nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒04‒16
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Deposit dollarization in emerging markets: modelling the hysteresis effect By Anna Krupkina; Alexey Ponomarenko
  2. Monetary transmission under competing corporate finance regimes = Transmisión monetaria bajo regímenes alternativos de finanzas corporativas By Paul de Grauwe; Eddie Gerba
  3. Uncertain forward guidance By Haberis, Alex; Harrison, Richard; Waldron, Matthew
  4. International inflation spillovers through input linkages By Raphael Auer; Andrei A Levchenko; Philip Sauré
  5. SVAR Approach for Extracting Inflation Expectations Given Severe Monetary Shocks: Evidence from Belarus By Dzmitry Kruk
  6. The Effect of Changes in the U.S. Monetary Policy on China's Capital Market Stability and Trade between China and Korea By Gang , Jianhua; Qian , Zongxin; Zhang , Chao; Zhang , Jiarui
  7. The risks of exit from the EMU and the EU (in Italian) By Giuseppe Marotta
  8. Estimating Liquidity Created by Banks in Pakistan By Sabahat
  9. Instability, imprecision and inconsistent use of equilibrium real interest rate estimates By Beyer, Robert; Wieland, Volker
  10. Non-Sterilized Interventions May Yield Perverse Effects on Spot Foreign Exchange Rates By Saglam, Ismail
  11. Spillovers from U.S. Monetary Policy Normalization on Brazil and Mexico’s Sovereign Bond Yields By Carlos Góes; Herman Kamil; Phil De Imus; Mercedes Garcia-Escribano; Roberto Perrelli; Shaun K. Roache; Jeremy Zook
  12. The Effect of Central Bank Liquidity Injections on Bank Credit Supply By Luisa Carpinelli; Matteo Crosignani
  13. How does monetary policy pass-through affect mortgage default? Evidence from the Irish mortgage market By Byrne, David; Kelly, Robert; O'Toole, Conor
  14. Pulling up the Tarnished Anchor: The End of Silver as a Global Unit of Account By Fernholz, Ricardo; Mitchener, Kris James; Weidenmier, Marc
  15. A note on money creation in emerg-ing market economies By Alexey Ponomarenko
  16. Understanding Inflation in Malawi; A Quantitative Investigation By Dong Frank Wu
  17. Risk Premium Shifts and Monetary Policy: A Coordination Approach By Stephen Morris; Hyun Song Shin
  18. Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt? By Peter Spahn
  19. Sectoral Labor Mobility and Optimal Monetary Policy By Alessandro Cantelmo; Giovanni Melina
  20. The Effects of Chinese Interest Rates and Inflation: A Decomposition of The Fisher Effect By Bosupeng, Mpho
  21. Policy Responses of the ECB in Managing the Euro Crisis and its Evolutionary Role By Kang , Yoo-Duk
  22. Direct and Spillover Effects of Unconventional Monetary and Exchange Rate Policies By Joseph E. Gagnon; Tamim Bayoumi; Juan M. Londono; Christian Saborowski; Horacio Sapriza
  23. Estimating DSGE models with Zero Interest Rate Policy By Mariano Kulish; James Morley; Tim Robinson
  24. Fiscal Surprises at the FOMC By Dean Croushore; Simon van Norden
  25. The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries By Claudiu Tiberiu Albulescu; Dominique P\'epin; Stephen Miller
  26. How the central banks' reaction function in SOE evolved during the crisis By Aleksandra Halka
  27. Deflating Inflation Expectations: The Implications of Inflation's Simple Dynamics By Cecchetti, Stephen G; Feroli, Michael; Hooper, Peter; Kashyap, Anil K; Schoenholtz, Kermit
  28. The role of the inflation target adjustment in stabilization policy By Yunjong Eo; Denny Lie
  29. Exchange Rate Policies at the Zero Lower Bound By Amador, Manuel; Bianchi, Javier; Bocola, Luigi; Perri, Fabrizio
  30. Flight to liquidity and systemic bank runs By Roberto Robatto

  1. By: Anna Krupkina (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: We apply empirical modelling set-ups developed to capture the hysteresis effect to the data on deposits dollar-ization in a cross-section of emerging market economies. Namely, we estimate nonlinear relationship that determines two equilibrium levels of deposit dollarization depending on its current dollarization value and the preceding episodes of sharp depreciation of the national currency over the past five years. When exchange rates are stable convergence to-wards higher equilibrium level of dollarization begins when the 45-50% threshold of deposit dollarization is exceeded. We estimate the model for short-run dynamics of dollarization and find that the speed of convergence towards higher equilibrium implies quarterly increase of the foreign currency deposits to total deposits ratio by 1.2-3 percentage points.
