nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒01‒08
thirty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Gender and Monetary Policymaking: Trends and Drivers By Donato Masciandaro; Paola Profeta; Davide Romelli
  2. The currency dimension of the bank lending channel in international monetary transmission By Elod Takats; Judit Temesvary
  3. Central banking in the XXI century: never say never By Fabio Panetta
  4. Learning, robust monetray policy and the merit of precaution By Marine Charlotte André; Meixing Dai
  5. A Behavioral New Keynesian Model By Xavier Gabaix
  6. Monetary Policy Credibility and the Comovement between Stock Returns and Inflation By Eurilton Araújo
  7. Doves, Hawks and Pigeons: Behavioral Monetary Policy and Interest Rate Inertia By Federico Favaretto; Donato Masciandaro
  8. The Degree of Currency Substitution and Exchange Rate Pass-Through By Ülke, Volkan
  9. From Monetary Policy to Macroprudentials: the Aftermath of the Great Recession By Bilin Neyapti
  10. Monetary policy and currency wars: National economic interests vs international partnership By Svetlana Bekareva; Alexander Baranov; Ekaterina Meltenisova
  11. The bank lending channel of conventional and unconventional monetary policy By Ugo Albertazzi; Andrea Nobili; Federico M. Signoretti
  12. A quantitative case for leaning against the wind By Andrew Filardo; Phurichai Rungcharoenkitkul
  13. Identifying the Effects of Monetary Policy Shock on Output and Prices in Thailand By Jiranyakul, Komain
  14. Macroprudential Policy Transmission and Interaction with Fiscal and Monetary Policy in an Emerging Economy: a DSGE model for Brazil By Fabia A. de Carvalho; Marcos R. Castro
  15. From Silence to Voice: Monetary Policy, Central Bank Governance and Communication By Donato Masciandaro; Davide Romelli
  16. Mending the broken link: heterogeneous bank lending and monetary policy pass-through. By Carlo Altavilla; Fabio Canova; Matteo Ciccarelli
  17. Fiscal Dominance and US Monetary: 1940–1975 By Humpage, Owen F.
  18. Central Bank Design and Banking Supervision By Martin Melecky; Anca Maria Podpiera
  19. Alternative interpretations of a stateless currency crisis By Sergio Cesaratto
  20. The Real Effects of Capital Requirements and Monetary Policy: Evidence from the United Kingdom By Filippo De Marco; Tomasz Wieladek
  21. Understanding Inflation in India By Laurence Ball; Anusha Chari; Prachi Mishra
  22. Monetary Policy, Trend Inflation and Unemployment Volatility By Sergio A. Lago Alves
  23. A Generic Theory of Price Determination By Oulatta, Moon
  24. Forecast Combination for Euro Area Inflation - A Cure in Times of Crisis? By Kirstin Hubrich; Frauke Skudelny
  25. Did the founding of the Federal Reserve affect the vulnerability of the interbank system to contagion risk? By Mark A Carlson; David C Wheelock
  26. Banks' strategies and cost of money: effects of the financial crisis on the European electronic overnight interbank market By Giulia Iori; Mauro Politi; Guido Germano; Giampaolo Gabbi
  27. Monetary Policy Committees, Voting Behavior and Ideal Points By Sylvester Eijffinger; Ronald Mahieu; Louis Raes
  28. A Historical Retrieval of the Methods and Functions of Monetary Policy By Hassan, Sherif Maher
  29. Adjustment to Small, Large, and Sunspot Shocks in Open Economies With Stock Collateral Constraints By Stephanie Schmitt-Grohé; Martín Uribe
  30. More than the Human Appendix: Fed Capital and Central Bank Financial Independence By Donato Masciandaro
  31. Central Bank Governance: Evolution, Goals, and Crises By Forrest Capie; Geoffrey Wood
  32. Euro area imbalances By Mark Mink; Jan Jacobs; Jakob de Haan
  33. Central Bankers as Supervisors: Do Crises Matter? By Donato Masciandaro; Davide Romelli
  34. Currency Wars or Efficient Spillovers? A General Theory of International Policy Cooperation By Anton Korinek
  35. Dominant Currency Paradigm By Camila Casas; Federico J. Díez; Gita Gopinath; Pierre-Olivier Gourinchas
  36. The impact of quantitative easing in the Netherlands: A stock-flow consistent approach By Meijers, Huub; Muysken, Joan

  1. By: Donato Masciandaro; Paola Profeta; Davide Romelli
    Abstract: This paper analyses the gender representation in monetary policy committees, offering three contributions. We propose the first index to evaluate the gender representation in monetary policymaking – i.e. the GMP Index – for a sample of 112 countries as of 2015. Second, we investigate the drivers of gender diversity in monetary policy committees. Our results show that, besides legal (Common Law), religious (Orthodox), historical (French colony) and socio-economic (female labour force) drivers, the gender representation is more likely to be relevant in countries characterized by a well-defined central bank governance, i.e. more independent central banks and less involved in supervision. Finally, we test whether gender diversity in central bank boards affects the conduct of monetary policy and hence macroeconomic outcomes. We find that gender diversity is inversely associated with inflation rates and money growth. The presence of women in central bank boards seems to be associated with a more hawkish approach to monetary policy making.
