nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒04‒09
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Matthias Neuenkirch; Matthias Nöckel
  2. Do monetary policy announcements affect foreign exchange returns and volatility? Some evidence from high-frequency intra-day South African data. By Cyril May; Greg Farrell; Jannie Rossouw
  3. Exchange Rate Pass-Through in the Euro Area By Davor Kunovac; Mariarosaria Comunale
  4. Effects and Risks of Unconventional Monetary Policy By Homburg, Stefan
  5. Capital controls and foreign currency denomination By Fernando Garcia-Barragan; Guangling Liu
  6. Negative interest rates, excess liquidity and bank business models: Banks’ reaction to unconventional monetary policy in the euro area By S. Demiralp; J. Eisenschmidt; T. Vlassopoulos
  7. The Currency-Plus-Commodity Basket; A Proposal for Exchange Rates in Oil-Exporting Countries to Accommodate Trade Shocks Automatically By Jeffrey Frankel
  8. Has the Fed responded to house and stock prices? A time-varying analysis. By Knut Are Aastveit; Francesco Furlanetto; Francesca Loria
  9. Inside money, investment, and unconventional monetary policy By Lukas Altermatt
  10. Macro-financial stability under EMU By Philip R. Lane
  11. On The Fisher Effect: A Review By Bosupeng, Mpho
  12. The Making of Hawks and Doves: Inflation Experiences on the FOMC By Ulrike Malmendier; Stefan Nagel; Zhen Yan
  13. The Role of the Inflation Target Adjustment in Stabilization Policy By Eo, Yunjong; Lie,Denny
  14. Aftershocks of Monetary Unification; Hysteresis with a Financial Twist By Tamim Bayoumi; Barry J. Eichengreen
  15. Currency wars or efficient spillovers? By Anton Korinek
  16. The Risk-Taking Channel in the US: A GVAR Approach By Raslan Alzubi; Mustafa Caglayan; Kostas Mouratidis
  17. Interest rate conundrums in the twenty-first century By Hanson, Samuel; Lucca, David O.; Wright, Jonathan H.
  18. Same, but different: Testing monetary policy shock measures By Ettmeier, Stephanie; Kriwoluzky, Alexander
  19. Modelling and forecasting money demand: divide and conquer By César Carrera; Jairo Flores
  20. Time to Rethink Monetary Policy in Emerging Economies: Touching the Tip of an Iceberg By Lee, Il Houng; Kim, Kyunghun; Kang, Eun Jung
  21. External Monetary Shocks to Central and Eastern European Countries By Pierre Lesuisse
  22. Lower bound beliefs and long-term interest rates By Christian Grisse; Signe Krogstrup; Silvio Schumacher
  23. Ultra-accommodative Monetary Policy and Unintentional Drags on Consumer Spending By Xing, Victor
  24. Money, inflation, and unemployment in the presence of informality By Mohammed Aït Lahcen
  25. Monetary easing and financial instability By Viral Acharya; Guillaume Plantin
  26. From Inflation Targeting to achieving Economic Growth By César Carrera

  1. By: Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the main refinancing rate, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react quickly and aggressively to an expansionary monetary policy shock by decreasing their lending standards. The banks' efforts to keep their lending margins stable are successful, as we find only an insignificant decrease in the margins over the medium-run.
    Keywords: European Central Bank, Macroprudential Policy, Monetary Policy Transmission, Risk-Taking Channel, Vector Autoregression
    JEL: E44 E51 E52 E58 G28
    Date: 2017
  2. By: Cyril May; Greg Farrell; Jannie Rossouw
    Abstract: This paper examines the temporal effect of domestic monetary policy surprises on both the levels and volatility of the South African rand/United States dollar exchange rate. The analysis in this ‘event study’ proceeds using intra-day minute-by-minute exchange rate data, repo rate data from the South African Reserve Bank’s scheduled monetary policy announcements, and Bloomberg market consensus repo rate forecasts. We find statistically and economically significant responses in intra-day high-frequency exchange rate returns and volatility to domestic interest rate surprises, but anticipated changes have no bearing on the rand. Our results suggest that monetary policy news is an important determinant of the exchange rate for approximately 5 to 40 minutes after the estimated time of the pronouncement – suggesting a relatively high degree of market ‘efficiency’ in its mechanical sense (and not ‘efficient’ market in the deeper economic-informational sense) in processing this information.
    Keywords: Exchange rate, expectations, monetary policy surprises, repo rate, returns, volatility
    JEL: C22 E52 E58 F31 F41 G14 G15
    Date: 2017–03
  3. By: Davor Kunovac (The Croatian National Bank, Croatia); Mariarosaria Comunale (Bank of Lithuania, Lithuania)
    Abstract: In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identification based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer inflation in the euro area.