    Keywords: dollarization, hysteresis, nonlinear model, emerging markets.
    JEL: C23 E41 F31
    Date: 2015–06
  2. By: Paul de Grauwe; Eddie Gerba
    Abstract: The behavioural agent-based framework of De Grauwe and Gerba (2015) is extended to allow for a counterfactual exercise on the role of banks for monetary transmissions. A bank-based corporate financing friction is introduced and the relative contribution of that friction to the effectiveness of monetary policy is evaluated. We find convincing evidence that the monetary transmission channel is stronger in the bank-based system compared to the market-based. Impulse responses to a monetary expansion are around the double of those in the market-based framework. The (asymmetric) effectiveness of monetary policy in counteracting busts is, on the other hand, relatively higher in the market-based model. The statistical fit of the bank-based behavioural model is also improved compared to the benchmark model. Lastly, we find that a market-based (bankbased) financing friction in a general equilibrium produces highly asymmetric (symmetric) distributions and more (less) pronounced business cycles.
    Keywords: monetary policy in EA; monetary transmissions; banks; financial frictions; market based finance
    JEL: E44 E52 G21 G32
    Date: 2017–04
  3. By: Haberis, Alex (Bank of England); Harrison, Richard (Bank of England); Waldron, Matthew (Bank of England)
    Abstract: We explore the effects of forward guidance at the zero lower bound when there is uncertainty over the lift-off date arising from: (i) the imperfect credibility of time- inconsistent forward-guidance promises; (ii) incomplete communication. We use a simple New Keynesian model to demonstrate that a forward guidance announcement to delay lift-off may be no more powerful in a more interest rate sensitive economy. We also demonstrate that attempts to delay lift-off further may fail to generate additional stimulus if the temptation to renege on the announcement is sufficiently great. In an empirical application, we consider counterfactual policy experiments based on the Federal Open Market Committee’s ‘threshold-based’ forward guidance, in which we link the probability of lift-off to the amount by which the announced unemployment threshold is breached. We show that a more precise articulation of the lift-off conditions requires a lower unemployment threshold in order to deliver the same amount of stimulus as a less precise one.
    Keywords: Forward guidance; uncertainty; zero lower bound
    JEL: E12 E17 E20 E30 E42 E52
    Date: 2017–03–31
  4. By: Raphael Auer; Andrei A Levchenko; Philip Sauré
    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, globalisation, inflation, input linkages, monetary policy, global value chain, production structure, input-output linkages, supply chain
    Date: 2017–04
  5. By: Dzmitry Kruk
    Abstract: Inflation expectations play a crucial role for macroeconomic dynamics and more specifically for monetary environment. However, inflation expectations is an unobservable variable. So, the quality of the correspondent measure in a great extent predetermines its feasibility for macroeconomic analysis. Today, survey-based measures of inflation expectations prevail in macroeconomic analysis. However, the drawbacks and/or unavailability of such measures give a rise to other identification strategies. Extracting inflation expectations from the actual data (e.g. series of interest rate and actual inflation) basing on SVAR identification approach has become a valuable alternative/supplement for measuring inflation expectations. In this paper I show that the existing strategy of inflation expectations identification through SVAR approach is very sensitive to the state of monetary environment. When a monetary environment is unstable (e.g. high and volatile inflation), the assumptions of the baseline approach are not hold, and it produces biased estimations. I emphasize two sources of this bias in estimations and suggest procedure for obtaining unbiased estimates. My identification strategy includes a number of steps. I suggest applying Markov regimeswitching framework for extracting an unbiased mean for ex ante real interest rate. Further, I use two-stage SVAR identification strategy. First, I identify an unexpected shock to actual inflation, which is crucial for obtaining a proper measure of inflation expectations. Further, I net the series of ex post interest rate from this ?noise?. Second, I run a baseline SVAR procedure, for which I use the data adjusted at the first step. Finally I obtain an unbiased and informatively rich series of inflation expectations.
