nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒01‒15
37 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Ambiguous Policy Announcements By Michelacci, Claudio; Paciello, Luigi
  2. Unconventional US Monetary Policy: New Tools, Same Channels? By Feldkircher, Martin; Huber, Florian
  3. Monetary Policy Credibility and Exchange Rate Pass-Through By Yan Carriere-Swallow; Bertrand Gruss; Nicolas E Magud; Fabian Valencia
  4. Currency Wars? Unconventional Monetary Policy Does Not Stimulate Exports By Rose, Andrew K
  5. The Currency Dimension of the Bank Lending Channel in International Monetary Transmission By Elod Takats; Judit Temesvary
  6. US Monetary Policy in a Globalized World By Crespo Cuaresma, Jesus; Doppelhofer, Gernot; Feldkircher, Martin; Huber, Florian
  7. A Behavioral New Keynesian Model By Gabaix, Xavier
  8. Money, Asset Prices and the Liquidity Premium By Lee, Seungduck
  9. Estabilidad de Precios en América Latina:¿Ya LLegamos Allí? By Olivo, Victor
  10. Spillover Effects of Unconventional Monetary Policy in Asia and the Pacific By Punzi, Maria Teresa; Chantapacdepong, Pornpinun
  11. Monetary Policy and Macroeconomic Stability Revisited By Hirose, Yasuo; Kurozumi, Takushi; Van Zandweghe, Willem
  12. The multiscale relationship between exchange rates and fundamentals differentials: Empirical evidence from Scandinavia By Habimana, Olivier
  13. Trend Fundamentals and Exchange Rate Dynamics By Huber, Florian; Kaufmann, Daniel
  14. Spillovers of the United States’ Unconventional Monetary Policy to Emerging Asia: The Bank Lending Channel By Xu, Ying; La, Hai Anh
  15. The effect of conventional and unconventional euro area monetary policy on macroeconomic variables By Halberstadt, Arne; Krippner, Leo
  16. Why are policy real interest rates so high in Brazil? An analysis of the determinants of the Central Bank of Brazil's real interest rate By Balliester Reis, Thereza
  17. The Term Structure and Inflation Uncertainty By Breach, Tomas; D'Amico, Stefania; Orphanides, Athanasios
  18. Determinants and implications of low global inflation rates By Juan Carlos Berganza; Pedro del Río; Fructuoso Borrallo
  19. Spillover Effects of Japan’s Quantitative and Qualitative Easing on East Asian Economies By Fukuda, Shin-ichi
  20. International Housing Markets, Unconventional Monetary Policy and the Zero Lower Bound By Huber, Florian; Punzi, Maria Teresa
  21. Drivers of Inflation Compensation : Evidence from Inflation Swaps in Advanced Economies By Marius del Giudice Rodriguez; Emre Yoldas
  23. Cost-Benefit Analysis of Leaning Against the Wind: Are Costs Larger Also with Less Effective Macroprudential Policy? By Svensson, Lars E O
  24. Interest rates, corporate lending and growth in the Euro Area By Tondl, Gabriele
  25. The Effects of Monetary Policy Shocks on Inequality By Davide Furceri; Prakash Loungani; Aleksandra Zdzienicka
  26. Economic Crises and the Eligibility for the Lender of Last Resort: Evidence from Nineteenth Century France By Bignon, Vincent; Jobst, Clemens
  27. Ups and Downs. Central Bank Independence from the Great Inflation to the Great Recession: Theory, Institutions and Empirics By Donato Masciandaro; Davide Romelli
  28. A Markov switching factor-augmented VAR model for analyzing US business cycles and monetary policy By Huber, Florian; Fischer, Manfred M.
  29. Long Memory, Breaks, and Trends: On the Sources of Persistence in Inflation Rates By Rinke, Saskia; Busch, Marie; Leschinski, Christian
  30. Three Essays on the Theory of Money and Financial Institutions Essay 3: The Economy with Innovation, Externalities and Context By Martin Shubik
  31. Policy effectiveness is limited by a flat Phillips curve, stabilization as practiced in Europe and the US information By David Kiefer
  32. Pereat Iustitia, Fiat Mundus: What is Left of the European Economic Constitution after the OMT-Litigation? By Christian Joerges
  33. Can the Central Bank Alleviate Fiscal Burdens? By Reis, Ricardo
  34. How Robust Is the Result That the Cost of "Leaning Against the Wind" Exceeds the Benefit? Response to Adrian and Liang By Svensson, Lars E O
