nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒12‒11
eighteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Remittance Infl ows and State-Dependent Monetary Policy Transmission in Developing Countries By Immaculate Machasio; Peter Tillmann
  2. 'Liquidity Regulation, Monetary Policy and Welfare' By George J. Bratsiotis
  3. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identi By Arias, Jonas; Caldara, Dario; Rubio-Ramírez, Juan Francisco
  4. Changes in Inflation Predictability in Major Latin American Countries By Garcés Díaz Daniel
  5. Quantitative Easing in a Small Open Economy: An International Portfolio Balancing Approach By Serdar Kabaca
  6. Joining the Dots: The FOMC and the future path of policy rates By Gerlach, Stefan; Stuart, Rebecca
  7. Domestic Factors and Episodes of Gross Capital Inflows By Rogelio Mercado Jr.
  8. Acknowledging Uncertainty, 10-07-2016; Shadow Open Market Committee Fall Meeting, New York, NY By Mester, Loretta J.
  9. Excess Reserves and Monetary Policy Implementation By Armenter, Roc; Lester, Benjamin
  10. The Effectiveness of Unconventional Monetary Policy in the Euro Area: An Event and Econometric Study By Steve Ambler; Fabio Rumler
  11. Money and Inflation: Evidence from P-Star Model By Sunil Paul; Sartaj Rasool Rather; M. Ramachandran
  12. The National and Regional Economic Outlook and Monetary Policy, 11-30-2016; The African American Chamber of Commerce of Western Pennsylvania Annual Business Luncheon, Pittsburgh, PA By Mester, Loretta J.
  13. Exchange Rate Pass-Through to Domestic Prices in the European Transition Economies By Rajmund Mirdala
  14. Three Essays on the Theory of Money and Financial Institutions: Essay 1: A Nontechnical Overview By Martin Shubik
  15. DSGE Model with Interbank Market Failure - The Role of Macro-prudential Policies By Tobias Schuler; Luisa Corrado
  16. A Proposal to Clarify the Objectives and Strategy of Monetary Policy By Hetzel, Robert L.
  17. The Role of Money in Federal Reserve Policy By Qureshi, Irfan
  18. Credit spreads, financial crises, and macroprudential policy By Akinci, Ozge; Queralto, Albert

  1. By: Immaculate Machasio (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: Remittance infl ows from overseas workers are an important source of foreign funding for developing and emerging economies. The literature is inconclusive about the cyclical nature of remittance infl ows. To the extent remittances are procyclical they pose a challenge to monetary policy: a tightening of policy will be less effective if at the same time remittances increase strongly. The same is true for a policy easing under exceptionally weak remittance in flows. This paper estimates a series of nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under different remittance in flows regimes. The model is able to provide state-dependent impulse response functions. We show that for Kenya, Mexico, Colombia and the Philippines monetary policy indeed has a smaller domestic effect under strong in flows of remittances. These results have important implications for the design of infl ation targeting in developing countries.
    Keywords: Remittance infl ows, monetary policy, in flation targeting, smooth-transition model, local projections
    JEL: E52 E32 O16
    Date: 2016
  2. By: George J. Bratsiotis
    Abstract: In the aftermath of the Great Recession, when various policies for regulating credit liquidity were introduced, the US Fed and other central banks placed more emphasis on the interest on reserves than the more traditional required reserve ratio. This paper employs a model with endogenous credit risk, a balance sheet channel, a cost channel and bank equity requirements, to examine the macroprudential role of the interest on reserves and the required reserve ratio and compare their welfare implications. Two transmission channels are identified, the deposit rate and the balance sheet channels. The required reserve ratio is shown to have conflicting effects through these two channels mitigating its policy effectiveness as a credit regulation tool. Conversely, with the interest on reserves both these channels complement each other in reducing the output gap, the cost channel and inflation. The results show that as a credit regulation tool the interest on reserves requires lower policy rate intervention and yields superior welfare outcomes to both the required reserve ratio and credit-augmented Taylor rules.
