nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒03‒19
twenty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Do central banks respond timely to developments in the global economy? By Hilde C. Bjornland; Leif Anders Thorsrud; Sepideh Khayati Zahiri
  2. Inflation Targeting and the Forward Bias Puzzle in Emerging Countries By Dramane Coulibaly; Hubert Kempf
  3. Czech Magic; Implementing Inflation-Forecast Targeting at the CNB By Kevin Clinton; Tibor Hlédik; Tomás Holub; Douglas Laxton; Hou Wang
  4. Has the Fed responded to house and stock prices? A time-varying analysis By Knut Are Aastveit; Francesco Furlanetto; Francesca Loria
  5. Inflation-Forecast Targeting for India; An Outline of the Analytical Framework By Jaromir Benes; Kevin Clinton; Asish George; Joice John; Ondra Kamenik; Douglas Laxton; Pratik Mitra; G.V. Nadhanael; Hou Wang; Fan Zhang
  6. Understanding Benign Liquidity Traps: The Case of Japan By Homburg, Stefan
  7. The Joint Dynamics of U.S. and Euro-area Inflation Rates: Expectations and Time-varying Uncertainty. By O. Grishchenko; S. Mouabbi; J.-P. Renne
  8. Case Study of the Moldovan Bank Fraud: Is Early Intervention the Best Central Bank Strategy to Avoid Financial Crises? By Alexandru Monahov; Thomas Jobert
  9. Designing a Simple Loss Function for Central Banks: Does a Dual Mandate Make Sense? By Davide Debortoli; Jinill Kim; Jesper Lindé; Ricardo Nunes
  10. Forward Guidance under Disagreement - Evidence from the Fed’s dot projections By Detmers, Gunda-Alexandra
  11. Show me the money: the monetary policy risk premium By Ozdagli, Ali K.; Velikov, Mihail
  12. Currency Wars or Efficient Spillovers? A General Theory of International Policy Cooperation By Anton Korinek
  13. Optimal Monetary Policy under Rigid Wages and Decreasing Returns By Kohlbrecher, Britta
  14. Investigating First-Stage Exchange Rate Pass-Through : Sectoral and Macro Evidence from Euro Area Countries By Christophe RAULT; Nidhaleddine BEN CHEIKH
  15. Agency Costs and the Monetary Transmission Mechanism By Reiter, Michael; Sveen, Tommy; Weinke, Lutz
  16. Monetary Policy, Hot Money and Housing Price Growth across Chinese Cities By Xiaoyu Huang; Tao Jin; Ji Zhang
  17. Hoarding international reserves and global liquidity expansion, what are the links and do they matter? By Nady Rapelanoro
  18. Globalization in the Periphery: Monetary Policy: What is Gained, What is Lost By Graciela Laura Kaminsky
  19. On wartime money finance in the Japanese occupied territories during the Pacific War: The case of instant reserve banks as bad central banks By SAITO, Makoto
  20. Money and Credit; Theory and Applications By Liang Wang; Randall Wright; Lucy Qian Liu
  21. Information Asymmetry and Financial Dollarization in Sub-Saharan Africa By Asongu, Simplice; Raheem, Ibrahim; Tchamyou, Venessa

  1. By: Hilde C. Bjornland; Leif Anders Thorsrud; Sepideh Khayati 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
    JEL: C11 C53 C55 E58 F17
    Date: 2017–03
  2. By: Dramane Coulibaly; Hubert Kempf
    Abstract: Based on quarterly data on 31 emerging countries (among which 16 are inflation targeting countries) from 1990Q1 to 2014Q3, we obtain a strong support for the conjecture that the implementation of inflation targeting weakens the Fisherian relation between expected depreciation and the interest rate differential (uncovered interest parity condition) and thus is conducive to the appearance of the forward bias puzzle in emerging countries. We show that this reects the performance of inflation targeting regimes in lowering the level and volatility of inflation which leads non-Fisherian fundamentals to be predominant. Our finding holds when controlling for country-specific effects, time-specific effects, global disinflationation, exchange rate management and using different econometric techniques.
    Keywords: Inflation targeting, uncovered interest parity, forward bias puzzle, emerging countries.
    JEL: E31 E52 F31
    Date: 2017
  3. By: Kevin Clinton; Tibor Hlédik; Tomás Holub; Douglas Laxton; Hou Wang
    Abstract: This paper describes the CNB’s experience implementing an inflation-forecast targeting (IFT) regime, and the building of a system for providing the economic information that policymakers need to implement IFT. The CNB’s experience has been very successful in establishing confidence in monetary policy in the Czech Republic and should provide useful guidance for other central banks that are considering adopting an IFT regime.