  35. Food Inflation in Sub-Saharan Africa; Causes and Policy Implications By Emre Alper; Niko A Hobdari; Ali Uppal
  36. Demonetization, the Cash Shortage and the Black Money. By Lahiri, Ashok K.
  37. The globalisation of inflation: the growing importance of global value chains By Raphael Auer; Claudio Borio; Andrew Filardo

  1. By: Michelacci, Claudio; Paciello, Luigi
    Abstract: We study the effects of monetary policy announcements in a New Keynesian model, where ambiguity-averse households with heterogenous net financial wealth use a worst-case criterion to assess the credibility of announcements. The announcement of a future loosening of monetary policy leads to the rebalancing of financial asset positions, it can cause credit crunches, and it may prove to be contractionary in the interim before implementation. This is because the households with positive net financial wealth (creditors) are those that are most likely to believe the announcement, due to the potential loss of wealth from the prospective policy easing. And when creditors believe the announcement more than debtors, their expected wealth losses are larger than the wealth gains that debtors expect. So aggregate net wealth is perceived to fall, and the economy can contract owing to lack of aggregate demand, which is more likely when the inequality in wealth is more pronounced. We evaluate the importance of this mechanism, focusing on the start of the ECB's practice of offering forward guidance in July 2013. The inflation expectations of households have responded in accordance with the theory. After matching the entire distribution of European households' net financial wealth, we find that the ECB's announcement is contractionary in our model. In general, redistributing expected wealth may have perverse effects when agents are ambiguity-averse.
    Date: 2017–01
  2. By: Feldkircher, Martin; Huber, Florian
    Abstract: In this paper we compare the transmission of a conventional monetary policy shock with that of an unexpected decrease in the term spread, which mirrors quantitative easing. Employing a time-varying vector autoregression with stochastic volatility, our results are two-fold: First, the spread shock works mainly through a boost to consumer wealth growth, while a conventional monetary policy shock affects real output growth via a broad credit / bank lending channel. Second, both shocks exhibit a distinct pattern over our sample period. More specifically, we find small output effects of a conventional monetary policy shock during the period of the global financial crisis and stronger effects in its aftermath. This might imply that when the central bank has left the policy rate unaltered for an extended period of time, a policy surprise might boost output particularly strongly. By contrast, the spread shock has affected output growth most strongly during the period of the global financial crisis and less so thereafter. This might point to diminishing effects of large scale asset purchase programs. (authors' abstrct)
    Keywords: Unconventional monetary policy; transmission channel; Bayesian TVP-SV-VAR
    Date: 2016–03
  3. By: Yan Carriere-Swallow; Bertrand Gruss; Nicolas E Magud; Fabian Valencia
    Abstract: A long-standing conjecture in macroeconomics is that recent declines in exchange rate pass-through are in part due to improved monetary policy performance. In a large sample of emerging and advanced economies, we find evidence of a strong link between exchange rate pass-through to consumer prices and the monetary policy regime’s performance in delivering price stability. Using input-output tables, we decompose exchange rate pass-through to consumer prices into a component that reflects the adjustment of imported goods at the border, and another that captures the response of all other prices. We find that price stability and central bank credibility have reduced the second component.
    Keywords: Monetary policy;Exchange rate pass-through;Consumer prices;Price stabilization;Developed countries;Emerging markets;Cross country analysis;Exchange rate pass-through, monetary policy credibility.
    Date: 2016–12–13
  4. By: Rose, Andrew K
    Abstract: I investigate whether countries that use unconventional monetary policy (UMP) experience export booms. I use a popular gravity model of trade which requires neither the exogeneity of UMP, nor instrumental variables for UMP. In practice, countries that engage in UMP experience a drop in exports vis-à -vis countries that are not engaged in such policies, holding other things constant. Quantitative easing is associated with exports that are about 10% lower to countries not engaged in UMP; this amount is significantly different from zero and similar to the effect of negative nominal interest rates. Thus there is no evidence that countries have gained export markets through unconventional monetary policy; any currency wars launched have been lost.
    Keywords: bilateral; data; easing; empirical; Gravity; interest; negative; nominal; quantitative; Trade
    JEL: E58 F14
    Date: 2017–01
  5. 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 cross-border 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: Bank lending channel ; Cross-border bank lending ; Currency denomination ; Monetary transmission
    JEL: E5 F42 G21
    Date: 2016–12
  6. By: Crespo Cuaresma, Jesus; Doppelhofer, Gernot; Feldkircher, Martin; Huber, Florian
    Abstract: We analyze the interaction between monetary policy in the US and the global economy proposing a new class of Bayesian global vector autoregressive models that accounts for time-varying parameters and stochastic volatility (TVP-SV-GVAR). Our results suggest that US monetary policy responds to shocks to the global economy, in particular to global aggregate demand and monetary policy shocks. On the other hand, US-based contractionary monetary policy shocks lead to persistent international output contractions and a drop in global inflation rates, coupled with rising interest rates in advanced economies and a real depreciation of currencies with respect to the US dollar. We find considerable evidence for heterogeneity in the spillovers across countries, as well for changes in the transmission of monetary policy shocks over time. (authors' abstract)
    Keywords: Global vector autoregression; time-varying parameters; stochastic volatility; monetary policy; international spillovers
    Date: 2015–11
  7. By: Gabaix, Xavier
    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 firms. (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 extant empirical evidence.