    Keywords: Exchange rate pass-through, import prices, consumer prices, inflation, bayesian vector autoregression
    JEL: E31 F3 F41
    Date: 2017–01
  4. By: Homburg, Stefan
    Abstract: During and after the Great Recession, the European Central Bank adopted unconventional monetary policies that are more or less uncontroversial in the literature. By contrast, its quanti-tative easing (QE) program that started in 2015 is highly dis-puted. The article evaluates the pros and cons of such a policy.
    Keywords: Quantitative easing; European Central Bank; excess reserves; money multiplier
    JEL: E51 E52 E58
    Date: 2017–03
  5. By: Fernando Garcia-Barragan; Guangling Liu
    Abstract: This paper studies the effectiveness of capital controls with foreign currency denomination and its welfare implications. To do this, we develop a general equilibrium model with financial frictions and banking, in which assets and liabilities are denominated in both domestic and foreign currencies. We propose a non-pecuniary capital-control policy that limits the gap between foreign-currency denominated loans and deposits to the amount of foreign funds that bankers can borrow from the international credit market. We show that capital controls have a critical impact on the dynamics of assets and liabilities that are denominated in foreign currency. This critical impact works through the capital control constraint on quantitative nancial variables directly, not through the spreads. The non-pecuniary capital controls help to stabilize the nancial sector and, hence, reduces the negative spillovers to the real economy. A more restrictive capital-control policy signicantly attenuates the welfare effect of the foreign monetary policy and exchange rate shocks.
    Keywords: Capital control, Foreign currency denomination, Open economy macroeconomics, Financial friction, Welfare analysis, DSGE
    JEL: E32 E44 E58 F38 F41
    Date: 2017–02
  6. By: S. Demiralp (Koc University); J. Eisenschmidt (ECB); T. Vlassopoulos (ECB)
    Abstract: In June 2014 the ECB became the first major central bank to lower one of its key policy rates to negative territory. The theoretical and empirical literature is silent on whether banks’ reaction would be different when the policy rate is lowered to negative levels compared to a standard reaction to a rate cut. In this paper we examine this question empirically by using individual bank data for the euro area to identify possible adjustments by banks triggered by the introduction of negative interest rates through three channels: government bond holdings, bank lending, and wholesale funding. We find evidence of a significant adjustment of banks’ balance sheets during the negative interest rate period. Banks tend to extend more loans, hold more non-domestic government bonds and rely less on wholesale funding. The nature and scope of the adjustment depends on banks’ business models.
    Keywords: negative rates, bank balance sheets, monetary transmission mechanism.
    JEL: E43 E52 G11 G21
    Date: 2017–03
  7. By: Jeffrey Frankel
    Abstract: The paper proposes an exchange rate regime for oil-exporting countries. The goal is to achieve the best of both flexible and fixed exchange rates. The arrangement is designed to deliver monetary policy that counteracts rather than exacerbates the effects of swings in the oil market, while yet offering the day-to-day transparency and predictability of a currency peg. The proposal is to peg the national currency to a basket, but a basket that includes not only the currencies of major trading partners (in particular, the dollar and the euro), but also the export commodity (oil). The plan is called Currency-plus-Commodity Basket (CCB). The paper begins by fleshing out the need for an innovative arrangement that allows accommodation to trade shocks. The analysis provides evidence from six Gulf countries that periods when their currencies were “undervalued”, in the sense that the actual foreign exchange value lay below what it would have been under the CCB proposal, were periods of overheating as reflected in high inflation and of external imbalance as reflected in high balance of payments surpluses. Conversely, periods when the currencies were “overvalued,” in the sense that their foreign exchange value lay above what it would have been under CCB, featured unusually low inflation and low balance of payments. These results are suggestive of the implication that the economy would have been more stable under CCB. The last section of the paper offers a practical blueprint for detailed implementation of the proposal.
    Keywords: basket, commodities, currency, exchange rate, Gulf, oil, peg, Saudi Arabia
    JEL: F3
    Date: 2017–03
  8. By: Knut Are Aastveit (NORGES BANK); Francesco Furlanetto (NORGES BANK); Francesca Loria (EUROPEAN UNIVERSITY INSTITUTE)
    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: 2017–04
  9. By: Lukas Altermatt
    Abstract: In this paper I build a new monetarist model that includes inside money and investment to analyze why an economy can fall into a liquidity trap, and what the effects of unconventional monetary policy measures like helicopter money and negative interest rates are under these circumstances. I find that the liquidity trap can be caused by a scarcity of savings instruments, by insufficient investment opportunities, by too much supply of bank deposits or by a combination of any of these reasons. I also find that unconventional monetary policies can get an economy out of a liquidity trap, but at a welfare cost, while issuing more government debt can do the same and also improve welfare.
