nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒02‒19
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Effectiveness of Monetary Policy in China: Evidence from a Qual VAR By Hongyi Chen; Kenneth ChowAuthor-Workplace-Name: Hong Kong Monetary Authority; Peter Tillmann
  2. A New Dilemma: Capital Controls and Monetary Policy in Sudden-Stop Economies By Michael B. Devereux; Eric R. Young; Changhua Yu
  3. Capital Controls and Monetary Policy Autonomy in a Small Open Economy By J. Scott Davis; Ignacio Presno
  4. Unconventional Monetary Policy Effects on Bank Lending in the Euro Area By Stefan Behrendt
  5. Inflation Bias and Markup Shocks in a LAMP Model with Strategic Interaction of Monetary and Fiscal Policy By Alice Albonico; Lorenza Rossi
  6. Monetary Policy and Indeterminacy after the 2001 Slump By Weder, Mark; Doko Tchatokay, Firmin; Groshenny, Nicolas; Haque, Qazi
  7. Effects of Monetary Policy Shocks on Exchange Rate in Emerging Countries By Soyoung Kim; Kuntae Lim
  8. Coordinating expectations through central bank projections By Fatemeh Mokhtarzadeh; Luba Petersen
  9. Banking theories and Macroeconomics. By Claudio Sardoni; Antonio Bianco
  10. The Renminbi Central Parity: An Empirical Investigation By Yin-Wong Cheung; Cho-Hoi Hui; Andrew Tsang
  11. The Impact of US Monetary Policy and Other External Shocks on the Hong Kong Economy: A Factor-augmented VAR Approach By Hongyi Chen; Andrew Tsang
  12. Temptation and Forward Guidance By Airaudo, Marco
  13. Has the Exchange Rate Pass-Through changed in South Africa? By Alain Kabundi; Asi Mbelu
  14. Monetary Policy and Asset Mispricing By Beckers, Benjamin; Bernoth, Kerstin
  15. The (Unintended?) Consequences of the Largest Liquidity Injection Ever By Matteo Crosignani; Miguel Faria-e-Castro; Luis Fonseca
  16. Exchange Rate Dynamics and US Dollar-denominated Sovereign Bond Prices in Emerging Markets By Cho-Hoi Hui; Chi-Fai Lo; Po-Hon Chau
  17. Risk-adjusted Covered Interest Parity: Theory and Evidence By Alfred Wong; David Leung; Calvin Ng
  18. Quantitative easing and the price-liquidity trade-off By Ferdinandusse, Marien; Freier, Maximilian; Ristiniemi, Annukka
  19. Reaffirming the Influence of Milton Friedman on U.K. Economic Policy By Nelson, Edward
  20. Can we Identify the Fed's Preferences? By Chatelain, Jean-Bernard; Ralf, Kirsten
  21. Whither central banking? By Charles A. E. Goodhart
  22. Forced structural convergence in the eurozone: Or a differentiated European monetary community By Scharpf, Fritz W.
  23. Pushing on a string: US monetary policy is less powerful in recessions By Silvana Tenreyro; Gregory Thwaites
  24. What Explains the Speed of Recovery from Banking Crises? By Ambrosius, Christian
  25. On the Global Financial Market Integration “Swoosh” and the Trilemma By Geert Bekaert; Arnaud Mehl
  26. The Country Chronologies to Exchange Rate Arrangements into the 21st Century: Will the Anchor Currency Hold? By Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
  27. Delayed Credit Recovery in Croatia:Supply or Demand Driven? By Mirna Dumičić; Igor Ljubaj
  28. Nominal GDP Targeting with Heterogeneous Labor Supply By Bullard, James; Singh, Aarti
  29. The (Dis)Advantages of Clearinghouses Before the Fed By Matthew S. Jaremski
  30. The social life of Bitcoin By Nigel Dodd
  31. The Role of Nonbank Financial Institutions in the Monetary Transmission Mechanism: Theory and Evidence By Sung-Eun Yu
  32. Does monetary policy generate asset price bubbles ? By Christophe Blot; Paul Hubert; Fabien Labondance

  1. By: Hongyi Chen (Hong Kong Institute for Monetary Research); Kenneth ChowAuthor-Workplace-Name: Hong Kong Monetary Authority; Peter Tillmann (Justus Liebig University Giessen)
    Abstract: Analyzing monetary policy in China is not straightforward because the People¡¯s Bank of China (PBoC) implements policy by using more than one instrument. In this paper we use a Qual VAR, a conventional VAR system augmented with binary policy announcements, to extract a latent indicator of tightening and easing pressure, respectively, for China. The model acknowledges that policy announcements are endogenous and summarizes policy by a single indicator. The Qual VAR allows us to study the impact of monetary policy in terms of unexpected changes in these latent variables, which we identify using sign restrictions. We show that the transmission of monetary policy impulses to the rest of the economy is remarkably similar to the transmission process in advanced economies in terms of both output growth and inflation despite a very different monetary policy framework. We find that bank loans are not sensitive to policy changes, which implies that window guidance is still a necessary policy tool. We also find that the impact of monetary policy shocks is asymmetric in terms of asset prices, that is, the asset price reactions differ in their sensitivity to tightening shocks and easing shocks, respectively. In particular, an easing of monetary conditions boosts stock prices while a tightening shock leaves stock prices unaffected. This shows that monetary policy is not a suitable tool to stabilize asset prices, which raises implications for financial stability and macroprudential policy.
