nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒01‒01
37 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Balance Sheet and Currency Mismatch: Evidence for Peruvian Firms By Nelson R. Ramírez-Rondán
  2. Monetary policy and regional house-price appreciation By Cooper, Daniel H.; Luengo-Prado, Maria Jose; Olivei, Giovanni P.
  3. Should Central Bank Forget Reserve Requirements? Assessment of Reserve Requirements in Transmitting SBP’s Policy Shocks to Retail Interest Rates and Exchange Rate By Muhammad Omer
  4. Optimal Monetary Policy in a Pure Currency Economy with Heterogenous Agents By Nicola Amendola; Leo Ferraris; Fabrizio Mattesini
  5. Measuring the Effects of Dollar Appreciation on Asia: A Favar Approach By Liu, Zheng; Spiegel, Mark M.; Tai, Andrew
  6. Forecasting the nominal exchange rate movements in a changing world. The case of the U.S. and the U.K. By Pantelis Promponas; David Alan Peel
  8. Uncovering the heterogeneous effects of ecb unconventional monetary policies across euro area countries By Pablo Burriel; Alessandro Galesi
  9. Monetary Policy Implementation and Private Repo Displacement : Evidence from the Overnight Reverse Repurchase Facility By Alyssa G. Anderson; John Kandrac
  10. Trend inflation and exchange rate dynamics: A New Keynesian approach By Takashi Kano
  11. Monetary Policy and Indeterminacy after the 2001 Slump By Firmin Doko Tchatoka; Nicolas Groshenny; Qazi Haque; Mark Weder
  12. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure By Arias, Jonas E.; Caldara, Dario; Rubio-Ramirez, Juan F.
  13. On the Effects of A Negative Interest Rate Policy By Yuzo Honda
  14. Sectoral allocation and macroeconomic imbalances in EMU By Niels Gilbert; Sebastiaan Pool
  15. Trust in the central bank and inflation expectations By Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Maarten van Rooij
  16. Do Ownership Structure and Market Power Matter in Interest Rate Pass-through? Evidence from Pakistan’s Bank Level Data By Syed Zulqernain Hussain; Mahmood ul Hasan Khan
  17. Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis By Mariana García-Schmidt; Michael Woodford
  18. The politics of central bank independence By Jakob de Haan; Sylvester Eijffinger
  19. Will helicopter money be spent? New evidence By Maarten van Rooij; Jakob de Haan
  20. Financial vulnerability and monetary policy By Adrian, Tobias; Duarte, Fernando M.
  21. How Would Monetary Policy Look Like if John Rawls Had Been Hired as a Chairman of the Fed? By Marta B. M. Areosa; Waldyr D. Areosa; Pierre Monnin
  22. Reform of the Global Monetary System By Michel Camdessus; Anoop Singh
  23. Do central banks respond timely to developments in the global economy? By Hilde C. Bjørnland; Leif Anders Thorsrud
  24. Relative Price Dispersion and In flation: Evidence for the UK and the US By Gulnihal Aksoy; Don Bredin; Deirdre Corcoran; Stilianos Fountas
  25. Dealing with Quantitative Easing Spillovers in East Asia: The Role of Institutions and Macroprudential Policy By Saiki, Ayako; Chantapacdepong, Pornpinun; Volz, Ulrich
  26. Monetary Policy, Private Debt and Financial Stability Risks By Gregory Bauer; Eleonora Granziera
  27. Modelling less developed emerging markets:the case of monetary transmission in Tunisia By Jan Przystupa,; Ewa Wróbel
  28. Delphic and Odyssean monetary policy shocks: Evidence from the euro-area By Philippe Andrade; Filippo Ferroni
  29. State-Dependent Transmission of Monetary Policy in the Euro Area By Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel
  30. Expectation and Duration at the Effective Lower Bound By King, Thomas B.
  31. A Portfolio Model of Quantitative Easing By Jens H. E. Christensen; Signe Krogstrup
  32. Welfare Costs of Inflation and Imperfect Competition in a Monetary Search Model By Benjamín García
  33. The Term Structure and Inflation Uncertainty By Breach , Tomas; D'Amico, Stefania; Orphanides, Athanasios
  34. Free-riding on Liquidity in the Colombian LVPS By Constanza Martínez; Freddy Cepeda
  35. Financial Variables in a Policy Rule: Does It Bring Macroeconomic Benefits? By Jan Zacek
  36. Access to Credit and Unconventional Monetary policy in the Eurozone after the Financial Crisis By Petr Korab
  37. The Efficiency of Monetary Policy when Guiding Inflation Expectations By Christian Bauer; Sebastian Weber

  1. By: Nelson R. Ramírez-Rondán (Central Bank of Peru)
    Abstract: In the Peruvian economy, as in other emerging economies, a significant portion of the debt held by firms is denominated in US dollars. While an exchange rate depreciation likely increases firm debt and influences plans of investment and production, literature finds weak or no evidence of this balance sheet effect. In this paper I argue that this effect is observed in firms with a significant currency mismatch. I estimate the currency mismatch (defined as assets minus liabilities in USD and expressed as a percentage of total assets in domestic currency) from which the exchange rate has negative effects on firms' investment. Using financial information from 74 non-financial Peruvian firms from 2002 to 2014, I find significant balance sheet effects for firms with a currency mismatch below -10.4 percent.