    Keywords: New monetarism, liquidity trap, helicopter money, negative interest rates, government debt, Ricardian equivalence, banking
    JEL: E4 E5 G2
    Date: 2017–03
  10. By: Philip R. Lane
    Abstract: This paper examines the cyclical behaviour of country-level macro-financial variables under EMU. Monetary union strengthened the covariation pattern between the output cycle and the financial cycle, while macro-financial policies at national and area-wide levels were insufficiently counter-cyclical during the 2003-2007 boom period. We critically examine the policy reform agenda required to improve macro-financial stability. JEL Classification: E52, E65, G28
    Keywords: macroeconomic stabilisation, financial stability, international capital flows, inflation, exchange rate
    Date: 2016–02
  11. By: Bosupeng, Mpho
    Abstract: The Fisher effect proposes that in the long run, nominal interest rates trend positively with inflation. In numerous studies the long run Fisher effect has been proved several times as compared to the short run Fisher effect phenomenon. The reason is in the long run, interest rates exhibit minimum volatility therefore resulting in the long run association. Even though the literature has been impressive in terms of validating the hypothesis, many central banks and policy makers have been lost in the lurch regarding the overall standpoint of the Fisher parity. This paper reviews the Fisher effect and examines factors that impinge on the hypothesis namely: inflation targeting, data set range and the regulation of the financial system.
    Keywords: Fisher effect; interest rates; inflation
    JEL: E43
    Date: 2016
  12. By: Ulrike Malmendier; Stefan Nagel; Zhen Yan
    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
  13. By: Eo, Yunjong; Lie,Denny
    Abstract: We study optimal monetary policy in a New Keynesian model in which the monetary authority faces a trade-off between inflation and output-gap stabilization due to cost-push shocks. In particular, we highlight the role of the inflation target adjustment in stabilization policy by showing that it can mitigate this policy trade-off and considerably improve welfare. The main fi ndings can be summarized as follows. First, we find that the welfare cost of a standard Taylor rule is non-trivial, even with optimized policy cofficients. Second, we propose an additional policy tool of a medium-run inflation target (MRIT) rule. When combined with the standard Taylor rule, the optimal MRIT signi ficantly reduces fluctuations in inflation originating from the cost-push shocks and results in a similar level of welfare to that associated with the Ramsey optimal policy. Third, the optimal MRIT needs to be adjusted in a persistent manner and in the opposite direction to the realization of a cost-push shock. Fourth, the welfare implication of the MRIT is more pronounced under a flatter Phillips curve. Finally, the main findings are relevant to the current economic environment of low inflation rates under a flat Phillips curve, implying that the monetary authority should increase the inflation target in such an environment..
    Keywords: Cost-push shocks; Monetary policy; Medium-run inflation targeting; Flat Phillips curve; Welfare analysis
    Date: 2017–05
  14. By: Tamim Bayoumi; Barry J. Eichengreen
    Abstract: Once upon a time, in the 1990s, it was widely agreed that neither Europe nor the United States was an optimum currency area, although moderating this concern was the finding that it was possible to distinguish a regional core and periphery (Bayoumi and Eichengreen, 1993). Revisiting these issues, we find that the United States is remains closer to an optimum currency area than the Euro Area. More intriguingly, the Euro Area shows striking changes in correlations and responses which we interpret as reflecting hysteresis with a financial twist, in which the financial system causes aggregate supply and demand shocks to reinforce each other. An implication is that the Euro Area needs vigorous, coordinated regulation of its banking and financial systems by a single supervisor—that monetary union without banking union will not work.
    Keywords: European Monetary Union;United States;Western Hemisphere;Optimum currency area, hysterisis, Financial Markets and the Macroeconomy, Financial Aspects of Economic Integration
    Date: 2017–03–13
  15. 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, but only if the three conditions are satisfied. Furthermore, we develop general guidelines for how policy cooperation can improve welfare when the conditions are violated.
    Keywords: currency wars, international spillovers, policy cooperation, first welfare theorem
    Date: 2017–03
  16. By: Raslan Alzubi (Department of Economics, University of Sheffield); Mustafa Caglayan (School of Social Sciences, Heriot-Watt University); Kostas Mouratidis (Department of Economics, University of Sheffield)
    Abstract: Employing data from thirty large banks in the US, we examine banks' risk-taking behaviour in response to monetary policy shocks. Our investigation provides support for the presence of a risk-taking channel: banks' nonperforming loans increase in medium to long run following an expansionary monetary policy shock. We also find that banks' capital structure plays an important role in explaining bank's risk-taking appetite. Impulse response analysis shows that shocks emanating from larger banks spillover to the rest of the sector but no such effect is observed for smaller banks. The results are confirmed for banks' Z-score.