    Keywords: China, monetary policy, Qual VAR, transmission mechanism, asset prices, financial stability
    JEL: E4 E5 C3
    Date: 2016–05
  2. By: Michael B. Devereux (University of British Columbia); Eric R. Young (University of Virginia); Changhua Yu (Peking University)
    Abstract: The dangers of high capital flow volatility and sudden stops have led economists to promote the use of capital controls as an addition to monetary policy in emerging market economies. This paper studies the benefits of capital controls and monetary policy in an open economy with financial frictions, nominal rigidities, and sudden stops. We focus on a time-consistent policy equilibrium. We find that during a crisis, an optimal monetary policy should sharply diverge from price stability. Without commitment, policymakers will also tax capital inflows in a crisis. But this is not optimal from an ex-ante social welfare perspective. An outcome without capital inflow taxes, using optimal monetary policy alone to respond to crises, is superior in welfare terms, but not time-consistent. If policy commitment were in place, capital inflows would be subsidized during crises. We also show that an optimal policy will never involve macro-prudential capital inflow taxes, or a departure from price stability, as a precaution against the risk of future crises (whether or not commitment is available).
    Keywords: Sudden stops, Pecuniary externality, Monetary policy, Capital controls, Time-consistency
    JEL: E44 E58 F38 F41
    Date: 2016–03
  3. By: J. Scott Davis; Ignacio Presno
    Abstract: Is there a link between capital controls and monetary policy autonomy in a country with a floating currency? Shocks to capital flows into a small open economy lead to volatility in asset prices and credit supply. To lessen the impact of capital flows on financial instability, a central bank finds it optimal to use the domestic interest rate to "manage" the capital account. Capital account restrictions affect the behavior of optimal monetary policy following shocks to the foreign interest rate. Capital controls allow optimal monetary policy to focus less on the foreign interest rate and more on domestic variables.
    Keywords: Capital controls ; Credit constraints ; Small open economy
    JEL: F32 F41 E52 E32
    Date: 2017–02
  4. By: Stefan Behrendt (Friedrich Schiller University Jena, School of Economics and Business Administration)
    Abstract: This paper employs a structural VAR framework with sign restrictions to estimate the effects of unconventional monetary policies of the European Central Bank since the Global Financial Crisis, mainly in their effectiveness towards bank lending. Using a variable for newly issued credit instead of the outstanding stock of credit, the effects on bank lending are smaller than found in previous similar studies for the Euro area.
    Keywords: unconventional monetary policy, zero lower bound, bank lending, SVAR
    JEL: C32 E30 E44 E51 E52 E58
    Date: 2017–02–08
  5. By: Alice Albonico (Department of Economics, Management and Statistics, University of Milan-Bicocca); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: This paper investigates the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authorities are independent and play strategically. It shows that: (i) both the long run and the short run equilibrium require a departure from zero inflation rate; (ii) in response to a markup shock, fiscal policy becomes more aggressive as the fraction of liquidity constrained agents increases and price stability is no longer optimal even under Ramsey; (iii) overall, optimal discretionary policies imply welfare losses for Ricardians, while liquidity constrained consumers experience welfare gains with respect to Ramsey.
