nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒12‒18
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. An Augmented Taylor rule for India’s Monetary Policy: Does Governor Regime Matters? By Bhuyan, Biswabhusan; Sethi, Dinabandhu
  2. International Great Inflation and Common Monetary Policy By Jacek Suda; Anastasia Zervou
  3. Monetary Policy, Inflation, and Inequality: The Case for Helicopters By Xavier Ragot; Florin O. Bilbiie
  4. Do central banks respond timely to developments in the global economy? By Hilde C. Bjørnland; Leif Anders Thorsrud; Sepideh K. Zahiri
  5. Financial Fragility in Monetary Economies By Fernando Martin; Aleksander Berentsen; David Andolfatto
  6. 'Institutional Mandates for Macroeconomic and Financial Stability' By Pierre-Richard Agénor; Alessandro Flamini
  7. Monetary Policy Rules and the Equity Premium By Anastasia Zervou
  8. QE: the story so far By Haldane, Andrew; Roberts-Sklar, Matt; Wieladek, Tomasz; Young, Chris
  9. Monetary Policy and Durable Goods By Barsky, Robert; Boehm, Christoph E.; House, Christopher L.; Kimball, Miles
  10. Response of Turkish Financial Markets to Negative Interest Rate Announcements of the ECB By Gokhan Sahin Gunes; Sumru Oz
  11. Macroeconomic Stabilization, Monetary-fiscal Interactions, and Europe's monetary Union By Corsetti, G.; Dedola, L.; Jarociński, M.; Mańkowiak, B.; Schmidt, S.
  12. Monetary Policy and Covered Interest Parity in the Post GFC Period: Evidence from Australian Dollar and the NZ Dollar By Shin-ichi Fukuda; Mariko Tanaka
  13. Central Bank Reputation, Cheap Talk and Transparency as Substitutes for Commitment: Experimental Evidence By John Duffy; Frank Heinemann
  14. Credit, Money, Interest, and Prices By Yuliy Sannikov; Saki Bigio
  15. Labor Market Frictions and Monetary Policy Design By Anna Almosova;
  16. The Effects of Monetary Policy and Other Announcements By Chao Gu; Han Han; Randall Wright
  17. What do Latin American inflation targeters care about? A comparative Bayesian estimation of central bank preferences By Stephen McKnight; Alexander Mihailov; Antonio Pompa Rangel
  18. A Network Analysis of the United Kingdom’s Consumer Price Index By Sarantitis, Georgios; Papadimitriou, Theophilos; Gogas, Periklis
  19. "Change Detection and the Causal Impact of the Yield Curve By Shu-Ping Shi; Stan Hurn; Peter C. B. Phillips
  20. Financing of Firms, Labor Reallocation and the Distributional Role of Monetary Policy By Salem Abo-Zaid; Anastasia Zervou
  21. Should the Reserve Bank worry about the exchange rate? By Nguyen, Luan
  22. Too Little, Too Late? Monetary Policymaking Inertia and Psychology: A Behavioral Model By Federico Favaretto; Donato Masciandaro
  23. Trend Inflation and Exchange Rate Dynamics : A New Keynesian Approach By KANO, Takashi
  24. Inflation Perceptions and Inflation Expectations By Alan K. Detmeister; David E. Lebow; Ekaterina V. Peneva
  25. Output Decomposition and the Monetary Policy Transmission Mechanism in Bangladesh: A Vector Autoregressive Approach By Suranjit, K
  26. Invoicing Currency and Financial Hedging By Lyonnet, Victor; Martin, Julien; Mejean, Isabelle
  27. Modelling Portfolio Capital Flows in a Global Framework: Multilateral Implications of Capital Controls By Boero, Gianna; Mandalinci, Zeyyad; Taylor, Mark P
  28. What was the message of Friedman’s Presidential Address to the American Economic Association? By James Forder
  29. Measuring Money Demand Function in Pakistan By Hassan, Shahid; Ali, Umbreen; Dawood, Mamoon
  30. Estimates of Fundamental Equilibrium Exchange Rates, November 2016 By William R. Cline
  31. Hiring and Investment Frictions as Inflation Determinants By Leonardo Melosi; Eran Yashiv; Renato Faccini
  32. International Capital Flows: Private v.s. Public By Jing Zhang
  33. Capital Flows, Beliefs, and Capital Controls By Rarytska, Olena; Tsyrennikov, Viktor

  1. By: Bhuyan, Biswabhusan; Sethi, Dinabandhu
    Abstract: This paper examined the monetary policy stance in India during the governors’ regime of Jalan- Reddy-Subbarao- Rajan. An Augmented Taylor Rule is employed to estimate monetary policy response for each period using monthly data. The results revealed that the governor regime matters in the monetary policy response. When output gap has been an important concern during Jalan, Subbarao and Rajan’s period, inflation remained a major concern for Reddy and Rajan’s regime. Interestingly, the interest rate is highly responsive to changes in exchange rate during Rajan period. These findings are consistent with the conditions of economy during those periods. In addition, the exchange rate and output gap remained a greater concern for policy maker in post-crisis period. Nevertheless, we find policy inertia during all regimes.
