nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒04‒02
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary policy's rising FX impact in the era of ultra-low rates By Ferrari, Massimo; Kearns, Jonathan; Schrimpf, Andreas
  2. Exchange Rate Policies at the Zero Lower Bound By Amador, Manuel; Bianchi, Javier; Bocola, Luigi; Perri, Fabrizio
  3. Term Structure Models with Negative Interest Rates By Yoichi Ueno
  4. The globalisation of inflation: the growing importance of global value chains By Auer, Raphael; Borio, Claudio; Filardo, Andrew J
  5. Banks' exposure to interest rate risk and the transmission of monetary policy By Matthieu Gomez; Augustin Landier; David Sraer; David Thesmar
  6. The (unintended?) consequences of the largest liquidity injection ever By Matteo Crosignani; Miguel Faria-e-Castro; Luís Fonseca
  7. Macroprudential policy with liquidity panics By Daniel Garcia-Macia; Alonso Villacorta
  8. International Inflation Spillovers Through Input Linkages By Auer, Raphael; Levchenko, Andrei A.; Sauré, Philip
  9. The Cost Channel Effect of Monetary Transmission: How Effective Is the ECB’s Low Interest Rate Policy for Increasing Inflation? By Dorothea Schäfer; Andreas Stephan; Khanh Trung Hoang
  10. The Making of Hawks and Doves: Inflation Experiences on the FOMC By Malmendier, Ulrike M.; Nagel, Stefan; Yan, Zhen
  11. Classifying Exchange Rate Regimes: 15 Years Later By Eduardo Levy Yeyati; Federico Sturzenegger
  12. Varieties of Capital Flows: What Do We Know? By Eduardo Levy Yeyati; Jimena Zuniga
  13. The pre-crisis monetary policy implementation framework By Kroeger, Alexander; McGowan, John; Sarkar, Asani
  14. Empirical Evidence from a Japanese Lending Survey within the TVP-VAR Framework: Does the Credit Channel Matter for Monetary Policy? By Tatsuki Okamoto; Yoichi Matsubayashi
  15. International Evidence on Long-Run Money Demand By Benati, Luca; Lucas, Robert E.; Nicolini, Juan Pablo; Weber, Warren E.
  16. Uncertainty and Monetary Policy in Good and Bad Times By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  17. The RMB Central Parity Formation Mechanism after August 2015: A Statistical Analysis By Yin-Wong Cheung; Cho-Hoi Hui; Andrew Tsang
  18. Do central bank forecasts matter for professional forecasters? By Jacek Kotłowski
  19. Declining Japanese Yen and Inertia of the U.S. Dollar By OGAWA Eiji; MUTO Makoto
  20. Welfare Cost of Inflation: The Role of Price Markups and Increasing Returns to Production Specialization By Chang, Juin-Jen; Lai, Ching-Chong; Liao, Chih-Hsing
  21. The calm policymaker By Barrdear, John
  22. Transparency, Investor Information Acquisition, and Money Market Fund Risk Rebalancing during the 2011-12 Eurozone Crisis By Gallagher, Emily; Schmidt, Lawrence; Timmermann, Allan G; Wermers, Russ
  23. Global or domestic? Which shocks drive inflation in the small open economies? By Aleksandra Halka; Jacek Kotłowski
  24. International Transmission of U.S. Monetary Policy Surprises By Kim, Kyunghun
  25. Povincial Inflation Dynamics in Indonesia: Hybrid New Keynesian Phillips Curve Approach By Mr Insukindro; Chandra Utama
  26. The Role of Financial Depth on The Asymmetric Impact of Monetary Policy By Mustafa Caglayan; Ozge Kandemir Kocaaslan; Kostas Mouratidis
  27. Durations at the Zero Lower Bound By Richard Dennis

  1. By: Ferrari, Massimo; Kearns, Jonathan; Schrimpf, Andreas
    Abstract: We show that the FX impact of monetary policy has been growing significantly. We use a high-frequency event study of the joint response of fixed income instruments and exchange rates to monetary policy news from seven major central banks spanning 2004-2015. News affecting short maturity bonds have the strongest impact, highlighting the relevance of communication regarding the path of future policy. The FX impact of monetary policy is state-dependent and is stronger the lower is the level of interest rates. A greater adjustment burden falls onto the exchange rate, as rates are increasingly constrained by the effective lower bound.