    Keywords: inflation bias, markup shocks, liquidity constrained consumers, optimal monetary and fiscal policy
    JEL: E3 E5
    Date: 2017–02
  6. By: Weder, Mark; Doko Tchatokay, Firmin; Groshenny, Nicolas; Haque, Qazi
    Abstract: This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. To relate to this debate, we consider three alternative empirical inflation series in the estimation. When using CPI or PCE, we find some support for the view that the Federal Reserve's policy was extra easy and may have led to equilibrium indeterminacy. Instead, when measuring inflation with core PCE, monetary policy appears to have been reasonable and suffciently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator. We re-formulate the artificial economy as a factor model where the theory's concept of inflation is the common factor to the three empirical inflation series. We find that CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Again, this procedure cannot dismiss indeterminacy.
    JEL: E50 E30 E32
    Date: 2016
  7. By: Soyoung Kim (Seoul National University); Kuntae Lim (Bank of Korea)
    Abstract: This study empirically investigates the effects of monetary policy shocks on the exchange rate in six emerging countries (Korea, Thailand, the Philippines, Mexico, Brazil, and Colombia). VAR models are used, wherein sign restrictions on impulse responses are imposed to identify monetary policy shocks. The empirical model reflects the small open emerging economy features. The estimation period is the recent period in which these countries adopted inflation targeting and more flexible exchange rate regimes based on the experience of advanced countries. The main findings are as follows. First, various puzzles such as the ¡°exchange rate puzzle,¡± ¡°delayed overshooting puzzle,¡± and ¡°forward discount bias puzzle¡± are frequently found in these countries. Second, more severe puzzles are found in these emerging countries than in small open advanced countries.
    Keywords: VAR, Monetary Policy Shocks, Exchange Rate, UIP Condition, Delayed Overshooting
    JEL: F3 E5
    Date: 2016–12
  8. By: Fatemeh Mokhtarzadeh (University of Victoria); Luba Petersen (Simon Fraser University)
    Abstract: This paper explores how expectations are influenced by central bank projections within a learning-to-forecast laboratory macroeconomy. Subjects are incentivized to forecast output and inflation in a laboratory macroeconomy where their aggregated expectations directly influence macroeconomic dynamics. Using a between-subject design, we systematically vary whether the central bank communicates no information, ex-ante rational nominal interest rate projections, or rational or adaptive dual projections of output and inflation. Our experimental findings suggest that interest rate projections and adaptive dual projections can encourage backward-looking forecasting behavior. Expectations are best coordinated and stabilized by communicating rational output and inflation forecasts.
    Keywords: expectations, monetary policy, projections, communication, credibility, laboratory experiment, experimental macroeconomics
    JEL: C9 D84 E52 E58
    Date: 2017–02
  9. By: Claudio Sardoni (Department of Social Sciences and Economics, Sapienza University of Rome); Antonio Bianco (Dipartimento di Scienze Sociali ed Economiche, Sapienza University of Rome (Italy).)
    Abstract: The recently expanding macro-financial literature is facing the analytical challenge to analyse the working of modern market economies without losing touch with the factual role played by financial institutions. Mainstream macroeconomic models that embody a financial sector are characterized by the understanding of banks as intermediaries of loanable funds (deposit-taking paving the way for loan extension). This approach to banking is increasingly considered as a major flaw in macroeconomic thinking. The Post-Keynesian theory of inside money creation is gaining momentum even in mainstream circles. The present article highlights the key differences of these alternative doctrines from a money supply perspective, so to stress the key aspects of the monetary dimension of the so-called financial cycle and the fact that monetary policy alone has no impact on aggregate expenditure.
    Keywords: Financial Cycle, Money Supply, Banking, Inside Money, Liquidity Risk.
    JEL: E44 E51
    Date: 2017–02
  10. By: Yin-Wong Cheung (City University of Hong Kong); Cho-Hoi Hui (Hong Kong Monetary Authority); Andrew Tsang (Hong Kong Institute for Monetary Research)
    Abstract: On August 11 2015, China revamped its procedure of setting the official central parity of the renminbi (RMB) against the US dollar. Our empirical investigation shows that the intertemporal dynamics of China¡¯s central parity are not the same before and after this policy change. They are more variable and have a few new determining factors. Both the deviation of the RMB offshore rate from the central parity and the US dollar index are the two significant determinants of the central parity both before and after the policy change. The VIX index has explanatory power before August 2015, but not after. After August 2015, the onshore RMB rate and the difference between the one-month offshore and onshore RMB forward points show a significant impact on the central parity. While the US dollar index effect remains, we find no evidence of a role for the RMB exchange rate against the currency basket revealed by China in December 2015 in the fixing process.