    Keywords: Monetary policy, Taylor’s rule, Inflation, Output gap, Hodrick-Prescott filter
    JEL: C22 E52 E58
    Date: 2016–12–04
  2. By: Jacek Suda (Narodowy Bank Polski); Anastasia Zervou (Texas A&M University, Department of Economics)
    Abstract: We study whether monetary authorities in the G7 countries were changing their responses to inflation in a similar manner during and following the Great Inflation era. We find that the common to the G7 countries inflation pattern during the Great Inflation period could be associated with a common pattern in the monetary policy response to inflation: we find that until the early 1980s monetary authorities in the G7 countries responded mildly to inflation, systematically fought it throughout the 1980s and lessened again their response during the 2000s. The estimated Taylor rule coefficients on inflation are cointegrated, implying the existence of a long run relation- ship in the responses to inflation during and after the Great Inflation period. At the same time, principal component analysis of the residuals of the estimated Taylor rules indicates that the shocks’ structure cannot account enough for the monetary policies’ comovements. We interpret these findings as suggestive of common monetary policy patterns.
    Keywords: International Monetary Policy, International Great Inflation, Time Varying Parameter Model
    JEL: E52 E58 C22
    Date: 2016–05–13
  3. By: Xavier Ragot (Paris School of Economics); Florin O. Bilbiie (Paris School of Economics)
    Abstract: We put together a model where heterogenous households hold money because they particpate infrequently in financial markets, while firms face nominal frictions, as in the New Keynesian literature. We build a tractable framework whereby we characterize analytically the effect of money injections on inflation, economic activity, and inequality. Our framework gives rise, inter alia, to endogenous persistence in response to transitory shocks. Monetary policy is intimately linked to inequality as the nominal interest rate is a relevant price for holding money for self-insurance reasons.
    Date: 2016
  4. By: Hilde C. Bjørnland; Leif Anders Thorsrud; Sepideh K. Zahiri
    Abstract: Our analysis suggests; they do not! To arrive at this conclusion we construct a real-time data set of interest rate projections from central banks in three small open economies; New Zealand, Norway, and Sweden, and analyze if revisions to these projections (i.e., forward guidance) can be predicted by timely information. Doing so, we find a systematic role for forward looking international indicators in predicting the revisions to the interest rate projections in all countries. In contrast, using similar indexes for the domestic economy yields largely insignificant results. Furthermore, we find that revisions to forward guidance matter. Using a VAR identified with external instruments based on forecast errors from the predictive regressions, we show that the responses to output, inflation, the exchange rate and asset returns resemble those one typically associates with a conventional monetary policy shock.
