideration (which, consist of different interest rates, monetary aggregates, exchange rates in this study) we propose use of eigenvector to obtain Impulse Response Functions (IRFs) of shock to individual variables in a factor. We find significant and desired impact of monetary policy decisions upon inflation in Pakistan. Administered prices, however, are found to have no response to interest rate changes in the country, which is understandable. By analyzing IRFs of inflation in Pakistan to shocks in interest rate we do not observe any price puzzle. It is simply because we consider the relevant variables omitted in previous studies reporting price puzzle in Pakistan.
    Keywords: Monetary policy, inflation, econometric modeling, interest rates
    JEL: E52 E31 C50 E43
    Date: 2016–11
  12. By: Hang Zhou
    Abstract: This paper revisits the definition of monetary policy autonomy and develops a new method to identify autonomy regimes of a set of countries. Compared to the traditional identification approach, which only focuses on the base country interest rate, monetary policy autonomy discussed in this paper is jointly determined by how the interest rate responds to foreign monetary policy as well as its domestic inflation and real GDP. Using a Bayesian Markov Switching model for the monetary policy function, I estimate policy responses in two regimes, and obtain measures of monetary policy autonomy in the estimation process. Testing the method with case studies and simulated data demonstrates the robustness of the approach under different scenarios. Applying the method to the data of a set of advanced countries, I find monetary policy autonomy decreases when exchange rate is fixed or capital control is loosened, which is consistent with the open economy trilemma.
    JEL: C22 E52 F33 F41
    Date: 2016–11–24
  13. By: Nyholm, Ken
    Abstract: Spillovers between the US and euro area term structures of interest rates are examined. Implications for monetary policy are investigated using term-structure metrics that proxy conventional and unconventional instruments, i.e. the short rate, the 10 year term premium, and the 10 year risk-free rate. A new discrete-time arbitrage-free term structure model is used to extract these variables, at a daily frequency during the period covering 2005 to 2016. Relying on forecast error variance decompositions, following Diebold and Yilmaz (2009), it is found that transatlantic spillovers have increased by approximately 11%-points during the examined period, making it more dicult for central banks to directly assess the impact of their policies. JEL Classification: C32, E43, E58
    Keywords: international spillovers, monetary policy, yield curve modelling
    Date: 2016–11
  14. By: Fecht, Falko; Nyborg, Kjell G; Rocholl, Jorg; Woschitz, Jiri
    Abstract: Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks' liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.
    Keywords: banks; central bank; Collateral; collateral policy; financial fragmentation; financial stability; interbank market; liquidity; repo; systemic arbitrage
    JEL: E42 E51 E52 E58 G12 G21
    Date: 2016–11
  15. By: Shin-ichi Fukuda (Faculty of Economics, The University of Tokyo); Mariko Tanaka (Faculty of Economics, Musashino University)
    Abstract: Unlike the other major currencies, the Australian Dollar and the NZ dollar had lower interest rate than the US dollar on forward contract in the post GFC period. The purpose of this paper is to explore why this happened through estimating the covered interest parity (CIP) condition. In the analysis, we focus on a unique feature of Australia and New Zealand where short-term interest rates remained significantly positive even after the GFC. The paper first constructs a theoretical model where increased liquidity risk causes deviations from the CIP condition. It then tests this theoretical implication by using daily data of six major currencies. We find that both money market risk measures and policy rates had significant effects on the CIP deviations. The result implies that unique monetary policy feature in Australia and New Zealand made deviations from the CIP condition distinct on the forward contract.
    Date: 2016–11
  16. By: Francesco Zanetti; Wei Li
    Abstract: This paper uses VAR analysis to identify monetary policy shocks on U.K. data using surprise changes in the policy rate as external instruments and imposing block exogeneity restrictions on domestic variables to estimate parameters from the viewpoint of the domestic economy. The results show large and persistent effects of monetary policy shocks on the domestic economy and point to the critical role of exchange rates and term premia. The analysis resolves important empirical puzzles of traditional recursive identification methods.
    Keywords: Monetary Policy Transmission, Structural VAR, Small Open Economy, External Instruments Identification
    JEL: E44 E52 F41
    Date: 2016–11–23
  17. By: Emmanuel Farhi (Harvard University); Matteo Maggiori (Harvard University)
    Abstract: We propose a simple model of the international monetary system. We study the world supply and demand for reserve assets denominated in different currencies under a variety of scenarios: under a Hegemon vs. a multi-polar world; when reserve assets are abundant vs. scarce; under a gold exchange standard vs. a floating rate system; away from or at the zero lower bound (ZLB). We rationalize the Triffin dilemma which posits the fundamental instability of the system, the common prediction regarding the natural and beneficial emergence of a multi-polar world, the Nurkse warning that a multi-polar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold exchange standard or at the ZLB is recessive. We show that competition among few countries in the issuance of reserve assets can have perverse effects on the total supply of reserve assets. Our analysis is both positive and normative.