    Keywords: China, RMB, exchange rate policy, central parity rate, on-shore and off-shore rates
    JEL: F31 F33 G15 G17 G18
    Date: 2016–06
  11. By: Hongyi Chen (Hong Kong Institute for Monetary Research); Andrew Tsang (Hong Kong Institute for Monetary Research)
    Abstract: This paper uses the factor-augmented VAR (FAVAR) framework to study the impact on the Hong Kong economy of the diverging monetary policies by the Fed, ECB and BoJ as well as the Mainland economy slowdown. The empirical results show that changes in US monetary policy mainly affect interest rate-sensitive sectors in Hong Kong; while real variables such as real GDP growth, unemployment rate are more sensitive to the economic slowdown in Mainland China. Monetary easing from the ECB and BoJ to some extent offsets the tightening of the Fed. The transmission channels of external shocks are through trade and capital markets. It is estimated that the combined effect of the four external shocks will on average lower Hong Kong¡¯s quarterly GDP growth by 0.6 percentage points and quarterly inflation by 0.2 percentage points in the first 4 quarters. However, Hong Kong¡¯s financial stability, particularly with regard to loan quality, banks¡¯ capital and liquidity, is well maintained by macroprudential policies suggesting that Hong Kong¡¯s financial system is resilient to external shocks.
    JEL: C3 E5 E3
    Date: 2016–06
  12. By: Airaudo, Marco (School of Economics)
    Abstract: In the aftermath of the recent financial crisis, several central banks have resorted to "forward guidance" in monetary policy - that is, announcing publicly the future path of the short-term interest rate - to stimulate inflation and economic activity, and therefore move the economy away from the liquidity trap. Standard monetary models predict sizable stimulative effects of forward guidance, which are much in excess of what observed in the data and grow exponentially with the forward guidance horizon. This apparent disconnect between theory and data has been labeled by the literature as the forward guidance puzzle. We introduce temptation and dynamic-self-control preferences, as formalized by Gul and Pesendorfer (Econometrica 2002, 2004), into an otherwise standard New Keynesian model. In our set-up, the representative agent faces a temptation to liquidate his entire financial wealth for the purpose of immediate consumption. Resisting temptation involves cognitive effort (or self-control) and hence some disutility. Optimal behavior therefore trades of the temptation for immediate satisfaction with long-run optimal consumption smoothing. We show that, for suitable parameterizations, dynamic self-control preferences deliver a discounted Euler equation,lower households. sensitivity to real interest rates, and make the Phillips curve less forward-looking. These features combined help solve the puzzle. Moreover, they have stark implications for what concerns the conditions for equilibrium determinacy, the adverse effects of large negative shocks to the real interest rate, and the paradox of volatility.
    Keywords: Monetary Policy; New Keynesian Model; Forward Guidance; Temptation; Self-Control
    JEL: E31 E32 E43 E52 E58
    Date: 2017–02–07
  13. By: Alain Kabundi; Asi Mbelu
    Abstract: This paper uses the two-stage exchange rate pass-through (ERPT) framework instead of the direct pass-through (PT) from the exchange rate to consumer inflation to assess the variation in the ERPT for South Africa from 1994 to 2014. The paper uses rolling-window estimation to examine the possibility of change in the ERPT over time. In addition, it investigates the asymmetric behaviour of the ERPT over the business cycle. The results indicate that the ERPT for South Africa is complete in the …rst stage but incomplete in the second stage. It implies that retailers do not pass all the cost to consumers. The …first-stage ERPT has declined slightly since the Global Financial Crisis. Weak domestic demand and possibly the concentration of …rms in the manufacturing sector are the main forces behind this low PT. Moreover, there is evidence of asymmetry in the …first-stage ERPT in that it tends to rise in the upturn phase of the economy compared to the downturn. The second-stage ERPT shows a considerable decline since the adoption of the in‡ation-targeting regime. Similar to the fi…rst-stage case, the PT is muted in the downturn but rises in the expansionary phase by about 10 per cent.