    Keywords: Inflation, Monetary Policy, Central Banks and their Policies, Gender Economics
    JEL: E31 E52 E58 J16
    Date: 2016
  2. By: Elod Takats; Judit Temesvary
    Abstract: We investigate how the use of a currency transmits monetary policy shocks in the global banking system. We use newly available unique data on the bilateral crossborder lending flows of 27 BIS-reporting lending banking systems to over 50 borrowing countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, this currency dimension of the bank lending channel works similarly across the three currencies suggesting that the cross-border bank lending channel of liquidity shock transmission may not be unique to lending in USD.
    Keywords: Cross-border bank lending, bank lending channel, monetary transmission, currency denomination
    Date: 2016–12
  3. By: Fabio Panetta
    Abstract: At first glance, today’s global economic outlook gives plenty of ammunition to the critics of central banks. Take the euro area – though its problems are by no means unique – where notwithstanding a strongly expansionary monetary stance, inflation is persistently low, growth is weak, and the recovery far more fragile than one would hope. It is unsurprising that in this environment we have got caught in a crossfire of questions on the nature of monetary policy. Is the ECB pursuing the right objectives? Is it doing so effectively? Zero or negative rates and intrusive asset purchase programmes could cause all sorts of distortions, including financial bubbles or inequalities? Is the ECB fully aware of this? And if so, does it care?
    Date: 2016
  4. By: Marine Charlotte André; Meixing Dai
    Abstract: We study in a New Keynesian framework the consequences of adaptative learning for the design of robust monetary policy. Compared to rational expectations, the fact that private follows adaptative learning gives the central bank an additional intertemporal trade-off between optimal behavior thanks to ability to manipulate future inflation expectations. We show that adaptative learning imposes a more restrictive constraint on monetary policy robustness to ensure the dynamic stability of the equilibrium than under rational expectations and weakens the argument in favor of a more aggressive monetary policy when the central bank takes account of model misspecifications.
    Keywords: robust control, model uncertainty, adaptative learning, optimal monetary policy.
    JEL: C62 D83 D84 E52 E58
    Date: 2016
  5. By: Xavier Gabaix
    Abstract: This paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy. The model is a tractable and parsimonious enrichment of the widely-used New Keynesian model – with one main new parameter, which quantifies how poorly agents understand future policy and its impact. That myopia parameter, in turn, affects the power of monetary and fiscal policy in a microfounded general equilibrium. A number of consequences emerge. (i) Fiscal stimulus or \helicopter drops of money" are powerful and, indeed, pull the economy out of the zero lower bound. More generally, the model allows for the joint analysis of optimal monetary and fiscal policy. (ii) The Taylor principle is strongly modified: even with passive monetary policy, equilibrium is determinate, whereas the traditional rational model yields multiple equilibria, which reduce its predictive power, and generates indeterminate economies at the zero lower bound (ZLB). (iii) The ZLB is much less costly than in the traditional model. (iv) The model helps solve the “forward guidance puzzle”: the fact that in the rational model, shocks to very distant rates have a very powerful impact on today's consumption and inflation: because agents are partially myopic, this effect is muted. (v) Optimal policy changes qualitatively: the optimal commitment policy with rational agents demands “nominal GDP targeting”; this is not the case with behavioral firms, as the benefits of commitment are less strong with myopic forms. (vi) The model is “neo-Fisherian” in the long run, but Keynesian in the short run: a permanent rise in the interest rate decreases inflation in the short run but increases it in the long run. The non-standard behavioral features of the model seem warranted by the empirical evidence.