    Keywords: Balance Sheet, Dollar Debt, Peru
    JEL: C33 E22 F31 F34
    Date: 2016–12
  2. By: Cooper, Daniel H. (Federal Reserve Bank of Boston); Luengo-Prado, Maria Jose (Federal Reserve Bank of Boston); Olivei, Giovanni P. (Federal Reserve Bank of Boston)
    Abstract: This paper examines the link between monetary policy and house-price appreciation by exploiting the fact that monetary policy is set at the national level, but has different effects on state-level activity in the United States. This differential impact of monetary policy provides an exogenous source of variation that can be used to assess the effect of monetary policy on state-level housing prices. Policy accommodation equivalent to 100 basis points on an equilibrium real federal funds rate basis raises housing prices by about 2.5 percent over the next two years. However, the estimated effect increases to 6.6 percent during the early 2000s housing boom.
    JEL: E43 E44 E52 E58
    Date: 2016–11–30
  3. By: Muhammad Omer (State Bank of Pakistan)
    Abstract: We have investigated the effectiveness of monetary policy tools, the discount rate and the reserve requirement ratio, in Pakistan by studying their pass through to the retail interest rates and the exchange rate. We find that the pass-through of the required reserve ratio to the retail rates and exchange rate is significant but incomplete. The pass through of discount rate; to the lending rate is complete; to the deposit rate is incomplete and; to the exchange rate is insignificant. Our results suggest that the required reserve is a more powerful tool for stabilizing the exchange rate shocks than discount rate. We, therefore, recommend State Bank of Pakistan to not to ignore the reserve requirement ratio as an active policy tool, specifically when exchange rate is under speculative attack.
    Keywords: Interest rates, monetary policy, exchange rate
    JEL: E43 E52 F31
    Date: 2016–12
  4. By: Nicola Amendola (DEF & CEIS,University of Rome Tor Vergata); Leo Ferraris (DEF & CEIS,University of Rome Tor Vergata); Fabrizio Mattesini (DEF & CEIS,University of Rome Tor Vergata)
    Abstract: This paper shows that, in a pure currency economy with heterogeneous agents and multiple commodities, a pecuniary externality plays a key role in making the equilibrium allocation constrained inefficient. Monetary policy intervention can help improve matters.
    Keywords: Money,Heterogeneity,Pecuniary Externality,Monetary Policy
    JEL: E40
    Date: 2016–12–17
  5. By: Liu, Zheng (Federal Reserve Bank of San Francisco); Spiegel, Mark M. (Federal Reserve Bank of San Francisco); Tai, Andrew (Federal Reserve Bank of San Francisco)
    Abstract: Exchange rate shocks have mixed effects on economic activity in both theory and empirical VAR models. In this paper, we extend the empirical literature by considering the implications of a positive shock to the U.S. dollar in a factor-augmented vector autoregression (FAVAR) model for the U.S. and three large Asian economies: Korea, Japan and China. The FAVAR framework allows us to represent a country’s aggregate economic activity by a latent factor, generated from a broad set of underlying observable economic indicators. To control for global conditions, we also include in the FAVAR a “global conditions index,” which is another latent factor generated from the economic indicators of major trading partners. We find that a dollar appreciation shock reduces economic activity and inflation not only for the U.S. economy, but also for all three Asian economies. This result, which is robust to a number of alternative specifications, suggests that in spite of their disparate economic structures and policy regimes, the dollar appreciation shock affects the Asian economies primarily through its impact on U.S. aggregate demand; and this demand channel dominates the expenditure-switching channel that affects a country’s export competitiveness.
    JEL: C30 E40 E50 F33 F37 F42
    Date: 2016–11–14
  6. By: Pantelis Promponas; David Alan Peel
    Abstract: Exchange rate forecasting has become an arena for many researchers the last decades while predictability depends heavily on several factors such as the choice of the fundamentals, the econometric model and the data form. The aim of this paper is to assess whether modelling time-variation and other forms of instabilities may improve the forecasting performance of the models. Paper begins with a brief critical review of the recently developed exchange rate forecasting models and continues with a real-time forecasting race between our fundamentals-based models, a DSGE model, estimated with Bayesian techniques and the benchmark random walk model without drift. Results suggest that models accounting for non-linearities may generate poor forecasts relative to more parsimonious and linear models.