    Keywords: Exchange rate pass-through, rolling-window regression, symmetric exchange rate pass-through
    JEL: C51 E52 E58
    Date: 2016–11
  14. By: Beckers, Benjamin; Bernoth, Kerstin
    Abstract: This paper investigates whether conventional interest rate policy of central banks is a suitable instrument to attenuate excessive mispricing in stocks as suggested by the proponents of a "leaning against the wind" (LATW) monetary policy. For this, we decompose the stock price into a fundamental, a risk premium and a mispricing component. We argue that mispricing can arise for two reasons: (i) from false subjective expectations of investors about future fundamentals and equity premia, and (ii) from the inherent indeterminacy in asset pricing in line with rational bubbles. Employing a partial equilibrium asset pricing model, we show that the response of the excessive stock price component to a monetary policy shock is ambiguous in both the short- and long-run, and depends on the nature of the mispricing. Subsequently, we evaluate the scope for a LATW policy empirically by employing a time-varying parameter VAR with a flexible identification scheme based on impact and long-run restrictions using data for the S&P500 index from 1962Q1 to 2014Q4. We find that a contractionary monetary policy shock in fact lowers stock prices beyond what is implied by the response of their underlying fundamentals.
    JEL: E44 E52 G12
    Date: 2016
  15. By: Matteo Crosignani; Miguel Faria-e-Castro; Luis Fonseca
    Abstract: We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank’s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening.
    Keywords: Lender of Last Resort ; Sovereign Debt ; Unconventional Monetary Policy
    JEL: E58 G21 G28 H63
    Date: 2017–01
  16. By: Cho-Hoi Hui (Hong Kong Monetary Authority); Chi-Fai Lo (The Chinese University of Hong Kong); Po-Hon Chau (The Chinese University of Hong Kong)
    Abstract: Based on an analogy between an economy¡¯s currency price and a firm¡¯s stock price, this paper develops a two-factor pricing model with closed-form solutions for US dollar-denominated sovereign bonds in which foreign exchange rates and US risk-free interest rates are the stochastic factors to study the dynamic linkage between the sovereign bond spreads and exchange rates in emerging markets. The numerical results during the pre-crisis (2003 - 2007) and post-crisis (2009 - 2014) periods and the associated error analysis show that the model credit spreads can broadly track the market credit spreads of the sovereign bonds of Brazil, Colombia, Mexico, the Philippines, Russia and Turkey. The results are consistent with empirical evidence of a connection between sovereign credit spreads and exchange rates, and the well-documented studies about twin sovereign debt and currency crises in emerging markets.
    JEL: G13 G21
    Date: 2016–05
  17. By: Alfred Wong (Hong Kong Monetary Authority); David Leung (Hong Kong Monetary Authority); Calvin Ng (Hong Kong Monetary Authority)
    Abstract: We extend the theory of covered interest parity (CIP), aligning the different risks involved in uncollateralized money market transactions and collateralized foreign exchange (FX) swap transactions, which underscore CIP deviations in times of elevated uncertainty. We postulate that the swap dealer behaves as if he tries to filter out the counterparty risk embedded in money market rates in pricing FX swaps. Our results suggest that he does so not only during turbulent times but also under normal market conditions. The extended theory also uncovers a simple way to disentangle counterparty and liquidity risk premiums embedded in money market rates.
    Keywords: Covered interest parity, CIP deviation, forward rate, exchange rate, Libor-OIS spread, counterparty credit risk, funding liquidity risk, FX swap
    JEL: F31 F32 G15
    Date: 2016–08
  18. By: Ferdinandusse, Marien (European Central Bank); Freier, Maximilian (European Central Bank); Ristiniemi, Annukka (Monetary Policy Department, Central Bank of Sweden)
    Abstract: We present a search theoretic model of over-the-counter debt with quantitative easing (QE). The impact of central bank asset purchases on yields depend on market tightness, which is determined by shares of preferred habitat investors. The model predicts that the impact of government bond purchases is higher in countries with a higher share of preferred habitat investors. Furthermore, there is a trade-off with liquidity, which is not present in other models of QE. We present a new index for the share of preferred habitat investors holding government bonds in Eurozone countries, based on the ECB's securities and holdings statistics, which we use to match the impact of QE on the observed yield changes in data and to test our model.