    JEL: D03 E03 E5 E6 G02
    Date: 2016–12
  6. By: Eurilton Araújo
    Abstract: Empirical evidence suggests that the magnitude of the negative comovement between real stock returns and inflation declined during the Great Moderation in the U.S. To understand the role of monetary policy credibility in this change, I study optimal monetary policy under loose commitment in a macroeconomic model in which stock price movements have direct implications for business cycles. In line with the data, a calibration of the model featuring a significant degree of credibility can replicate the weakening of the negative relationship between real stock returns and inflation in the Great Moderation era
    Date: 2016–12
  7. By: Federico Favaretto; Donato Masciandaro
    Abstract: Behavioral bias – loss aversion – can explain monetary policy inertia in setting interest rates. Economic literature has tended to explain inertia in monetary policymaking in terms of frictions and delays, or has stressed the role of governance rules. We introduce a new driver of inertia, independent from frictions and central bank governance settings: a Monetary Policy Committee (MPC) that takes decisions on interest rates by voting according to a majority rule, in an economy with nominal price rigidities and rational expectations. Central bankers are senior officials, high-ranking bureaucrats who care about their careers and can be divided into three groups, depending on their level of inflation conservatism: doves, pigeons, and hawks. While a conservative stance doesn’t necessarily produce monetary inertia, we show that introducing loss aversion in individual behavior influences the stance of monetary policy under three different but convergent perspectives. First of all, a Moderation Effect can emerge, i.e. the number of pigeons increases. At the same time also a Hysteresis Effect can become relevant, whereby both doves and hawks soften their attitudes. Finally a Smoothing Effect tends to stabilize the number of pigeons. Together, the three effects consistently cause higher monetary policy inertia.
    Keywords: Monetary Policy, Behavioral Economics
    JEL: E5
    Date: 2016
  8. By: Ülke, Volkan
    Abstract: This study investigates the effect of the degree of currency substitution on the exchange rate pass-through (ERPT) to import and domestic prices in Turkey, using monthly data between 1998 and 2013. The recursive interacted vector autoregressive (IVAR) specification of Towbin and Weber (2013) is employed, based on McCarthy’s (1999) distribution chain model. Currency substitution is treated as an interaction term in the IVAR specification. The empirical evidence suggests that high currency substitution increases the effect of ERPT to import and domestic prices.
    Keywords: Exchange rate pass-through; currency substitution; inflation; interacted VAR.
    JEL: C32 E31 E52 F31
    Date: 2015–09–15
  9. By: Bilin Neyapti
    Abstract: Monetary policy is about the determination of money stock and interest rates to affect economic activity in the short-, medium- and the long-term. Besides helping to eliminate recessionary or inflationary business cycles, controlling interest rates and value of money have important impact on economic prospects by way of affecting domestic and international transaction costs. From a normative perspective, the ultimate goal of monetary policy is to increase allocative and distributional efficiency that are, in theory, consistent with the price stability focus of the modern central banking practice. Low level and variability of inflation rates is necessary for investment and sustainable growth; provided that the benefits of growth are distributed equitably, it also contributes economic development.
    Date: 2016
  10. By: Svetlana Bekareva; Alexander Baranov; Ekaterina Meltenisova
    Abstract: Introduction. The investigation is devoted to the issue of a national financial stability and economic growth. The theme of our investigation is topical because of the modern world economy processes. Some countries have been using different monetary, economic, and political instruments to stimulate growth of their national economies since the 2007 ? 2009 world economic and financial crisis. Some developing countries began suffering from competitiveness losses of their national produces as a result of quantitative easing implemented by some developed countries such as, for example, the USA and Japan, or foreign exchange intervention by the central bank of Switzerland, in order to devaluate their national currencies. An aggressive monetary policy that aimed competitive devaluation led to the currency wars. Currency war is deliberate policy of manipulating exchange rates downwards to increase domestic competitiveness that takes place in many countries at the same time and can lead to economic crisis. What instruments can be used to manipulate exchange rates in the modern international monetary system? It depends on the exchange rate regime announced by a country. Nowadays developed countries mainly use interest rates as a key monetary instrument, and some of them apply a negative interest rate policy. Use of interest rates and quantitative easing by developing countries might have negative effect on the economy. Moreover, a key interest rate (or discount rate) in developing countries sometimes is just an indicator for banking system rates that can stimulate credit activity in a national economy. Specific objectives of the investigation are: 1) to determine effect of using different instruments of monetary policy by developed and developing countries; 2) to assess the results of implementing currency war methods in order to increase their national competitiveness for different countries. Statistical data has been found in the International Monetary Fund database. We applied indices connected with foreign exchange markets and monetary policy for about 50 countries including more than 20 countries which carry out monetary policy of competitive devaluation. Methods of investigation represent econometric analysis. Cluster and panel data analyses were used to determine groups of similar economies and the most powerful group of countries nowadays and find factors influenced competitiveness of regional and national economies connected with chosen indexes which show monetary policy effect. Results of the investigation are as follows. The methods and instruments of monetary policy are different for countries and they have been changing since 2007. They depend on the national and regional features of economic development. The key instrument for developed economies is supposed to be interest rates; not all of the countries with emerging markets can use them effectively. There are countries which have some advantages of currency wars but the global perspectives are vague. Conclusion is connected with determining of the perspectives of further changing in monetary policy by different countries, applying a negative interest rate policy, and currency wars expansion.