    Keywords: event study; Exchange Rates; forward guidance; High Frequency Data; Unconventional Monetary Policy
    JEL: E52 E58 F31
    Date: 2017–03
  2. By: Amador, Manuel (Federal Reserve Bank of Minneapolis); Bianchi, Javier (Federal Reserve Bank of Minneapolis); Bocola, Luigi (Northwestern University); Perri, Fabrizio (Federal Reserve Bank of Minneapolis)
    Abstract: We study how a monetary authority pursues an exchange rate objective in an environment that features a zero lower bound (ZLB) constraint on nominal interest rates and limits to international arbitrage. If the nominal interest rate that is consistent with interest rate parity is positive, the central bank can achieve its exchange rate objective by choosing that interest rate, a well-known result in international finance. However, if the rate consistent with parity is negative, pursuing an exchange rate objective necessarily results in zero nominal interest rates, deviations from parity, capital inflows, and welfare costs associated with the accumulation of foreign reserves by the central bank. In this latter case, all changes in external conditions that increase inflows of capital toward the country are detrimental, while policies such as negative nominal interest rates or capital controls can reduce the costs associated with an exchange rate policy. We provide a simple way of measuring these costs, and present empirical support for the key implications of our framework: when interest rates are close to zero, violations in covered interest parity are more likely, and those violations are associated with reserve accumulation by central banks.
    Keywords: Capital flows; CIP deviations; Currency pegs; Foreign exchange interventions; International reserves; Negative interest rates
    JEL: F31 F32 F41
    Date: 2017–03–16
  3. By: Yoichi Ueno (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper proposes a new term structure model to generalize the Gaussian affine model and the Black model with an efficient and accurate solution method. The new model assumes that arbitrage between money or reserves and government bonds works but not perfectly. The new model enables us to quantify the effects of forward guidance, quantitative easing, and the negative interest rate policy. Estimation results for Switzerland, Germany, and Japan show that the new model outperforms both the Gaussian affine model and the Black model. Moreover, the results indicate that the power of arbitrage moves in tandem with basis swap spreads.
    Keywords: Term Structure Model, Monetary Policy, Negative Interest Rate, Basis Swap Spreads
    JEL: E43 E52 G12
    Date: 2017–03
  4. By: Auer, Raphael; Borio, Claudio; Filardo, Andrew J
    Abstract: Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional trade-based measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation.