    Keywords: Monetary policy, interest rate path, forecast revisions and global indicators
    Date: 2016–11
  5. By: Fernando Martin (Federal Reserve Bank of St. Louis); Aleksander Berentsen (University of Basel); David Andolfatto (Federal Reserve Bank of St. Louis)
    Abstract: We integrate the Diamond and Dybvig (1983) theory of financial fragility with the Lagos and Wright (2005) model of monetary exchange. Non-bank monetary economies with well-functioning secondary markets for capital can allocate risk reasonably well, but are never efficient. When secondary markets are subject to ``market freeze'' events, risk-sharing deteriorates accordingly. A fractional-reserve bank can dominate a monetary economy because: (i) it provides superior risk-sharing even when market freeze events are absent; and (ii) it bypasses the need for a secondary capital market to begin with. Indeed, fractional reserve banks can implement the optimal allocation when monetary policy follows the Friedman rule. However, the desirability of fractional reserve banking is diminished if the structure is subject to ``bank runs''. In the event of a run, an open secondary market allows banks to liquidate capital at a price that permits honoring all deposit obligations. If bank runs are expected to occur with a sufficiently high probability, then a narrow banking structure may be preferred. Narrow banks are more stable, but offer less risk-sharing. We find that high inflation economies penalize narrow banking systems relatively more than fractional reserve systems. Special interests are not generally aligned over the choice of bank regime.
    Date: 2016
  6. By: Pierre-Richard Agénor; Alessandro Flamini
    Abstract: The performance of alternative institutional policy mandates for achieving macroeconomic and financial stability is studied in a model with financial frictions. These mandates involve goal-integrated, goal-distinct, and common-goal mandates for the monetary authority and the financial regulator. In the first case both monetary and macroprudential policies are set optimally, but in the last two cases monetary policy only is set optimally whereas macroprudential policy is implemented through a simple, credit-based reserve requirement rule. The model is parameterized and used to simulate responses to a financial shock. The analysis shows that it is optimal to use both the policy rate and the required reserve ratio only under the goal-integrated mandate. In addition, it is optimal to delegate the financial stability goal solely to the monetary authority when the financial regulator is only equipped with a credit-based reserve rule. The key reason is that only the integrated mandate can fully internalize the policy spillovers which adversely affect economic stability..
    Date: 2016
  7. By: Anastasia Zervou (Texas A&M University)
    Abstract: We study the effect of monetary policy on the equity premium using a segmented stock market model. Optimal monetary policy in our model involves risk-sharing and is countercyclical with respect to dividend shocks; thus, it implies low equity return compared to other policies, including inflation targeting. The optimal policy, however, does not guarantee inflation stability and produces higher nominal bond return compared to inflation targeting. Our calibration exercise finds equity premium of 7% under the inflation targeting policy and 1.5% under the optimal policy. We suggest that suboptimal policies focusing on inflation stability might result in high equity premia.
    Date: 2016
  8. By: Haldane, Andrew; Roberts-Sklar, Matt; Wieladek, Tomasz; Young, Chris
    Abstract: In the past decade or so, a number of central banks have purchased assets financed by the creation of central bank reserves as a tool for loosening monetary policy - a policy often known as "quantitative easing" or "QE". The first half of the paper reviews the international evidence on the impact on financial markets and economic activity of this policy. It finds that these central bank balance sheet expansions had a discernible and significant impact on financial markets and the economy. The second half of the paper provides new empirical analysis on the macroeconomic impact of central bank balance sheet expansions, across time and countries. It finds three key results. First, it is only when central bank balance sheet expansions are used as a monetary policy tool that they have a significant macro-economic impact. Second, there is evidence for the US that the effectiveness of QE may vary over time, depending on the state of the economy and liquidity of the financial system. And third, QE can have strong spill-over effects cross-border, acting mainly via financial channels. For example, the impact of US QE on UK economic activity may be as large as the impact on US economic activity.
    Keywords: central bank balance sheet.; QE; Quantitative easing; Unconventional Monetary Policy
    JEL: E43 E44 E52 E58 E6
    Date: 2016–12
  9. By: Barsky, Robert (Federal Reserve Bank of Chicago); Boehm, Christoph E. (University of Michigan); House, Christopher L. (University of Michigan); Kimball, Miles (University of Michigan)
    Abstract: We analyze monetary policy in a New Keynesian model with durable and nondurable goods each with a separate degree of price rigidity. The model behavior is governed by two New Keynesian Phillips Curves. If durable goods are sufficiently long-lived we obtain an intriguing variant of the well-known “divine coincidence.” In our model, the output gap depends only on inflation in the durable goods sector. We then analyze the optimal Taylor rule for this economy. If the monetary authority wants to stabilize the aggregate output gap, it places much more emphasis on stabilizing durable goods inflation (relative to its share of value-added in the economy). In contrast, if the monetary authority values stabilizing aggregate inflation, then it is optimal to respond to sectoral inflation in direct proportion to their shares of economic activity. Our results flow from the inherently high interest elasticity of demand for durable goods. We use numerical methods to verify the robustness of our analytical results for a broader class of model parameterizations.
