nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒04‒23
twenty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Heterogeneity in Euro Area Monetary Policy Transmission: Results from a large Multi-Country BVAR By Ute Volz; Martin Mandler; Michael Scharnagl
  2. Monetary Policy and Global Banking By Falk Bräuning; Victoria Ivashina
  3. Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets By Eric T. Swanson
  4. Monetary policy's rising FX impact in the era of ultra-low rates By Massimo Ferrari; Jonathan Kearns; Andreas Schrimpf
  5. Real dollarization and monetary policy in Peru By Alex Contreras M.; Zenón Quispe M.; Fernando Alonso Regalado S.; F. Martín Martinez P.
  6. Unconventional monetary policy: interest rates and low inflation: A review of literature and methods By Mariarosaria Comunale; Jonas Striaukas
  7. Low Real Interest Rates and the Zero Lower Bound By Williamson, Stephen D.
  8. A Segmented Markets Model to Teach Analysis of Monetary Policy Shocks in Developing Economies By Waknis, Parag
  9. Threshold effects of financial stress on monetary policy rules: a panel data analysis By Floro, Danvee; van Roye, Björn
  10. The inflation risk premium in the post-Lehman period By Camba-Méndez, Gonzalo; Werner, Thomas
  11. The Effectiveness of Forward Guidance in an Estimated DSGE Model for the Euro Area: the Role of Expectations By Roberta Cardani; Alessia Paccagnini; Stelios D. Bekiros
  12. The Cost Channel Effect of Monetary Transmission: How Effective is the ECB's Low Interest Rate Policy for Increasing Inflation? By Schäfer, Dorothea; Stephan, Andreas; Trung Hoang, Khanh
  13. GENDER AND CENTRAL BANKING By Ibrahima Diouf; Dominique Pépin
  14. Turning Over a Golden Leaf? Global Liquidity and Emerging Market Central Banks’ Demand for Gold after the Financial Crisis By Gopalakrishnan, Balagopal; Mohapatra, Sanket
  15. Monetary Policy and the Predictability of Nominal Exchange Rates By Martin Eichenbaum; Benjamin K. Johannsen; Sergio Rebelo
  16. Forecasting Chilean Inflation with the Hybrid New Keynesian Phillips Curve: Globalisation, Combination, and Accuracy By Medel, Carlos A.
  17. Price Jumps in Developed Stock Markets: The Role of Monetary Policy Committee Meetings By Rangan Gupta; Chi Keng Marco Lau; Ruipeng Liu; Hardik A. Marfatia
  18. Does monetary policy generate asset price bubbles ? By Christophe Blot; Paul Hubert; Fabien Labondance
  19. Exploring the Nexus between Inflation and Globalization under Inflation Targeting through the Lens of New Zealand’s Experience By Ayse Kabukcuoglu; Enrique Martínez-García; Mehmet Ali Soytas
  20. Do Digital Currencies Pose a Threat to Sovereign Currencies and Central Banks? By Daniel Heller
  21. Proposals for a policy mix in the euro area By Georg Feigl; Markus Marterbauer; Miriam Rehm; Matthias Schnetzer; Sepp Zuckerstätter; Lars Andersen; Thea Nissen; Signe Dahl; Peter Hohlfeld; Benjamin Lojak; Thomas Theobald; Achim Truger; null null; Guillaume Allegre; Céline Antonin; Christophe Blot; Jérôme Creel; Bruno Ducoudre; Paul Hubert; Sabine Lebayon; Sandrine Levasseur; Hélène Périvier; Raul Sampognaro; Aurélien Saussay; Vincent Touze; Sébastien Villemot; Xavier Timbeau

  1. By: Ute Volz; Martin Mandler; Michael Scharnagl
    Abstract: We analyse empirically whether the common monetary policy of the Eurosystem has heterogeneous effects on the four large member countries of the European Monetary Union (France, Germany, Italy and Spain) focussing on possible cross-country differences in the reaction of output, the price level and financial variables to changes in the Euroystem’s monetary policy interest rate. We use a large multi-country Bayesian vector autoregression to jointly model the dynamics of output, prices and financial variables in the four countries after 1999. Following Giannone, Lenza, and Primiceri (2015) the prior distributions are selected in a data-driven way. We compare across countries the reactions of the variables to exogenous changes in the Eurosystem’s common monetary policy interest rate. The Bayesian approach specifically allows us to make explicit probabilistic statements about the extent of cross-country heterogeneity in the effects of monetary policy. We further strengthen the robustness our results using a battery of additional tests on cross-country differences in the distributions of the effects of monetary policy. Comparing the macroeconomic effects of an exogenous increase in the Eurosystem’s monetary policy interest rate across countries we find real output to respond less negatively in Spain compared to the other three countries while the drop in the price level is less pronounced in Germany relative to France, Italy and Spain. Bond yields rise more strongly and persistently in France and Germany compared to Italy and Spain.
