nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒02‒05
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Forward guidance and the state of the economy By Keen, Benjamin D.; Richter, Alexander; Throckmorton, Nathaniel
  2. Central bank communications: a case study By Davis, J. Scott; Wynne, Mark A.
  3. Exchange Rate Pass-Through in the Euro Area By Mariarosaria Comunale; Davor Kunovac
  4. Do central banks respond timely to developments in the global economy? By Hilde C. Bjørnland; Leif Anders Thorsrud; Sepideh K. Zahiri
  5. Asset Prices, Nominal Rigidities, and Monetary Policy: Case of Housing Price By Kengo Nutahara
  6. Confidence Interval Projections of the Federal Reserve Balance Sheet and Income By Erin E. Syron Ferris; Soo Jeong Kim; Bernd Schlusche
  7. The speed of exchange rate pass-through By Bonadio, Barthélémy; Fischer, Andreas M.; Saure, Philip
  8. Pass-through with low inflation and volatile exchange rates By Alexius, Annika; Holmberg, Mikaela
  9. Relationship of Fiscal Discipline and House hold Income on Money Demand Function in Sri Lanka By Iftekhar, Umbreen; Dawood, Mamoon; Shahid, Hassan
  10. Collateral, Central Bank Repos, and Systemic Arbitrage By Falko Fecht; Kjell G. Nyborg; Jörg Rocholl; Jiri Woschitz
  11. Expected Inflation Regimes in Japan By OKIMOTO, Tatsuyoshi
  12. Are nonlinear methods necessary at the zero lower bound? By Richter, Alexander; Throckmorton, Nathaniel
  13. The Natural Rate of Interest I: Theory By Philipp König; Dmitry Chervyakov
  14. Mending the broken link: heterogeneous bank lending and monetary policy pass-through. By Carlo Altavilla; Fabio Canova; Matteo Ciccarelli
  15. Foreign Banks and International Transmission of Monetary Policy: Evidence from the Syndicated Loan Market By Asli Demirguc-Kunt; Balint Horvath; Harry Huizinga
  16. Israel’s Triumph over Inflation: The Long and Winding Road By Assaf Razin
  17. The Globalisation of Inflation: the Growing Importance of Global Value Chains By Auer, Raphael; Borio, Claudio; Filardo, Andrew J.
  18. How Government Policy and Demographics affect Money Demand Function in Bangladesh? By Iftekhar, Umbreen; Dawood, Mamoon; Shahid, Hasaan
  19. Globalization, market structure and inflation dynamics By Guilloux-Nefussi, Sophie
  20. Has the South African Reserve Bank responded to equity prices since the sub-prime crisis? An asymmetric convergence approach By Phiri, Andrew
  21. Large and State-Dependent Effects of Quasi-Random Monetary Experiments By Jorda, Oscar; Schularick, Moritz; Taylor, Alan M.
  22. Monetary policy, Farm sector income and Farm Household Well-being --a VECM Analysis By gao, chen; leatham, david
  23. Is the Renminbi a safe haven? By Fatum, Rasmus; Yamamoto, Yohei; Zhu, Guozhong

  1. By: Keen, Benjamin D. (University of Oklahoma); Richter, Alexander (Federal Reserve Bank of Dallas); Throckmorton, Nathaniel (College of William & Mary)
    Abstract: This paper examines forward guidance using a nonlinear New Keynesian model with a zero lower bound (ZLB) constraint on the nominal interest rate. Forward guidance is modeled with news shocks to the monetary policy rule. The effectiveness of forward guidance depends on the state of the economy, the speed of the recovery, the ZLB constraint, the degree of uncertainty, the monetary response to inflation, the size of the news shocks, and the forward guidance horizon. Specifically, the stimulus from forward guidance falls as the economy deteriorates or as households expect a slower recovery. When the ZLB binds, less uncertainty about the economy or an expectation of a stronger response to inflation reduces the benefit of forward guidance. Forward guidance via a news shock is less stimulative than an unanticipated monetary policy shock around the steady state, but a news shock is more stimulative near the ZLB and always has a larger cumulative effect on output. When the central bank extends the forward guidance horizon, the cumulative effect initially increases but then decreases. These results indicate that there are limits to the stimulus forward guidance can provide, but that stimulus is largest when the news is communicated early in a recession.