    Keywords: global value chain; globalisation; inflation; input-ouput linkages; international inflation synchronisation; monetary policy; Phillips curve; production structure; Supply Chain
    JEL: E31 E52 E58 F02 F14 F41 F42 F62
    Date: 2017–03
  5. By: Matthieu Gomez; Augustin Landier; David Sraer; David Thesmar
    Abstract: We show that the cash-flow exposure of banks to interest rate risk, or income gap, affects the transmission of monetary policy shocks to bank lending and real activity. We first use a large panel of U.S. banks to show that the sensitivity of bank profits to interest rates increases significantly with measured income gap, even when banks use interest rate derivatives. We then document that, in the cross-section of banks, income gap predicts the sensitivity of bank lending to interest rates. The effect of income gap is larger or similar in magnitudes to that of previously identified factors, such as leverage, bank size or even asset liquidity. To alleviate the concern that this result is driven by the endogenous matching of banks and firms, we use loan-level data and compare the supply of credit to the same firm by banks with different income gap. This analysis allows us to trace the impact of banks’ income gap on firm borrowing capacity, investment and employment, which we find to be significant. JEL Classification: E52, G21, E44
    Keywords: interest rate risk, monetary policy, bank lending
    Date: 2016–06
  6. By: Matteo Crosignani; Miguel Faria-e-Castro; Luís 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. JEL Classification: E58, G21, G28, H63
    Keywords: Lender of Last Resort, Unconventional Monetary Policy, Sovereign Debt
    Date: 2016–12
  7. By: Daniel Garcia-Macia; Alonso Villacorta
    Abstract: We analyze the optimality of macroprudential policies in an environment where the role of the banking sector is to efficiently allocate liquid assets across firms. Informational frictions in the banking sector can lead to an interbank market freeze. Firms react to the breakdown of the banking system by inefficiently accumulating liquid assets by themselves. This reduces the demand for bank loans and bank profits, which further disrupts the financial sector and increases the probability of a freeze, inducing firms to hoard even more liquid assets. Liquidity panics provide a new rationale for stricter liquidity requirements, as this policy alleviates the informational frictions in the banking sector and paradoxically can end up increasing aggregate investment. On the contrary, policies encouraging bank lending can have the opposite effect. JEL Classification: G01, G21, G28
    Keywords: macroprudential policy, interbank market, liquidity panics
    Date: 2016–09
  8. By: Auer, Raphael; Levchenko, Andrei A.; Sauré, Philip
    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: global value chain; globalisation; inflation; input linkages; input-output linkages; international inflation synchronization; monetary policy; production structure; Supply Chain
    JEL: E31 E52 E58 F02 F14 F33 F41 F42 F62
    Date: 2017–03
  9. By: Dorothea Schäfer; Andreas Stephan; Khanh Trung Hoang
    Abstract: We examine whether monetary transmission during the financial and sovereign debt crisis was dominated by the cost channel or by the demand-side channel effect. We use two approaches to track down the potential passthrough of changes in the monetary policy rate to those in consumer prices. First, we utilize panel data from the German manufacturing industry. Second, we conduct time series analyses for Germany, Italy, and Spain. We find that when manufacturing firms’ interest costs drop, the changes in their respective industry’s price index are smaller one year later. This finding is consistent with the cost channel theory. Taken together, the results of both panel data and time series analyses imply that the ECB’s low interest rate policy has worked better for boosting inflation in Italy and Spain than in Germany
    Keywords: Inflation, cost channel, monetary transmission
    JEL: G01 E31
    Date: 2017
  10. By: Malmendier, Ulrike M.; Nagel, Stefan; Yan, Zhen
    Abstract: We show that personal experiences of inflation strongly influence the hawkish or dovish leanings of central bankers. For all members of the Federal Open Market Committee (FOMC) since 1951, we estimate an adaptive learning rule based on their lifetime inflation data. The resulting experience-based forecasts have significant predictive power for members' FOMC voting decisions, the hawkishness of the tone of their speeches, as well as the heterogeneity in their semi-annual inflation projections. Averaging over all FOMC members present at a meeting, inflation experiences also help to explain the federal funds target rate, over and above conventional Taylor rule components.
    JEL: D84 E03 E50
    Date: 2017–03
  11. By: Eduardo Levy Yeyati; Federico Sturzenegger
    Abstract: Levy Yeyati and Sturzenegger (2001, 2003, 2005) proposed an exchange rate regime classification based on cluster analysis to group countries according to the relative volatility of exchange rates and reserves, thereby shifting the focus from a de jure to de facto approach in the empirical analysis of exchange rate policy. This note extends the classification through 2014 and broadens the country sample, increasing the number of classified country-year observations from 3335 to 5616. Based on this extension, the note documents the main stylized facts in the 2000s, including the behavior of exchange rate policy around the global financial crisis, and the prevalence of floating regimes.