    Keywords: inflation expectations, monetary shock, SVAR identification, Markov regime-switching model, Belarus
    JEL: C22 C32 C82 E43 E47
    Date: 2016–12
  6. By: Gang , Jianhua (Renmin University of China); Qian , Zongxin (Renmin University of China - School of Finance); Zhang , Chao (Renmin University of China); Zhang , Jiarui (China Europe International Business School (CEIBS))
    Abstract: This paper first reviews the trade structure between China and the Republic of Korea (hereafter referred as Korea) and the two countries’ international capital flow. Then it discusses the effect of the Federal Reserve rate on UIP in both China and Korea, which turns out to be uninfluential through our analysis. Then we use VAR model and the extended model, the multivariate GARCH-DCC model to examine interaction between different factors. The result shows that positive-legged equity return would induce outflow and flow positively affects equity return. Sharp offshore RMB devaluation would cause domestic market plummets and higher legged spread means higher carry trade return. Besides, in the respect of capital control effects, offshore RMB devaluation would cause spread to be wider because of inelasticity of the onshore RMB rate. Carry trade return has positive and significant intercept. Finally, we argue that although the appreciation of USD has little impact on bilateral trade between China and Korea in short time, in long run, currency risk exists and it may cause significant fluctuations in the trade. We suggest that China and Korea should gradually use local currency to price their trade.
    Keywords: Monetary Policy; Capital Market; Trade; China; Trade; Korea; Korea
    Date: 2015–12–30
  7. By: Giuseppe Marotta
    Abstract: The recipe of leaving the Euro, and therefore the EU, in order to foster Italian net export through a devaluation of the new Lira, offers hardly credible benefits compared to certain costs of the ensuing triple financial crisis. The costs would be heightened given the economic, legal ad geopolitical constraints of the country.
    Keywords: Italexit, redenomination risk, triple financial crisis, global value chain, EMU trilemma.
    JEL: E40 E61
    Date: 2017–04
  8. By: Sabahat (State Bank of Pakistan)
    Abstract: The saving-investment facilitation, the core function of the banking system results in liquidity creation. The on-balance sheet and off-balance sheet activities of banks play a vital role in liquidity provision: banks create liquidity while actively managing their portfolios of assets and liabilities of different maturities. This study attempts to measure the liquidity created by Pakistan’s banking system using methods employed by Berger and Bouwman (2009). Four measures LIC-C1, LIC-C2, LIC-T1 and LIC-T2 have been constructed for banks. We also group banks according to their size. Analyses of these measures indicate that, compared to other measures, the LIC-C1 measure records the highest amount of liquidity created during Sep07-Jun16. In absolute terms, liquidity of Rs 2.55 trillion was created at the end of Jun 2016, equal to 16.5 percent of the total assets of the banking industry. Further, a disaggregated analysis shows that most of the participation has come from large banks; medium sized banks’ ability remained subdued, whereas the group of small banks performed well in liquidity provision.
    Keywords: Liquidity Creation, Banking System, Balance Sheet
    JEL: G10 G21 E50 E58
    Date: 2017–03
  9. By: Beyer, Robert; Wieland, Volker
    Abstract: The current debate on monetary and fiscal policy is heavily influenced by estimates of the equilibrium real interest rate. In particular, this concerns estimates derived from a simple aggregate demand and Phillips curve model with time-varying components as proposed by Laubach and Williams (2003). For example, Summers (2014a) refers to these estimates as important evidence for a secular stagnation and the need for fiscal stimulus. Yellen (2015, 2017) has made use of such estimates in order to explain and justify why the Federal Reserve has held interest rates so low for so long. First, we re-estimate the U.S. equilibrium rate with the methodology of Laubach and Williams (2003). Then, we build on their approach and the modifications proposed in Mésonnier and Renne (2007) and Garnier and Wilhelmsen (2009) to provide new estimates for the United States, the euro area and Germany. Third, we subject these estimates to a battery of sensitivity tests. Due to the great uncertainty and sensitivity that accompany these equilibrium rate estimates, the observed decline in the estimates is not a reliable indicator of a need for expansionary monetary and fiscal policy. Yet, if these estimates are employed to determine the appropriate monetary policy stance, such estimates are better used together with the consistent estimate of the level of potential output.