    Keywords: Forecasting exchange rate, Exchange rate literature, Instability, Taylor rule, PPP, UIP, Money supply, Real-time estimation, Time-Varying models, DSGE model, Bayesian methods
    JEL: C53 E51 E52 F31 F37 G17
    Date: 2016
  7. By: Gergely Patrik Balla (Magyar Nemzeti Bank (Central Bank of Hungary)); Tamás Ilyés (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: In our study we analysed the effect of the introduction of an instant payment system in Hungary, using a large number of transaction level data of an extended time period, simulating the operation of the payment system. We analysed the two main theoretical models of instant payments: instant settlement in central bank money, and instant clearing with prefunded cyclical settlement. For both models we estimated the effect of using low and high transaction limits. We differentiated three liquidity costs associated with the operation of such a system. First, we estimated the impact on settlement queues in the real-time gross settlement system and calculated the costs of extra liquidity needed to dissolve the queues and support the continuous operation of the system. In the second step we estimated the liquidity needs of a prefunded instant payment system by different confidence levels and prudential requirements. Lastly, we analysed the effects of the different models on the stability of the payment system. The results clearly show that the costs associated with the dissolution of queues are marginal because retail payments comprise a very small percentage of the inter-bank payment flows, thus the instant payment system would not generate additional settlement queues. On the other hand, liquidity needs of a prefunded model can be significant, especially with high collateral confidence levels and high transaction value limits. However, these liquidity needs can be lowered by seasonal adjustments to the prefunded amounts and by using a robust but rational collateral confidence level. We also show that these costs are relatively higher for institutions with fewer customers as their payments turnover is more volatile, and so they have to make relatively larger prefunded deposits.
    Keywords: instant payments, retail payments, liquidity management, RTGS
    JEL: C53 G17 G29
    Date: 2016
  8. By: Pablo Burriel (Banco de España); Alessandro Galesi (Banco de España)
    Abstract: We assess the effects of the ECB’s recent unconventional monetary policy measures by estimating a global VAR that exploits panel variation among all euro area economies and explicitly takes into account cross-country interdependencies. Unconventional monetary policy measures have benefi cial effects on activity, credit, infl ation and equity prices, and lead to a depreciation of the exchange rate. Most euro area members benefi t from these measures, but with a substantial degree of heterogeneity. Cross-country spillovers account for a sizable fraction of such dispersion, and substantially amplify effects. Countries with less fragile banking systems benefi t the most from unconventional monetary policy measures. Compared to expansionary conventional monetary policies, unconventional measures are particularly effective in reducing fi rms’ fi nancing costs and boosting credit.
    Keywords: unconventional monetary policy, euro area, GVAR, heterogeneity, spillovers
    JEL: C32 E52 E58
    Date: 2016–12
  9. By: Alyssa G. Anderson; John Kandrac
    Abstract: In recent years, the scale and scope of major central banks' intervention in financial markets has expanded in unprecedented ways. In this paper, we demonstrate how monetary policy implementation that relies on such intervention in financial markets can displace private transactions. Specifically, we examine the experience with the Federal Reserve's newest policy tool, known as the overnight reverse repurchase (ONRRP) facility, to understand its effects on the repo market. Using exogenous variation in the parameters of the ONRRP facility, we show that participation in the ONRRP comes from substitution out of private repo. However, we also demonstrate that cash lenders, when investing in the ONRRP, do not cease trading with any of their dealer counterparties, highlighting the importance of lending relationships in the repo market. Lastly, using a confidential data set of repo transactions, we find that the presence of the Fed as a borrower in the repo market increases the bargaining power of cash lenders, who are able to command higher rates in their remaining private repo transactions.
    Keywords: Repo ; Money market mutual funds ; Monetary policy ; Federal Reserve
    JEL: G23 E52 G11 E58
    Date: 2016–10–31
  10. By: Takashi Kano
    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
  11. By: Firmin Doko Tchatoka (School of Economics, University of Adelaide); Nicolas Groshenny (School of Economics, University of Adelaide); Qazi Haque (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide)
    Abstract: This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. We find that only when measuring inflation with core PCE does monetary policy appear to have been reasonable and sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator and re-formulate the artificial economy as a factor model where the theoryÂ’s concept of inflation is the common factor to the empirical inflation series. CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Finally, we estimate an economy that distinguishes between core and headline inflation rates. This model comfortably rules out indeterminacy.