    Keywords: behavioral macroeconomics; bounded rationality; forward guidance; price level targetting; zero lower bound
    JEL: D03 E03 E12 E52 E6 E62 E63 G02
    Date: 2016–12
  8. By: Lee, Seungduck
    Abstract: This paper examines the effect of monetary policy on the liquidity premium, i.e., the market value of the liquidity services that financial assets provide. To guide the empirical analysis, I set up a monetary search model in which bonds provide liquidity services in addition to money. The theory predicts that money supply and nominal interest rates are positively correlated with the liquidity premium, but the premium is negatively correlated with the bond supply. The empirical analysis over the period from 1946 and 2008 confirms the theoretical predictions. This indicates that liquid bonds are substantive substitutes for money and the opportunity cost of holding money plays a key role in asset price determination. Lastly, the theory rationalizes the existence of negative nominal yields in equilibrium, when the cost of holding money is low whereas liquid bonds are scarce, and I present empirical findings to support it.
    Keywords: asset price, monetary search model, liquidity, liquidity premium, money supply, negative nominal yield
    JEL: E31 E41 E51 E52 G12
    Date: 2016–10–31
  9. By: Olivo, Victor
    Abstract: This paper main purpose is to analyze whether Latin America economies as a whole and on an individual basis have achieved price stability, or are moving towards this objective. After a revision of the literature on the quantitative definition of price stability, I adopt the one that has prevailed in most central banks worldwide: an inflation rate of 2% within a range between 1-3%. Comparing observed inflation and a three-year moving average of the inflation rate of Latin American countries with this benchmark, I conclude that the region has attained a low inflation but not price stability. The paper goes on to examine several factors that decrease the benefits and increase the cost of lowering inflation once this has been reduced below 10%. It also evaluates how the monetary policy strategies adopted throughout the region have influenced the achievement of price stability. I conclude that the region should avoid complacency. In a globalized world in which nations compete intensively in international trade and to attract capital flows, the achievement of the price stability objective added to others institutional reforms, could be fundamental.
    Keywords: Keywords: price stability, inflation rate, central banks, monetary policy, interest rate, monetary base.
    JEL: E3 E31 E5 E52 E58
    Date: 2016–11–30
  10. By: Punzi, Maria Teresa (Asian Development Bank Institute); Chantapacdepong, Pornpinun (Asian Development Bank Institute)
    Abstract: We assess the evolution of spillover effects of unconventional monetary policies on Asia and the Pacific region, and evaluate the impact on and implications for the macroeconomy. We develop a Panel Vector Auto Regression model for the Asia and Pacific region for a period covering data from first quarter 2000 until first quarter 2015. We split the overall sample into two subsets: the Pre-Crisis (2000q1–2006q4) and Post-Crisis (2009q1–2015q1) samples. We identify unconventional monetary policy shocks with a shadow interest rate estimated by Krippner (2013). We find that Asia and the Pacific region has responded to the advanced economies’ actions with accommodative monetary policy. Such lower interest rates were coupled with currency appreciation, asset price inflation, and strong movements in capital flows. Foreign investors have shifted their preferences for bonds in Asia and the Pacific. If prior to the Global Financial Crisis, the “global saving glut” hypothesis (i.e., Asian savings flight to the US) was one of the major effects resulting in booming US house prices, it is clear that a reversal effect has dominated the economy after the Global Financial Crisis: funds flight to Asia and the Pacific region putting pressure on asset prices, leading to financial vulnerability.
    Keywords: spillover effects; unconventional monetary policy (UMP); Global Financial Crisis (GFC); funds flight; global savings glut
    JEL: E44 E52 F41
    Date: 2017–01–05
  11. By: Hirose, Yasuo; Kurozumi, Takushi; Van Zandweghe, Willem (Federal Reserve Bank of Kansas City)
    Abstract: This paper revisits the question of how the Federal Reserve achieved macroeconomic stability after the Great Inflation of the 1970s.
    Keywords: Monetary policy; Great inflation; Equilibrium indeterminacy; Generalized New Keynesian Phillips curve; Sequential Monte Carlo algorithm
    JEL: C11 C52 C62 E31 E52
    Date: 2017–01–04
  12. By: Habimana, Olivier
    Abstract: This paper investigates the extent to which macroeconomic fundamentals explain movements in the Swedish Krona against the Danish Krone and the Norwegian Krone exchange rates; three currencies of neighboring countries that are main trade partners and with long-term economic similarities. Exchange rates and fundamentals are decomposed into wavelet scales to gauge the explanatory power of the monetary model at different frequencies. There is a significant relationship between interest rate, inflation, and to a lesser extent the stock of money and output differentials and in-sample exchange rates movements at horizons of eight months and above. Wavelet decomposition uncovers the time scale aspect of exchange rate determination, and suggests that the monetary model is still a useful framework at medium and long horizons.
