nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒03‒26
eighteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Central Bank Policy Rates: Are They Cointegrated? By Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana
  2. Gold in Monetary Transmission - Some Evidence of Nonlinearities By Shubhasis Dey
  3. 'Monetary Policy with Sectoral Trade-offs' By Ivan Petrella; Raffaele Rossi; Emiliano Santoro
  4. Historical Events and the Gold Price By Shubhasis Dey
  5. Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations By Jordi Galí
  6. High Trend Inflation and Passive Monetary Detours According to the long-run Taylor principle (Davig and Leeper, 2007), a central bank can deviate to a passive monetary policy and still obtain determinacy if a sufficiently aggressive monetary policy is expected for the future. Does this principle hold true when both monetary and fiscal policies can switch and there is positive trend inflation? We find that passive monetary detours are no longer possible when trend inflation is high, whatever fiscal policy is in place. This has important policy implications in terms of flexibility and monetary-fiscal authorities coordination. By Guido Ascari; Anna Florio; Alessandro Gobbi
  7. The Skewness of the Price Change Distribution : A New Touchstone for Sticky Price Models By Daniel Villar Vallenas; Shaowen Luo
  8. Monetary POlicy with Sectoral Trade-offs By Petrella, Ivan; Rossi, Rafaelle; Santoro, Emilio
  9. A summary of a survey on proposed African monetary unions By Simplice Asongu; Jacinta C. Nwachukwu; Vanessa S. Tchamyou
  10. Identifying Unconventional Monetary Policy Shocks By Kiyotaka NAKASHIMA; Masahiko SHIBAMOTO; Koji TAKAHASHI
  11. Exchange Rate Flexibility, Financial Market Openness and Economic Growth By Lee , Il Houng; Kim , Kyunghun; Kang , Eunjung
  12. The macroeconomic effects of quantitative easing in the Euro area : evidence from an estimated DSGE model By HOHBERGER, Stefan; PRIFTIS, Romanos; VOGEL, Lukas
  13. International Inflation Spillovers Through Input Linkages By Raphael A. Auer; Andrei A. Levchenko; Philip Saure
  14. Inflation and Economic Growth in a Schumpeterian Model with Endogenous Entry of Heterogeneous Firms By Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi; Liao, Chih-Hsing
  15. The Transmission of Monetary Policy through Bank Lending : The Floating Rate Channel By Filippo Ippolito; Ali K. Ozdagli; Ander Perez
  16. Two-sided Learning and Short-Run Dynamics in a New Keynesian Model of the Economy By Christian Matthes; Francesca Rondina
  17. How Would US Banks Fare in a Negative Interest Rate Environment? By David M. Arseneau
  18. Inflation dynamics in pre and post deregulation era in Ghana: Do petroleum prices have any influence? By Addae, Edna; Ackah, Ishmael

  1. By: Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana
    Abstract: This paper analyses the stochastic properties of and the bilateral linkages between the central bank policy rates of the US, the Eurozone, Australia, Canada, Japan and the UK using fractional integration and cointegration techniques respectively. The univariate analysis suggests a high degree of persistence in all cases: the fractional integration parameter d is estimated to be above 1, ranging from 1.26 (US) to 1.48 (UK), with the single exception of Japan, for which the unit root null cannot be rejected. Concerning the bivariate results, Australian interest rates are found to be cointegrated with the Eurozone and UK ones, Canadian rates with the UK and US ones, and Japanese rates with the UK ones. The increasing degree of integration of international financial markets and the coordinated monetary policy responses following the global financial crisis might both account for such linkages.
    Keywords: Interest Rates; Long memory; Fractional integration and cointegration
    JEL: C22 C32 E47
    Date: 2017
  2. By: Shubhasis Dey (Indian Institute of Management Kozhikode)
    Abstract: As a commodity, gold occupies a special place in Indian psyche. With formal capital markets still out of reach for a large section of the Indian population, gold, beyond its traditional use as jewellery, also acts as a store of value, especially under an environment of moderately high inflation. In this paper, we further explore the asset price channel of monetary transmission by endogenizing gold price inflation within the Indian macroeconomic system. Supported by empirical tests in favor of such an inclusion, a linear VAR model results indicate that gold seems to act as a shock absorber by way of shielding other macroeconomic variables, especially GDP growth, from the influence monetary policy shocks. In India, the demand for gold is primarily met by imports. Thus, the dynamics of gold, real exchange rate and inflation are likely to be interlinked in a nonlinear manner. Based on estimation of a TVAR model and simulation methods of inference, we find that there are significant differences in the macroeconomic dynamics of the Indian economy under high and low inflation regimes. Moreover, the TVAR model results suggest that gold seems to matter more in the Indian macroeconomic system during episodes of high inflation.