    Keywords: Forward guidance; zero lower bound; news shocks; global solution method
    JEL: E43 E58 E61
    Date: 2016–11–08
  2. By: Davis, J. Scott (Federal Reserve Bank of Dallas); Wynne, Mark A. (Federal Reserve Bank of Dallas)
    Abstract: Over the past twenty five years, central bank communications have undergone a major revolution. Central banks that previously shrouded themselves in mystery now embrace social media to get their message out to the widest audience. The Federal Reserve System has not always been at the forefront of these changes, but the volume of information about monetary policy that the Federal Open Market Committee (FOMC) now releases dwarfs what it was releasing a quarter century ago. In this paper we focus on just one channel of FOMC communications, the post-meeting statement. We document how it has evolved over time, and in particular the extent to which it has become more detailed, but also more difficult to understand. We then use a VAR with daily financial market data to estimate a daily time series of U.S. monetary policy shocks. We show how these shocks on Fed statement release days have gotten larger as the statement has gotten longer and more detailed, and we show that the length and complexity of the statement has a direct effect on the size of the monetary policy shock following a Fed decision.
    JEL: E58 E65
    Date: 2016–09–01
  3. By: Mariarosaria Comunale (Bank of Lithuania); Davor Kunovac (Bank of Finland)
    Abstract: In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identification based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer inflation in the euro area.
    Keywords: Exchange rate pass-through, import prices, consumer prices, in?ation, bayesian vector autoregression.
    JEL: C38 E31 F31
    Date: 2017–01–29
  4. By: Hilde C. Bjørnland; Leif Anders Thorsrud; Sepideh K. Zahiri
    Abstract: Our analysis suggests; they do not! To arrive at this conclusion we construct a real-time data set of interest rate projections from central banks in three small open economies; New Zealand, Norway, and Sweden, and analyze if revisions to these projections (i.e., forward guidance) can be predicted by timely information. Doing so, we find a systematic role for forward looking international indicators in predicting the revisions to the interest rate projections in all countries. In contrast, using similar indexes for the domestic economy yields largely insignificant results. Furthermore, we find that revisions to forward guidance matter. Using a VAR identified with external instruments based on forecast errors from the predictive regressions, we show that the responses to output, inflation, the exchange rate and asset returns resemble those one typically associates with a conventional monetary policy shock.
    Keywords: Monetary policy, interest rate path, forecast revisions and global indicators
    Date: 2016–11
  5. By: Kengo Nutahara
    Abstract: Carlstrom and Fuerst (2007) ["Asset Prices, Nominal Rigidities, and Monetary Policy," Review of Economic Dynamics 10, 256-275] find that monetary policy response to share prices is a source of equilibrium indeterminacy in a stickyprice economy. We find that if housing price is a target of a central bank, monetary policy response to asset price is helpful for equilibrium determinacy.
    Date: 2017–01
  6. By: Erin E. Syron Ferris; Soo Jeong Kim; Bernd Schlusche
    Abstract: In response to the financial crisis of 2008 and the subsequent recession, the Federal Reserve employed large-scale asset purchases (LSAPs) and a maturity extension program (MEP) with the purpose of reducing longer-term interest rates, and thereby promoting more accommodative financial conditions at a time when the conventional monetary policy tool, the federal funds rate, was at its effective lower bound. In this note, we presented the implications for the Federal Reserve's balance sheet and income arising from a range of future potential macroeconomic outcomes.
    Date: 2017–01–13
  7. By: Bonadio, Barthélémy (University of Michigan); Fischer, Andreas M. (Swiss National Bank and CEPR); Saure, Philip (Swiss National Bank)
    Abstract: On January 15, 2015, the Swiss National Bank terminated its minimum exchange rate policy of one euro against 1.2 Swiss francs. This policy shift resulted in a sharp, unanticipated and permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the exchange rate pass-through into import unit values of this shock at the daily frequency using Swiss transaction-level trade data. Our key findings are twofold. First, for goods invoiced in euro the pass-through is immediate and complete. This finding is consistent with no systematic nominal price adjustment in this subset of goods. Second, for goods invoiced in Swiss francs the pass-through is partial and very fast: it starts on the second working day after the exchange rate shock and reaches the medium-run pass-through after eight working days on average. We interpret the latter finding as evidence that nominal rigidities unravelled quickly in the face of a large exchange rate shock.