    Date: 2016
  3. By: Arias, Jonas; Caldara, Dario; Rubio-Ramírez, Juan Francisco
    Abstract: This paper studies the effects of monetary policy shocks using structural VARs. We achieve identification by imposing sign and zero restrictions on the systematic component of monetary policy. We consistently find that an increase in the fed funds rate induces a contraction in output. We also show that the identification strategy in Uhlig (2005), which imposes sign restrictions on the impulse responses to a monetary shock, does not satisfy our restrictions on the systematic component of monetary policy with high posterior probability. This finding accounts for the difference in results with Uhlig (2005), who found that contractionary monetary policy shocks have no clear effect on output. When we reconcile the two approaches by combining both sets of restrictions, monetary policy shocks remain contractionary.
    Date: 2016–11
  4. By: Garcés Díaz Daniel
    Abstract: Forecasts of inflation in the United States since the mid eighties have had smaller errors than in the past, but those conditional on commonly used variables cannot consistently beat the ones from univariate models. This paper shows through simple modifications to the classical monetary model that something similar occurred in those major Latin American economies that achieved their own "Great Moderation." For those countries that did not attain macroeconomic stability, inflation forecasting conditional on some variables has not changed. Allowing the parameters that determine Granger causality to change when the monetary regime does, makes possible the estimation of parsimonious inflation models for all available data (eight decades for one country and five for the others). The models so obtained ouperform others in pseudo out-of-sample forecasts for most of the period under study, except in the cases when an inflation targeting policy was successfully implemented.
    Keywords: Money;exchange rate;cointegration;inflation forecasting
    JEL: C32 E41 E42 E52
    Date: 2016–12
  5. By: Serdar Kabaca
    Abstract: This paper studies the effects of quantitative easing (QE) in a small open economy dynamic stochastic general-equilibrium model with international portfolio balancing. Portfolios are classified as imperfectly substitutable short-term and long-term subportfolios, each including domestic and foreign bonds. Unlike in standard small open economy models, both domestic and foreign bonds may be traded internationally. The model links the domestic term premium to the global term premium, and the implication of the model on the effectiveness of QE policies in reducing the domestic term premium depends crucially on the degree of substitutability between domestic and foreign bonds. The estimated model implies that QE in small open economies is expected to be much less effective on long-term yields because of the high substitutability between home and foreign assets found in the data. In the model, this causes the effect on the exchange rate to be limited. The paper also shows that foreign investors’ access to the domestic debt market is essential when evaluating the QE policy; ignoring foreign investors’ access would mistakenly make the policy look more effective.
    Keywords: International topics, Transmission of monetary policy
    JEL: E52 F41
    Date: 2016
  6. By: Gerlach, Stefan (BSI Bank and CEPR); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: The Federal Reserve publishes since 2012 Federal Open Market Committee (FOMC) members' views regarding what federal funds rate will be necessary for the FOMC to achieve its statutory targets. The views or "projections" pertain to the end of the current and the next two or three years, and the "longer run." We use a simple model to interpolate the projections between these discrete points in time, estimate the interest rates one, two and three years ahead, and study how they evolve with macroeconomic conditions. News regarding the labour market, but not inflation, effects the projections in the sample period.
    Keywords: Federal Reserve, monetary policy, interest rate expectations, interpolation
    JEL: E52 E58
    Date: 2016–10
  7. By: Rogelio Mercado Jr. (Newcastle Business School, Northumbria University)
    Abstract: This paper extends the literature on gross capital flows by looking into domestic factors that covary significantly with cross-country differences in the transitional likelihoods of moving between episodes of capital inflows. Applying a state-transition framework, we view states of gross capital inflows as “normal”, “surge”, and “stop”, following Forbes and Warnock (2012a and 2012b) approach in identifying extreme episodes for a sample of 55 advanced and emerging economies from 1980Q1 to 2014Q4. The empirical findings show that cross-country differences in transitional likelihoods are strongly associated with state-dependence variables such as duration and occurrence. There is evidence to suggest the presence of negative duration dependence on the transitional likelihood of moving between episodes such that the longer an economy spends in a given episode, the less likely it will exit that episode. However, duration and occurrence of episodes of gross capital inflows are also significantly correlated with domestic factors such as output volatility, de facto and de jure financial openness, and foreign reserves.