    Keywords: monetary policy; economic growth; currency war
    JEL: F31
    Date: 2016–12
  11. By: Ugo Albertazzi (Bank of Italy); Andrea Nobili (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: Using a new monthly dataset on bank-level lending rates, we study the transmission of conventional and unconventional monetary policy in the euro area via shifts in the supply of credit. We find that a bank lending channel is operational for both types of measures, though its functioning differs: for standard operations the transmission is weaker for banks with more capital and a more solid funding structure, in line with an important role of asymmetric information. However, in response to non-standard measures lending supply expands by more at banks with stronger capital and funding positions, suggesting a crucial role for regulatory and economic constraints. We also find that the transmission of unconventional measures is attenuated by their negative effect on future bank’s capital position via the net interest income (reverse bank capital channel). Finally, we find that large sovereign exposures mute the response of lending rates to conventional policy, but amplify the transmission of unconventional measures.
    Keywords: unconventional monetary policy, lending rates, bank lending channel, bank capital channel, fragmentation
    JEL: E30 E32 E51
    Date: 2016–12
  12. By: Andrew Filardo; Phurichai Rungcharoenkitkul
    Abstract: Should a monetary authority lean against the build-up of financial imbalances? We study this policy question in an environment in which there are recurring cycles of financial imbalances that develop over time and eventually collapse in a costly manner. The optimal policy reflects the trade-off between the short-run macroeconomic costs of leaning against the wind and the longer-run benefits of stabilising the financial cycle. We model the financial cycle as a nonlinear Markov regime-switching process, calibrate the model to US data and characterise the optimal monetary policy. Leaning systematically over the whole financial cycle is found to outperform policies of "benign neglect" and "late-in-the-cycle" discretionary interventions. This conclusion is robust to a wide range of alternative assumptions and supports an orientation shift in monetary policy frameworks away from narrow price stability to a joint consideration of price and financial stability.
    Keywords: monetary policy, financial stability, leaning against the wind, financial cycle, time-varying transition probability Markov regime-switching model
    Date: 2016–12
  13. By: Jiranyakul, Komain
    Abstract: This paper attempts to identify the effects of monetary policy shock on output and price level in Thailand during 2005Q1 and 2016Q2. Recently available policy rate is used as a monetary policy variable. The structural VAR methodology is employed to identify the monetary policy shock. To enhance the precision of the model specification, the short-run restrictions are imposed on the specified structural model of cointegrated variables to allow the levels of variables to interact simultaneously with each other. The results from the analysis of the structural model reveal that a shock to monetary policy drives cycles for both real GDP and the inflation rate.
    Keywords: Monetary policy shock, structural VAR, impulse response
    JEL: C32 E5 E52
    Date: 2016–12
  14. By: Fabia A. de Carvalho; Marcos R. Castro
    Abstract: We use a DSGE model with heterogeneous financial frictions and foreign capital flows estimated with Bayesian techniques for Brazil to investigate optimal combinations of simple macroprudential, fiscal and monetary policy rules that can react to the business and/or the financial cycle. We find that the gains from implementing a cyclical fiscal policy are only significant if macroprudential policy countercyclically reacts to the financial cycle. Optimal fiscal policy is countercyclical in the business cycle and slightly procyclical in the financial cycle
    Date: 2016–12
  15. By: Donato Masciandaro; Davide Romelli
    Abstract: In the Concluding Remarks that Paolo Baffi - Governor of Bank of Italy - read on 31 May 1979, he stressed that “the actions of central banks are no longer cloaked in silence, and perhaps never will be again. Whereas in the past silence was seen as a guarantee of independence, today this is achieved by giving an explicit account of one’s actions”. In the Governor’s words it is evident and illuminating the precognition of the increasing importance of the links between monetary policy, central bank governance and communication in influencing the overall effectiveness of the monetary action in the modern economies.
    Date: 2016
  16. By: Carlo Altavilla; Fabio Canova; Matteo Ciccarelli
    Abstract: We analyze the pass-through of monetary policy measures to lending rates to Örms and households in the euro area using a novel bank-level dataset. Banksí characteristics such as the capital ratio, the exposure to sovereign debt, and the percentage of non-performing loans are responsible for the heterogeneity in pass-through of conventional monetary policy changes. The location of a bank is irrelevant. Non-standard measures normalized the capacity of banks to grant loans. Banks with high level of non-performing loans and low capital ratio were most a§ected. Banksílending margins fell considerably. Macroeconomic implications are discussed.
    Keywords: Monetary policy pass-through, european banks, heterogeneity, VARs.