    Keywords: Indeterminacy, Taylor Rules, Great Deviation
    JEL: E32 E52 E58
    Date: 2016–12
  12. By: Arias, Jonas E. (Federal Reserve Bank of Philadelphia); Caldara, Dario (Federal Reserve Board of Governors); Rubio-Ramirez, Juan F. (Emory University & Federal Reserve Bank of Atlanta)
    Abstract: This paper studies the effects of monetary policy shocks using structural vector autoregressions (SVARs). 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.
    Keywords: SVARs; monetary policy shocks; systematic component of monetary policy
    JEL: C51 E52
    Date: 2016–12–01
  13. By: Yuzo Honda (Department of Informatics, Kansai University)
    Abstract: This paper reports what effects the negative interest rate policy (NIRP), introduced by the Bank of Japan in February 2016, brought about on the Japanese economy. First, NIRP was very effective in stimulating Private Residential Investment. Second, it lowered the long-term interest rate and was likely to have supported Private Non-Residential Investment. Third, there is a reason to believe that it probably stopped around August 2016 the yen appreciation trend in the foreign exchange rates. Fourth, it was also likely to have stopped the downward trend of stock prices around August 2016. Overall, NIRP was empirically found to have expansionary effects. It is a legitimate policy tool to alleviate the zero interest rate lower bound, though due considerations should be given to its side effects at the same time.
    Keywords: Negative Interest Rate, Residential Investment, Non-Residential Investment, Foreign Exchange Rate
    JEL: E52
    Date: 2016–12
  14. By: Niels Gilbert; Sebastiaan Pool
    Abstract: In the decade following the introduction of the euro, many Southern EMU members experienced sizeable capital inflows. We document how, instead of contributing to convergence, these flows mainly fueled growth of the nontradable sectors. We rationalize these developments using a tractable two-sector, two-region ('North' and 'South') model of a monetary union. We show how the sharp fall in Southern interest rates that occurred in the run-up to EMU, leads to a consumption boom, wage growth, growth of the nontradable sector, and a deteriorating external position. In the North, an opposite process occurs. As such, both real exchange rates and external positions of the two regions diverge. Including a third country with a flexible exchange rate vis-à-vis the euro amplifies the effects of monetary integration in the South, while dampening them in the North. Using a panel-BVAR, we confirm empirically that the euro area countries experiencing a fall in interest rates relative to the euro area average, experienced faster growth of the nontradable sector and a deteriorating current account balance. We investigate various policy reforms to speed up the necessary rebalancing process. A deepening of the European market shows most promise, boosting GDP growth while facilitating a rebalancing towards tradables.
    Keywords: EMU; monetary integration; current account imbalances; sectoral allocation
    JEL: F32 F34 F36 F45
    Date: 2016–12
  15. By: Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Maarten van Rooij
    Abstract: Using micro data from the 2015 Dutch CentERpanel, we examine whether trust in the European Central Bank (ECB) influences individuals' expectations and uncertainty about future inflation, and also whether it anchors inflation expectations. We find that higher trust in the ECB lowers inflation expectations on average, and significantly reduces uncertainty about future inflation. Moreover, results from quantile regressions suggest that trusting the ECB increases (lowers) inflation expectations when the latter are below (above) the ECB's inflation target. These findings hold after controlling for people's knowledge about the objectives of the ECB. In addition, higher trust in the ECB raises expectations about GDP growth. The findings suggest that a central bank can influence the economy through people's expectations, even in times when conventional monetary policy tools likely have weak effects.
    Keywords: inflation expectations; inflation uncertainty; Anchorin; Trust in the ECB; Subjective Expectations
    JEL: D12 D81 E03 E40 E58
    Date: 2016–12
  16. By: Syed Zulqernain Hussain (State Bank of Pakistan); Mahmood ul Hasan Khan (State Bank of Pakistan)
    Abstract: This study measures the degree and the speed of the pass-through of the policy rate to individual banks’ retail rates in Pakistan, and investigates variation in interest rate pass through across banks in the context of banks’ market power and ownership structure. Monthly data of lending and deposit rates of 31 banks along with 6-month KIBOR (proxy for policy rate in this study) from June 2005 to October 2015 is used to estimate an unrestricted autoregressive distributed lag (ARDL) model. In aggregate, the results indicate the presence of co-integration between the 6-month KIBOR and banks’ retail rates. There is a complete pass-through from 6-month KIBOR to lending rate on fresh loans, and it takes only two months to realize the full impact. However, the pass-through is incomplete (0.58 bps in the long run and 0.37 bps in short run) in case of deposits. Large five banks have considerably different level of pass-through as compared to the small banks. Public sector commercial banks have relatively low level of pass-through as compared to the private banks. Furthermore, specialized banks have relatively low level of pass-through as compared to commercial banks.