    JEL: F30 F33
    Date: 2016–06
  12. By: Eduardo Levy Yeyati; Jimena Zuniga
    Abstract: Capital flows have been the subject of key policy concern since the Brady plan launched the emerging markets asset class. Their massive volume, coupled with their volatile and procyclical nature, is often associated with a variety of financial and real risks: excess exchange rate volatility (gradual overvaluation and sharp corrections), dollar liquidity crunches, distressed asset sales, and crisis propensity. These risks have changed over time. Emerging market crises in the 1990s and 2000s were inherently driven by financial dollarization and balance sheet effects, the latter were intimately related with capital inflows in the form of growing foreign liability positions. But, now that financial dollarization has receded in the emerging market word (either through debt deleveraging or international reserve accumulation), the focus shifted to the macroeconomic effects of cross market flows, including extended periods of exchange rate misalignment and the amplification of business cycles in a context of large and persistent terms-of-trade shocks and global liquidity swings. Hence, the difficulty of evaluating capital flows based on data mostly from the 1990s and early 2000s. Hence, also, the emphasis on the recent empirical literature that revisits the issue with fresh data and an open mind. Capital flows cannot be addressed indistinctly or in isolation. Increasingly, academics and practitioners have flagged that different types of capital flows display different behaviors. Conventional wisdom tends to assume that, within portfolio flows, fixed income assets (bonds) are more harmful than equity in that they may introduce currency imbalances that may create deleterious balance sheet effects in the event of sharp exchange rate depreciation. By the same token, it is usually assumed that portfolio flows (including equity securities) are more volatile than foreign direct investment (FDI), because the latter is "sunk" in illiquid instruments that, precisely because of their illiquidity, are not prone to react to speculative motives or short-lived financial distress. However, even this simple order of riskiness deserves some reassessment. Within debt liabilities, a distinction needs to be made between foreign and local currency denominated instruments, at a time when foreign-currency instruments still dominate local-currency ones as emerging market investments; duration is another critical aspect to consider. Is equity "safer" than a long domestic currency bond from a macro prudential perspective?
    Date: 2015–05
  13. By: Kroeger, Alexander (Analysis Group); McGowan, John (Federal Reserve Bank of New York); Sarkar, Asani (Federal Reserve Bank of New York)
    Abstract: This paper describes the Federal Reserve’s framework for implementing monetary policy prior to the expansion of the Fed’s balance sheet during the financial crisis. The pre-crisis framework was a reserve-scarcity regime in which banks demanded reserves in order to meet minimum reserve requirements. The New York Fed’s open market trading desk implemented monetary policy by carefully managing the supply of reserves, primarily through the conduct of daily repo operations with primary dealers. The open market trading desk was able to achieve its monetary policy implementation objectives efficiently in the pre-crisis period without impairing financial market functioning. However, the framework deployed was complex relative to alternative implementation frameworks and required substantial intraday overdrafts from the Fed to meet banks’ short-term payment needs. Once its balance sheet expanded in response to the financial crisis, the Fed was no longer able to rely on the pre-crisis framework to control the policy rate. Nevertheless, the open market trading desk successfully controlled the policy rate using the new, post-crisis framework, suggesting that effective monetary control may be achieved through different frameworks.
    Keywords: Fed; monetary policy framework; pre-crisis
    JEL: E52 E58 N10
    Date: 2017–03–01
  14. By: Tatsuki Okamoto (Graduate School of Economics, Kobe University); Yoichi Matsubayashi (Graduate School of Economics, Kobe University)
    Abstract: This paper examines whether Japanese monetary policy had been working through the credit channel and its sub-channels between March 2000 and March 2016 using time-varying parameter VAR. The identification of credit transmission channels is a very difficult problem due to the impossibility to observe the conditions of credit supply and demand. However, using the credible data collected from the ‘Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks’ (SLOS), we identified the credit channel and its sub-channels. To the best of the authors’ knowledge, there are no previous studies that have employed SLOS data for the evaluation of transmission channels. The estimation findings show a high possibility that large and middle-sized firms had little effect on monetary policy through the credit channel, but did have an effect through portfolio rebalancing. Small firms are thought to have an effect through the credit channel and its sub-channels, but it is not a big effect. The detailed reason as to why the effect of monetary easing differed by the firm size should be considered by looking at more specific portfolio rebalancing effects and loans to overseas.