    JEL: F14 F31 F41
    Date: 2016–09–01
  8. By: Alexius, Annika (Dept. of Economics, Stockholm University); Holmberg, Mikaela (Dept. of Economics, Stockholm University)
    Abstract: As central banks struggle to boost inflation rates in the face of low global inflation and volatile foreign exchange markets, it has become particularly important to understand how inflation in open economies is affected by movements in exchange rates and foreign inflation. Using a time-varying parameter Bayesian VAR, we analyze the behavior of pass-through across time and in relation to macroeconomic variables. We find little support for the Taylor (2000) hypothesis that pass-through is lower when inflation is close to target. In our data, inflation rates are often below rather than above target, and pass-through does not appear to increase significantly at low inflation rates. Furthermore, inflation persistence is unrelated to pass-through. The pass-through of foreign prices is much higher than the pass through of exchange rates. It is positively associated with the variance of foreign inflation, which is consistent with Calvo pricing.
    Keywords: Pass through; inflation; Bayesian time varying parameter VAR
    JEL: E31 F41
    Date: 2017–01–27
  9. By: Iftekhar, Umbreen; Dawood, Mamoon; Shahid, Hassan
    Abstract: This paper attempts to find those determinants stirring the function of money demand in Sri Lanka during 1975-2013. The empirical analysis starts from applying the unit root tests i.e. Ng-Perron. We apply ARDL bound testing approach of co-integration to scrutinize the co-integration in variables. We select independent variables like per capita GDP, interest rate, exchange rate, fiscal deficit, urban population and rural population to determine money demand function. The findings revealed that income, interest rate and fiscal deficit effect money demand significantly and positively. The exchange rate affects negatively and significantly upon money demand. The stable money demand function is found over time applying CUSUM and CUSUMSQ stability test. The model of our study strongly recommends the real demand for M2 is vital monetary aggregate in terms of policy implication including the appropriateness of model in Sri Lanka.
    Keywords: Interest Rates, Money Demand, Household Income
    JEL: E4 E40
    Date: 2017–01–31
  10. By: Falko Fecht (Frankfurt School of Finance & Management); Kjell G. Nyborg (University of Zurich, Centre for Economic Policy Research (CEPR), and Swiss Finance Institute); Jörg Rocholl (ESMT European School of Management and Technology); Jiri Woschitz (University of Zurich)
    Abstract: Central banks are under increased scrutiny because of the rapid growth in, and composition of, their balance sheets. Therefore, understanding the processes that shape these balance sheets and their consequences is crucial. We contribute by studying an extensive dataset of banks’ liquidity uptake and pledged collateral in central bank repos. We document systemic arbitrage whereby banks funnel credit risk and low-quality collateral to the central bank. Weaker banks use lower quality collateral to demand disproportionately larger amounts of central bank money (liquidity). This holds both before and after the financial crisis and may contribute to financial fragility and fragmentation.
    Keywords: Collateral, repo, systemic arbitrage, central bank, collateral policy, banks, liquidity, interbank market, financial stability, financial fragmentation
    JEL: G12 G21 E42 E51 E52 E58
  11. By: OKIMOTO, Tatsuyoshi
    Abstract: This paper examines the dynamics of expected inflation regimes in Japan over the last three decades based on the smooth transition Phillips curve model. We find that there is a strong connection between the expected inflation and monetary policy regimes. The results also suggest that the introduction of the inflation targeting policy, and quantitative and qualitative easing in the beginning of 2013 have successfully escaped from the deflationary regime, but was not enough to achieve the 2% inflation target. Finally, our results indicate the significance of exchange rates in explaining the recent fluctuations of inflation, and the importance of oil and stock prices in maintaining the positive expected inflation regime.
    Keywords: Hybrid Phillips curve, monetary policy, inflation targeting, qualitative and quantitative easing, smooth transition model
    JEL: C22 E31 E52
    Date: 2017–01
  12. By: Richter, Alexander (Federal Reserve Bank of Dallas); Throckmorton, Nathaniel (College of William & Mary)
    Abstract: This paper examines the importance of the zero lower bound (ZLB) constraint on the nominal interest rate by estimating three variants of a small-scale New Keynesian model: (1) a nonlinear model with an occassionally binding ZLB constraint; (2) a constrained linear model, which imposes the constraint in the filter but not the solution; and (3) an unconstrained linear model, which never imposes the constraint. The posterior distributions are similar, but important differences arise in their predictions at the ZLB. The nonlinear model fits the data better at the ZLB and primarily attributes the ZLB to a reduction in household demand due to discount factor shocks. In the linear models, the ZLB is due to large contractionary monetary policy shocks, which is at odds with the Fed’s expansionary policy during the Great Recession. Posterior predictive analysis shows the nonlinear model is partially able to account for the increase in output volatility and the negative skewness in output and inflation that occurred during the ZLB period, whereas the linear models predict almost no changes in those statistics. We also compare the results from our nonlinear model to the quasi-linear solution based on OccBin. The quasi-linear model fits the data better than the linear models, but it still generate too little volatility at the ZLB and predicts that a large policy shock caused the ZLB to bind in 2008Q4.