    Keywords: France, Germany, Italy, Spain, Monetary issues, Macroeconometric modeling
    Date: 2016–07–04
  2. By: Falk Bräuning; Victoria Ivashina
    Abstract: Global banks use their global balance sheets to respond to local monetary policy. However, sources and uses of funds are often denominated in different currencies. This leads to a foreign exchange (FX) exposure that banks need to hedge. If cross-currency flows are large, the hedging cost increases, diminishing the return on lending in foreign currency. We show that, in response to domestic monetary policy easing, global banks increase their foreign reserves in currency areas with the highest interest rate, while decreasing lending in these markets. We also find an increase in FX hedging activity and its rising cost, as manifested in violations of covered interest rate parity.
    JEL: E44 E52 F31 G21
    Date: 2017–04
  3. By: Eric T. Swanson
    Abstract: I extend the methods of Gurkaynak, Sack, and Swanson (2005) to separately identify the effects of Federal Reserve forward guidance and large-scale asset purchases (LSAPs) during the 2009–15 U.S. zero lower bound (ZLB) period. I find that both forward guidance and LSAPs had substantial and highly statistically significant effects on medium-term Treasury yields, stock prices, and exchange rates, comparable in magnitude to the effects of the federal funds rate before the ZLB. Forward guidance was more effective than LSAPs at moving short-term Treasury yields, while LSAPs were more effective than forward guidance and the federal funds rate at moving longer-term Treasury yields, corporate bond yields, and interest rate uncertainty. However, the effects of forward guidance were not very persistent, with a half-life of 1–4 months. The effects of LSAPs seem to be more persistent. I conclude that, overall in terms of these criteria, LSAPs were a more effective policy tool than forward guidance during the ZLB period.
    JEL: E44 E52 E58
    Date: 2017–04
  4. By: Massimo Ferrari; Jonathan Kearns; Andreas Schrimpf
    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 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: Rates, Unconventional Monetary Policy, Forward Guidance, Event Study, High Frequency Data
    Date: 2017–04
  5. By: Alex Contreras M. (BCRP, UDEP, UPC y UNI); Zenón Quispe M. (BCRP); Fernando Alonso Regalado S. (BCRP y Universidad del Pacífico); F. Martín Martinez P. (BCRP y Universidad Nacional Mayor de San Marcos)
    Abstract: Despite the average inflation levels of 2.8 percent between 2002 and 2015, within the range of the price stability goal, partial dollarization remains as the main vulnerability of the Peruvian economy. Although financial dollarization has already been importantly reduced, in the case of lending, from 82 percent at the end of 1990’s to 29 percent in June 2016; the dollarization of transactions persists at high levels such as 58 percent imposing important challenges to monetary policy, principally in events of higher volatility of the exchange rate which passes-through to domestic inflation. In this scenario, measuring the real dollarization at the sectorial level and at the level of the structure of costs of non-financial firms becomes crucial to understand it and to contribute to the design of the monetary policy in the presence of dollarization.
    Date: 2017–04
  6. By: Mariarosaria Comunale; Jonas Striaukas
    Abstract: In this paper, we review a range of approaches used to capture monetary policy in a period of Zero Lower Bound (ZLB). We concentrate here on methods closely linked to interest rates, which include: spreads, synthetic indices from principal component analysis, and different shadow rates. Next, we calculate these measures for the euro area, draw comparisons among different approaches, and look at the effects on main macroeconomic variables, with a special focus on inflation. By and large, the impact of unconventional monetary policy shocks on inflation is found to be significantly positive across studies and methods. Finally, we summarize the literature on the Natural Real Rate of Interest. This overview may help to assess how long low (real) interest rates in a ZLB stay in place, potentially leading to more accurate policy recommendations.
    Keywords: Unconventional monetary policy, zero lower bound, shadow rates, natural interest rate, inflation.
    JEL: E43 E52 E58 F42
    Date: 2017–04
  7. By: Williamson, Stephen D. (Federal Reserve Bank of St. Louis)
    Abstract: How do low real interest rates constrain monetary policy? Is the zero lower bound optimal if the real interest rate is sufficiently low? What is the role of forward guidance? A model is constructed that can in- corporate sticky price frictions, collateral constraints, and conventional monetary distortions. The model has neo-Fisherian properties. Forward guidance in a liquidity trap works through the promise of higher future inflation, generated by a higher future nominal interest rate. With very tight collateral constraints, the real interest rate can be very low, but the zero lower bound need not be optimal.
    JEL: E4 E5
    Date: 2017–04–01
  8. By: Waknis, Parag
    Abstract: The standard undergraduate textbook models in macroeconomics like the IS-LM/AD-AS model are not disaggregated enough to understand the effects of monetary policy shocks in developing economies typically characterized by substantial informality, and goods and financial markets segmentation. In this paper, I present a version of a segmented markets model based on Williamson (2009, 2011) that could be used as an effective alternative. I demonstrate the use of the framework by analyzing the effects of demonetization- a substantial reduction in the availability of outside money- in a developing country setting.