    Keywords: Time-Varying Parameter vector autoregressive (TVP-VAR) model, Credit Channel, Credit supply, Lending standards, Monetary policy.
    JEL: E41 E44 E51 E52 G21
    Date: 2017–03
  15. By: Benati, Luca (University of Bern); Lucas, Robert E. (University of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Weber, Warren E. (University of South Carolina)
    Abstract: We explore the long-run demand for M1 based on a data set that has comprised 32 countries since 1851. In many cases, cointegration tests identify a long-run equilibrium relationship between either velocity and the short rate or M1, GDP, and the short rate. Evidence is especially strong for the United States and the United Kingdom over the entire period since World War I and for moderate and high-inflation countries. With the exception of high-inflation countries–for which a “log-log” specification is preferred–the data often prefer the specification in the levels of velocity and the short rate originally estimated by Selden (1956) and Latané (1960). This is especially clear for the United States and other low-inflation countries.
    Keywords: Long-run money demand; Cointegration
    JEL: C32 E41
    Date: 2017–02–10
  16. By: Giovanni Caggiano (Department of Economics, Monash University; Department of Economics and Management, University of Padova; and Bank of Finland); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research, the University of Melbourne; Department of Economics, The University of Melbourne; and Department of Economics and Management, University of Padova); Gabriela Nodari (Reserve Bank of Australia)
    Abstract: We investigate the role played by systematic monetary policy in tackling the real effects of uncertainty shocks in U.S. recessions and expansions. We model key indicators of the business cycle with a nonlinear VAR that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated to jumps in financial volatility. Uncertainty shocks hitting in recessions are found to trigger a more abrupt drop and a faster recovery in real activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic monetary policy in stabilizing real activity is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.
    Keywords: Uncertainty shocks, nonlinear Smooth Transition Vector AutoRegressions, Generalized Impulse Response Functions, systematic monetary policy
    JEL: C32 E32
    Date: 2017–03
  17. 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: We study the renminbi (RMB) central parity formation mechanism following the August 2015 reform. Statistical models are formulated to assess the linkages between the central parity and the alternative variants of the RMB exchange rate, market volatility and selected control variables. In a linear regression framework, we identify the roles of the onshore and offshore RMB exchange rates and the US dollar index, but not the RMB currency basket index. However, the marginal effect of the RMB index is revealed via a multiplicative interaction model that incorporates a condition variable given by the volatility of the offshore RMB market. The offshore RMB volatility exerts a dampening effect on the links between the central parity and its determinants, reflecting that Chinese authorities do not hesitate to adjust their policy actions under threat of high volatility.
    Keywords: China¡¯s Exchange Rate Policy, Currency Basket, Multiplicative Interaction Model, Onshore and Offshore RMB Rates, Volatility
    JEL: F31 F33
    Date: 2017–03
  18. By: Jacek Kotłowski
    Abstract: This paper examines to what extent public information provided by the central bank affects the forecasts formulated by professional forecasters. We investigated empirically whether disclosing GDP and inflation forecasts by Narodowy Bank Polski (the central bank of Poland) reduced the disagreement in professional forecasters' expectations. We also checked whether the strength of the forecasters’ reaction to the release of the central bank’s projection depends on the phase of the business cycle. Finally we identified the determinants of the dispersion among the forecasters.In the first step we used single equation models estimated separately for inflation and GDP forecasts. While the results confirm that by publishing its projection of future GDP growth, the central bank was reducing the dispersion of GDP forecasts, we extended the linear model and introduced asymmetry in the response of individual GDP forecasts to the release of NBP projection. Therefore in the second step we used the Smooth Transition Regression (STR) models with both logistic function and exponential transition function.The results only partially support the hypothesis on the coordinating role of the central bank existing in the literature. The main finding is that by publishing its projection of future GDP growth, the central bank was reducing the dispersion of one-year-ahead GDP forecasts. Our study indicates that the role of the central bank in reducing the forecasts dispersion was strengthening over time. We also found using non-linear STR models that the extent to which the projection release affected the dispersion of GDP forecasts varied over the business cycle. By disclosing its own projection the central bank reduced the disagreement among the forecasters the most in the periods when the economy moved from one phase of the business cycle to another.