    Keywords: Pass-through, retail rates, bank-size
    JEL: D40 E43 G21
    Date: 2016–12
  17. By: Mariana García-Schmidt; Michael Woodford
    Abstract: A prolonged period of extremely low nominal interest rates has not resulted in high inflation. This has led to increased interest in the “Neo-Fisherian" proposition according to which low nominal interest rates may themselves cause inflation to be lower. The fact that standard models have the property that perfect foresight equilibria with a low fixed interest rate forever involve low inflation might seem to support such a view. Here, however, we argue that such a conclusion depends on a misunderstanding of the circumstances under which it makes sense to predict the effects of a monetary policy commitment by calculating the perfect foresight equilibrium (PFE). We propose an explicit cognitive process by which agents form their expectations of future endogenous variables. Under some circumstances, such as a commitment to follow a Taylor rule, a PFE can arise as a limiting case of our more general concept of reflective equilibrium. But we show that a policy of fixing the interest rate for a long period of time creates a situation in which reflective equilibrium need not resemble any PFE. In our view, this makes PFE predictions not plausible outcomes in the case of policies of the latter sort. According to our alternative approach, a commitment to maintain a low nominal interest rate for longer should always be expansionary and inflationary; but likely less so than the usual PFE analysis would imply, and much less in the case of a long-horizon commitment.
    Date: 2016–12
  18. By: Jakob de Haan; Sylvester Eijffinger
    Abstract: This paper reviews recent research on the political economy of monetary policy-making, both by economists and political scientists. The traditional argument for central bank independence (CBI) is based on the desire to counter inflationary biases. However, studies in political science on the determinants of central bank independence suggest that governments may choose to delegate monetary policy in order to detach it from political debates and power struggles. This argument would be especially valid in countries with coalition governments, federal structures and strongly polarized political systems. The recent financial crisis has changed the role of central banks as evidenced by the large set of new unconventional monetary and macro-prudential policy measures. But financial stability and unconventional monetary policies have much stronger distributional consequences than conventional monetary policies and this has potential implications for the central bank's independence. It may also have changed the regime from monetary dominance to fiscal dominance. However, our results do not suggest that CBI has been reduced since the Great Financial Crisis. This holds both for legal measures of CBI and the turnover rate of central bank governors.
    Keywords: central bank independence; fiscal dominance; determinants of CBI
    JEL: E42 E52 E58
    Date: 2016–12
  19. By: Maarten van Rooij; Jakob de Haan
    Abstract: According to some economists, central banks should use 'helicopter money' (monetary financing of government expenditure or transfers to households) to boost inflation (expectations). Based on a survey among Dutch households, we examine whether respondents intend to spend the money received via such a transfer. Our findings suggest that only a small part of transfers will be spent and that such a transfer will hardly affect inflation expectations. Furthermore, whether transfers come from the central bank or the government hardly makes any difference. Finally, our results suggest that using helicopter money would have mixed consequences for public trust in the ECB.
    Keywords: Helicopter money; central banking; ECB; trust; unconventional monetary policy
    JEL: E52 E58 D14
    Date: 2016–12
  20. By: Adrian, Tobias (Federal Reserve Bank of New York); Duarte, Fernando M. (Federal Reserve Bank of New York)
    Abstract: We present a parsimonious New Keynesian model that features financial vulnerabilities. The vulnerabilities generate time varying downside risk of GDP growth by driving the dynamics of risk premia. Monetary policy impacts the output gap directly via the IS curve, and indirectly via its impact on financial vulnerabilities. The optimal monetary policy rule always depends on financial vulnerabilities in addition to output, inflation, and the real rate. We show that a classic Taylor rule exacerbates downside risk of GDP growth relative to an optimal Taylor rule, thus generating welfare losses associated with negative skewness of GDP growth.
    Keywords: monetary policy; macro-finance; financial stability
    JEL: E52 G10 G12
    Date: 2016–12–01
  21. By: Marta B. M. Areosa; Waldyr D. Areosa; Pierre Monnin
    Abstract: Using a textbook New Keynesian model extended with an inequality channel, we examine optimal monetary policy departing from the traditional utilitarian social welfare function, to consider alternative functions, including the Rawlsian approach of putting only weight to the agent with the lowest welfare level. Our main results show the optimal responses from a Rawlsian monetary authority are: (i) a less aggressive monetary tightening, but inducing a more pronounced drop in inflation after a monetary shock; (ii) a monetary policy easing after an increase in government spending and (iii) a more pronounced drop in the interest rate after a positive total factor productivity shock.