    Keywords: capital flows, surges, stops, capital flows transitions
    JEL: F30 F32 F36
    Date: 2016–12
  8. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: I would like to share my perspective as someone who has participated in some of those policy decisions. I will comment on how I approach monetary policymaking in an uncertain world, review the types of uncertainty policymakers and economists need to deal with, and provide some recommendations for improving monetary policy communications. Of course, the views I’ll present today are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Keywords: Communications; Monetary Policy; Uncertainty;
    Date: 2016–10–07
  9. By: Armenter, Roc (Federal Reserve Bank of Philadelphia); Lester, Benjamin (Federal Reserve Bank of Philadelphia)
    Abstract: In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. We provide a parsimonious model that captures the key features of the current federal funds market along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. We use this model to analyze the factors that determine rates and volumes under the new implementation framework and to study the effects of changes in the policy rates and other shocks to the economic environment. We also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding the role of the overnight reverse repurchase agreement facility in supporting the federal funds rate.
    Keywords: excess reserves; federal funds market; federal funds rate
    JEL: E42 E43 E52 E58
    Date: 2016–11–29
  10. By: Steve Ambler (ESG, Université du Québec à Montréal, Canada; C.D. Howe Institute, Canada; The Rimini Centre for Economic Analysis, Italy); Fabio Rumler (Economic Analysis Division, Oesterreichische Nationalbank, Austria)
    Abstract: We use daily data on government bond yields and market-based inflation expectations (from inflation-linked swaps) to measure the effectiveness of unconventional monetary policy (UMP) in the euro area. We focus on the effects of policy announcements on ex-ante real interest rates, since the main transmission mechanism of monetary policy is through real interest rates and their effect on aggregate demand. We find evidence of significant impacts of UMP announcements of the ECB on real interest rates at maturities of five and ten years that operate mainly by raising inflation expectations. When distinguishing among UMP announcements that exceeded or disappointed market expectations, we find that the former significantly reduced nominal and real interest rates and increased inflation expectations while the latter had the opposite effect.
    Date: 2016–11
  11. By: Sunil Paul (Madras School of Economics); Sartaj Rasool Rather (Madras School of Economics); M. Ramachandran (Department of Economics, Pondicherry University, Puducherry)
    Abstract: This study uses P-star model to examine the role of money in explaining inflation in India. In particular, we compare the performance of traditional Phillips curve approach against P-star model in forecasting inflation. Moreover, the study estimates P-star model using the alternative measures of money such as simple sum and Divisia M3, to examine the relevance of aggregation theoretic monetary aggregates in explaining inflation. The empirical results indicate that P-star model with real money gap has an edge over traditional Phillips curve approach in forecasting inflation. More importantly, we found that the P-star model estimated with Divisia real money gap performs better than its simple sum counterpart. These results highlight the role of money in explaining inflation in India.Length: 39 pages
    Keywords: Inflation, P-star, Philips curve, Divisia monetary aggregates Classification-JEL: C43; E49
    Date: 2015–08
  12. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Today, I would like to focus on our monetary policy role by discussing my outlook for both the national and regional economy and my views on monetary policy. The economic expansion is now in its eighth year, and considerable progress has been and continues to be made on both parts of the Fed’s statutory goals of full employment and price stability. In my view, the underlying fundamentals supporting the economic expansion remain sound. As we gain more clarity about the policies that might be forthcoming, the FOMC will assess their effects, as well as the implications of economic and financial developments, on the medium-run economic outlook and appropriate monetary policy. Monetary policy is not on a pre-set course and we will continue to use the best available models, analysis, and judgment to assess the situation.
    Keywords: Labor Markets; Inflation; Small Businesses; Monetary Policy;
    Date: 2016–11–30
  13. By: Rajmund Mirdala (Department of Economics at the Faculty of Economics, Technical University of Kosice, Slovak Republic)
    Abstract: Vulnerability of exchange rates to the external price shocks as well as their absorption capabilities represents one of the most discussed area in the fixed versus flexible exchange rate dilemma. Ability of exchange rates to serve as a traditional vehicle for a transmission of external shocks to domestic prices is affected by exchange rate arrangement adopted by monetary authorities. As a result, exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyze exchange rate pass-through to domestic prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal pricing chain. Our results indicate that there are different patterns of exchange rate passthrough to domestic prices according to the baseline period as well as the exchange rate regime diversity.