    Keywords: Inflation targeting;Czech Republic;Central banks;Monetary policy;Forecasting models;Inflation Targeting, Monetary Policy, Optimal Control
    Date: 2017–01–30
  4. By: Knut Are Aastveit (Norges Bank (Central Bank of Norway)); Francesco Furlanetto (Norges Bank (Central Bank of Norway)); Francesca Loria
    Abstract: In this paper we use a structural VAR model with time-varying parameters and stochastic volatility to investigate whether the Federal Reserve has responded systematically to asset prices and whether this response has changed over time. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to inflation, the output gap, house prices and stock prices. We find some time variation in the coefficients for house prices and stock prices but fairly stable coefficients over time for inflation and the output gap. Our results indicate that the systematic component of monetary policy in the US i) attached a positive weight to real house price growth but lowered it prior to the crisis and eventually raised it again and ii) only episodically took real stock price growth into account.
    Keywords: Bayesian VAR, Time-varying parameters, Monetary policy, House prices, Stock market
    JEL: C32 E44 E52 E58
    Date: 2017–03–07
  5. By: Jaromir Benes; Kevin Clinton; Asish George; Joice John; Ondra Kamenik; Douglas Laxton; Pratik Mitra; G.V. Nadhanael; Hou Wang; Fan Zhang
    Abstract: India formally adopted flexible inflation targeting (FIT) in June 2016 to place price stability, defined in terms of a target CPI inflation, as the primary objective of monetary policy. In this context, the paper draws on Indian macroeconomic developments since 2000 and the experience of other countries that adopted FIT to bring out insights on how credible policy with an emphasis on a strong nominal anchor can reduce the impact of supply shocks and improve macroeconomic stability. For illustrating the key issues given the unique structural characteristics of India and the policy options under an FIT framework, the paper describes an analytical framework using the core quarterly projection model (QPM). Simulations of the QPM are carried out to illustrate the monetary policy responses under different types of uncertainty and to bring out the importance of gaining credibility for improving monetary policy efficacy.
    Keywords: Inflation targeting;India;Disinflation;Price stabilization;Monetary policy;Forecasting models;inflation targeting; Reserve Bank of India; inflation episodes in India; forecasting models; monetary policy models; model calibration; monetary policy rules; monetary policy simulations.
    Date: 2017–02–13
  6. By: Homburg, Stefan
    Abstract: Japan has been in a benign liquidity trap since the 1990s. In a benign liquidity trap, interest rates approach zero and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper introduces a monetary general equilibrium model that is compatible with Japan’s performance and resolves puzzles associated with liquidity traps. Possible conclusions for Anglo-Saxon countries and eurozone members are also discussed
    JEL: E31 E43 E52
    Date: 2016
  7. By: O. Grishchenko; S. Mouabbi; J.-P. Renne
    Abstract: We use several U.S. and euro-area surveys of professional forecasters to estimate a dynamic factor model of inflation with time-varying uncertinty. We obtain survey-consistent distributions of future inflation at any horizon, both in the United States and in the euro area. Our methodology allows us to compute, in closed form, survey-consistent measures of inflation expectations, inflation uncertainty, inflation expectations anchoring, deflation probabilities and U.S. and euro-area inflation co-movements. Our results suggest strong commonalities between inflation dynamics in the two economies.
    Keywords: inflation, surveys of professional forecasters, dynamic factor model with stochastic volatility, term structure of inflation expectations and inflation uncertainty, anchoring of inflation expectations
    JEL: C32 E31 E44
    Date: 2017
  8. By: Alexandru Monahov (Université Côte d'Azur; GREDEG CNRS); Thomas Jobert (Université Côte d'Azur; GREDEG CNRS)
    Abstract: In this paper, we study the means by which a billion dollar fraud that was perpetuated in the Moldovan banking sector evolved into a severe financial crisis in which the Central Bank’s inaction came under scrutiny. We examine the financial operations through which money was taken out of the banking system and reconstruct the fraudulent schemes that led to the demise of three systemically important banks. We also create an agent-based simulation of the banking system which replicates the pre-crisis environment and the fraudulent schemes to determine whether Central Bank intervention could have improved the outcome of the crisis.
    Keywords: Financial Fraud, Prudential supervision, Central Bank Intervention, Agent Based Model, Multi-Agent Simulation
    JEL: C61 C63 E58 E65 G28
    Date: 2017–03
  9. By: Davide Debortoli; Jinill Kim; Jesper Lindé; Ricardo Nunes
    Abstract: Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.