    Keywords: equlibrium real interest rate; estimation; monetary policy
    JEL: E40 E43 E52
    Date: 2017–03
  10. By: Saglam, Ismail
    Abstract: We study the effects of non-sterilized intervention on a spot foreign exchange rate using a multi-period game-theoretical model which involves an unspecified number of competitive traders, a finite number of strategic traders (forex dealers), and the central bank of the home country. Simulating the subgame-perfect Nash equilibrium of the two-stage game played by the strategic traders in each period, we show that the non-sterilized intervention of the central bank may lead to a perverse result. This result may arise when the intervention becomes strong enough to unintentionally induce some of the strategic traders -who have previously traded in the direction desired by the monetary authority- to optimally switch to the opposite trade direction.
    Keywords: Exchange rate; central bank intervention; foreign exchange dealers; imperfect competition
    JEL: D43 F31 G20
    Date: 2017–04–13
  11. By: Carlos Góes; Herman Kamil; Phil De Imus; Mercedes Garcia-Escribano; Roberto Perrelli; Shaun K. Roache; Jeremy Zook
    Abstract: This paper examines the transmission of changes in the U.S. monetary policy to localcurrency sovereign bond yields of Brazil and Mexico. Using vector error-correction models, we find that the U.S. 10-year bond yield was a key driver of long-term yields in these countries, and that Brazilian yields were more sensitive to U.S. shocks than Mexican yields during 2010–13. Remarkably, the propagation of shocks from U.S. long-term yields was amplified by changes in the policy rate in Brazil, but not in Mexico. Our counterfactual analysis suggests that yields in both countries temporarily overshot the values predicted by the model in the aftermath of the Fed’s “tapering†announcement in May 2013. This study suggests that emerging markets will need to contend with potential spillovers from shifts in monetary policy expectations in the U.S., which often lead to higher government bond interest rates and bouts of volatility.
    Keywords: Western Hemisphere;Brazil;Mexico;QE, tapering, local-currency sovereign bond yields, vector error correction models, General
    Date: 2017–03–10
  12. By: Luisa Carpinelli; Matteo Crosignani
    Abstract: We study the effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up. We combine borrower-level data from the Italian credit registry with bank security-level holdings and analyze the transmission of the European Central Bank three-year Long Term Refinancing Operation. Exploiting a regulatory change that expands eligible collateral, we show that banks more affected by the dry-up use this facility to restore their credit supply, while less affected banks use it to increase their holdings of high-yield government bonds. Unable to switch from affected banks during the dry-up, firms benefit from the intervention.
    Keywords: Bank Credit Supply ; Bank Wholesale Funding ; Lender of Last Resort ; Unconventional Monetary Policy
    JEL: E50 E58 G21 H63
    Date: 2017–03
  13. By: Byrne, David (Central Bank of Ireland); Kelly, Robert (Central Bank of Ireland); O'Toole, Conor (Central Bank of Ireland)
    Abstract: One channel through which monetary policy can affect loan default in the mortgage market is by altering the affordability of borrower repayments. Quantifying the exact impact of this relationship is complex as it depends on both the structure and passthrough of a given mortgage market. This paper uses a quasi-natural experiment to identify the impact of changes in interest rates on mortgage default. Using a panel of loan level administrative data for Ireland, we deal with selection bias that is inherent in identifying the impact of interest rates by exploiting the variation between two types of adjustable rate mortgage that were offered to Irish borrowers for a particular period in the mid-2000s. We map changes in interest rates to default by quantifying the direct effect through changes in borrower installments. Using a pass-through approach, we find a strong and highly statistically significant impact of interest rates on mortgage default, with a 1 per cent reduction in installment associated with a 5.8 per cent decrease in the likelihood of default over the following year. We also find evidence that negative equity offsets the some of the gains arising from lower policy rates indicating an interaction between monetary policy and asset price shocks in the mortgage market.
    Keywords: Monetary Policy, Mortgage Default
    JEL: E52 E58 G01 G21
    Date: 2017–03
  14. By: Fernholz, Ricardo; Mitchener, Kris James; Weidenmier, Marc
    Abstract: We use the demise of silver-based standards in the 19th century to explore price dynamics when a commodity-based money ceases to function as a global unit of account. We develop a general equilibrium model of the global economy with gold and silver money. Calibration of the model shows that silver ceased functioning as a global price anchor in the mid-1890s - the price of silver is positively correlated with agricultural commodities through the mid-1890s, but not thereafter. In contrast to Fisher (1911) and Friedman (1990), both of whom predict greater price stability under bimetallism, our model suggests that a global bimetallic system in which the gold price of silver fluctuates has higher price volatility than a global monometallic system. We confirm this result using agricultural commodity price data for 1870-1913.