    Keywords: Poland, Monetary issues, Forecasting and projection methods
    Date: 2015–07–01
  19. By: OGAWA Eiji; MUTO Makoto
    Abstract: The U.S. dollar has maintained its position as the key currency in the global economy even after the euro was introduced to some states of the European Union (EU) in 1999. This is evidence of inertia of the U.S. dollar as the key currency. Our previous study (Ogawa and Muto (2016)) conducted empirical analysis to investigate the effects of several events on the inertia of the U.S. dollar. This paper focuses on the effects of the introduction of the euro and the global financial crisis on the contribution of the Japanese yen to utility. The introduction of the euro significantly decreased the contribution of the Japanese yen to utility as well as that of the Swiss franc. It explains the finding that the introduction of the euro increased the contribution of the euro to utility while the contribution of the U.S. dollar to utility was unchanged. The contribution of the Japanese yen to utility has significantly decreased while the global financial crisis occurred. The Japanese yen has a declining trend in terms of its contribution to utility both before and after the introduction of the euro and the global financial crisis.
    Date: 2017–03
  20. By: Chang, Juin-Jen; Lai, Ching-Chong; Liao, Chih-Hsing
    Abstract: Estimates of the welfare costs of moderate inflation are generally modest or small. This paper, by shedding light on increasing returns to production specialization, obtains a substantial welfare cost of 8% in an endogenous growth model of monopolistic competition with endogenous entry. Analytically, we show that the effect of inflation is aggravated (resp. alleviated) by a price markup if the degree of increasing returns to production specialization is relatively high (resp. low). Accordingly, our quantitative analysis indicates that the welfare cost of inflation exhibits an inverted U-shaped relationship with the price markup. This non-monotone is sharply in contradiction to the conventional notion. Nonetheless, the welfare cost of inflation is unambiguously increasing in the degree of increasing returns to production specialization.
    Keywords: Welfare cost of inflation, price markup, increasing returns to production specialization.
    JEL: E5 E52 O4 O42
    Date: 2017–03–21
  21. By: Barrdear, John (Bank of England)
    Abstract: Determinacy is ensured in the New Keynesian model when firms face imperfect common knowledge, regardless of whether the Taylor principle is satisfied. Strategic complementarity in pricing and idiosyncratic noise in firms’ signals, however small, are together sufficient to eliminate backward-looking solutions without appealing to the assumptions of Blanchard and Kahn (1980). Standard solutions emerge when the Taylor principle is followed, but when the policymaker demurs, the price level — and not just inflation — is stationary. A unique and stable solution also emerges with the interest rate pegged to its steady-state value, in contrast to Sargent and Wallace (1975).
    Keywords: Dispersed information; imperfect common knowledge; New Keynesian; indeterminacy; Blanchard-Kahn; Taylor rules; Taylor principle; interest rate peg
    JEL: D84 E31 E52
    Date: 2017–03–24
  22. By: Gallagher, Emily; Schmidt, Lawrence; Timmermann, Allan G; Wermers, Russ
    Abstract: Abstract We study investor redemptions and portfolio rebalancing decisions of money market mutual funds (MMFs) during the Eurozone crisis. We exploit the multiple shareclass structure of the MMF industry and the detailed portfolio holdings disclosure required by 2010 regulatory changes to highlight costs and benefits of increased transparency in short-term funding markets. Consistent with theoretical predictions of models featuring costly (and incomplete) information acquisition, investors with the lowest information acquisition costs are most responsive to cross-sectional heterogeneity in funds' exposures to Eurozone securities. Moreover, managers catering to these investors disproportionately shift their portfolios away from the riskiest and most information-sensitive securities.