    Keywords: Taylor rule; inflation targeting; economic stabilization
    JEL: E31 E32 E52
    Date: 2016–11–06
  10. By: Gokhan Sahin Gunes (Koc University-TUSIAD ERF and Koc University); Sumru Oz (Koc University-TUSIAD ERF)
    Abstract: This paper examines the impact of negative interest rate announcements of the ECB on Turkish financial markets. Negative Interest Rate Policies (NIRP) are expected to affect emerging market and developing economies (EMDEs) through an increase in the inflow of capital searching for higher yields. The expectation for an increase in short-term capital inflows to an EMDE might have transmission channels to the whole economy similar to those of expansionary monetary policies, except for a sign change in case of the exchange rate channel. The rest of the transmission channels are portfolio, interest rate, and credit channels. The latter is excluded from the analysis since it takes time to realize. Accordingly, we analyze the impact of negative interest rate announcements of the ECB on EUR/TRY and USD/TRY exchange rates; 1-month and 3-month TRLibor rates; BIST 100 Index, as well as 2-year and 10-year bond returns using GARCH (1,1) model. The results show that the announcements significantly affect both the volatility of Turkey's financial indicators and their returns especially through interest rate and portfolio channels. The robustness of the results on volatility is tested by using an event study.
    Keywords: NIRP, transmission channels, financial indicators, Turkey.
    JEL: E58 F30 G10
    Date: 2016–12
  11. By: Corsetti, G.; Dedola, L.; Jarociński, M.; Mańkowiak, B.; Schmidt, S.
    Abstract: The euro area has been experiencing a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix.
    Keywords: Lower Bound on Nominal Interest Rates; Self-fulfilling Sovereign Default; Eurobond; Government Bonds; Joint Analysis of Fiscal and Monetary Policy
    JEL: E31 E62 E63
    Date: 2016–12–15
  12. By: Shin-ichi Fukuda (The University of Tokyo); Mariko Tanaka (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
  13. By: John Duffy; Frank Heinemann
    Abstract: We implement a repeated version of the Barro-Gordon monetary policy game in the laboratory and ask whether reputation serves as a substitute for commitment, enabling the central bank to achieve the efficient Ramsey equilibrium and avoid the inefficient, time-inconsistent one-shot Nash equilibrium. We find that reputation is a poor substitute for commitment. We then explore whether central bank cheap talk, policy transparency, both cheap talk and policy transparency or economic transparency yield improvements in the direction of the Ramsey equilibrium under the discretionary policy regime. Our findings suggest that these mechanisms have only small or transitory effects on welfare. Surprisingly, the real effects of supply shocks are better mitigated by a commitment regime than by any discretionary policy. Thus, we find that there is no trade-off between flexibility and credibility.
    JEL: C92 D83 E52 E58
    Date: 2016–12
  14. By: Yuliy Sannikov (Princeton University); Saki Bigio (UCLA)
    Abstract: We develop a monetary theory where monetary policy operates exclusively through the bank-lending channel. Credit demand and deposit creation are dynamically linked. Policy tools affect lending through the provision of reserves and their influence on interbank market rates. A credit crunch causes debt-deflation episode that sends agents to their borrowing constraints. Unemployment increases because firms reduce utilization to avoid the risk of violating borrowing limits. Standard monetary policy has power only if credit is extended. We study the cross-section and aggregate dynamics of credit, monetary aggregates, nominal interest, and prices after several policy experiments.