    Keywords: Quantitative easing; liquidity; search and matching
    JEL: E52 E58 G12
    Date: 2017–02–01
  19. By: Nelson, Edward
    Abstract: This paper finds a significant influence of Milton Friedman on U.K. economic policy from the 1970s onward, and especially during the period of the Thatcher Government. The finding is based on a consideration of statements by policymakers and key economic advisers, as well as an analysis of Friedman’s commentary in the 1970s, 1980s, and 1990s on U.K. economic developments. It is shown that explicit acknowledgments of Friedman’s influence were given on the record over the years by Margaret Thatcher, Chancellor of the Exchequer Geoffrey Howe, Bank of England officials, and others in policy circles. Examples of Friedman’s influence include the absorption into U.K. policy doctrine of the permanent income hypothesis and the natural rate hypothesis, the rejection from 1979 onward of incomes policy as a weapon against inflation, and U.K. officials’ repeated appeals to monetary sovereignty when arguing against monetary union or a sterling peg. Evidence of influence by Friedman on privatization policy and on the official perspective on the current account deficit can also be discerned. Friedman had only limited personal interaction with U.K. policymakers, but his influence was felt in the adoption into actual U.K. policymaking of recommendations made in his writings and in the fact that those writings—which were studied closely by a number of senior U.K. economic advisers—helped alter economists’ conceptual framework in the United Kingdom and thereby fostered doctrinal changes in U.K. economic policy. The analysis in this paper also shows that two key critics of the Conservative party’s economic policy under Margaret Thatcher—Labour’s Harold Wilson and the Conservatives’ Edward Heath—had good reason to ascribe this policy partly to the influence of Friedman, whom each of them had met before the Thatcher era.
    Keywords: Milton Friedman, U.K. economic policy, incomes policy, monetarism, Thatcher Government, doctrine of economic policy.
    Date: 2017–02
  20. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: A pre-test of Ramsey optimal policy versus time-consistent policy rejects time-consistent policy and (optimal) simple rule for the U.S. Fed during 1960 to 2006, assuming the reference new-Keynesian Phillips curve transmission mechanism with auto-correlated cost-push shock. The number of reduced form parameters is larger with Ramsey optimal policy than with time-consistent policy although the number of structural parameters, including central bank preferences, is the same. The new-Keynesian Phillips curve model is under-identified with Ramsey optimal policy (one identifying equation missing) and hence under-identified for time-consistent policy (three identifying equations missing). Estimating a structural VAR for Ramsey optimal policy during Volcker-Greenspan period, the new-Keynesian Phillips curve slope parameter and the Fed's preferences (weight of the volatility of the output gap) are not statistically different from zero at the 5% level.
    Keywords: Ramsey optimal policy,Time-consistent policy,Identification,Central bank preferences,New-Keynesian Phillips curve
    JEL: C61 C62 E52 E58
    Date: 2017
  21. By: Charles A. E. Goodhart
    Abstract: The history of central banking can be divided into periods of consensus about the roles and function of central banks, interspersed with periods of uncertainty, often following a crisis, in which central banks are searching for a new consensus.
    JEL: F3 G3
    Date: 2016
  22. By: Scharpf, Fritz W.
    Abstract: Eight years after the onset of the "Great Recession," the eurozone is deeply split between "Northern" EMU economies that seem to be doing reasonably well and "Southern" countries that continue to struggle with socioeconomic catastrophe. This paper argues that the continuing malaise is a consequence of the structural diversity among Northern and Southern economies and of an asymmetrical euro regime that must try to enforce the structural convergence of their political economies. The present regime is vulnerable, however. It may fail economically should its rules have to be relaxed, and it may fail politically should it no longer be possible to suppress North-South conflicts. In light of these risks, the paper concludes by presenting the outline of a differentiated European Currency Community that would accommodate structurally diverse but highly interdependent economies in a flexible two-level regime.