    Date: 2016
  18. By: Lo, Chi-Sheng
    Abstract: This research applies recursive Structural Vector Auto Regression (SVAR) model with short-run restriction into two kinds of shocks: monetary and volatility. The first SVAR estimates the shock of contractionary monetary policy on Taiwan’s key monthly macroeconomic variables including exports, CPI, exchange rate, money supply, and Taiwan Weighted Stock Exchange (TWSE) Index. The second SVAR estimates the shock of Generalized Autoregressive Conditional Heteroskedasticity (GARCH) volatility of TWSE on Taiwan’s daily exchange rate, overnight interbank loan rate, and Taiwan Government Bond Index (TGBI). The first SVAR model shows prize puzzle has been evident in Taiwan. The second SVAR model found flight to safety into bond market after the volatility shock in equity market. Combining the results of both models and based on other literature reviews, we can also conclude that effectiveness of monetary policy exhibits quite significant non-linearity in Taiwan.
    Keywords: Vector Auto Regression, Monetary Policy Shock, Volatility Shock, Flight to Safety, Taiwan
    JEL: C58 E50 G1
    Date: 2016–08–28
  19. By: Garratt, Rodney; Wallace, Neil
    Abstract: The value of Bitcoin depends upon self-fulfilling beliefs that are hard to pin down. We demonstrate this for the case where Bitcoin is the only form of money in the economy and then generalize the message to the case of multiple Bitcoin clones and/or a competing sovereign currency. Some aspects of the indeterminacy we describe would no longer hold if Bitcoin were an interesting-bearing object.
    Keywords: Social and Behavioral Sciences, Virtual Currency, Bitcoin, Indeterminancy, Exchange Rates
    Date: 2016–10–01
  20. By: Eddie Gerba; Corrado Macchiarelli
    Abstract: The European Union has pursued a number of initiatives to create a safer and sounder financial sector for the single market. In parallel, bold unconventional monetary policies have been implemented in order to combat low inflation, foster risk taking and, ultimately, reinvigorate growth. But monetary and macro-prudential policies interact with each other and thus may enhance or diminish the effectiveness of the other. Monetary policy affects financial stability by shaping, for instance, leverage and borrowing. Equally, macro-prudential policies constrain borrowing, which in turn have side-effects on output and prices, and therefore on monetary policy. When both monetary and macroprudential functions are housed within the central bank, coordination is improved, but safeguards are needed to counter the risks from dual objectives. Against this background, this paper outlines the theoretical and empirical underpinnings of macro-prudential policy, and discusses the way it interacts with monetary policy. We identify advantages as well as risks from cooperating in the two policy areas, and provide suggestions in terms of institutional design on how to contain those risks. Against this backdrop, we evaluate the recent European practice.
    JEL: J1
    Date: 2016–10
  21. By: Eickmeier, Sandra; Metiu, Norbert; Prieto, Esteban
    Abstract: We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods. To rationalize our robust empirical results, we use a macroeconomic model in which banks endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, banks lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy.
    Keywords: monetary policy,credit spread,non-linearity,intermediary leverage,financial accelerator
    JEL: C32 E44 E52
    Date: 2016
  22. By: Martín Uribe
    Abstract: The unpleasant monetarist arithmetic of Sargent and Wallace (1981) states that in a fiscally dominant regime tighter money now can cause higher inflation in the future. In spite of the qualifier ‘unpleasant,’ this result is positive in nature, and, therefore, void of normative content. I analyze conditions under which it is optimal in a welfare sense for the central bank to delay inflation by issuing debt to finance part of the fiscal deficit. The analysis is conducted in the context of a model in which the aforementioned monetarist arithmetic holds, in the sense that if the government finds it optimal to delay inflation, it does so knowing that it would result in higher inflation in the future. The central result of the paper is that delaying inflation is optimal when the fiscal deficit is expected to decline over time.
    JEL: E51 E52 E58 E63
    Date: 2016–11
  23. By: Shengxing Zhang (London School of Economics); Ricardo Lagos
    Abstract: In this paper we document a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, we develop a model of this mechanism, and use a quantitative version to assess the ability of the theory to match the evidence.