    Date: 2016–12
  22. By: Michel Camdessus (IMF); Anoop Singh (Centennial Group International and the Emerging Markets Forum)
    Date: 2016–10
  23. By: Hilde C. Bjørnland (Norges Bank (Central Bank of Norway)); Leif Anders Thorsrud (Norges Bank (Central Bank of Norway))
    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, in flation, 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
    JEL: C11 C53 C55 E58 F17
    Date: 2016–12–21
  24. By: Gulnihal Aksoy (University College Dublin, IRELAND); Don Bredin (University College Dublin, IRELAND); Deirdre Corcoran (Galway Mayo Institute of Technology, IRELAND); Stilianos Fountas (University of Macedonia, GREECE)
    Abstract: One potential real effect of infl ation is its infl uence on the dispersion of relative prices in the economy which affects economic efficiency and aggregate output. Using a novel data set for the US and UK and a VARMA asymmetric bivariate GARCH-M model of in flation and relative price dispersion, we test for the effects of infl ation and infl ation uncertainty on relative price dispersion. We obtain two main results: First, infl ation affects relative price dispersion positively in the US supporting the menu costs model and negatively in the UK supporting the monetary search model. Second, there is no evidence for the role of infl ation uncertainty in explaining relative price dispersion, either for the US or the UK.
    Keywords: GARCH-M, Relative Price Dispersion, Infl ation.
    JEL: C32 E31
    Date: 2016–12
  25. By: Saiki, Ayako (Asian Development Bank Institute); Chantapacdepong, Pornpinun (Asian Development Bank Institute); Volz, Ulrich (Asian Development Bank Institute)
    Abstract: This paper explores the impact of advanced countries’ quantitative easing on emerging market economies (EMEs) and how macroprudential policy and good governance play a role in preventing potential financial vulnerabilities. We used confidential locational bank statistics data from the Bank for International Settlements to examine whether quantitative easing has caused an appreciation of EMEs’ currencies and how it has done so, and whether this has in turn boosted foreign-currency borrowing, thus making EMEs vulnerable to balance sheet and maturity mismatch problems. While focusing our analysis on East Asian economies, we compare them with Latin American economies, which were also major recipients of quantitative easing capital inflows. We found that government effectiveness plays an important role in curbing excessive borrowing when the exchange rate is overvalued.
    Keywords: Quantitative easing; spillover effects; macroprudential policy; good governance; capital inflows; emerging market economies (EMEs); East Asia; Latin America
    JEL: E44 E58 F31 F32 F34
    Date: 2016–12–27
  26. By: Gregory Bauer; Eleonora Granziera
    Abstract: Can monetary policy be used to promote financial stability? We answer this question by estimating the impact of a monetary policy shock on private-sector leverage and the likelihood of a financial crisis. Impulse responses obtained from a panel VAR model of 18 advanced countries suggest that the debt-to-GDP ratio rises in the short run following an unexpected tightening in monetary policy. As a consequence, the likelihood of a financial crisis increases, as estimated from a panel logit regression. However, in the long run, output recovers and higher borrowing costs discourage new lending, leading to a deleveraging of the private sector. A lower debt-to-GDP ratio in turn reduces the likelihood of a financial crisis. These results suggest that monetary policy can achieve a less risky financial system in the long run but could fuel financial instability in the short run. We also find that the ultimate effects of a monetary policy tightening on the probability of a financial crisis depend on the leverage of the private sector: the higher the initial value of the debt-to-GDP ratio, the more beneficial the monetary policy intervention in the long run, but the more destabilizing in the short run.
    Keywords: Credit and credit aggregates, Financial stability, Monetary Policy, Transmission of monetary policy
    JEL: E E52 E58 C21 C23
    Date: 2016
  27. By: Jan Przystupa,; Ewa Wróbel
    Abstract: Our paper is a case study devoted to a country which belongs to a group of less developed EMEs (LDEMEs), not depending on natural resources. In spite of many features which distinguish such countries from developed market economies, they are frequently modelled basing on assumptions which are better-suited for mature economies, e.g. New Keynesian DSGE models. From the point of view of monetary transmission analysis, the most important distortions which make LDEMEs special are: underdeveloped shallow financial markets, uncompetitive labour market, informal economy, weak institutions, problematic central bank independence, state ownership and controls, especially of prices and in the financial sector. In the paper we propose a complex way of proceeding in modelling the LDMEs, starting from the stylized facts and assessment of a distance of the modelled economy from theoretical assumptions and pointing at the most problematic sectors, through structural VARs providing reactions to shocks with a relatively small number of assumptions, to a suite of structural models, estimated with classical and Bayesian methods, to have a range of possible reactions. We show that to be applicable, the standard NK models need to be adjusted with specific features of LDEMEs.
    Keywords: (LDEMEs), monetary transmission, VAR, structural models.