    Keywords: Inflation regime; gold price; hedge; TVAR
    JEL: E31 E44 E47 E52 C32
    Date: 2016–06
  3. By: Ivan Petrella; Raffaele Rossi; Emiliano Santoro
    Abstract: We formulate a two-sector New Keynesian economy that features sectoral heterogeneity along three main dimensions: price stickiness, consumption goods durability, and the inter-sectoral trade of input materials. The combination of these factors deeply affects inter-sectoral and intra-sectoral stabilization. In this context, we examine the welfare properties of simple rules that adjust the policy rate in response to the output gap and alternative measures of final goods price inflation. Aggregating durable and non-durable goods prices depending on the relative frequency of sectoral price-setting may induce a severe bias. Due to factor demand linkages, the cost of production in one sector is influenced by price-setting in the other sector of the economy. As a result, measures of aggregate inflation that weigh sectoral price dynamics based on the relative degree of price rigidity do not allow the central bank to keep track of the effective speeds of sectoral price adjustment.
    Date: 2017
  4. By: Shubhasis Dey (Indian Institute of Management Kozhikode)
    Abstract: Gold prices are quick to respond to world events. However, some of these events stand out, in the sense that they have had significant influence on the conditional mean and volatility of gold prices. In this paper, we have taken 30 historical events ranging from the suspension of dollar’s convertibility into gold in August 1971 to the end of the Quantitative Easing in the US in October 2014 and studied their impact on real gold prices. We find that the US economy and the current dollar-based monetary system is still the main driver of real gold prices. Our empirical exercise in this paper finds that the mean and variance of real gold prices have experienced significant changes primarily when the historical events in question either reinforced or challenged the economic dominance of the US and the role of dollar in the global monetary system.
    Keywords: Gold prices; historical events; hedge; safe haven
    JEL: E4 G1 C52 C58
    Date: 2016–05
  5. By: Jordi Galí
    Abstract: I develop an extension of the basic New Keynesian model with overlapping generations of finitely-lived agents. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria featuring asset price bubbles. I examine the conditions under which bubbly equilibria may emerge and the implications for the design of monetary policy.
    Keywords: monetary policy rules, stabilization policies, asset price volatility
    JEL: E44 E52
    Date: 2017–03
  6. By: Guido Ascari (Department of Economics, University of Oxford); Anna Florio (Department of Management, Economics and Industrial Engineering, Politecnico di Milano); Alessandro Gobbi (Department of Economics and Management, University of Pavia)
    Keywords: trend inflation, monetary-fiscal policy interactions, Markov-switching, determinacy
    JEL: E5
    Date: 2017–03
  7. By: Daniel Villar Vallenas; Shaowen Luo
    Abstract: We present a new way of empirically evaluating various sticky price models used to assess the degree of monetary non-neutrality. While menu cost models uniformly predict that price change skewness and dispersion fall with inflation, in the Calvo model both rise. However, CPI price data from the late 1970's onwards shows that skewness does not fall with inflation, while dispersion does. We develop a random menu cost model that, with a menu cost distribution that has a strong Calvo feature, can match the empirical patterns found. The model therefore exhibits much more monetary non-neutrality than existing menu cost models.