    Date: 2016
  24. By: Gregor Bäurle; Daniel Kaufmann; Sylvia Kaufmann; Rodney W. Strachan
    Abstract: The interaction of macroeconomic variables may change as the nominal short-term interest rates approach zero. In this paper, we propose an empirical model that captures these changing dynamics with a time-varying parameter vector autoregressive process. State-dependent parameters are determined by a latent state indicator. This state indicator follows a distribution with time-varying probabilities affected by the lagged interest rate. As the interest rate enters the critical zero lower bound (ZLB) region, the dynamics between the variables and the effect of shocks change. We estimate the model with Bayesian methods and explicitly consider that the interest rate may be constrained in the ZLB region. We provide an estimate of the latent rate, i.e., a lower interest rate than the observed level, which is state- and model-consistent. The endogenous specification of the state indicator permits dynamic forecasts of the state and system variables. In the application of the model to the Swiss data, we evaluate state-dependent impulse responses to a risk premium shock that is identified with sign restrictions. Additionally, we discuss scenario-based forecasts and evaluate the probability of the system exiting the ZLB region that is only based on the inherent dynamics.
    Keywords: Regime switching, time-varying probability, constrained variables
    JEL: C3 E3
    Date: 2016
  25. By: Keister, Todd (Rutgers University); Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: It has been largely acknowledged that monetary policy can affect borrowers and lenders differently. This paper investigates whether the distributional effects of monetary policy are an inherent feature of monetary economies with private credit instruments. In our framework, both money and credit instruments can potentially be used as media of exchange to overcome trading frictions in decentralized markets. Entrepreneurs have access to productive projects but face credit constraints due to limited pledgeability of their returns. Monetary policy affects the liquidity premium on private credit and thereby influences the cost of borrowing and the level of investment, but any attempt to ease borrowing constraints results in suboptimal decentralized-market trading activity. We show that this policy trade-off is not an inherent feature of monetary economies with private credit instruments. If we consider a richer set of aggregate liquidity management instruments, such as the payment of interest on inside money and capital requirements, it is possible to implement an efficient allocation.
    Keywords: monetary theory and policy; liquidity premium; Friedman rule; investment; bank lending channel
    Date: 2016–11–25
  26. By: Phuong Ngo (Cleveland State University); Francois Gourio (Federal Reserve Bank of Chicago)
    Abstract: Long-term interest rates have fallen to historically low levels since the Great Recession started. One potential contributor are low premia for infl‡ation and interest rate risk. We show how a fairly standard New Keynesian macroeconomic model generates lower infl‡ation and interest rate risk premia when the economy becomes close to the zero lower bound (ZLB). In particular, the in‡flation risk premia switches from positive to negative. We provide evidence consistent with this mechanism: since 2009, investors seem to view infl‡ation as more positively correlated with the price of risky assets.
    Date: 2016
  27. By: Sartaj Rasool Rather (Madras School of Economics); S. Raja Sethu Durai (Department of Economics, Pondicherry University, Puducherry); M. Ramachandran (Department of Economics, Pondicherry University, Puducherry)
    Abstract: Unlike earlier literature that documented positive association between inflation and the dispersion of relative prices over time, the empirical evidence from this study suggests that the relative price dispersion increases in response to the deviation of inflation from certain threshold/target level in either direction rather than the inflation per se. More importantly, the inflation rate at which the dispersion of relative prices is minimized turn out to be 4 percent for US and Japan; hence, supporting the proposal of 4 percent inflation target for both the countries.
    Keywords: Inflation uncertainty, relative price dispersion, rolling cointegration, threshold inflationClassification-JEL: E30; E31; E52
    Date: 2015–12
  28. By: Sébastien Galanti (LEO - Laboratoire d'économie d'Orleans - CNRS - Centre National de la Recherche Scientifique - UO - Université d'Orléans)
    Abstract: In multi-country studies, researchers frequently extract data in a single currency rather than in native currencies. This approach can be misleading for financial analysts’ forecasts in the euro zone when researchers are using the IBES database. We suspect that forecasts of earnings before the birth of the euro on January 1, 1999 are kept in national currencies, although they are supposed to be displayed in euros, which can severely distort results concerning earnings forecast accuracy. We propose a simple procedure for checking for the existence of this error, as well as a quick solution to overcome it.
    Keywords: Earnings per Share, Earnings Forecasts, Security, Analysts, IBES database, Forecasts accuracy, Microeconomic data
    Date: 2016
  29. By: Paul Hubert (OFCE - OFCE - Sciences Po); Fabien Labondance (CRESE - Centre de REcherches sur les Stratégies Economiques - UFC - UFC - Université de Franche-Comté, UBFC - Université Bourgogne Franche-Comté, OFCE - OFCE - Sciences Po)
    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.