    Keywords: Central banks’ objectives, simple loss function, monetary policy design, sticky prices and sticky wages, DSGE models
    JEL: C32 E58 E61
    Date: 2017–03
  10. By: Detmers, Gunda-Alexandra
    Abstract: This paper compares the effectiveness of date- and state-based forward guidance issued by the Federal Reserve since mid-2011 accounting for the influence of disagreement within the FOMC. I find that the Fed’s forward guidance reduces the sensitivity of interest rates to macroeconomic news. The sensitivity shrinkage is stronger in the case of date-based forward guidance due to its unconditional nature. Yet, high levels of disagreement as published through the FOMC’s dot projections since 2012 partially restore sensitivity to macroeconomic news. Thus, disagreement appears to lower the information content of forward guidance and to weaken the Fed’s commitment as perceived by financial markets.
    JEL: E52 E58 E43
    Date: 2016
  11. By: Ozdagli, Ali K. (Federal Reserve Bank of Boston); Velikov, Mihail (Federal Reserve Bank of Richmond)
    Abstract: We study how monetary policy affects the cross-section of expected stock returns. For this purpose, we create a parsimonious monetary policy exposure (MPE) index based on observable firm characteristics that are theoretically linked to how firms react to monetary policy. We find that stocks whose prices react more positively to expansionary monetary policy surprises earn lower average returns. This finding is consistent with the intuition that monetary policy is expansionary in bad economic times when the marginal value of wealth is high, and thus high MPE stocks serve as a hedge against bad times. A long-short trading strategy designed to exploit this effect achieves an annualized value-weighted return of 9.96 percent with an associated Sharpe Ratio of 0.93 between 1975 and 2015. This return premium cannot be explained by standard factor models and survives a battery of robustness tests.
    Keywords: monetary policy; asset pricing; risk factors
    JEL: E12 E31 E44 E52 G12 G14
    Date: 2016–12–01
  12. By: Anton Korinek
    Abstract: In an interconnected world, national economic policies regularly lead to large international spillover effects, which frequently trigger calls for international policy cooperation. However, the premise of successful cooperation is that there is a Pareto inefficiency, i.e. if there is scope to make some nations better off without hurting others. This paper presents a first welfare theorem for open economies that defines an efficient benchmark and spells out the conditions that need to be violated to generate inefficiency and scope for cooperation. These are: (i) policymakers act competitively in the international market, (ii) policymakers have sufficient external policy instruments and (iii) international markets are free of imperfections. Our theorem holds even if each economy suffers from a wide range of domestic market imperfections and targeting problems. We provide examples of current account intervention, monetary policy, fiscal policy, macroprudential policy/capital controls, and exchange rate management and show that the resulting spillovers are Pareto efficient, as long as the three conditions are satisfied. Furthermore, we develop general guidelines for how policy cooperation can improve welfare when the conditions are violated.
    Keywords: Open economies;Current account;Intervention;Monetary policy;Fiscal policy;Macroprudential Policy;Capital controls;Exchange rate management;Spillovers;Economic theory;General equilibrium models;first welfare theorem, international policy cooperation, spillovers, currency wars
    Date: 2017–02–10
  13. By: Kohlbrecher, Britta
    Abstract: This paper is the first to study optimal Ramsey monetary policy in a search and matching model that combines real wage rigidity and decreasing returns to scale in production. Adding decreasing returns to scale significantly reduces the trade-off between employment and inflation stabilization usually associated with real wage rigidity. As firms adjust employment in response to an aggregate productivity shock, the resulting change in the marginal product of labor partly offsets the effect of a rigid real wage on marginal costs. The effect is quantitatively important. Optimal inflation volatility is reduced by a factor of four compared to a model with constant returns.
    JEL: E24 E52 J64
    Date: 2016
  14. By: Christophe RAULT; Nidhaleddine BEN CHEIKH
    Date: 2017
  15. By: Reiter, Michael (Institute for Advanced Studies, Vienna); Sveen, Tommy (BI Norwegian Business School); Weinke, Lutz (Humboldt Universitaet zu Berlin)
    Abstract: Once New Keynesian (NK) theory (see, e.g., Woodford 2003) is combined with a standard model of investment (see, e.g., Thomas 2002), the resulting framework loses its ability to generate a realistic monetary transmission mechanism. This is the puzzle uncovered in Reiter et al. (2013). The simple economic reason behind it is the unrealistically large interest rate elasticity of investment, as implied by standard investment theory. In order to address this puzzle we develop a NK model featuring fully flexible investment combined with a financial friction in the spirit of Carlstrom and Fuerst (1997). This model is used to isolate the quantitative importance of the financial friction for the monetary transmission mechanism.