    Keywords: Exchange rate disconnect puzzle, monetary model, Scandinavia, wavelets.
    JEL: E44 F3 F31
    Date: 2017–01–03
  13. By: Huber, Florian; Kaufmann, Daniel
    Abstract: We estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US Dollar. The empirical model is based on the assumption that both countries' monetary policy strategies may be well described by Taylor rules with a time-varying inflation target, a time-varying natural rate of unemployment, and interest rate smoothing. The estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered. The model generally outperforms a benchmark model that does not account for changes in trend inflation and trend unemployment. (authors' abstract)
    Keywords: Exchange rate models; trend inflation; natural rate of unemployment; Taylor rule; unobserved components stochastic volatility model
    Date: 2016–01
  14. By: Xu, Ying (Asian Development Bank Institute); La, Hai Anh (Asian Development Bank Institute)
    Abstract: This paper assesses the spillover effects of the United States’ unconventional monetary policy (i.e., quantitative easing programs adopted during 2008–2014) on the Asian credit market. With a focus on cross-border bank lending, we employed firm-level loan data with regard to the syndicated loan market and measured the international bank lending channel through changes in United States dollar-denominated loans extended to Asian borrowers. We found that the growth of dollar credit in Asia increased substantially in response to quantitative easing in the United States financial market. The results of this study confirm the existence of the bank lending channel in Asia and emphasize the role of credit flows in transmitting financial conditions. The paper also provides new evidence of cross-border liquidity spillover in the syndicated loan market. We found that the overall spillover effect was large but differed significantly in Asia by types of borrowing firms, financing purposes, and loan terms at different stages of the quantitative easing programs. The paper concludes with a discussion of relevant policy implications for the region.
    Keywords: Spillovers; unconventional monetary policy; UMP; United States; Asian credit market; credit flows; spillover effects; cross-border liquidity; bank lending channel
    JEL: F21 F36 G01 G21 G28
    Date: 2016–12–31
  15. By: Halberstadt, Arne; Krippner, Leo
    Abstract: We investigate the e ect of monetary policy on European macroeconomic variables using a small-scale vector autoregression (VAR) and the "Effective Monetary Stimulus" (EMS). The EMS is a monetary policy metric obtained from yield curve data that is designed to consistently reflect the overall stance of monetary policy across conventional and uncoventional monetary policy environments. Empirically, using the EMS in our VAR obtains plausible and stable structural relationships with prices and output developments across and within conventional and unconventional environments, and more so than short-maturity rates or alternative metrics, suggesting that it provides a useful practical monetary policy metric for policy makers. The VAR results show that European monetary policy shocks have been accommodative since 2007, although their e ect has become more uncertain compared to the conventional policy period.
    Keywords: Monetary Policy,Zero Lower Bound,Dynamic Term Structure Model
    JEL: E43 E44 E52
    Date: 2016
  16. By: Balliester Reis, Thereza
    Abstract: This paper discusses the reasons for Brazil.s high policy real interest rates by considering two opposing views, the orthodox and heterodox approaches. While orthodox authors defend the position that bad domestic policies are the cause of the high interest rate, heterodox economists claim that the international financial system and orthodox policies influence the level of the policy rate in Brazil. The aim of this study is to assess whether the proposed arguments can be supported when comparing Brazilian real interest rates with other developing countries under the same monetary regime. The conclusion is that, although the orthodox and heterodox arguments are both intuitively plausible, when comparing stylized facts and testing the hypotheses econometrically neither is sufficient to elucidate the Brazilian case. The paper concludes by suggesting that there might be political causes of the high real interest rates in Brazil such as a politically influential rentier class.
    Keywords: Brazil,Central Bank,interest rate,monetary policy,developing countries
    JEL: E43 E58
    Date: 2016
  17. By: Breach, Tomas; D'Amico, Stefania; Orphanides, Athanasios
    Abstract: This paper develops and estimates a Quadratic-Gaussian model of the US 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 IRP has important implications for the other components of the nominal yield: expected real rates, expected inflation, and real risk premia.