    Keywords: Risk-taking channel; GVAR; monetary policy shocks; spilloverover effects
    JEL: E44 E52 G01 G19 G29
    Date: 2017–03
  17. By: Hanson, Samuel (Harvard Business School); Lucca, David O. (Federal Reserve Bank of New York); Wright, Jonathan H. (Johns Hopkins University)
    Abstract: A large literature argues that long-term interest rates appear to react far more to high-frequency (for example, daily or monthly) movements in short-term interest rates than is predicted by the standard expectations hypothesis. We find that, since 2000, such high-frequency “excess sensitivity” remains evident in U.S. data and has, if anything, grown stronger. By contrast, the positive association between low-frequency changes (such as those seen at a six- or twelve-month horizon) in short- and long-term interest rates, which was quite strong before 2000, has weakened substantially in recent years. As a result, “conundrums”— defined as six- or twelve-month periods in which short rates and long rates move in opposite directions—have become far more common since 2000. We argue that the puzzling combination of high-frequency excess sensitivity and low-frequency decoupling between short- and long-term rates can be understood using a model in which (i) shocks to short-term interest rates lead to a rise in term premia on long-term bonds and (ii) arbitrage capital moves slowly over time. We discuss the implications of our findings for interest rate predictability, the transmission of monetary policy, and the validity of high-frequency event study approaches for assessing the impact of monetary policy.
    Keywords: interest rates; conundrum; monetary policy transmission
    JEL: E43 E52 G12
    Date: 2017–03–01
  18. By: Ettmeier, Stephanie; Kriwoluzky, Alexander
    Abstract: In this study, we test whether three popular measures for monetary policy, that is, Romer and Romer (2004), Barakchian and Crowe (2013), and Gertler and Karadi (2015), constitute suitable proxy variables for monetary policy shocks. To this end, we employ different test statistics used in the literature to detect weak proxy variables. We find that the measure derived by Gertler and Karadi (2015) is the most suitable in this regard.
    Keywords: monetary policy shock measures,Proxy-SVAR,weak proxies,F-test
    JEL: C12 C32 E32 E52
    Date: 2017
  19. By: César Carrera (Banco Central de Reserva del Perú); Jairo Flores (Banco Central de Reserva del Perú)
    Abstract: The literature on money demand suggests several specification forms of empirical functions that better describe observed data on money in circulation. In a first stage, we select the best long-run model specification for a money demand function at the aggregate level based on forecast performance. On a second stage we divide the money in circulation by denomination and argue that determinants of a low-level denomination is different than those of a high-level. We then estimate the best model specification for each denomination and aggregate each forecast in order to have an aggregate proyection. We finally compare forecasts between these strategies. Our results indicate that the bottom-up approach has a better performance than the traditional view of directly forecasting the aggregate.
    Keywords: Money demand, bottom-up, co-integration, forecast
    JEL: C16 F31 F41
    Date: 2017–04
  20. By: Lee, Il Houng (Korea Institute for International Economic Policy); Kim, Kyunghun (Korea Institute for International Economic Policy); Kang, Eun Jung (Korea Institute for International Economic Policy)
    Abstract: Emerging economies are struggling to keep their growth momentum alive in the face of waning global demand. Yet, they are partly handicapped by the loss of monetary policy independence and greater exposure to potential capital reversal. Against this background, a comprehensive review of all their 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: Monetary Policy; Emerging Economies
    Date: 2016–03–08
  21. By: Pierre Lesuisse (CERDI - Centre d'Etudes et de Recherches sur le Développement International - CNRS - Université d'Auvergne)
    Abstract: Few countries are part of the European Union but on the verge of the Euro-zone. This study aims at identifying the amplitude of the direct ECB monetary policy impact, i.e. the so-called international monetary spillovers, in Central and Eastern European countries (CEECs). The use of a panel-VAR method allows to deal with the small time span and endogeneity. We found that CEECs tend to significantly converge in monetary terms to the ECB standards. The direct impact on real variables remains relatively weak but contrary to the literature, is significant and in line with expectations. A persistent negative adjustment of GDP gives a quick glimpse of a robust reaction against monetary shock when the focus is made on the post-economic crisis period. The exchange rate regime plays a small but significant role in terms of magnitude. This increased interdependence is the result of macroeconomic reforms implemented during the last 25 years.