    Date: 2016
  15. By: Anna Almosova;
    Abstract: This paper estimates a New Keynesian DSGE model with search frictions and monetary rules augmented with di erent labor market indicators. In accordance with a theoretical literature I nd that a central bank reacts to a labor market tightness, employment or unemployment. Posterior odds tests speak in favor of models with augmented Taylor rules versus a model with a model with a standard rule. The augmented rules were also shown to be more ecient in terms of welfare.
    JEL: E52 E24 C11
    Date: 2016–12
  16. By: Chao Gu; Han Han (School of Economics, Peking University); Randall Wright (FRB Chicago, FRB Minneapolis, University of Wisconsin and NBER)
    Abstract: We analyze the impact of news (information shocks) in economies where liquidity plays a role. While we also consider news about real factors, like productivity, one motivation is that central bank announcements evidently affect markets, as taken for granted by advocates of forward guidance policy. The dynamic effects can be complicated, with information about monetary policy or real factors affecting markets for goods, equity, housing, credit and foreign exchange. Even news about neutral policy can induce cyclic or boom-bust responses. More generally, we show that central bank announcements can induce rather than reduce volatility, and might increase or decrease welfare.
    Keywords: Announcements, Monetary Policy, News, Dynamics
    JEL: E30 E44 E52 G14 D53 D83
  17. By: Stephen McKnight (El Colegio de Mexico); Alexander Mihailov (University of Reading); Antonio Pompa Rangel (Banco de México)
    Abstract: This paper uses Bayesian estimation techniques to uncover the central bank preferences of the big five Latin American inflation targeting countries: Brazil, Chile, Colombia, Mexico, and Peru. The target weights of each central bank.s loss function are estimated using a medium-scale small open economy New Keynesian model with incomplete international asset markets and imperfect exchange-rate pass-through. Our results suggest that all central banks in the region place a high priority on stabilizing in.ation and interest rate smoothing. While stabilizing the real exchange rate is a concern for all countries except Brazil, only Mexico is found to assign considerable weight to reducing real exchange rate .uctuations. Overall, Brazil, Colombia, and Peru show evidence of implementing a strict inflation targeting policy, whereas Chile and Mexico follow a more flexible policy by placing a sizeable weight to output gap stabilization. Finally, the posterior distributions for the central bank preference parameters are found to be strikingly di¤erent under complete asset markets. This highlights the sensitivity of Bayesian estimation, particularly when uncovering central bank preferences, to alternative international asset market structures.
    Keywords: Bayesian estimation, central bank preferences, inflation targeting, Latin Amer- ica, small open economies, incomplete asset markets, monetary policy
    JEL: C51 E52 F41
    Date: 2016–11
  18. By: Sarantitis, Georgios (Democritus University of Thrace, Department of Economics); Papadimitriou, Theophilos (Democritus University of Thrace, Department of Economics); Gogas, Periklis (Democritus University of Thrace, Department of Economics)
    Abstract: In this paper we model the United Kingdom’s Consumer Price Index as a complex network and we apply clustering and optimization techniques to study the network evolution through time. By doing this, we provide a dynamic, multi-level analysis of the mechanism that drives inflation in the U.K. We find that the CPI-classes’ network exhibits an evolving topology through time which depends substantially on the prevailing economic conditions in the U.K. We identify non-overlapping communities of these U.K. CPI classes and we observe that they do not correspond to the actual categories they belong into; a finding that suggests that diverse forces are driving the inter-relations of the CPI classes which are stronger between categories rather than within them. Finally, we present a reduced version of the U.K. CPI that fulfills the core inflation measure criteria and can possibly be used as an appropriate measure of the underlying inflation in the U.K. Since this new measure makes use of only 14 out of the 85 U.K. CPI classes, it can be used to complement the Bank of England’s arsenal of core inflation measures without the need for further resource allocation.