    Keywords: bimetallism; classical gold standard; fixed exchange rates; silver; unit of account
    JEL: E42 F33 N10 N20
    Date: 2017–04
  15. By: Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: This paper discusses the money creation mechanisms in emerging markets with special focus on external transactions. We argue that one should not rule out the possibility that fluctuations in the loans-to-deposits and non-core liabilities ratios are driven by the banks. We also argue that, under a flexible exchange rate regime in which the central bank is not trying to accumulate foreign reserves, external transactions are unlikely to contribute significantly to money growth. To make our argument, we analyze a historical episode of these flows in Korea and Russia and conduct a canonical correlation analysis for a cross-section of emerging market economies.
    Keywords: Money supply, non-core liabilities, loans-to-deposits ratio, emerging markets
    JEL: E51 F30 G21
    Date: 2016–05
  16. By: Dong Frank Wu
    Abstract: This paper focuses on the role of the pass-through of the exchange rate and policydeterminants in driving inflation. Using linear and nonlinear frameworks, the paper finds: (i) after the switch to a floating exchange rate regime in 2012, nonfood prices not only directly influence headline inflation, but also have an significant impact on food inflation via second round effects; (ii) the pass-through of the exchange rate to headline inflation has jumped from zero to 11 percent under the floating regime, after controlling for other factors; (iii) the improved significance of T-bill rates in shaping inflation flags its importance in Malawi’s monetary framework although the monetary transmission mechanism needs further strengthening; (iv) the increased impact of broad money underscores the necessity for fiscal discipline and central bank independence.
    Keywords: Inflation;Malawi;Exchange rate pass-through;Exchange rate regimes;Floating exchange rates;Regression analysis;Econometric models;Inflation, Exchange Rate, Pass-through, Regime Switch
    Date: 2017–03–09
  17. By: Stephen Morris (Princeton University); Hyun Song Shin (Bank for International Settlements)
    Abstract: We explore a global game model of the impact of monetary policy shocks. Risk-neutral asset managers interact with risk-averse households in a market with a risky bond and a floating rate money market fund. Asset managers are averse to coming last in the ranking of short-term performance. This friction injects a coordination element in asset managers’ portfolio choice that leads to large jumps in risk premiums in response to small future anticipated changes in central bank policy rates. The size of the asset management sector is the key parameter determining the extent of market disruption to monetary policy shocks.
    Keywords: market liquidity, risk-taking channel, runs
    JEL: E43 E52 E58
    Date: 2015–12
  18. By: Peter Spahn
    Abstract: We analyze the benefits and costs of a non-euro country opting-in to the banking union. The decision to opt-in depends on the comparison between the assessment of the banking union attractiveness and the robustness of a national safety net. The benefits of opting-in are still only potential and uncertain, while costs are more tangible. Due to treaty constraints, noneuro countries participating in the banking union will not be on equal footing with euro area members. Analysis presented in the paper points out that reducing the weaknesses of the banking union and thus providing incentives for opting-in is not probable in the short term, mainly due to political constraints. Until a fully-fledged banking union with well-capitalized backstops is established it may be optimal for a non-euro country to join the banking union upon the euro adoption. Assessing first experiences with the functioning of the banking union and opt-in countries will be crucial for non-euro countries when deciding whether to opt-in.
    Keywords: currency union, lender of last resort, central bank reserves, central bank budget constraint
    JEL: E5 E6
    Date: 2016–10
  19. By: Alessandro Cantelmo; Giovanni Melina
    Abstract: In an estimated two-sector New-Keynesian model with durable and nondurable goods, an inverse relationship between sectoral labor mobility and the optimal weight the central bank should attach to durables inflation arises. The combination of nominal wage stickiness and limited labor mobility leads to a nonzero optimal weight for durables inflation even if durables prices were fully flexible. These results survive alternative calibrations and interestrate rules and point toward a non-negligible role of sectoral labor mobility for the conduct of monetary policy.