    Keywords: endogenous information acquisition; eurozone crisis; financial fragility; Money market funds; transparency in short-term funding markets
    JEL: G01 G21 G23
    Date: 2017–03
  23. By: Aleksandra Halka; Jacek Kotłowski
    Abstract: In the paper we investigate to what extent the inflation in small open economies is driven by global demand and supply shocks. The experience of the last decades reveals the growing role of the global factors in shaping inflation in many economies. As indicated by Borio and Filardo [2007] and Ciccareli and Mojon [2008] this phenomenon is usually explained by growing impact of globalization related to increasing turnovers in international trade combined by falling unit labour costs in China and other emerging economies. While the most of research related to the impact of globalization on inflation works with macro data we conduct the analysis using disaggregated price indices. In the research we focus on Central and Eastern European economies tightly integrated via trade and financial channel with the euro area and due to their involvement in global value chains strongly affected by the globalization process.We proceed in two steps. In the first step we use SVAR methodology with sign restrictions as proposed by Canova and De Nicolo [2002] and Frey and Pagan [2011] and from the set of global variables we extract three shocks, which may contribute the most to the overall variability of inflation: global demand shock, commodity specific shock and non-commodity supply shock associated, to some extent, with the globalization process. In the second step we regress the dissagregated price indices for selected CEE economies (Poland, Czech Republic and Hungary) on the global shocks extracted in the previous step simultaneously controlling for the domestic output gap and exchange rate. This approach allows us to identify these groups of goods of services which prices react the most to the global shocks in particular to non-commodity supply shock.The general outcome stemming from our analysis indicate that the role of the global shocks in shaping inflation in CEE economies relies on their size and openness. The global supply and demand shocks are transmitted to the domestic inflation to greater extent for smaller and more open economies. However there are several similarities across the CEE economies. The supply shocks in all countries affect prices of semi durables, mostly clothing and footwear, but also communication or transport. Since we assign supply shocks to the globalization and technological progress it is not a surprise. The dynamics of clothing’s prices exhibit downward trend which can be attributed to the movement of the production to the countries with lower production costs. Similar explanation relates to the prices of transport equipment. The relationship between global supply shocks and prices of communication may be also explained to some extent by globalization process reflected in growing productiveness and increasing competitiveness on this market. The influence of the global demand shocks on the inflation in the analyzed countries is not the crucial one. For Poland, which is the biggest country, with the largest domestic market, the most of the analyzed price indices react to the domestic output gap rather than global demand shocks. For the two other countries – Hungary and Czech Republic, which are smaller and more open economies – both: domestic output gaps and global demand shocks are less important for the domestic inflation. According to our intuition prices of energy and transport (which are strongly influenced by oil prices) in all analyzed countries are affected by the commodity shocks.
    Keywords: Poland, Czech Republic and Hungary, Macroeconometric modeling, Monetary issues
    Date: 2015–07–01
  24. By: Kim, Kyunghun (Korea Institute for International Economic Policy)
    Abstract: This paper examines the international transmission of the US monetary policy surprises. The US monetary policy surprises are defined by the gap between the actual fed fund rate and its forecast estimated a quarter ahead. The US monetary policy surprises are used as external shocks to investigate the spillover effects of policy uncertainty on other economies and address the endogeneity problem. The US is the base country where the monetary policy uncertainty shocks take place. I construct the each country's international linkages such as the equity market and debt market linkages vis-à-vis the epicenter, US to investigate how the shocks are transmitted to other countries through those linkages. The empirical result shows that the equity market integration is associated with the business cycle divergence and the debt market integration is associated with the business cycle co-movement when the US policy uncertainty index is low. However, the equity market integration is associated with the business cycle comovement and the debt market integration plays insignificant role in transmitting the monetary policy surprises when the US policy uncertainty index is high.