    Keywords: Network Analysis; Threshold-Minimum Dominating Set; community detection; core inflation; consumer price index
    JEL: C61 E31 E52
    Date: 2015–09–16
  19. By: Shu-Ping Shi (Macquarie University); Stan Hurn (Queensland University of Technology - School of Economics and Finance); Peter C. B. Phillips (Cowles Foundation, Yale University)
    Abstract: This paper re-examines changes in the causal link between money and income in the United States for over the past half century (1959 - 2014). Three methods for the data-driven discovery of change points in causal relationships are proposed, all of which can be implemented without prior detrending of the data. These methods are a forward recursive algorithm, a recursive rolling algorithm and the rolling window algorithm all of which utilize subsample tests of Granger causality within a lag-augmented vector autoregressive framework. The limit distributions for these subsample Wald tests are provided. The results from a suite of simulation experiments suggest that the rolling window algorithm provides the most reliable results, followed by the recursive rolling method. The forward expanding window procedure is shown to have worst performance. All three approaches find evidence of money-income causality during the Volcker period in the 1980s. The rolling and recursive rolling algorithms detect two additional causality episodes: the turbulent period of late 1960s and the starting period of the subprime mortgage crisis in 2007.
    Keywords: Time-varying Granger causality, subsample Wald tests, Money-Income
    JEL: C12 C15 C32 E47
    Date: 2016–12
  20. By: Salem Abo-Zaid (Texas Tech University, Department of Economics); Anastasia Zervou (Texas A&M University, Department of Economics)
    Abstract: We analyze monetary policy in a heterogenous firms environment where cash con- strained firms finance operations through external financing and cash unconstrained firms operate by using internal funds. We show that firms respond differently to shocks: expansionary monetary policy sharply increases the relative employment of the cash constrained firms while positive productivity shocks induce a rise in the relative employment of the cash unconstrained firms. Our analysis points to a clear role of monetary policy in reallocating resources across sectors that differ in their financing capabilities. Furthermore, the predictions of our model match the empirical evidence implying that financially constrained firms react sharply to monetary policy shocks but are less cyclical than unconstrained firms following productivity shocks.
    Keywords: Heterogeneous Firms, Monetary Policy, Labor Reallocation, Firms’ financing
    JEL: E32 E44 E52
    Date: 2016–10–20
  21. By: Nguyen, Luan
    Abstract: This research paper is focused on estimating a set of parameters for a simple monetarypolicy model of New Zealand and calibrate these parameters to compute viability kernels. We found output gap to be persistent across our sample period. There is weak evidence of a downward sloping IS curve and an upward sloping Phillips curve. The estimation results for thereal exchange rate parameter in the IS equation and the uncovered interest rate parity do notconfirm the theoretical predictions. By calibrating the estimated parameters to our viability analysis, we recommend that the Reserve Bank should not worry about the exchange rate, the OCR be lowered further and increasing the scope of fiscal policy in sharing the burden with monetary policy.
    Keywords: Monetary policy; Viability theory; Viability kernels; Central bank; Real exchange rate
    JEL: E52 E58 E61 F41
    Date: 2016–10–17
  22. By: Federico Favaretto; Donato Masciandaro
    Abstract: Can the inertia in the monetary policymaking be attributed to psychological drivers? Our model shows two results. First, our baseline model with individual loss aversion explains inertia in a monetary policy committee (MPC) where holds a de jure majority rule. Second, our second model shows that introducing a specication of loss aversion for all members in a MPC leads to inertial decisions when status-quo ination is below the ination target. Conversely when status-quo ination is above the target rate, inertial policy does not occur until the level of ination discounts the loss aversion mechanism. In the framework of a hawk-dove dimension we conclude that loss aversion favors inertial monetary policy.
    Keywords: Monetary Policy, Behavioral Economics
    JEL: D7 E5
    Date: 2016
  23. By: KANO, Takashi
    Abstract: The paper studies exchange rate implications of trend inflation within a two-country New Keynesian (NK) model under incomplete international financial markets. A NK Phillips curve generalized by trend inflation with a positive long-run mean implies an expectational difference equation of inflation with higher-order leads of expected inflation. The resulting two-country inflation differential is smoother, more persistent, and more insensitive to a real exchange rate. General equilibrium then yields (i) a persistent real exchange rate with an autoregressive root close to one, (ii) a hump-shaped impulse response of a real exchange rate with a half-life longer than four years, (iii) a volatile real exchange rate relative to cross-country inflation differential, (iv) an almost perfect co-movement between real and nominal exchange rates. and (v) a sharp rise in the volatility of a real exchange rate from a managed nominal exchange rate regime to a flexible one within an otherwise standard two-country NK model. Trend inflation, therefore, approaches empirical puzzles of exchange rates dynamics.