    Date: 2016–10–01
  30. By: Paul Hubert (OFCE - OFCE - Sciences Po); Fabien Labondance (CRESE - Centre de REcherches sur les Stratégies Economiques - UFC - UFC - Université de Franche-Comté, UBFC - Université Bourgogne Franche-Comté, OFCE - OFCE - Sciences Po)
    Abstract: We explore empirically the theoretical prediction that waves of optimism or pessimism may have aggregate effects, in the context of monetary policy. We investigate whether the sentiment conveyed by ECB and FOMC policymakers in their statements affect the term structure of private short-term interest rate expectations. First, we quantify central bank tone using a computational linguistics approach. Second, we identify sentiment as exogenous shocks to these quantitative measures using an augmented narrative approach following the information friction literature. Third, we estimate the impact of sentiment on private agents’ expectations about future short-term interest rates using a high-frequency methodology and an ARCH model. We find that sentiment shocks increase private interest rate expectations around maturities of one and two years. We also find that this effect is non-linear and depends on the state of the economy and on the characteristics (precision, sign and size) of the sentiment signal.
    Keywords: Animal spirits, Optimism, Confidence, Central bank communication, Interest rate expectations, ECB, FOMC
    Date: 2016–07–01
  31. By: Martine Quinzii (University of California, Davis)
    Abstract: This paper presents a simple model of banking equilibrium in which unconventional monetary policy serves as a tool to enhance the safety of the banking system. Every economy has two intrinsic characteristics: a ``natural'' debt-equity ratio which depends on the endowments of the infinitely risk averse safe-debt providers and the risk neutral equity providers, and a ``critical'' debt-equity ratio which depends only on the risks inherent in the banks' productive loans. When the natural debt-equity ratio exceeds the critical ratio, there is a positive probability of bankruptcy in equilibrium. In such ``high debt'' economies, standard banking equilibria are inefficient regardless of the capital requirement imposed by regulators. However unconventional monetary policy using the balance sheet of the Central Bank in conjunction with a standard equity requirement can restore the Pareto optimality of the banking equilibrium.
    Date: 2016
  32. By: Accominotti, Olivier
    Abstract: In May-July 1931, a series of financial panics shook Central Europe before spreading to the rest of the world. This paper explores how the 1931 Central European crisis propagated to the London and New York financial centers; it also examines the role of cross-border banking linkages in international crisis transmission. Using archival bank-level data, I document US and British banks' asset-side exposure to the crisis region. The Continental crisis disturbed few US banks but endangered several British financial institutions and triggered severe stress in the London money market. Central European credits were mostly held by large and diversified commercial banks in the United States and by small and geographically specialized financial institutions in Britain. Differences in the market structure of the trade finance industry explain why the 1931 Central European crisis infected London banks but not New York banks.
    Keywords: International Contagion; Cross-Border Banking; Trade Finance; 1931 Crisis
    JEL: F34 G21 N22 N24
    Date: 2016–11
  33. By: J. Paul Dunne (School of Economics, University of Cape Town); Christine S. Makanza (School of Economics, University of Cape Town)
    Abstract: The debate on global current account imbalances has become more pronounced with the change in global monetary conditions following the 2008 financial crisis. Emerging markets are at a greater risk of being affected by these changes as they have weaker macroeconomic fundamentals and are less insulated against external shocks. This implies they are at a greater risk of adverse effects of normalisation of monetary policy as this may result in an outflow of capital. Despite these risks, there is a lack of investigation into the consequences of monetary policy for current account deficits in emerging economies. This study covers this gap by estimating SVAR models to analyse the effect of monetary policy on current account dynamics in South Africa. South Africa is used as an attractive emerging market case study because of the large current account deficit and dataset that has so far not been exploited to understand the external balance. The study analyses the effect of foreign and domestic monetary shocks on current account developments so as to determine whether changing global monetary policy warrants any intervention of the current account in emerging markets. The study goes further to analyse the channels through which monetary shocks are transmitted to the current account so as to determine how the savings investment gap is affected by monetary policy. Our main contribution is in providing an understanding of the relationship between the current account and monetary policy in emerging markets, and uncovering the effects of global monetary policy on emerging market current accounts. Our analysis shows that the current account is affected by global monetary shocks, with higher foreign interest rates resulting in a lower current account deficit, suggesting that the normalisation of US monetary policy could result in a sharp current account reversal.
    Date: 2016
  34. By: Parker, Miles
    Abstract: This paper studies how disasters aff ect consumer price inflation, one of the main remaining gaps in our understanding of the impact of disasters. There is a marked heterogeneity in the impact between advanced economies, where the impact is negligible, and developing economies, where the impact can last for several years. There are also di fferences in the impact by type of disasters, particularly when considering inflation sub-indices. Storms in- crease food price inflation in the near term, although the eff ect dissipates within a year. Floods also typically have a short-run impact on inflation. Earthquakes reduce CPI inflation excluding food, housing and energy. JEL Classification: E31, Q54
    Keywords: disasters, inflation
    Date: 2016–11

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