    Keywords: Business Cycle Co-Movement; Spillover; Monetary Policy; Global Financial Market; Capital Control
    JEL: E52 F33 F42 F44
    Date: 2016–07–29
  25. By: Mr Insukindro; Chandra Utama
    Abstract: In general, the previous studies analyze the inflation dynamics in Indonesia using national data which may have some weaknesses because the results tend to be dominated by the behavior of inflation in Java. It is expected that the results of this study can represent the inflation dynamics in the whole provinces of Indonesia. This paper attempts to analyze the provincial inflation dynamics in Indonesia for the period of 2005 (III) -2013 (III) by utilizing Hybrid New Keynesian Phillips Curve (HNKPC) theory and recent developments in econometric analysis of data panel. The approaches follow relevant HNKPC theory, using dynamic (backward- and forward- looking) data panel analysis and Generalized Method of Moment (GMM) estimation. The findings show that HNKPC approach can be utilized to estimate the inflation dynamics in the whole provinces of Indonesia. The empirical results also indicate that formations of inflation expectations are determined by past and future inflation. In other words, the provincial inflation dynamics in Indonesia are dominated by the forward-looking behavior of economic agents. The estimated parameters of the backward- and forward-looking behavior are relatively lower than those of the previous studies. Those may be because the previous studies use national data instead of provincial data. It is suggested that our economic agents respond quickly to the credible policies introduced by government and future information.
    Keywords: Indonesia, Macroeconometric modeling, Monetary issues
    Date: 2015–07–01
  26. By: Mustafa Caglayan; Ozge Kandemir Kocaaslan; Kostas Mouratidis
    Abstract: There is a growing literature on the importance of financial markets arguing that credit market imperfections act as a propagator of shocks and play a significant role in magnifying output fluctuations. However, we do not see any study that empirically studies the examines the role of financial markets on the effectiveness of monetary policy. This paper investigates the role of financial markets in evaluating the asymmetric impact of monetary policy on real output over the business cycle.To examine the role of financial markets in determining the impact of monetary policy on real output, we implement an instrumental variables Markov regime switching framework. A first draft is prepared and is attached to this conference submission.Results can be summarized as follows: i)Monetary policy has a regime dependent impact on output growth: a restrictive monetary policy has a negative and significant impact on output growth during recessions, yet this effect is not significant during expansions; ii) Financial depth significantly mitigates the impact of monetary policy in recessions. More concretely, we find that in recessions the total impact of monetary policy on output growth becomes much milder and even diminishes with the deepening of the financial markets. This finding makes sense firms mostly suffer from financial frictions during periods of recessions; however, deeper financial markets could help firms to raise funds even in bad times.
    Keywords: USA, Monetary issues, Macroeconometric modeling
    Date: 2015–07–01
  27. By: Richard Dennis
    Abstract: Many central banks in developed countries have had very low policy rates for quite some time. A growing number are experimenting with official rates that are negative. We develop a New Keynesian model in which the zero lower bound (ZLB) on nominal interest rates is imposed as an occasionally binding constraint and use this model to examine the duration of ZLB episodes. In addition, we show that capital accumulation and capital adjustment costs can raise significantly the length of time an economy spends at the ZLB, as can the conduct of monetary policy. We identify anticipation effects that make the ZLB more likely to bind and we show that allowing negative nominal interest rates shortens average durations, but only by about one quarter.
    Keywords: Monetary policy, zero lower bound, new Keynesian
    JEL: E3 E4 E5
    Date: 2017–03

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