    Keywords: Hidden Factors; Inflation Risk Premium; Quadratic-Gaussian Term Structure Models; Survey Forecasts
    JEL: C58 E43 E44 G12
    Date: 2016–12
  18. By: Juan Carlos Berganza (Banco de España); Pedro del Río (Banco de España); Fructuoso Borrallo (European Central Bank)
    Abstract: In this paper we look at global inflation trends over the last decade and try to disentangle factors that could explain the ultra-low levels of inflation during the recovery from the Great Recession. We review the literature on the subject, which points at possible structural shifts in price and wage setting processes in recent decades, such as inflation’s reduced cyclical sensitivity to domestic economic slack, a bigger role being played by forward-looking inflation expectations, and the increased importance of global factors. We then test empirically whether changes in the coefficients of the Phillips curve in the wake of the global financial crisis can explain the behaviour of inflation over this period for a large group of advanced economies. Our results show a wide range of variation between countries, and in some cases the findings are insufficiently robust to offer a satisfactory explanation of the recent course of inflation. Nevertheless, the persistence of inflation and the increased importance of backward-looking inflation expectations in some countries may pose risks for inflation-expectation anchoring and central bank credibility. Finally, we review the adverse effects on the real economy of ultra-low inflation over an extended period and analyse the policy options for addressing this problem.
    Keywords: inflation, inflation expectations, Phillips curve, monetary policy.
    JEL: E31 E32 E50
    Date: 2016–12
  19. By: Fukuda, Shin-ichi (Asian Development Bank Institute)
    Abstract: This paper explores the spillover effects of Japan’s quantitative and qualitative easing (QQE) on East Asian economies. Under the new monetary policy regime, the Japanese yen depreciated substantially, raising concerns that it would have a regional beggar-thy-neighbor effect. It is thus important to see what effects the QQE had on neighboring economies. Our empirical investigation of East Asian stock markets finds that they first reacted to the yen’s depreciation negatively, yet came to respond positively as the QQE progressed, implying that the QQE had a much smaller beggar-thy-neighbor effect than was originally feared. We show that the QQE benefited East Asian economies because the positive spillover effect of Japan’s stock market recovery dominated the beggar-thy-neighbor effect in the region.
    Keywords: spillovers; quantitative and qualitative easing; qqe; beggar-thy-neighbor effect; East Asia; yen depreciation; stock market
    JEL: E52 F10 F32
    Date: 2017–01–11
  20. By: Huber, Florian; Punzi, Maria Teresa
    Abstract: In this paper we propose a time-varying parameter VAR model for the housing market in the United States, the United Kingdom, Japan and the Euro Area. For these four economies, we answer the following research questions: (i) How can we evaluate the stance of monetary policy when the policy rate hits the zero lower bound? (ii) Can developments in the housing market still be explained by policy measures adopted by central banks? (iii) Did central banks succeed in mitigating the detrimental impact of the financial crisis on selected housing variables? We analyze the relationship between unconventional monetary policy and the housing markets by using the shadow interest rate estimated by Krippner (2013b). Our findings suggest that the monetary policy transmission mechanism to the housing market has not changed with the implementation of quantitative easing or forward guidance, and central banks can affect the composition of an investors portfolio through investment in housing. A counterfactual exercise provides some evidence that unconventional monetary policy has been particularly successful in dampening the consequences of the financial crisis on housing markets in the United States, while the effects are more muted in the other countries considered in this study. (authors' abstract)
    Keywords: Zero Lower Bound; Shadow interest rate; Housing Market; Time-varying parameter VAR
    Date: 2016–01–25
  21. By: Marius del Giudice Rodriguez; Emre Yoldas
    Abstract: In this note, we provide a comparative analysis of inflation swaps for three advanced economies: the United States, the euro area, and the United Kingdom. We consider empirical proxies for energy prices, economic activity, exchange rates, and risky asset prices as potential drivers of inflation expectations and risk premiums in a regression framework.
    Date: 2016–12–30
  22. By: Shweta Mehta; Kruti Patel; Krupa Mehta
    Abstract: Demonetization means to the suspension of current currency units and reinstate those currency units with new currency units. In this paper researchers aim to study the advantages and disadvantages of demonetization and its impact on Indian banking sector. Despite major developments in paperless currency over the past decade, physical cash remains widely used throughout the world. Therefore one of the main motivating factors for this study is to find out the alternatives of physical cash payments such as online bank transfer, e- clearing, e- KYC, digital locker and Unified Payment Interface. Key words: money, demonetisation, cash, cash crunch, cashless, e-money Policy
    Date: 2016–12
  23. By: Svensson, Lars E O
    Abstract: "Leaning against the wind" (of asset prices and credit booms) (LAW), that is, a somewhat tighter monetary policy and a higher policy interest rate, has costs in terms of a weaker economy with higher unemployment and lower inflation. It has been justified by possible benefits in terms of a lower probability or magnitude of a future financial crisis. A worse macro outcome in the near future is then considered to be an acceptable cost to be traded off against a better expected macro outcome further into the future. But a crisis can come any time, and the cost of a crisis is higher if initially the economy is weaker due to previous LAW. LAW thus has an additional cost in the form of a higher cost of a crisis when a crisis occurs. With this additional cost, for existing empirical estimates, the costs of LAW exceed by a substantial margin the possible benefits from a lower probability of a crisis. Furthermore, empirically a lower probability of a crisis is associated with lower real debt growth. But if monetary policy is neutral in the long run, it cannot affect real debt in the long run. Then, if a higher policy rate would result in lower debt growth and a lower probability of a crisis for a few years, this is followed by higher debt growth and a higher probability of a crisis in the future. This implies that the cumulated benefits over time of LAW are close to zero. But even if monetary policy is assumed to be non-neutral and permanently affect real debt, empirically the benefits are still less than the costs. Finally, somewhat surprisingly, less effective macroprudential policy, and generally a credit boom, with resulting higher probability, magnitude, or duration of a crisis, increase costs of LAW more than benefits, thus making costs exceed benefits by an even larger margin.