    Keywords: Inflation ; Monetary policy ; Prices, business fluctuations, and cycles
    JEL: E31 E32 E47 E52
    Date: 2017–03–10
  8. By: Petrella, Ivan (Warwick Business School and CEPR); Rossi, Rafaelle (University of Manchester); Santoro, Emilio (University of Copenhagen)
    Abstract: We formulate a two-sector New Keynesian economy that features sectoral heterogeneity along three main dimensions: price stickiness, consumption goods durability, and the inter-sectoral trade of input materials. The combination of these factors deeply a§ects inter-sectoral and intra-sectoralstabilization. In this context, we examine the welfare properties of simple rules that adjust thepolicy rate in response to the output gap and alternative measures of final goods price inflation. Aggregating durable and non-durable goods prices depending on the relative frequency of sectoral price-setting may induce a severe bias. Due to factor demand linkages, the cost of production in one sector is ináuenced by price-setting in the other sector of the economy. As a result, measures of aggregate inflation that weigh sectoral price dynamics based on the relative degree of price rigidity do not allow the central bank to keep track of the effective speeds of sectoral price adjustment
    Keywords: durable goods ; input-output interactions ; monetary policy ; interest rate rules JEL Classification Numbers: E23 ; E32 ; E52
    Date: 2017
  9. By: Simplice Asongu (Yaoundé/Cameroun); Jacinta C. Nwachukwu (Coventry University, UK); Vanessa S. Tchamyou (Yaoundé/Cameroon)
    Abstract: This review summarises a survey of about 70 empirical studies on proposed African monetary unions published during the past fifteen years. Four main strands are outlined in four tables. They include the: (i) West African Monetary Zone (WAMZ), (ii) East African Monetary Union (EAMU), (iii) Southern African Monetary Union (SAMU) and (iv) African Monetary Union (AMU). A number of concerns are apparent from the feasibility and/or desirability of potential monetary unions. They are variations in: empirical strategies, selection of variables, considered periodicities and sampled countries. The Hegelian dialectics are used to establish selective expansion as the predominant mode of monetary integration. Some studies make the case for strong institutions and pegs as alternatives to currency unions. The employment of cluster analysis, distinguishing shocks from responses in the examination of business cycle synchronisation and the disaggregation of panels into sub-samples provide more subtle policy implications.
    Keywords: Currency Area; Policy Coordination; Africa
    JEL: F15 F36 F42 O55 P52
    Date: 2017–03
  10. By: Kiyotaka NAKASHIMA (Faculty of Economics, Konan University, Japan); Masahiko SHIBAMOTO (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Koji TAKAHASHI (Department of Economics, University of California, San Diego, USA)
    Abstract: This paper proposes a novel method for identifying unconventional monetary policy shocks. Our identifying method incorporates the movement in two unconventional monetary policy indicators, namely the size and composition of the central bank’s balance sheet, after its policy decisions. Under some restrictions imposed in the vector autoregressive model, we identify two unconventional policy shocks, quantitative and qualitative shocks, as news shocks that best portend the current and future paths of the unconventional policy indicators in response to the policy shocks. The qualitative easing shocks have expansionary effects on real economy, while the quantitative easing shocks have contractionary effects.
    Date: 2017–03
  11. By: Lee , Il Houng (Bank of Korea - Monetary Policy Department; Korea Institute for International Economic Policy); Kim , Kyunghun (Korea Institute for International Economic Policy); Kang , Eunjung (Korea Institute for International Economic Policy)
    Abstract: With global recovery not in sight, along with calls for stronger structural reform, international policy coordination is again under spotlight. Correcting global imbalance would contribute towards closing the demand gap. Emerging economies in particular should allow greater exchange rate flexibility and not intervene in the foreign exchange market to reflect fundamentals. Yet, the impact of greater exchange rate flexibility is unclear as they also struggle to keep their growth momentum alive and hedge against greater exposure to potential capital reversal than ever before. With the loss of monetary policy independence, emerging markets (EMs) are running out of policy options. Against this background, unless international policy coordination is fundamentally recast, a comprehensive review of all emerging market economies’ policy options are in order, including both macro policy instruments, micro measures, and global safety net aimed at attaining the best possible solution to escaping global recession.
    Keywords: Exchange Rate Flexibility; Financial Market; Economic Growth; Emerging Economies; Monetary Policy Independence
    JEL: F31 F33 F43 G15
    Date: 2016–04–20
  12. By: HOHBERGER, Stefan; PRIFTIS, Romanos; VOGEL, Lukas
    Abstract: This paper analyses the macroeconomic effects of the ECB's quantitative easing programme using an open-economy DSGE model estimated with Bayesian techniques. Using data on government debt stocks and yields across maturities we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to EA year-on-year output growth and inflation of up to 0.4 and 0.5 pp in the standard linearized version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact up to 1.0 and 0.7 pp, respectively.
    Keywords: Quantitative easing; Portfolio rebalancing; Bayesian estimation; Open-economy DSGE model; Real GDP
    JEL: E44 E52 E53 F41
    Date: 2017
  13. By: Raphael A. Auer (Bank for International Settlements and CEPR); Andrei A. Levchenko (University of Michigan, NBER, and CEPR); Philip Saure (Swiss National Bank)
    Abstract: We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disinflation and high inflation.