    Keywords: Monetary integration,External shocks,Panel VAR.
    Date: 2017–02–14
  22. By: Christian Grisse; Signe Krogstrup; Silvio Schumacher
    Abstract: We study the transmission of changes in the believed location of the lower bound to longterm interest rates since the introduction of negative interest rate policies. The expectations hypothesis of the term structure combined with a lower bound on policy rates suggests that the transmission of policy rate changes to long-term interest rates is reduced when policy rates approach this lower bound. We show that if market participants revise downward the believed location of the lower bound, this may reduce long-term yields and increase transmission. A cross-country event study suggests that such effects have been empirically relevant during the recent negative interest rate episode.
    Keywords: monetary policy, negative interest rates, lower bound, yield curve, term structure
    JEL: E43 E52
    Date: 2017
  23. By: Xing, Victor
    Abstract: New York Fed President Dudley recently commented that “real consumer spending growth appears to have moderated somewhat from the relatively robust pace of the second half of 2015” (Dudley, 2016). While this may suggest headwinds from cyclical economic conditions, there are emerging signs that ultra-accommodative policy also acts as a constraint on consumer spending via income effects. Instead of inducing savers to spend and borrow, rapid asset price appreciation as a result of monetary easing have outpaced wage growth, and pass-through services inflation subsequently reduced discretionary income and forced already-levered consumers to save instead of spend. This unintended consequence worked against accommodative policy’s desired substitution effects and suggests further easing would likely yield diminishing results if asset price appreciation continues to outpace real income growth.
    Keywords: Quantitative Easing, Malinvestment, Consumer Spending, Involuntary Renter, Asset Price Inflation, Financial Conditions, Wage Growth
    JEL: E2 E5 G11 G12
    Date: 2016–04–23
  24. By: Mohammed Aït Lahcen
    Abstract: This paper studies the impact of informality on the long-run relationship between inflation and unemployment in developing economies. I present a dynamic general equilibrium model with informality in both labor and goods markets and where money and credit coexist. An increase in inflation affects unemployment through two channels: the matching channel and the hiring channel. On one hand, higher inflation reduces the surplus of monetary trades thus lowering firms entry and increasing unemployment. On the other hand, the lower impact of inflation on formal transactions where credit is partially available shifts firms hiring decision from high separation informal jobs to low separation formal jobs thus reducing unemployment. The model is calibrated to match certain long-run statistics of the Brazilian economy. Numerical results indicate that, in the presence of a sizable informal sector, inflation has a small negative effect on unemployment while producing a significant impact on labor allocation between formal and informal jobs. These results point to the importance of accounting for informality when considering the inflation-unemployment trade-off in the conduct of monetary policy.
    Keywords: Informality, Phillips curve, money, labor, search and matching
    JEL: E26 E41 J64 H26 O17
    Date: 2017–03
  25. By: Viral Acharya; Guillaume Plantin
    Abstract: We study optimal monetary policy in the presence of financial stability concerns. We build a model in which monetary easing can lower the cost of capital for firms and restore the natural level of investment, but does also subsidize inefficient maturity transformation by financial intermediaries in the form of “carry trades" that borrow cheap at the short-term against illiquid long-term assets. Carry trades not only lead to financial instability in the form of rollover risk, but also crowd out real investment since intermediaries equate the marginal return on lending to firms to that on carry trades. Optimal monetary policy trades off any stimulative gains against these costs of carry trades. The model provides a framework to understand the puzzling phenomenon that the unprecedented post-2008 monetary easing has been associated with below-trend real investment, even while returns to real and financial capital have been historically high.
    Keywords: Monetary policy; quantitative easing; financial stability; financial fragility; shadow banking; maturity transformation; carry trades
    JEL: E52 E58 G00 G21 G23 G28
    Date: 2017–01
  26. By: César Carrera (Banco Central de Reserva del Perú y Universidad del Pacífico)
    Abstract: Most economists agree that the relationship between long-run economic growth and inflation is negative. It is well documented that countries with inflation target achieve lower levels of inflation. But there is no study that relates inflation target and growth. I focus this study in identifying this relationship. I follow Sala-i-Martin (1997) and sample 45 countries that have an inflation target. This variable is then evaluated by controlling for three variables that are strongly correlated with economic growth and different subsets that belong to a set of variables that the literature agrees in being correlated with long-run economic growth. This strategy allows me to have a distribution of the parameter that captures a link between inflation target and growth. My results suggest that such effect, if any, is slightly negative.
    Keywords: Inflation target, inflation, growth
    JEL: E31 E58 N16
    Date: 2017–04

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