    Keywords: financial stability; macroprudential policy; monetary policy
    JEL: E52 E58 G01
    Date: 2017–01
  24. By: Tondl, Gabriele
    Abstract: The sluggish development of corporate lending has remained the central concern of EU monetary policy makers as it is considered to hinder seriously the resurgence of growth. This paper looks at the development of loans to large corporations vs SMEs in the pre-crisis and post-crisis period and wishes to answer: (i) to which extent do allocated loan volumes actually contribute to Output growth? (ii) which factors determine the development of loans, considering above all loan interest rates? and (iii) what causes differences in loan interest levels across the EA? The results indicate that different loan developments in the EA explain very well differences in output development, loans to SMEs contribute even more to output growth than those for large corporations. Loan development itself is negatively influenced by the interest level which differs significantly across EA members, with small loans in addition always being charged an interest premium over large loans. The capitalization of banks, the size of banks and their internationalization play a role as well. A part of the sluggish growth of loans can be explained by the increasing use of alternative financial instruments by large firms. Interest rates in turn are following the ECB interest rate, - but this link has become looser in the post-crisis period, and long term government bond rates. Different risks faced by banks and different bank structures have become important explanatories of interest rates in the post-crisis period. (author's abstract)
    Keywords: Corporate lending; Credit market fragmentation; Interest pass-through; Bank lending rates; Finance and growth; Euro Area
    Date: 2016–06
  25. By: Davide Furceri; Prakash Loungani; Aleksandra Zdzienicka
    Abstract: This paper provides new evidence of the effect of monetary policy shocks on income inequality. Using a measure of unanticipated changes in policy rates for a panel of 32 advanced and emerging market countries over the period 1990-2013, the paper finds that contractionary (expansionary) monetary actions increase (reduce) income inequality. The effect, however, varies over time, depending on the type of the shocks (tightening versus expansionary monetary policy) and the state of the business cycle, and across countries depending on the share of labor income and redistribution policies. In particular, we find that the effect is larger for positive monetary policy shocks, especially during expansions. Looking across countries, we find that the effect is larger in countries with higher labor share of income and smaller redistribution policies. Finally, while an unexpected increase in policy rates increases inequality, changes in policy rates driven by an increase in growth are associated with lower inequality.
    Keywords: Monetary policy;Income inequality;Developed countries;Emerging markets;Panel analysis;Time series;monetary policy; monetary policy shocks; income inequality.
    Date: 2016–12–22
  26. By: Bignon, Vincent; Jobst, Clemens
    Abstract: This paper shows that a central bank can more efficiently mitigate economic crises when it broadens eligibility for its discount facility to any safe asset or solvent agent. We use difference-in-differences panel regressions and emulate crises by studying how defaults of banks and non-agricultural firms were affected by the arrival of an agricultural disease. We exploit the specificities of the implementation of the discount window to deal with the endogeneity of the access to the central bank to the arrival of the crisis and local default rates. We find that broad eligibility reduced significantly the increase in the default rate when the shock hit the local economy. A counterfactual exercise shows that defaults would have been 10% to 15% higher if the central bank would have implemented the strictest eligibility rule. This effect is identified independently of changes in policy interest rates and the fiscal deficit.
    Keywords: Bagehot rule; Collateral; default rate; discount window
    JEL: E32 E44 E51 E58 N14
    Date: 2017–01
  27. By: Donato Masciandaro; Davide Romelli
    Abstract: This paper analyzes the pillar of modern central bank governance, i.e. central bank independence, highlighting three contributions. First, we provide a systematic review of the economics of central bank independence. Second, using a principal agent model we design a political economy framework, which explains how politicians can shape central bank governance in addressing macroeconomic shocks, taking into account both the wishes of the citizens and their own personal interests. This framework is then used to interpret the evolution of central bank independence from the Great Inflation throughout the Great Moderation – i.e. from the seventies to the first decade of the twenty-first century – and to the Great Recession during which recent reforms have shaken the design of the central banks by increasing their involvement in banking and financial supervision. Finally, we provide empirical evidence supporting this evolution of central bank independence using recently developed indices of dynamic central bank independence.