    Keywords: Real and Nominal Exchange Rates, Trend Inflation, New Keynesian Models
    JEL: E31 E52 F31 F41
    Date: 2016–12
  24. By: Alan K. Detmeister; David E. Lebow; Ekaterina V. Peneva
    Abstract: In this note, we discuss new data on consumers' perceptions of recent inflation from the University of Michigan Surveys of Consumers (MSC). Our preliminary results show that survey responses indicate inflation perceptions differ widely across individuals (with a slightly wider distribution than for inflation expectations) but the bulk of responses are between zero and five percent.
    Date: 2016–12–05
  25. By: Suranjit, K
    Abstract: This paper investigates the output composition of the monetary policy transmission mechanism for Bangladesh. Vector Auto-regression (VAR) models are used to analyse the data from 1973 to 2015. Although the central bank’s policy interest rate shock does not significantly affect the major compositions of the output, investment channel still works better than consumption. However, exchange rate shock effects more significantly on the real economy mainly through consumption than investment. This research, on one hand, demonstrates the potential channels of the monetary policy transmission mechanism. On the other hand, methodologically, it proposes a minor modified model that suite for economy of the developing countries like Bangladesh where the net export component of output is negative which creates some complexity in using the standard model used for developed countries like the USA, the EU, Japan and Australia.
    Keywords: Output Decomposition; VAR model; Monetary Policy Transmission Mechanism; Bangladesh
    JEL: E52 E58 O11 O42
    Date: 2016–10–20
  26. By: Lyonnet, Victor; Martin, Julien; Mejean, Isabelle
    Abstract: We use the results of a survey conducted on a sample of 3,013 exporting firms located in five euro-countries to explore the link between exporters' currency choice decisions and use of financial instruments to hedge exchange rate risks. Approximately 90% of firms in the sample invoice exports in their (producer) currency. Large firms are however more likely to use another currency. These firms are also more likely to hedge against exchange rate risk, which increases their propensity to invoice in the importer's currency. We propose a model of currency choice and hedging that rationalizes these findings. When the cost of hedging has a fixed component, large firms are more likely to hedge and to invoice in the importer's currency. This has implications for exchange rate pass-through.
    JEL: F1 F3 F4
    Date: 2016–12
  27. By: Boero, Gianna; Mandalinci, Zeyyad; Taylor, Mark P
    Abstract: In the aftermath of the global financial crisis, many emerging market countries resorted to capital controls to tackle the excessive surge of capital inflows. A number of recent research papers have suggested that the imposition of controls may have imposed negative externalities on other countries by deflecting flows. Our aim in the research reported in this paper is to construct a comprehensive global econometric model which captures the dynamic interactions of capital flows with domestic and global fundamentals, and to assess the efficacy of capital controls and potential deflection effects on other countries. The results suggest that capital controls areeffective for some countries in the short run, but have no lasting effects. Moreover, there is only limited evidence of deflection effects for a small number of emerging market countries.
    Keywords: capital controls; emerging markets; Global VAR (GVAR); Portfolio Capital Flows
    JEL: C32 C5 F32 F42 G11
    Date: 2016–12
  28. By: James Forder
    Abstract: Abstract It is widely accepted that the importance of Friedman’s Presidential Address to the American Economic Association lies in its criticism of policy based on the Phillips curve. It is argued that a reading of the text does not support such a view, and this and other considerations suggest that any such aim was far from Friedman’s mind in 1968. His objective was the quite different one of making a case for policy ‘rules’ rather than discretion.
    Keywords: Milton Friedman; rules and discretion; expectations; Phillips curve
    JEL: B22 B31 E58
    Date: 2016–12–13
  29. By: Hassan, Shahid; Ali, Umbreen; Dawood, Mamoon
    Abstract: This study investigates the factors such as interest rate, GDP per capita, exchange rate, fiscal deficit, urban and rural population to determine money demand function for Pakistan over the period from 1972-2013. We use ARDL Bound Testing approach in order to test long run relation between money demand and its factors whereas both long and short run coefficients will be found using similar approach. The results show that real interest rate exerts significant and negative effect upon money demand in both long and short run in Pakistan. The results also disclose that exchange rate and rural population are leaving significant but negative effect on the demand for money. These findings are robust to different diagnostic tests.