    Keywords: Central banks and their policies;Labor mobility;Optimal monetary policy, durable goods, DSGE, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–03–06
  20. By: Bosupeng, Mpho
    Abstract: China’s economic growth as well as global influence has been escalating in the last decades. The purpose of this investigation is to determine the impact of Chinese interest rates and inflation on other economies. The study uses data from 1982 to 2013 and applies the Toda and Yamamoto approach to Granger causality. Using data for nineteen countries, the results show that China has significant influence on interest rates and inflation dynamics of Costa Rica, Kenya and Nigeria. The study further shows that Japan and South Africa induce China’s interest rates as well as inflation. It is projected that as China’s economy continues to grow, her influence in global financial matters and other economies will also intensify.
    Keywords: nominal interest rates, real interest rates, inflation, economic growth
    JEL: E43
    Date: 2016
  21. By: Kang , Yoo-Duk (Korea Institute for International Economic Policy)
    Abstract: This study aims to review the policy responses of the European Central Bank (ECB) during the global economic crisis and subsequent Euro crisis, and sheds light on the logic and backgrounds related to these responses. The ECB used increasingly non-conventional measures, such as the purchase of sovereign bonds, which was unexpected before the crisis. In this context, the study raises the following question: is the increasing use of non-conventional measures temporary one in response to an unprecedent crisis or is it a sign of structural change in ECB's role? The ECB has features in common with most central banks of advanced countries, but it differs from them in three aspects. First, the ECB has a mandate only with respect to price stability. it has a very high level of institutional and political independence. Third, the ECB and the national central banks of the Eurosystem are forbidden to finance governments (monetization). These salient features of the ECB are very similar to those of the German Bundesbank. Given the role of Deutsche Mark and the Bundesbank in the European monetary integration, it seems that the ECB would include features that are legacies of the Bundesbank. As the Euro crisis spread over the entire eurozone starting from the European peripheries, responses by the ECB have been increasingly active. In order to keep financial markets stable, it has intervened with non-conventional measures. For the first time, it made large-scale purchase of sovereign bonds from the secondary market and provided long term liquidity to financial institutions with low interest rates. In addition, its Governing Council declared the outright monetary transaction (OMT), which means that the ECB will purchase unlimited quantity of sovereign bonds in case of a crisis. Its willingness and determination toward market intervention played an important role in mitigating the crisis. However, these measures, particularly the purchases or plans to purchase sovereign bonds, caused a dispute between different actors and principles. They were conceived and implemented amidst tension between member states, particularly Germany and France and between ECB's mandate (price stability) and financial stability (response to the euro crisis). During the crisis, the ECB made it clear that its priority and mandate are in maintaining price stability and emphasized that non-conventional measures were implemented to secure a 'transmission channel' of monetary policy. Eventually its measures contributed to mitigation of tensions in the sovereign market, but it emphasized repeatedly that these measures were conducted as a part of its monetary policy. Besides, its president underlined that the ECB excluded completely all political influences in its policy consideration. Regarding the future change in ECB's role, it is necessary to note and consider three aspects. First, the Euro crisis provided occasions for reflecting upon the role of the central bank as the 'lender of last resort'. As the crisis deepened, the role of ECB has been up for discussion. This means that all debates regarding its role during the crisis could become a starting point for its institutional change, albeit small. Second, the role of the ECB will be impacted significantly by the level of economic integration in the EU. Considering that the EU does not have any authority to impose taxes and conduct fiscal policy, it is hardly expected that the ECB provides credit to any European institutions and governments. Third, the ECB has now a supervisory authority over the commercial banks in Eurozone under the ongoing banking union. This means that the ECB has to follow two simultaneous objectives, price stability and financial stability. While the ECB declared that two objectives will be treated individually according to the 'principle of separation', the political and economic dynamics that the ECB has to encounter will be more complicated than before.
    Keywords: Euro Crisis; European Central Bank; Price Stability; Non Conventional Measures
    Date: 2015–07–03
  22. By: Joseph E. Gagnon; Tamim Bayoumi; Juan M. Londono; Christian Saborowski; Horacio Sapriza
    Abstract: This paper explores the effects of unconventional monetary and exchange rate policies. We find that official foreign asset purchases have large effects on current accounts that diminish as capital mobility rises and spill over to financially integrated countries. There is an additional effect through the stock of central bank assets. Domestic asset purchases have an effect on current accounts only when capital mobility is low. We also find that rising US bond yields drive foreign yields, stock prices and depreciations, but less so on days of policy announcements. We develop a theoretical model that is broadly consistent with our results.