    Keywords: Europe,monetary union,structural convergence,democracy,Europa,Währungsunion,strukturelle Konvergenz,Demokratie
    Date: 2016
  23. By: Silvana Tenreyro; Gregory Thwaites
    Abstract: We investigate how the response of the US economy to monetary policy shocks depends on the state of the business cycle. The effects of monetary policy are less powerful in recessions, especially for durables expenditure and business investment. The asymmetry relates to how fast the economy is growing, rather than to the level of resource utilization. There is some evidence that fiscal policy has counteracted monetary policy in recessions but reinforced it in booms. We also find evidence that contractionary policy shocks are more powerful than expansionary shocks, but contractionary shocks have not been more common in booms. So this asymmetry cannot explain our main finding.
    JEL: E21 E22 E32 E52
    Date: 2016–10
  24. By: Ambrosius, Christian
    Abstract: While much research has been done on causes and effects of banking crises, little is known about what determines recovery from banking crises, despite of large variations in post-crises performances across countries. In order to identify local and global factors that determine the length of recovery (i.e. the time it takes until countries reach their pre-crisis level of per capita GDP), this paper employs event history analysis on 138 incidents of banking crises between 1970 and 2013. Cox proportional hazards show that crises characteristics, specific country conditions as well as external factors affect the duration of recovery. Regarding domestic factors, simultaneous currency crises, large financial sectors and overvalued currencies are associated with later recovery. Regarding external factors, a low growth of world trade has a negative effect on recovery, and so does uncertainty in financial markets as reflected in high gold prices. Moreover, contractionary monetary policy of the US Fed as Central Bank of the international key currency has a negative effect on the length of recovery in middle-income countries. In general, the dominance of global variables as well as variables related to the exchange-rate underline that the speed of recovery is particularly constrained by countries’ positions within the global economy.
    JEL: H12 E44 O23
    Date: 2016
  25. By: Geert Bekaert; Arnaud Mehl
    Abstract: We propose a simple measure of de facto financial market integration based on a factor model of monthly equity returns, which can be computed back to the first era of financial globalization for 17 countries. Global financial market integration follows a “swoosh” shape – i.e. high pre-1913, still higher post-1990, low in the interwar period – rather than the other shapes hypothesized in earlier literature. We find no evidence of financial globalization reversing since the Great Recession as claimed in other recent studies. De jure capital account openness and global growth uncertainty are the two main determinants of long-run global financial market integration. We use our measure to revisit the debate on the trilemma between financial openness, the exchange rate regime, and monetary policy autonomy, and on whether the trilemma has recently morphed into a dilemma due to global financial cycles. We find evidence consistent with the trilemma and inconsistent with the dilemma hypothesis, both throughout history and for the recent decades; non-US central banks still exert more control over domestic interest rates when exchange rates are flexible in economies open to global finance.
    JEL: F15 F21 F30 F36 F38 F41 F6 G15 N2
    Date: 2017–02
  26. By: Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: Detailed country-by-country chronologies are an informative companion piece to our paper “Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?,” which provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. The individual country chronologies are also a central component of our approach to classifying regimes. These country histories date dual or multiple exchange rate episodes, as well as to differentiate between pre-announced pegs, crawling pegs, and bands from their de facto counterparts. We think it is important to distinguish between say, de facto pegs or bands from announced pegs or bands, because their properties are potentially different. The chronologies also flag the dates for important turning points, such as when the exchange rate first floated, or when the anchor currency was changed. We extend our chronologies as far back as possible, even though we only classify regimes from 1946 onwards.
    JEL: E5 F3 F4 N2
    Date: 2017–02
  27. By: Mirna Dumičić (The Croatian National Bank, Croatia); Igor Ljubaj (The Croatian National Bank, Croatia)
    Abstract: In order to enhance the understanding of credit cycle dynamics in Croatia we explore the evolution of credit demand and credit supply of corporates and households in Croatia and identify their determinants based on the switching regression framework. These results are crosschecked by the insights from the bank lending survey. The conducted analysis shows there are both supply and demand-side factors that limit the possibility of intensifying household and corporate credit activity. However, a more pronounced drag seems to be coming from subdued demand, which is greatly influenced by the unfavourable domestic macroeconomic environment and particularly GDP developments. This suggests that it is not unusual that credit recovery is still missing, but also confirms that the scope for monetary policy to stimulate lending is limited.