    Keywords: Financial Frictions, Sticky Prices
    JEL: E22 E31 E32
    Date: 2017–03
  16. By: Xiaoyu Huang; Tao Jin; Ji Zhang
    Abstract: We use a dynamic hierarchical factor model to identify the national, regional, and local factors of the city-level housing price growth in China from 2005 to 2014. We find that city-specific factors account for a large proportion of the variations in city-level housing price growth for most cities. However, the national factor also plays an important role in explaining the fluctuations of city-level housing price growth rates especially after 2009---the average explaining power of the national factor for housing price growth fluctuations reaches 18%. We use a VAR model to investigate the driving forces of the national factor and find that unexpected PBoC policy and hot money flow changes can affect the national housing prices significantly. A positive monetary policy shock has a significant negative impact on the national factor, which lasts for more than two years. Meanwhile, a positive hot money shock does cause a significant increase in the national factor. However, this effect is relatively transitory and reverses in half a year. Monetary policy also affects the national factor by responding positively to positive hot money and price shocks---the reversed effect of hot money shocks and the negative impact of positive price shocks on the national factor result from the tightening of monetary policy triggered by these shocks.
    Date: 2017–03
  17. By: Nady Rapelanoro
    Abstract: Global liquidity expansion raises concerns amongst regulators and policy makers, especially since its evolution is closely related to destabilizing phenomena’s, particularly for the financial sector. Despite that those effects are largely investigated in the advanced countries, the literature is scarce concerning the effects for the emerging and developing economies. In this paper, our objective is to investigate the links between the hoarding reserves observed in the Asian emerging economies and the development of the global liquidity conditions in the core countries. For this purpose, we study the theoretical relationships between the two phenomena and provide an empirical approach that evaluates the influences of the growing demand for reserves in the emerging countries into the main reserves issuing country. We particularly focus on macroeconomics consequences and the effects on the developments of global liquidity conditions.
    Keywords: SVARs, Global liquidity, Emerging countries, International reserves.
    JEL: C32 E42 E43 F41
    Date: 2017
  18. By: Graciela Laura Kaminsky (George Washington University)
    Date: 2016
  19. By: SAITO, Makoto
    Abstract: This paper explores how the Japanese government financed war expenditures locally in the occupied territories during the Pacific War. First, the reserve banks, founded instantly by the government, funded the occupation forces by issuing their bank notes in North/Central China, and Southern Regions. Second, the Japanese government financed military expenses by requesting the existing central banks to issue their legal tenders in Manchuria, Indochina, and Thailand. In the years 1943-1945, the first method in the regions with sharp inflations yielded 559.7 billion yen at face value, but only 7.2 billion yen at purchasing power parity (PPP), while the second in the regions with relatively low inflations generated only 5.8 billion yen at face value, but still 3.6 billion yen at PPP. In the former regions, the occupation forces did not acquire that much purchasing power, while in the latter regions, non-negligible portions of the occupied countries' nominal GDP were transferred to the occupation forces.
    Keywords: money finance, wartime finance, occupation, central bank, reserve bank
    Date: 2017–02
  20. By: Liang Wang; Randall Wright; Lucy Qian Liu
    Abstract: We develop a theory of money and credit as competing payment instruments, then put it to work in applications. Buyers can use cash or credit, with the former (latter) subject to the inflation tax (transaction costs). Frictions that make the choice of payment method interesting also imply equilibrium price dispersion. We deliver closed-form solutions for money demand. We then show the model can simultaneously account for the price-change facts, cash-credit shares in micro payment data, and money-interest correlations in macro data. We analyze the effects of inflation on welfare, price dispersion and markups. We also describe nonstationary equilibria as self-fulfilling prophecies, which is standard, except here it entails dynamics in the price distribution.
    Keywords: Money;Credit;Demand for money;Sticky prices;Welfare;Econometric models;Money, Credit, Inflation, Price Dispersion, Sticky Prices
    Date: 2017–01–27
  21. By: Asongu, Simplice; Raheem, Ibrahim; Tchamyou, Venessa
    Abstract: Financial dollarization in Sub-Saharan Africa is the most persistent compared to other regions of the world. This study complements the existing scant literature on dollarization in Africa by assessing the role of information sharing offices (public credit registries and private credit bureaus) on financial dollarization in 26 countries of SSA for the period 2001-2012. The empirical evidence is based on Ordinary Least Squares (OLS) and Generalised Method of Moments (GMM). The findings show that information sharing offices (which are designed to reduce information asymmetry) in the banking industry are a deterrent to dollarization. Policy implications are discussed.
    Keywords: Dollarization; Openness; Information Asymmetry; Africa
    JEL: E31 E41 G20 O16 O55
    Date: 2016–11

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