    Date: 2016–10
  17. By: Humpage, Owen F. (Federal Reserve Bank of Cleveland)
    Abstract: This narrative investigates the frictions that existed between the Federal Reserve’s monetary policies and the US Treasury’s debt-management operations from the onset of the Second World War through the end of the Federal Reserve’s even-keel actions in mid-1975. The analysis suggests that three factors can help explain why the Federal Reserve compromised the attainment of its statutorily mandated monetary-policy objectives for debt-management reasons: 1) the existence of an existential threat, 2) the fear that to do otherwise would create instability in the banking sector, and 3) the vulnerability of Treasury financing operations to monetary-policy actions that existed when the Treasury did not auction its debts.
    Keywords: Federal Reserve; US Treasury; monetary policy; debt management; bills only; even-keel;
    JEL: E02 E5 E6
    Date: 2016–12–21
  18. By: Martin Melecky; Anca Maria Podpiera
    Abstract: The agenda of “Central Banking and Monetary Policy: Which Will Be the New Normal?” conference included a timely discussion about the involvement of central banks in the banking supervision, in the context of an optimal design of central banking. In the last 15 years, numerous changes in the institutional structures of prudential supervision have taken place. Prior the global financial crisis, central banks’ involvement in the prudential banking supervision has diminished due to a tendency to unify the prudential supervision in agencies outside of central banks. The aftermath of the global crisis sparked a new wave in which many countries integrated prudential supervision back under the authority of central banks. Nevertheless, the question of the optimal placement of banking supervision still persists while the empirical evidence is yet limited. Our empirical analysis suggests that countries with deeper financial markets and countries undergoing rapid financial deepening can benefit from having bank supervision in the central bank to better foster financial stability.
    Date: 2016
  19. By: Sergio Cesaratto
    Abstract: A number of economists warned that a political union was a prerequisite for a viable currency union. This paper disputes the feasibility of such a political union. A fully-fledged federal union, that would likely please peripheral Europe, is impracticable since it implies a degree of fiscal solidarity that just does not exist. A Hayekian minimal federal state, that would appeal to core-Europe, would be refused by peripheral members, since residual fiscal sovereignty would be surrendered without any clear positive economic and social return. Even an intermediate solution based on coordinated Keynesian policies would be unfeasible, since it would be at odds with German ‘monetary mercantilism’. The euro area is thus trapped between equally unfeasible political perspectives. In this bleak context, austerity policies are mainly explained by the necessity of readdressing the euro area BoP crisis. This crisis presents striking similarities to traditional financial crises in emerging economies associated with fixed exchange regimes. Therefore, the ECB's delayed response to the sovereign debt crisis cannot be seen as the culprit of the euro area crisis. The ECB’s monetary refinancing mechanisms, Target 2 and the ECB's belated OMT intervention impeded a blow-up of the currency union, but could not solve its deep causes. The current combination of austerity policies and moderate ECB intervention aims to rebalance intra-eurozone foreign accounts and to force competitive deflation strategy.
    Keywords: European crisis, political and currency unions, ECB, balance of payments crisis, mercantilism
    JEL: E11 F33 N14
    Date: 2016–08
  20. By: Filippo De Marco; Tomasz Wieladek
    Abstract: We study the effects of bank-specific capital requirements on Small and Medium Enterprises (SMEs) in the UK from 1998 to 2006. Following a 1% increase in capital requirements, SMEs’ asset growth contracts by 6.9% in the first year of a new bankfirm relationship, but the effect declines over time. We also compare the effects of capital requirements to those of monetary policy. Monetary policy only affects firms with higher credit risk and those borrowing from small banks, whereas capital requirements affect both. Capital requirement changes, instead, do not affect firms with alternative sources of finance, but monetary policy shocks do.
    Keywords: Capital requirements, SME real effects, relationship lending, microprudential and monetary policy
    JEL: G21 G28 E51
    Date: 2016
  21. By: Laurence Ball; Anusha Chari; Prachi Mishra
    Abstract: This paper examines the behavior of quarterly inflation in India since 1994, both headline inflation and core inflation as measured by the weighted median of price changes across industries. We explain core inflation with a Phillips curve in which the inflation rate depends on a slow-moving average of past inflation and on the deviation of output from trend. Headline inflation is more volatile than core: it fluctuates due to large changes in the relative prices of certain industries, which are largely but not exclusively industries that produce food and energy. There is some evidence that changes in headline inflation feed into expected inflation and future core inflation. Several aspects of India’s inflation process are similar to inflation in advanced economies in the 1970s and 80s.