    JEL: E51 E52
    Date: 2015
  28. By: Philippe Andrade (Banque de France); Filippo Ferroni (Banque de France and University of Surrey)
    Abstract: In this paper, we study the impact of the ECB announcements on the market-based expectations of interest rates and of in ation rates. We nd that the impact of the ECB announcements on in ation expectations has changed over the last fteen years. In particular, while in the central part of our sample the ECB announcements were read as a signal about the economic conditions (i.e. Delphic component), in latest episodes they have been interpreted as a commitment device on future monetary policy accommodation (i.e. Odyssean component). We propose an approach to separately identify the Delphic and Odyssean component of the ECB monetary policy announcements and we measure their dynamic impact on the economy.
    JEL: C10 E52 E32
    Date: 2016–10
  29. By: Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we estimate a logit mixture vector autoregressive (Logit-MVAR) model describing monetary policy transmission in the euro area over the period 1999–2015. MVARs allow us to differentiate between different states of the economy. In our model, the state weights are determined by an underlying logit model. In contrast to other classes of non-linear VARs, the regime affiliation is neither strictly binary nor binary with a (short) transition period. We show that monetary policy transmission in the euro area can indeed be described as a mixture of two states. The first (second) state with an overall share of 80% (20%) can be interpreted as a “normal state” (“crisis state”). In both states, output and prices are found to decrease after monetary policy shocks. During “crisis times,” the contraction is much stronger, as the peak effect is more than twice as large when compared to “normal times.” In contrast, the effect of monetary policy shocks is less enduring in crisis times. Both findings provide a strong indication that the transmission mechanism is indeed different for the euro area during times of economic and financial distress.
    Keywords: Economic and financial crisis, euro area, mixture VAR, monetary policy transmission, state-dependency
    JEL: C32 E52 E58
    Date: 2016
  30. By: King, Thomas B. (Federal Reserve Bank of Chicago)
    Abstract: I study unconventional monetary policy in a structural model of risk-averse arbitrage, augmented with an effective lower bound (ELB) on nominal rates. The model exposes nonlinear interactions among short-rate expectations, bond supply, and term premia that are absent from models that ignore the ELB, and these features help it replicate the recent behavior of long-term yields, including event-study evidence on the responses to unconventional policy. When the model is calibrated to long-run moments of the yield curve and subjected to shocks approximating the size of the Federal Reserve’s forward guidance and asset purchases, it implies that those policies worked primarily by changing the anticipated path of short-term interest rates, not by lowering investors’ exposures to interest-rate risk. However, the effects of short-rate expectations were more attenuated than the effects of bond-supply shocks during the ELB period.
    Keywords: Disinflation; Inflation Targeting; Interest rates; Monetary Policy; Tail Risk; Zero Lower Bound
    JEL: E32 E52
    Date: 2016–11–30
  31. By: Jens H. E. Christensen; Signe Krogstrup
    Abstract: This paper presents a portfolio model of asset price effects arising from central bank large-scale asset purchases, commonly known as quantitative easing (QE). Two financial frictions—segmentation of the market for central bank reserves and imperfect asset substitutability—give rise to two distinct portfolio effects. One derives from the reduced supply of the purchased assets. The other runs through banks’ portfolio responses to the created reserves and is independent of the assets purchased. The results imply that central bank reserve expansions can affect long-term bond prices even in the absence of long-term bond purchases.
    Keywords: unconventional monetary policy, transmission, reserve-induced portfolio balance channel
    JEL: G11 E43 E50 E52 E58
    Date: 2016
  32. By: Benjamín García
    Abstract: In this paper, I quantitatively measure the welfare costs of inflation. I build into standard moneysearch models, such as Rocheteau and Wright(2005) and Lagos and Wright(2005), by introducing endogenous imperfect competition based on free entry decisions that allow for the share of the transaction surplus going to firms to be determined endogenously. Under this framework, the welfare cost of inflation is amplified through a feedback loop, in which restricted money demand reduces the number of firms that the market can support. In turn, this reduction increases market concentration, reduces the consumer surplus, and further decreases the incentives to hold money. I find that, depending on the calibration, between 63 to 90 percent of the estimated welfare costs of inflation can be attributed to the interaction between money holdings and market concentration.
    Date: 2016–11
  33. By: Breach , Tomas (Federal Reserve Bank of Chicago); D'Amico, Stefania (Federal Reserve Bank of Chicago); Orphanides, Athanasios (MIT Sloan School of Management)
    Abstract: This paper develops and estimates a Quadratic-Gaussian model of the U.S. term structure that can accommodate the rich dynamics of inflation risk premia over the 1983-2013 period by allowing for time-varying market prices of inflation risk and incorporating survey information on inflation uncertainty in the estimation. The model captures changes in premia over very diverse periods, from the inflation scare episodes of the 1980s, when perceived inflation uncertainty was high, to the more recent episodes of negative premia, when perceived inflation uncertainty has been considerably smaller. A decomposition of the nominal ten-year yield suggests a decline in the estimated inflation risk premium of 1.7 percentage points from the early 1980s to mid 1990s. Subsequently, its predicted value has fluctuated around zero and turned negative at times, reaching its lowest values (about -0.6 percentage points) before the latest financial crisis, in 2005-2007, and during the subsequent weak recovery, in 2010-2012. The model's ability to generate sensible estimates of the inflation risk premium has important implications for the other components of the nominal yield: expected real rates, expected inflation, and real risk premia.