    Keywords: Monetary Policy, Central Bank Independence, Banking Supervision, Global Financial Crisis
    JEL: E31 E52 E58 E62
    Date: 2015
  28. By: Huber, Florian; Fischer, Manfred M.
    Abstract: This paper develops a multivariate regime switching monetary policy model for the US economy. To exploit a large dataset we use a factor-augmented VAR with discrete regime shifts, capturing distinct business cycle phases. The transition probabilities are modelled as time-varying, depending on a broad set of indicators that influence business cycle movements. The model is used to investigate the relationship between business cycle phases and monetary policy. Our results indicate that the effects of monetary policy are stronger in recessions, whereas the responses are more muted in expansionary phases. Moreover, lagged prices serve as good predictors for business cycle transitions. (authors' abstract)
    Keywords: Non-linear FAVAR; business cycles; monetary policy; structural model
    Date: 2015–08
  29. By: Rinke, Saskia; Busch, Marie; Leschinski, Christian
    Abstract: The persistence of inflation rates is of major importance to central banks due to the fact that it determines the costs of monetary policy according to the Phillips curve. This article is motivated by newly available econometric methods which allow for a consistent estimation of the persistence parameter under low frequency contaminations and consistent break point estimation under long memory without a priori assumptions on the presence of breaks. In contrast to previous studies, we allow for smooth trends in addition to breaks as a source of spurious long memory. We support the fi nding of reduced memory parameters in monthly inflation rates of the G7 countries as well as spurious long memory, except for the US. Nevertheless, only a few breaks can be located. Instead, all countries exhibit signi cant trends at the 5 percent level with the exception of the US.
    Keywords: Spurious Long Memory; Breaks; Trends; Inflation; G7 countries
    JEL: C13 E58
    Date: 2017–01
  30. By: Martin Shubik (Cowles Foundation, Yale University)
    Abstract: This essay is the third of three. The first is nontechnical and in part autobiograhpical describing the evolution of my approach to developing a microeconomic theory of money institutions. The second essay was devoted to a more formal sketch of a closed economic exchange system with no other externalities beyond money and markets. This essay builds on the existence of monetary exchange but also context, and active government with nonsymmetric information and many externaties indicate that the views of Keynes, Hayek and Schumpeter are all consistent with the next stages of complexity as the logic requires many different arrays of institutions to provide the necessary economic functions and adjust to the variety of socio-economic contexts.
    Keywords: Schumpeter, Keynes, aggregation, information, disequilibrium, minimal institutions, innovation, playable games
    JEL: C7 D50 E4
    Date: 2016–12
  31. By: David Kiefer
    Abstract: A standard model of activist macroeconomic policy derives a monetary reaction rule by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve. In addition to monetary policy, governments apply a variety of instruments to influence inflation and output, including fiscal policy, bailouts and foreign exchange policy, but effectiveness is limited by Phillips curve flatness. Solving the Phillips curve and reaction rule for a reduced form, we study this theory with a panel of countries. A textbook version of the activist model leads to disappointing results; the activist model fits the data only slightly better than a flat-Phillipscurve benchmark. The econometric results are enhanced by accounting for autocorrelated shocks. Although results are mixed, our interpretation favors inertial inflation expectations over rational ones. An extension of this approach suggests that US policy is more effective than that of European governments, finding that the US Phillips curve is more than twice as steep.
    Keywords: stabilization policy, inflation targets, expectations JEL Classification: E61, E63
    Date: 2016
  32. By: Christian Joerges (University of Bremen - Faculty of Law; Hertie School of Governance)
    Abstract: What kind of law are Germany’s Constitutional Court and the CJEU concerned with when they decide upon European and national powers in the realms of monetary, economic and fiscal policy? Is it still possible to identify some meta-legal conceptual basis for the ordering functions attributed to law in these fields? It seems that Europe’s responses to the financial crisis have no theoretical foundation, neither in some variety of economic liberalism, nor in some Keynesian counter-vision. Do we really have to leave it to ECB to define the notion of monetary policy and to then develop and use instruments to implement its decisions? With these queries, we do not insinuate that this lack of conceptual orientation can be attributed to some wilful disregard of well-founded legal commands. Instead, we submit that Europe is exposed to a state of emergency which has led to the restless search for new modes of crisis management which damage the integrity of law. Were the two dissenting judges of the 2nd Senate of the German Constitutional Court right with their suggestion that the Bundesverfassungsgericht (BVerfG) should dismiss the complaints of Peter Gauweiler and Others? Did their non possumus respect the law’s limits and therefore the law’s integrity? Or did instead the CJEU act as a good guardian of European constitutionalism through its de facto unconditioned legalisation of executive federalism?