    JEL: E31 E58 F0
    Date: 2016–12
  22. By: Sergio A. Lago Alves
    Abstract: The literature has long agreed that the canonical DMP model with search and matching frictions in the labor market can deliver large volatilities in labor market quantities, consistent with US data during the Great Moderation period (1985-2005), only if there is at least some wage stickiness. I show that the canonical model can deliver nontrivial volatility in unemployment without wage stickiness. By keeping average US inflation at a small but positive rate, monetary policy may be accountable for the standard deviations of labor market variables to have achieved those large empirical levels. Solving the Shimer (2005) puzzle, the role of long-run inflation holds even for an economy with flexible wages, as long as it has staggered price setting and search and matching frictions in the labor market
    Date: 2016–12
  23. By: Oulatta, Moon
    Abstract: For a long time, the general consensus regarding the causes of inflation across Sub-Saharan African countries was that inflation was mainly determined by supply side factors. This study shows that in the case of the West African Economic and Monetary Union, the driving forces of inflation emanate from both supply and demand side factors. On the supply side, rainfall, and international crude oil prices were found to be the most important supply determinants of inflation. On the demand side, the internal prices of cocoa and tobacco, the output gap of the main trading partners, and exogenous changes in the real money supply (M1), and real government spending were found to be the most important demand determinants of domestic inflation. There are 3 relevant policy implications to these findings. (1) In the short run, there is an optimal trade-off between inflation and real output that policy makers could exploit. (2) The members of the WAEMU are extremely vulnerable to supply shocks driven by large swings in commodity prices and weather shocks, the current fixed exchange rate policy does not appear to be completely isolating the countries from adverse terms of trade shocks driven by crude oil price shocks. However, the empirical estimates of the pass through of imported crude oil inflation on domestic inflation seems very slim. (3) The international prices of key cash crops remain a vital source of income for the members WAEMU.
    Keywords: Inflation, Two Stage Least Squares, Monetary policy, BCEAO
    JEL: C36 E31 E52
    Date: 2016–11–20
  24. By: Kirstin Hubrich; Frauke Skudelny
    Abstract: The period of extraordinary volatility in euro area headline inflation starting in 2007 raised the question whether forecast combination methods can be used to hedge against bad forecast performance of single models during such periods and provide more robust forecasts. We investigate this issue for forecasts from a range of short-term forecasting models. Our analysis shows that there is considerable variation of the relative performance of the different models over time. To take that into account we suggest employing performance-based forecast combination methods, in particular one with more weight on the recent forecast performance. We compare such an approach with equal forecast combination that has been found to outperform more sophisticated forecast combination methods in the past, and investigate whether it can improve forecast accuracy over the single best model. The time-varying weights assign weights to the economic interpretations of the forecast stemming from different models. The combination methods are evaluated for HICP headline inflation and HICP excluding food and energy. We investigate how forecast accuracy of the combination methods differs between pre-crisis times, the period after the global financial crisis and the full evaluation period including the global financial crisis with its extraordinary volatility in inflation. Overall, we find that, first, forecast combination helps hedge against bad forecast performance and, second, that performance-based weighting tends to outperform simple averaging.
    Keywords: Forecasting ; Euro area inflation ; Forecast combinations ; Forecast evaluation
    JEL: C32 C52 C53 E31 E37
    Date: 2016–08
  25. By: Mark A Carlson; David C Wheelock
    Abstract: As a result of legal restrictions on branch banking, an extensive interbank system developed in the United States during the 19th century to facilitate interregional payments and flows of liquidity and credit. Vast sums moved through the interbank system to meet seasonal and other demands, but the system also transmitted shocks during banking panics. The Federal Reserve was established in 1914 to reduce reliance on the interbank market and correct other defects that caused banking system instability. Drawing on recent theoretical work on interbank networks, we examine how the Fed's establishment affected the system's resilience to solvency and liquidity shocks and whether these shocks might have been contagious. We find that the interbank system became more resilient to solvency shocks, but less resilient to liquidity shocks, as banks sharply reduced their liquidity after the Fed's founding. The industry's response illustrates how the introduction of a lender of last resort can alter private behavior in a way that increases the likelihood that the lender may be needed.
    Keywords: Federal Reserve System, contagion, systemic risk, seasonal liquidity demand, interbank networks, banking panics, National Banking system
    Date: 2016–12
  26. By: Giulia Iori; Mauro Politi; Guido Germano; Giampaolo Gabbi
    Abstract: We present an empirical analysis of the European electronic interbank market of overnight lending e-MID during the years 1999-2009. After introducing the market mechanism, we consider the activity, defined as the number of trades per day; the spreads, defined as the difference between the rate of a transaction and the key rates of the European Central Bank; the lending conditions, defined as the difference between the costs of a lent and a borrowed Euro; the bank strategies, defined through different variants of the cumulative volume functions; etc. Among other facts, it emerges that the lending conditions differ from bank to bank, and that the bank strategies are not strongly associated either to the present, past or future spreads. Moreover, we show the presence of a bid-ask spread-like effect and its behavior during the crisis.