    Keywords: credit supply, credit demand, households, corporates, Croatia, switching regression framework
    JEL: E44 G21 G28
    Date: 2017–01
  28. By: Bullard, James; Singh, Aarti
    Abstract: We study nominal GDP targeting as optimal monetary policy in a model with a credit market friction following Azariadis, Bullard, Singh and Suda (2016), henceforth ABSS. As in ABSS, the macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). We extend the ABSS framework to allow for endogenous and heterogeneous household labor supply among credit market participant households. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supplying their desired amount of labor, a type of "divine coincidence" result. We also analyze the case when there is an aging population. We interpret these findings in light of the recent debate in monetary policy concerning labor force participation.
    Keywords: Non-state contingent nominal contracting, optimal monetary policy, nominal GDP targeting, life cycle economies, heterogeneous households, credit market participation, labor supply.
    Date: 2017–02
  29. By: Matthew S. Jaremski
    Abstract: Operating in individual cities, U.S. clearinghouses were the closest thing to a central bank before 1914, but they only assisted banks that chose to join the association. Using an annual bank-level database for seven states between 1880 and 1910, this paper shows that after the entry of a clearinghouse member banks were less likely and non-member banks in the same city were more likely to close. The results are driven by the fact that the presence of clearinghouses led all banks to become more exposed to systemic liquidity risk, yet only provided liquidity to member banks during panics.
    JEL: G21 G32 N21
    Date: 2017–01
  30. By: Nigel Dodd
    Abstract: This paper challenges the notion that Bitcoin is ‘trust-free’ money by highlighting the social practices, organizational structures and utopian ambitions that sustain it. At the paper’s heart is the paradox that if Bitcoin succeeds in its own terms as an ideology, it will fail in practical terms as a form of money. The main reason for this is that the new currency is premised on the idea of money as a ‘thing’ that must be abstracted from social life in order for to be protected from manipulation by bank intermediaries and political authorities. The image is of a fully mechanized currency that operates over and above social life. In practice, however, the currency has generated a thriving community around its political ideals, relies on a high degree of social organization in order to be produced, has a discernible social structure, and is characterized by asymmetries of wealth and power that not dissimilar from the mainstream financial system. Unwittingly, then, Bitcoin serves as a powerful demonstration of the relational character of money.
    JEL: J1
    Date: 2017
  31. By: Sung-Eun Yu
    Abstract: Nonbank financial institutions (NBFIs) have substantially increased their market share since 1980s. In spite of the growing importance of NBFIs, they have received much less attention in the monetary transmission mechanism. This paper examines if monetary policy affects NBFIs in the similar way as banks. First, I theoretically explain how monetary policy influences the loan supply of all financial intermediaries (banks and NBFIs) through changes in their net worth. Then, I empirically test whether these two kinds of lending institutions decrease their net worth and the intermediated loans in response to a tight monetary shock. I find that, at the statistically significant level, NBFIs shrink their net worth and a type of loan, especially C&I loans?but not all types of loans decrease, as predicted?in the same way as banks. In particular, NBFIs’ C&I loans “decrease” substantially in the beginning periods; however, NBFIs’ mortgages and consumer credit “increase” in the middle periods, showing a statistically significant level. These evidences suggest that the theoretical explanation is, at least, consistent with the evidence of C&I loans?but not mortgages and consumer loans. One possible explanation is that, while banks reject mortgages and consumer loans, NBFIs may increase mortgages and consumer loans by picking up the demand for these two types of loans.
    Keywords: monetary policy, nonbank financial institutions, net worth, loan supply JEL Classification: E51, E52, E58
    Date: 2017
  32. By: Christophe Blot (OFCE-Sciences PO); Paul Hubert (OFCE-Sciences PO); Fabien Labondance (Université de Bourgogne Franche Comté, CRESE, OFCE-Sciences PO)
    Abstract: This paper empirically assesses the effect of monetary policy on asset price bubbles and aims to disentangle the competing predictions of theoretical bubble models. First, we take advantage of the model averaging feature of Principal Component Analysis to estimate bubble indicators, for the stock, bond and housing markets in the United States and Euro area, based on the structural, econometric and statistical approaches proposed in the literature to measure bubbles. Second, we assess the linear and non-linear effect of monetary shocks on these bubble components using local projections. The main result of this paper is that monetary policy does not affect asset price bubble components, except for the US stock market for which we find evidence in favor of the prediction of rational bubble models.
    Keywords: Asset price bubbles, Monetary policy, Quantitative Easing, Federal Reserve, ECB
    JEL: E44 G12 E52
    Date: 2017–02

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