    Keywords: Bayesian estimation; model comparison; zero lower bound; particle filter
    JEL: C11 E43 E58
    Date: 2016–08–02
  13. By: Philipp König; Dmitry Chervyakov
    Abstract: The term natural (or neutral) real interest rate refers to the equilibrium value of the real interest rate. As this equilibrium is usually conceived as a situation where inflationary or deflationary pressures have abated, the natural real interest rate is a key concept for central banks seeking to stabilize the general price level or targeting the rate of inflation. The present roundup provides a brief historical review of this concept and explains the relevance of the natural real rate for monetary policy analysis.
    Date: 2017
  14. 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
  15. By: Asli Demirguc-Kunt; Balint Horvath; Harry Huizinga
    Abstract: This paper uses loan-level data from 124 countries over 1995–2015 to examine the transmission of monetary policy through the cross-border syndicated loan market. The results show that the expansion of monetary policy increases cross border credit supply especially to weaker firms. However, greater foreign bank presence in the borrower country appears to reduce the potentially destabilizing impact of lower policy interest rates on cross-border lending, as it attenuates increases in loan volume and maturity while magnifying increases in collateralization and covenant use. The mitigating effect of foreign banking presence in the borrowing country on the transmission of monetary policy is robust to controlling for borrower-country economic and financial development, and a range of borrower and lender country policies and institutions, including the strength of bank regulation and supervision, exchange rate flexibility, and restrictions on capital flows. The findings qualify the characterization of international banks as sources of credit instability, and suggest that foreign bank entry can improve the stability of cross-border credit in the face of international monetary policy shocks.
    Keywords: Cross-border lending, monetary transmission, banking FDI, bank regulation, capital controls.
    JEL: E44 E52 F34 F38 F42 G15 G20
    Date: 2017–01–25
  16. By: Assaf Razin
    Abstract: The paper gives an economic-history perspective of the long struggle with inflation. It covers the early acceleration to three-digit levels, lasting 8 years; The stabilization program, based on political backing triggered sharp fall in inflationary expectation, and consequently to sharp inflation reduction to two-digit levels; The convergence to the advanced countries’ levels during the “great Moderation”; and Israel’s resistance to the deflation-depression forces that the 2008 crisis created. The emphasis is on the forces of globalization and the building of institutions, political, regulatory, financial, budget design, and monetary, which helped stabilize prices and output.
    JEL: E0 F0
    Date: 2017–01
  17. By: Auer, Raphael (Bank of International Settlements); Borio, Claudio (Bank of International Settlements); Filardo, Andrew J. (Bank of International Settlements)
    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 tradebased 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.
    Date: 2017–01–01
  18. By: Iftekhar, Umbreen; Dawood, Mamoon; Shahid, Hasaan
    Abstract: Money demand has a key position in macroeconomics generally and monetary economics particularly. The improved economic condition of any country is a sign of increasing money demand and deteriorating economic climate is a sign of decreasing money demand (Maravic and Palic, 2005). In this study, Autoregressive distributed lag (ARDL) approach of co-integration developed by Pesaran et al., (2001) is used to estimate the money demand function. Real interest rate, GDP per capita, exchange rate, fiscal deficit, urban and rural population are selected to determine money demand function in Bangladesh over the period from 1975-2013. The co-integration analysis reveals that interest rate and per capita GDP exerts significant effect upon money demand both in long run and short run as well. Both urban and rural population have significant effect on money demand in the long run and short run and money demand function is found stable over time.
    Keywords: Government Policy, Demography, Money Demand
    JEL: E4 E41
    Date: 2017–01–31
  19. By: Guilloux-Nefussi, Sophie (Banque de France)
    Abstract: The decline in the sensitivity of inflation to domestic slack observed in developed countries since the mid 1980’s has been often attributed to globalization. However, this intuition has so far not been formalized. I develop a general equilibrium setup in which the sensitivity of inflation to marginal cost decreases when international trade costs fall. In order to do so, I add three ingredients to an otherwise standard two-country new-Keynesian model. Strategic interactions generate a time varying desired markup; endogenous entry and heterogeneous productivity engender a self-selection of the most productive firms (also the largest ones) in international trade. Hence the weight of large firms in domestic production increases. These firms transmit less marginal cost fluctuations to price adjustments, rather absorbing them into their desired markup in order to protect their market share. At the aggregate level, domestic inflation reacts less to real activity fluctuations.