    Date: 2017–03–13
  23. By: Mariano Kulish (School of Economics, Australian School of Business, the University of New South Wales); James Morley (School of Economics, Australian School of Business, the University of New South Wales); Tim Robinson (Melbourne Institute of Applied Economics and Social Research, University of Melbourne)
    Abstract: We propose an approach to estimating structural models in which the central bank holds the policy rate fixed for an extended period of the estimation sample. Embedding this policy in a version of the Smets and Wouters (2007) model that incorporates information from the yield curve to help with identification at the zero lower bound, we jointly estimate the structural parameters for the period of 1983-2014 and the expected duration of the zero interest rate policy in each quarter since 2009. This allows us to assess the effects of the zero lower bound, in particular, how private agents' beliefs about its duration influence output, inflation and interest rates at longer maturities. We find considerable variation in the expected duration over time, with a large increase in 2011 when the Federal Reserve moved to calendar-based forward guidance and a similar decrease in 2013 with the so-called `Taper tantrum'. We also measure the severity of the zero lower bound as a constraint and quantify the associated output losses. Conditional forecasts from the model suggest that a longer expected duration corresponds to higher output growth in the near term, with offsetting lower growth at the time of expected liftoff. Impulse response analysis confirms that an exogenous change in the expected duration has significant effects on the real economy.
    Keywords: zero lower bound, forward guidance, Bayesian estimation.
    JEL: E52 E58
    Date: 2016–10
  24. By: Dean Croushore; Simon van Norden
    Abstract: This paper provides an detailed examination of a new set of fiscal forecasts for the U.S. assembled by Croushore and van Norden (2017) from FOMC briefing books. The data are of particular interest as (1) they afford a look at fiscal forecasts over six complete business cycles and several fiscal policy regimes, covering both peacetime and several wars, (2) the forecasts were precisely those presented to monetary policymakers, (3) they include frequently-updated estimates of both actual and cyclically-adjusted deficits, (4) unlike most other US fiscal forecasts, they were neither partisan nor constrained by unrealistic assumptions about future fiscal policy, and (5) forecasts for other variables (GDP growth, inflation) from the same forecasters are known to compare favorably to most other available forecasts. We detail the performance of forecast federal expenditures, revenues, surpluses and structural surpluses in terms of accuracy, bias and efficiency. We find that (1) fiscal forecast errors can be economically large, even at relatively short forecast horizons, (2) while the accuracy of unemployment rate forecast errors improved after 1990, that of most fiscal variables deteriorated considerably, (3) there is limited evidence of forecast bias, and most of this evidence is confined to the period before 1993, (4) the forecasts appear to be efficient with respect to both the Fed Funds rate and CBO projections, and (5) cyclically-adjusted deficit forecasts appear to be over-optimistic around both business cycle peaks and troughs.
    Keywords: fiscal policy, deficits, forecasting, FOMC, Greenbook,
    JEL: E62 H68
    Date: 2017–04–05
  25. By: Claudiu Tiberiu Albulescu (UPT); Dominique P\'epin (CRIEF); Stephen Miller (WGU Nevada)
    Abstract: This paper investigates and compares currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro. In addition, we develop a model with microeconomic foundations, which identifies difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to money demand sensitivity to the interest rate spread between the CEE countries and the euro area. Moreover, we show how the exchange rate affects money demand, even absent a currency substitution effect. This model applies to any country where an international currency offers liquidity services to domestic agents. The model generates empirical tests of long-run money demand using two complementary cointegrating equations. The opportunity cost of holding the money and the scale variable, either household consumption or output, explain the long-run money demand in CEE countries.