    JEL: J1
    Date: 2015–07
  27. By: Sylvester Eijffinger; Ronald Mahieu; Louis Raes
    Abstract: While not obvious at first sight, in many modern economies, the position of a monetary authority is similar to the position of the highest-level court (Goodhart (2002)). For example, both bodies are expected to operate independently even though there are crosscountry differences in what independence entails. In the United Kingdom, the highest court is the Appellate Committee of the House of Lords (in short: Law Lords). There is a consensus among legal scholars that the powers of Law Lords with respect to the legislature are less wide ranging in the United Kingdom than the United States’ counterpart, the supreme court (Goodhart and Meade (2004), p.11). In economic jargon one says that the Supreme Court has goal independence whereas the Law Lords have instrument independence.
    Date: 2016
  28. By: Hassan, Sherif Maher
    Abstract: There exists a broad implicit agreement that steering the monetary policy has important consequences for the whole economy (Friedman, 1968). This book uses topic classification to present a historical retrieval of the main theories and applications of the monetary policy within different schools of economic thinking and across history. From Humes’ automatic price-species flow in the 17th century, to the Keynesians, Monetarists and Austrians perspectives of the monetary dynamics in the beginning of the 19th century. The second chapter provides a general overview about how the monetary authority can fine tune monetary indicators in response to business cycle shocks. This part will discuss the monetary transmission mechanisms that represent the different means of interaction between monetary tools together and their impact on the real economy. In this context, the concept of inflation targeting will be elaborated in details while explaining its main institutional and economic prerequisites. The third and final chapter is devoted to giving an overview of the Egyptian monetary policy from 1990 to 2010 prior to the Egyptian revolution. The detailed analysis disaggregates this period into three eras: the first starts from 1991 till 1996 (ERSAP era), the second from 1996 till 2003 (Transitional era), and the third from 2003 till 2010 (towards Inflation Targeting era). This part of the book covers the broad changes occurred in the Egyptian monetary regimes and how well the successive governments used various monetary tools to achieve their policy goals and to mitigate real economic problems like unemployment and inflation.
    Keywords: Monetary policy, Egypt, inflation targeting
    JEL: B2 E4
    Date: 2016
  29. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper characterizes analytically the adjustment of an open economy with a stock collateral constraint to fundamental and nonfundamental shocks. In the model, external borrowing is limited by the value of physical capital. Three results are established: (1) Adjustment to external shocks is nonlinear. In response to small negative output shocks, the economy adjusts as prescribed by the intertemporal approach to the current account, with increases in debt, deficits in the trade and current account balances, and no significant movement in the price of collateral. By contrast, in response to large negative output shocks the economy experiences a sudden stop with debt deleveraging, trade and current account reversals, and a Fisherian deflation of asset prices. (2) Generically, weak fundamentals (low output and high external debt) give rise to multiple equilibria. (3) In this case, the economy is prone to self-fulfilling sudden stops driven by downward revisions of expectations about the value of collateral.
    JEL: F41
    Date: 2016–12
  30. By: Donato Masciandaro
    Abstract: In 2002 in reviewing the role of the Federal Reserve System (FED) the United States General Accounting Office declared that” We found no widely accepted, analytically based criteria to show whether a central bank needs capital as a cushion against losses or how the level of such an account should be determined”; the FED capital has become somewhat like the human appendix, an organ whose function is no longer understood (Stella 2009). Is it still true? These short notes address the issue, using a Q&A exposition and taking the occasion the fact that the U.S. Government Accountability Office (GAO), has been asked by members of the Congress to study the implications of a recent dividend rate change for Federal Reserve Bank stock and the implications of modifying or eliminating the existing requirement that all member banks purchase stock issued by their respective Federal Reserve Bank.
    Keywords: Federal Reserve System, Central Bank Independence, Central Bank Capital, Global Crisis
    JEL: E42 E58 E61
    Date: 2016
  31. By: Forrest Capie; Geoffrey Wood
    Abstract: Governance: What and Why? Corporate governance was discussed before the financial crises of earlier this century, but attention to it has increased dramatically since that crisis. What is governance, and why did it suddenly become so interesting? The Oxford English Dictionary gives a comprehensive definition. It tells us governance has six meanings: the action or manner of governing; the state of being governed; the office, function, or power of governing; method of management, system of regulations; mode of living, behaviour, demeanour; wise self command.