    JEL: E31 F41 F62
    Date: 2016–11–03
  20. By: Phiri, Andrew
    Abstract: The global financial crisis of 2008 sparked an ongoing debate concerning the interlink between monetary policy and equity returns. This study contributes to the debate by examining whether the South African Reserve Bank (SARB) repo rate responds asymmetrically to changes in the returns on four equity indices on the Johannesburg Stock Exchange (JSE). Our empirical model is the momentum threshold autoregressive (MTAR) model which is applied to monthly data corresponding to periods before the financial crisis (2002:01 - 2008:08) and periods after the crisis (2008:08 - 2016:12). There are three main findings which can be derived from our empirical analysis. Firstly, we significant negative relationship between equity prices to the repo rate before the crisis and this relationship turns insignificant in periods after the crisis. Secondly, we find that the Reserve Bank mainly monitored positive disturbances to equity indices before the crisis whereas after the crisis the Reserve Bank appears to be more responsive to negative equity deviations. Lastly, we find significant error correcting behaviour in periods before the crisis but not afterwards. Overall, our results indicate that the SARB appears to have been responsive to equity returns prior to the crisis but not for subsequent periods.
    Keywords: Repo rate; Stock market returns; Monetary Policy; South African Reserve Bank (SARB); Johannesburg Stock Exchange (JSE); Financial crisis; South Africa.
    JEL: C22 C51 C52 E52 G10
    Date: 2017–02–02
  21. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (Department of Economics, University of Bonn); Taylor, Alan M. (University of California, Davis)
    Abstract: Fixing the exchange rate constrains monetary policy. Along with unfettered cross-border capital flows, the trilemma implies that arbitrage, not the central bank, determines how interest rates fluctuate. The annals of international finance thus provide quasi-natural experiments with which to measure how macroeconomic outcomes respond to policy rates. Based on historical data since 1870, we estimate the local average treatment effect (LATE) of monetary policy interventions and examine its implications for the population ATE with a trilemma instrument. Using a novel control function approach we evaluate the robustness of our findings to possible spillovers via alternative channels. Our results prove to be robust. We find that the effects of monetary policy are much larger than previously estimated, and that these effects are state-dependent.
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2017–01–13
  22. By: gao, chen; leatham, david
    Abstract: Farm sector seems to be countercyclical to the household well-being and general economy. In recent years the farm sector is experiencing downtrend with net farm income significantly drops from 2013 high. On the other hand, average farm household income keeps booming, even has higher growth rates than average U.S. household income. Considering the whole economy fully recovered, Federal Reserve started to hike interest rate in 2015. This paper aims to address the linkage and equilibrium among farm sector income, farm household well-being and macroeconomic monetary policies empirically. By using Vector Error Correction Model (VECM), we show both the ratio of average farm household income to U.S. household income and the off-farm earnings of farm household are cointegrated with CPI. Farm portion of farm household income, although strongly positive correlated with farm sector net income, is not cointegrated with either CPI or farm sector net income. Towards sector level analysis, farm sector net income, Federal Funds Rate (FFR) and CPI are proved to be all cointegrated. CPI is dominating the decision of FFR and further affecting net farm income. Combining our results from household level and sector level, a jump in FFR can lead to slower pace of CPI and farm sector net income, then dragging down the ratio of average farm household income to U.S. household income and the off-farm earnings. In the next few years with FFR goes up, we expect farm sector income will keep in relatively low level and farm household may suffer from reduced off-farm earnings. Related farm supporting policies are then discussed conceptually.
    Keywords: monetary policy farm income VECM, Agribusiness, Agricultural and Food Policy, Agricultural Finance, Community/Rural/Urban Development, Financial Economics, Q10 C22 E52,
    Date: 2017
  23. By: Fatum, Rasmus (University of Alberta); Yamamoto, Yohei (Hitotsubashi University); Zhu, Guozhong (University of Alberta)
    Abstract: We investigate the relationship between market uncertainty and the relative value of the Renminbi against currencies that the safe haven literature typically considers as the traditional safe haven currency candidates. Our sample spans the February 2011 to April 2016 period. Band spectral regression models enable us to capture that the relationship between market uncertainty and the relative value of the Renminbi is frequency dependent. While we find evidence of some degree of safe haven currency behavior of the Renminbi during the early part of our sample, our findings do not support the suggestion that the Renminbi is currently a safe haven currency or that the Renminbi is progressing towards safe haven currency status.
    JEL: F31 G15
    Date: 2016–07–21

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