    Keywords: OMT Reference of the German Constitutional Court; Gauweiler judgment of the CJEU; European Monetary Policy; national fiscal policy; Economic and Monetary Union; Economic Emergency; Europe, contestation and normalisation
    JEL: A14 B25 E58
    Date: 2015–11
  33. By: Reis, Ricardo
    Abstract: Central banks affect the resources available to fiscal authorities through the impact of their policies on the public debt, as well as through their income, their mix of assets, their liabilities, and their own solvency. This paper inspects the ability of the central bank to alleviate the fiscal burden by influencing different terms in the government resource constraint. It discusses five channels: (i) how inflation can (and cannot) lower the real burden of the public debt, (ii) how seignorage is generated and subject to what constraints, (iii) whether central bank liabilities should count as public debt, (iv) how central bank assets create income risk, and whether or not this threatens its solvency, and (v) how the central bank balance sheet can be used for fiscal redistributions. Overall, it concludes that the scope for the central bank to lower the fiscal burden is limited.
    Keywords: interest rates; monetary policy; Quantitative easing; Reserves
    JEL: E52 E58 E63
    Date: 2017–01
  34. By: Svensson, Lars E O
    Abstract: The main result in Svensson (2017) and its previous versions is that, given current knowledge and empirical estimates, the cost of using monetary policy to lean against the wind' for financial-stability purposes exceeds the benefit by a substantial margin. Adrian and Liang conduct a sensitivity analysis of this result, state that 'the result that costs exceed benefits rely critically on assumptions about the change in unemployment in a recession or crisis, the crisis probability, and the elasticity of crisis probability with respect to the interest rate,' and provide alternative assumptions that they assert would overturn the result. This paper shows that Adrian and Liang's alternative assumptions are hardly realistic: they exceed existing empirical estimates by more than 11, 13, and 40 standard errors. Adrian and Liang furthermore do not comment on the extensive sensitivity analysis already done in previous versions of Svensson (2017), which supports the robustness of my result.
    Keywords: Financial crises; financial stability; monetary policy
    JEL: E52 E58 G01
    Date: 2017–01
  35. By: Emre Alper; Niko A Hobdari; Ali Uppal
    Abstract: This paper analyzes food inflation trends in Sub-Saharan Africa (SSA) from 2000 to 2016 using two novel datasets of disaggregated CPI baskets. Average food inflation is higher, more volatile, and similarly persistent as non-food non-fuel (NF/NF) inflation, especially in low-income countries (LICs) in SSA. We find evidence that food inflation became less persistent from 2009 onwards, related to recent improvements in monetary policy frameworks. We also find that high food prices are driven mainly by non-tradable food in SSA and there is incomplete pass-through from world food and fuel prices and exchange rates to domestic food prices. Taken together, these finding suggest that central banks in low-income countries with high and persistent food inflation should continue to pay attention to headline inflation to anchor inflation expectations. Other policy levers include reducing tariffs and improving storage and transport infrastructure to reduce food pressures.
    Keywords: Food prices;Sub-Saharan Africa;Inflation;Low-income developing countries;
    Date: 2016–12–22
  36. By: Lahiri, Ashok K. (Bandhan Bank)
    Abstract: Demonetisation of INR 500 and INR 1,000 notes in India on November 8, 2016 is different from many other countries' scrapping of high value notes in two respects - the withdrawal of their legal tender status and continuation with INR 1,000 and INR 2,000 notes. It has resulted in a cash shortage. Non-cash medium of payments may be encouraged by this shortage, but, with supplies only from the domestic currency presses, the shortage is unlikely to disappear by the end of 2016. Import of currency printed abroad may provide a solution for ending it sooner. The impact of the shortage, if it continues, will be fully felt in the last quarter of 2016-17. Its growth impact in 2016-17 is 0.7-1.3 per cent depending on how much shortage continues and for how long. The big painful jolt of demonetisation creates the right psychological milieu for the war against black money to start. Only Time will tell whether steps such as the Income Declaration Scheme (IDS) in the Budget for 2016-17, the August 2016 amendment of the Benami Transactions (Prohibition) Act of 1988, and the Taxation Laws (Second Amendment) in November 2016, are parts of a concerted plan for tackling black money, and this time is different from 1946 and 1978. With the strides made in digitisation of tax returns and bank records together with PAN, Aadhar and KYC regulations, compared to 6 per cent in 1946 and 11 per cent in 1978, at least 15 per cent or INR 2.2 trillion of the demonetised notes not exchanged into deposits or cash will provide a preliminary positive feedback on the success of the current demonetisation.
    Date: 2016–12
  37. By: Raphael Auer; Claudio Borio; Andrew Filardo
    Abstract: Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional trade-based measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation.
    Keywords: globalisation, inflation, Phillips curve, monetary policy, global value chain, production structure, international inflation synchronisation, input-ouput linkages, supply chain
    Date: 2017–01

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