    Date: 2017–04
  26. By: Aleksandra Halka
    Abstract: The outbreak of the global financial crisis made the central banks to admit that keeping inflation within the target is not sufficient to stabilize the economy. Apart from price stability they should also care about financial and macroeconomic stability. To achieve this central banks should look not only at inflation but also at other variables. Economists agree broadly that inflation targeting framework should be realized in more flexible way in terms of both: paying more attention to output growth and allowing inflation to return to the target in longer horizon. The central bankers admitted that in some cases stabilizing the economy, may require inflation to deviate from the target for an extended period of time. This more flexible approach may be reflected in the modification of the way monetary policy is conducted and hence in the central banks' reaction function. The aim of this paper is to check empirically whether selected European central banks in small open economies outside the euro area, conducting autonomous monetary policy changed the way the monetary policy is conducted - whether central banks enhanced the flexibility of their inflation targeting strategy during the crisis. I investigate the reaction functions of the selected central banks using the ordered logit model to account for the unconventional monetary measures introduced by the central banks. The explanatory variables are the CPI and GDP growth forecasts published by four central banks in European small open economies which conduct autonomous monetary policy and are inflation targeters. The dependent variable is the change of the monetary policy stance reflected in changes of the policy rate and/or unconventional monetary policy measures. The results indicate that all analyzed banks have changed their way of setting interest rates, however in each case the change is different. The Czech central bank (CNB) extended the CPI forecast horizon which it takes into consideration when setting the interest rate. Additionally the its monetary stance became more accommodative. The Hungarian central bank (MNB) increased the weight put on the GDP growth after the outbreak of the global financial crisis. Similarly to the CNB, the MNB started to conduct more accommodative monetary policy. Although in the case of the Polish central bank (NBP) we do not observe changes of the forecast horizon, this bank also started to put more weight on the GDP growth forecast as compared to CPI forecast. Besides, the NBP's monetary policy has become more accommodative. In the case of the Swedish central bank, we do not observe an increase of the importance of the GDP growth, however there is an extension of the CPI forecast horizon which it takes into consideration when setting the interest rate. The results show that all the banks are ready to accept an extended period or larger deviations of inflation from the target in order to maintain the stability of the whole economy and become more flexible inflation targeters
    Keywords: The Czech Republic, Hungary, Poland, Sweden, Monetary issues, Macroeconometric modeling
    Date: 2016–07–04
  27. By: Cecchetti, Stephen G; Feroli, Michael; Hooper, Peter; Kashyap, Anil K; Schoenholtz, Kermit
    Abstract: This report examines the behavior of inflation in the United States since 1984 (updating Cecchetti et al. (2007)). Over this period, the change in inflation is negatively serially correlated, and the change in inflation is best predicted by a statistical model that includes only information from the two most recent quarters. We find that the level of inflation fluctuates around a slowly changing trend that we call the local mean of inflation. Few variables add extra explanatory power for inflation once the local mean is taken into account. This local mean is itself well characterized by a random walk. Labor market slack has a statistically significant, but quantitatively small, effect on the local mean and inflation expectations have no effect. Some financial conditions that are influenced by monetary policy have larger effects on the local mean. Concretely, this means that one-off moves in labor market slack or inflation expectations that are not mirrored in broader indicators of inflation pressures are unlikely to be predictive of changes in trend inflation.
    Keywords: Federal Open Market Committee; FOMC; inflation dynamics; Inflation expectations; inflation target; inflation trend; monetary policy; Philip Curve; price stability; US Monetary Policy Forum
    JEL: E31 E52
    Date: 2017–03
  28. By: Yunjong Eo; Denny Lie
    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 findings can be summarized as follows. First, we find that the welfare cost of a standard Taylor rule is non-trivial, even with optimized policy coefficients. 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 significantly 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
    JEL: E12 E32 E58 E61
    Date: 2017–04
  29. By: Amador, Manuel; Bianchi, Javier; Bocola, Luigi; Perri, Fabrizio
    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 it 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
  30. By: Roberto Robatto
    Abstract: This paper presents a general equilibrium, monetary model of bank runs to study monetary injections during financial crises. When the probability of runs is positive, depositors increase money demand and reduce deposits; at the economy-wide level, the velocity of money drops and deflation arises. Two quantitative examples show that the model accounts for a large fraction of (i) the drop in deposits in the Great Depression, and (ii) the $400 billion run on money market mutual funds in September 2008. In some circumstances, monetary injections have no effects on prices but reduce money velocity and deposits. Counterfactual policy analyses show that, if the Federal Reserve had not intervened in September 2008, the run on money market mutual funds would have been much smaller. JEL Classification: E44, E51, G20
    Keywords: Monetary Injections, Flight to Liquidity, Bank Runs, Endogenous Money Velocity, Great Depression, Great Recession, Money Market Mutual Funds
    Date: 2017–03

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