    Keywords: international inflation synchronization, input linkages
    JEL: F33 F41 F42
    Date: 2017–02–15
  14. By: Chu, Angus C.; Cozzi, Guido; Furukawa, Yuichi; Liao, Chih-Hsing
    Abstract: This study develops a Schumpeterian growth model with endogenous entry of heterogeneous firms to analyze the effects of monetary policy on economic growth via a cash-in-advance constraint on R&D investment. Our results can be summarized as follows. In the special case of a zero entry cost, an increase in the nominal interest rate decreases R&D, the arrival rate of innovations and economic growth as in previous studies. However, in the general case of a positive entry cost, an increase in the nominal interest rate affects the distribution of innovations that are implemented and would have an inverted-U effect on economic growth if the entry cost is sufficiently large. We also calibrate the model to aggregate data of the US economy and find that the growth-maximizing inflation rate is about 3%, which is consistent with recent empirical estimates.
    Keywords: monetary policy, inflation, economic growth, heterogeneous firms
    JEL: E41 O3 O4
    Date: 2017–03
  15. By: Filippo Ippolito; Ali K. Ozdagli; Ander Perez
    Abstract: We describe and test a mechanism through which outstanding bank loans affect the firm balance sheet channel of monetary policy transmission. Unlike other debt, most bank loans have floating rates mechanically tied to monetary policy rates. Hence, monetary policy-induced changes to floating rates affect the liquidity, balance sheet strength, and investment of financially constrained firms that use bank debt. We show that firms---especially financially constrained firms---with more unhedged bank debt display stronger sensitivity of their stock price, cash holdings, sales, inventory, and fixed capital investment to monetary policy. This effect disappears when policy rates are at the zero lower bound, which further supports the floating rate mechanism and reveals a new limitation of unconventional monetary policy. We argue that the floating rate channel can have a significant macroeconomic effect due to the large size of the aggregate stock of unhedged floating-rate business debt, an effect at least as important as the bank lending channel through new loans.
    Keywords: Bank debt ; Financial constraints ; Firm balance sheet channel ; Floating interest rates ; Hedging ; Monetary policy transmission
    JEL: G21 G32 E52
    Date: 2017–03
  16. By: Christian Matthes (Federal Reserve Bank of Richmond, Richmond, VA); Francesca Rondina (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: We investigate the role of asymmetric information and learning in a New Keynesian framework in which private agents and the central bank have imperfect knowledge of the economy. We assume that agents employ the data that they observe to form beliefs about the relationships that they do not know, use their beliefs to decide on actions, and revise these beliefs through a statistical learning algorithm as new information becomes available. Using simulations, we show that asymmetric information and learning can significantly change the dynamics of the variables of the model.
    Keywords: Asymmetric Information, Learning, Expectations, Monetary Policy
    JEL: E37 E47 E52
    Date: 2017
  17. By: David M. Arseneau
    Abstract: This paper uses a unique new data set to empirically examine bank-level expectations regarding the impact of negative short-term interest rates on bank profitability through net interest margins. The results show that banks differ significantly in their views regarding how profits might be affected in a negative interest rate environment and that much of this heterogeneity can be explained by cross-bank differences in the provision of liquidity services. We find that those banks that are more active in providing liquidity to borrowers anticipate suffering reduced profitability through declines in interest income on short-duration assets. The opposite is true of banks that are more active in providing liquidity to depositors as these banks expect to benefit from lower short-term funding costs. However, we find that these distributional effects wash out at the aggregate level, as liquidity provision is sufficiently well diversified across all banks.
    Keywords: Banking conditions ; Net interest margins ; Unconventional monetary policy
    JEL: E43 E44 G21
    Date: 2017–03
  18. By: Addae, Edna; Ackah, Ishmael
    Abstract: The study looks at the impact of price of petroleum prices on inflation in the Ghanaian economy in the pre and post deregulation era and associated direction of causality as well as the extent of pass through of high international petroleum products price to the domestic retail market. An ARDL model was applied on time series monthly data of various petroleum fuel prices as well as exchange rate.A pass-through formula use by Baig et al, (2007) was also applied. The results reveal that changes in LPG, Kerosene and premium prices have marginal impact on inflation. The pass through analysis revealed Ghana has not pass through more than 50% of increase price of international or import petroleum product of gasoline, kerosene and LPG to the ordinary consumers in the period of the study and this was lower in the post deregulation than pre deregulation. The study therefore recommends full deregulation to continue since it favours lower pass through of fuel price increase in the world market to ordinary consumers whiles may consider gasoline and premium price increase at the expense of kerosene and liquefied petroleum gas price if inflation is to be shielded from fuel price increase.
    Keywords: Inflation, Deregulation, Petroleum Prices, Ghana
    JEL: E3 E31 Q3 Q31 Q4
    Date: 2017–03–07

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