    Date: 2016
  32. By: Mark Mink; Jan Jacobs; Jakob de Haan
    Abstract: We argue that if currency union member states have different potential output per capita, output growth rates, or trade balances, the common monetary policy may not be optimal for all of them. Euro area imbalances for potential output and for trade balances are quite large, while output growth imbalances are more modest. Member states with larger imbalances of one type also have larger imbalances of both other types, but a decline of one imbalance need not coincide with a decline of the others. We also show that imbalances are fairly persistent, and are larger in poorer and smaller member states.
    Keywords: euro area macroeconomic imbalances; common monetary policy; economic convergence; business cycle synchronization; euro crisis
    JEL: E30 F45 O47
    Date: 2016–12
  33. By: Donato Masciandaro; Davide Romelli
    Abstract: Following the 2007-09 Global Financial Crisis many countries have changed their financial supervisory architecture by increasing the involvement of central banks in supervision. This has led many scholars to argue that financial crises are an important driver in explaining the evolution of the role of central banks as supervisors. In this paper, we formally test whether there is any link between supervisory reforms and the occurrence of financial crises. We study the evolution of financial sector supervision by constructing a new database that captures the full set of supervisory reforms implemented during the period 1996-2013 in a large sample of countries. Our findings support the view that systemic banking crises are important drivers of reforms in supervisory structure. However, we also highlight an equally important “bandwagon” effect, namely a tendency of countries to reform their financial supervisory architecture when others do so as well. Our finding can explain how it is possible to identify a political driver in reforming the supervisory settings notwithstanding the economic theory does not indicate an optimal institutional setting. We construct several measures of spatial spillover effects and show that they can explain institutional similarities among countries and impact the probability of reforming the role of the central bank in financial sector supervision. We also stress the importance of the degree of central bank independence in the choice to concentrate financial supervision in the hands of the central bank. Our results support the view that the traditional theory of central banking has to be integrated with political economy considerations.
    Keywords: Financial Supervision, Central Banking, Central Bank Independence, Political Economy, Banking Supervision
    JEL: E58 E63 G18
    Date: 2015
  34. By: Anton Korinek
    Abstract: In an interconnected world, national economic policies regularly lead to large international spillover effects, which frequently trigger calls for international policy cooperation. However, the premise of successful cooperation is that there is a Pareto inefficiency, i.e. if there is scope to make some nations better off without hurting others. This paper presents a first welfare theorem for open economies that defines an efficient benchmark and spells out the conditions that need to be violated to generate inefficiency and scope for cooperation. These are: (i) policymakers act competitively in the international market, (ii) policymakers have sufficient external policy instruments and (iii) international markets are free of imperfections. Our theorem holds even if each economy suffers from a wide range of domestic market imperfections and targeting problems. We provide examples of current account intervention, monetary policy, fiscal policy, macroprudential policy/capital controls, and exchange rate management and show that the resulting spillovers are consistent with Pareto efficiency, but only if the three conditions are satisfied. Furthermore, we develop general guidelines for how policy cooperation can improve welfare when the conditions are violated.
    JEL: D61 F13 F33 F42
    Date: 2016–12
  35. By: Camila Casas; Federico J. Díez; Gita Gopinath; Pierre-Olivier Gourinchas
    Abstract: Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer's currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) terms of trade are stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports and export expansions following depreciations are weak. Using merged firm level and customs data from Colombia we document strong support for the dominant currency paradigm and reject the alternatives of producer currency and local currency pricing.
    JEL: E0 F0
    Date: 2016–12
  36. By: Meijers, Huub (UNU-MERIT, and SBE, Maastricht University); Muysken, Joan (UNU-MERIT, CofFEE-Europe and SBE, Maastricht University)
    Abstract: The Netherlands is a prosperous, small open economy with a large financial sector and a trade balance surplus. Current observations suggest that the quantitative easing (QE) initiated by the ECB has a strong impact on the financial sector and international capital flows, while the impact on economic growth is relatively weak in the Netherlands. We analyse these stylised facts using the stock-flow consistent (SFC) approach which builds on earlier work. We develop an open economy SFC model for the Netherlands with an elaborated financial sector, including pension funds which invest to a large extent abroad, and recognise that firms invest a considerable part of their financial assets abroad. This enables us to explain that the direct effects of QE are relatively small due to substantial foreign selling of Dutch government bonds and recapitalisations of the financial sector. The indirect effects of QE are much stronger. They influence the economy through low interest rates and exchange rate appreciation, but have unintended consequences through increased housing prices and asset prices - the latter two are endogenous in our model. We calibrate the model to mimic the observed stylised facts for the Netherlands and perform some policy experiments
    Keywords: stock-flow consistent modelling, quantitative easing, current account surplus
    JEL: E44 B5 E6 F45 G21 G32 O16
    Date: 2016–12–07

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