    Keywords: Money Markets
    JEL: E52
    Date: 2016–12–09
  30. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: As of mid-November, the US dollar has become overvalued by about 11 percent. The prospect of fiscal stimulus and associated interest rate increases under the new US administration risks still further increases in the dollar. An even stronger dollar would widen the path of growing trade deficits already in the pipeline. As President-elect Donald Trump has attributed trade deficits largely to past trade agreement “disasters,” there is a corresponding risk of escalating trade policy conflict, in a perverse dynamic reminiscent of the initial years of Reaganomics. In October 2016, the base month of this new set of fundamental equilibrium exchange rate (FEER) estimates, the US dollar was overvalued by 8 percent, about the same amount as identified in the three previous issues in this series. The real effective exchange rate (REER) of the dollar in October was 17 percent above its level in mid-2014. Given the two-year lag from the exchange rate signal to the trade outcome, the US current account deficit is on track to widen from 2.7 percent of GDP this year to nearly 4 percent by 2021. The new estimates, all based on October exchange rates, again find a modest undervaluation of the yen (by 3 percent) but no misalignment of the euro and Chinese renminbi. The Korean won is undervalued by 6 percent. Cases of significant overvaluation besides that of the United States include Argentina (by about 7 percent), Turkey (by about 9 percent), Australia (by about 6 percent), and New Zealand (by about 4 percent). A familiar list of smaller economies with significantly undervalued currencies once again shows undervaluation in Singapore and Taiwan (by 26 to 27 percent), and Sweden and Switzerland (by 5 to 7 percent).
    Date: 2016–11
  31. By: Leonardo Melosi (Federal Reserve Bank of Chicago); Eran Yashiv (Tel Aviv University); Renato Faccini (Queen Mary, University of London)
    Abstract: We embed convex hiring and investment frictions in a New Keynesian DSGE model with intra-firm wage bargaining. We show that these frictions have crucial implications for the response of marginal costs, and consequently inflation; and for the co-movement of inflation with real variables. We elucidate how the presence of hiring and investment frictions affects the transmission mechanism of monetary and technological shocks by means of impulse responses. We find that hiring frictions are a key determinant of current period marginal costs; investment frictions also matter, by affecting expectations of future marginal costs. Estimating the model with private-sector US data shows that both hiring frictions and investment frictions help explain inflation dynamics. Smoothed estimates of marginal costs are radically different in models with and without hiring frictions. Our results indicate that hiring frictions explain around 50% of the variation in marginal costs, the real wage component explains around 35% while the remain 15% is accounted for by an intrafirm bargaining component. These estimates rely only on moderate levels of the relevant frictions.
    Date: 2016
  32. By: Jing Zhang (Federal Reserve Bank of Chicago)
    Abstract: We study both empirically and quantitatively the patterns of international capital flows by the private sector and the public sector.
    Date: 2016
  33. By: Rarytska, Olena; Tsyrennikov, Viktor
    Abstract: Belief heterogeneity generates speculative cross-border capital flows that are much larger than flows generated by the hedging/insurance motives. We show theoretically that limiting financial trades may gen- erate welfare gains despite inhibiting insurance possibilities. Financial constraints tame speculation forces, limit movements of the net for- eign wealth positions, and thus reduce consumption volatility. This provides a novel justification for capital controls. Simulations indicate that welfare gains from imposing capital con- trols can be substantial, equivalent to a permanent consumption in- crease of up to 4%, or 80 times the cost of business cycles. Controls that activate only during substantial inflows or outflows are preferred to those constantly active, e.g. a transaction tax used by some emerg- ing market economies. Yet, despite improving macroeconomic stability capital controls may unintentionally lead to increased volatility in the domestic financial markets.
    Keywords: international portfolios, capital controls, foreign ex- change intervention, International Relations/Trade, F32,
    Date: 2016–04

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