    Keywords: exchange rate pass-through, inflation, VAR, Cholesky decomposition, impulse-response function
    JEL: C32 E31 F41
    Date: 2016–10
  14. By: Martin Shubik (Cowles Foundation, Yale University)
    Abstract: This is a nontechnical retrospective paper on a game theoretic approach to the theory of money and financial institutions. The stress is on process models and the reconciliation of general equilibrium with Keynes and Schumpeter’s approaches to non-equilibrium dynamics.
    Keywords: Bankruptcy, Innovation, Growth, Competition, Price-formation
    JEL: C7 E12
    Date: 2016–11
  15. By: Tobias Schuler; Luisa Corrado
    Abstract: This paper analyses the effects of several macro-prudential policy measures on the banking sector and its linkages to the macroeconomy. We employ a dynamic general equilibrium model with sticky prices, in which banks trade excess funds in the interbank lending market. We find that an increase in the liquidity requirement effectively reduces the impact of an interbank shock on output and employment, while an increased capital requirement propagates only through financial variables as inflation and interest rates. We conclude that stricter liquidity measures which limit inside money creation, dampen the severity of a breakdown in interbank lend- ing. Targeting interbank financing directly through liquidity measures along with a moderate capital requirement generates lower welfare losses. We thereby provide a comprehensive rationale in favor of the regulatory measures in Basel III.
    JEL: E40 E51 E58 G28
    Date: 2016–12–05
  16. By: Hetzel, Robert L. (Federal Reserve Bank of Richmond)
    Abstract: Academic economists have perennially made arguments for the conduct of monetary policy constrained by an explicit rule. These arguments have gone nowhere. This paper advances a proposal to clarify Fed objectives and strategy in order to facilitate discussion leading to consensus over a desirable rule. Economists are likely to have more success in their quest for a rule if they follow the indirect strategy of pushing the Fed for more transparency about the systematic character of policy.
    JEL: E52 E58
    Date: 2016–09–12
  17. By: Qureshi, Irfan (Department of Economics, University of Warwick)
    Abstract: Is the classic Taylor rule misspecified? I show that the inability of the Taylor rule to explain the federal funds rate using real-time data stems from the omission of a money growth objective. I highlight the significant role played by money in the policy discourse during the Volcker-Greenspan era using new FOMC data, benchmarking a novel characterization of “good” policy. An application of this framework offers a unified policy-based explanation of the Great Moderation and Recession. Welfare analysis based on the New-Keynesian model endorses the rule with money. The evidence raises significant concerns about relying on the simple Taylor rule as a policy benchmark and suggests why money may serve as a useful indicator in guiding future monetary policy decisions.
    Keywords: Taylor rule ; policy objectives ; money aggregates ; macroeconomic stability
    JEL: E30 E31 E42 E52 E58 E61
    Date: 2016
  18. By: Akinci, Ozge (Federal Reserve Bank of New York); Queralto, Albert (Board of Governors of the Federal Reserve System)
    Abstract: Credit spreads display occasional spikes and are more strongly countercyclical in times of financial stress. Financial crises are extreme cases of this nonlinear behavior, featuring deep recessions and sharp losses in bank equity. We develop a macroeconomic model with a banking sector in which banks’ leverage constraints are occasionally binding and equity issuance is endogenous. The model captures the nonlinearities in the data and produces quantitatively realistic crises. Endogenous equity issuance makes crises infrequent but does not prevent them altogether. Macroprudential policy designed to enhance banks’ incentive to issue equity lowers the probability of a crisis and increases welfare.
    Keywords: financial intermediation; sudden stops; leverage constraints; occasionally binding constraints; financial stability policy
    JEL: E32 E44 F41
    Date: 2016–11–01

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