    Keywords: Quadratic-Gaussian Term Structure Models; Inflation Risk Premium; Survey Forecasts; Hidden Factors
    JEL: C58 E43 E44 G12
    Date: 2016–12–12
  34. By: Constanza Martínez (Banco de la República); Freddy Cepeda (Banco de la República)
    Abstract: The functioning of large-value payment systems (LVPSs) can be affected when some of its participants voluntarily decide to delay their payments until they can totally fund them with the payments received from other participants. This behaviour, known as the free-rider problem, can cause an under-provision of liquidity in LVPSs that operate under a RTGS (real-time gross settlement) mode. With the aim of determining whether there are free-riders in the Colombian LVPS (CUD), we empirically tested this payment strategy: firstly, using regression techniques (quantile regression models) and secondly, computing the empirical quantiles. Our results indicate that there is evidence of this problem in the Colombian case; however, their negative effects on CUD are negligible. Classification JEL: C23, E42, G20
    Keywords: Payment system, free riding on liquidity, liquidity hoarding, quantile regression models.
    Date: 2016–12
  35. By: Jan Zacek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: After the recent financial crisis of 2007, a connection between monetary policy and financial stability has started to be thoroughly investigated. One of the particular areas of this research field deals with the role of various financial variables in the monetary policy rules. The main purpose of this research is to find whether direct incorporation of the financial variables in the monetary policy rule can bring macroeconomic benefits in terms of lower volatility of inflation and output. So far, the main emphasis of the research has been placed on the investigation of the augmented Taylor rules in the context of a closed economy. This paper sheds light on the performance of the augmented Taylor rules in a small open economy. For this purpose, a New Keynesian DSGE model with two types of financial frictions is constructed. The model is calibrated for the Czech Republic. This work provides four conclusions. First, incorporation of the financial variables (asset prices and the volume of credit) in the monetary policy rule is beneficial for macroeconomic stabilization in terms of lower implied volatilities of inflation and output. Second, the usefulness of the augmented monetary policy rule is the most apparent in case of the shock originating abroad. Third, there is a strong link between the financial and the real side of an economy. Fourth, if the banking sector experiences a sharp drop in bank capital that brings this sector into decline, activity in the whole economy deteriorates and monetary policy is not able to achieve macroeconomic stability using its conventional tools.
    Keywords: DSGE models, financial imperfections, inflation targeting, monetary policy
    JEL: E31 E43 E52 E58
    Date: 2016–12
  36. By: Petr Korab (Department of Finance, Faculty of Business and Economics, Mendel University in Brno)
    Abstract: This paper investigates the availability of bank credit to enterprises in the Eurozone after the recent financial crisis. The analysis draws from a rich firm-level dataset on perceived credit availability of micro, small and medium-sized, and large enterprises in 11 countries in the Euro Area during the time horizon 2010 – 2014. Employing probit and logit estimators, the empirical results suggest that GDP growth is a significant factor improving availability to small and medium-sized and large firms in the post-crisis period. On the contrary, the asset-purchase programmes of the European Central Bank did not show a significant impact on credit availability to micro and small and medium-sized enterprises. The findings support the decision of the ECB to further intensify asset purchasing and officially introduce the program of quantitative easing in 2015.
    Keywords: credit availability, credit rationing, credit constraints, credit supply, financial crisis recovery
    JEL: E51 E52
    Date: 2016–12
  37. By: Christian Bauer; Sebastian Weber
    Abstract: We assess the efficiency of monetary policy to guide inflation expectations in high and low regimes. Using quantile regression we analyze the persistence of inflation expectations from the Consensus Economics Survey at different quantiles. We find a) empirical evidence that expectations are not anchored in the tails of their distribution and b) robust evidence for structural breaks for the USA and Italy. After the outbreak of the Global Financial crisis expectations become unanchored. The Fed's unconventional monetary policy at the ZLB in thus ineffective in guiding inflation expectations.
    Keywords: Inflation expectations, persistence, monetary policy, quantile regressions, structural breaks, quantile unit root test, zero lower bound
    JEL: C22 C32 D84 E31 E52
    Date: 2016

This nep-mon issue is ©2017 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.