    Keywords: segmented markets, developing countries, demonetization, economic education, informal markets, undergraduate macroeconomics.
    JEL: A22 E42 O17
    Date: 2017–03–28
  9. By: Floro, Danvee; van Roye, Björn
    Abstract: This study tests for the state-dependent response of monetary policy to increases in overall financial stress and financial sector-specific stress across a panel of advanced and emerging economy central banks. We use a factor-augmented dynamic panel threshold regression model with (estimated) common components to deal with crosssectional dependence. We find strong evidence of state-dependence in the response of monetary policy to financial sector-specific stress for advanced economy central banks, as they pursue aggressive monetary policy loosening in response to stock market and banking stress only in times of high financial market volatility. By comparison, evidence of threshold effects of financial stress is generally weak for emerging market central banks. JEL Classification: E31, E44, E52, E58, C23, C24
    Keywords: cross-section dependence, Financial stress, monetary policy, threshold panel regression
    Date: 2017–04
  10. By: Camba-Méndez, Gonzalo; Werner, Thomas
    Abstract: In this paper we construct model-free and model-based indicators for the inflation risk premium in the US and the euro area. We study the impact of market liquidity, surprises from inflation data releases, inflation volatility and deflation fears on the inflation risk premium. For our analysis, we construct a special dataset with a broad range of indicators. The dataset is carefully constructed to ensure that at every point in time the series are aligned with the information set available to traders. Furthermore, we adopt a Bayesian variable selection procedure to deal with the strong multicollinearity in the variables that potentially can explain the movements in the inflation risk premium. We find that the inflation risk premium turned negative, on both sides of the Atlantic, during the post-Lehman period. This confirms the recent finding by Campbell et al. (2016) that nominal bonds are no longer "inflation bet" but have turned into "deflation hedges". We also find, and contrary to common beliefs, that indicators of inflation uncertainty alone cannot explain the movements in the inflation risk premium in the post-Lehman period. The decline in the inflation risk premium seems mostly related to increased deflation fears and the belief that inflation will stay far away from the monetary policy target rather than declining inflation uncertainty. This in turn would suggest that central banks should not be complacent with low or even negative inflation risk premia. JEL Classification: E44, G17
    Keywords: inflation expectations, Inflation linked swaps, inflation risk premium
    Date: 2017–03
  11. By: Roberta Cardani; Alessia Paccagnini; Stelios D. Bekiros
    Abstract: We assess the effectiveness of the forward guidance undertaken by European Central Bank using a standard medium-scale DSGE model à la Smets and Wouters (2007). Exploiting data on expectations from surveys, we show that incorporating expectations should be crucial in performance evaluation of models for the forward guidance. We conduct an exhaustive empirical exercise to compare the pseudo out-of-sample predictive performance of the estimated DSGE model with a Bayesian VAR and a DSGE-VAR models. DSGE model with expectations outperforms others for inflation; while for output and short term-interest rate the DSGE-VAR with expectations reports the best prediction.
    Keywords: DSGE Bayesian estimation; Survey professional forecasts; Real time data
    JEL: C52 C53 E58 E52
    Date: 2017–01
  12. By: Schäfer, Dorothea (DIW Berlin, JIBS and CERBE); Stephan, Andreas (Linnæus University, Ratio Institute and JIBS); Trung Hoang, Khanh (DIW Berlinn)
    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: E31 E43 E43 G01 G01
    Date: 2017–03–23
  13. By: Ibrahima Diouf (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: Female Central Bank chairs represent but a tiny minority. To understand why, this article analyzes socioeconomic and socio-political characteristics of the countries where females have chaired Central Banks. Then, it suggests that gender differences in preferences as regards monetary policy goals may have some influence. This hypothesis is based on an empirical analysis showing that female Central Bank chairs focus more than their male colleagues on achieving the price stability goal. This means, then, that females are more resistant than males to political pressures. Finally, it concludes that gender differences in degree of conservatism, may be an explanatory factor in female underrepresentation in the Central Bank chairs.
    Keywords: monetary policy,Central Bank,gender gap,preference parameters,female,conservatism
    Date: 2017–02
  14. By: Gopalakrishnan, Balagopal; Mohapatra, Sanket
    Abstract: The quantity of gold reserves held by central banks in emerging markets and developing economies (EMDEs) has risen sharply following the global financial crisis in 2008. This paper examines factors driving holding of gold by central banks in 50 EMDEs using a dynamic panel generalized method of moments model. We find that monetary expansion in advanced economies is robustly related to the post-crisis increase in EMDE gold reserves, after controlling for domestic factors and changes in the global risk environment. This effect holds across different measures of global liquidity, and is robust to alternate model specifications, inclusion of additional covariates, and alternate estimation methods. We argue that the unprecedented monetary expansion in advanced economies has resulted in a shift in EMDE reserve asset holding strategy, resulting in continued accumulation of gold reserves even after the peak of the financial crisis.
    Date: 2017–04–12
  15. By: Martin Eichenbaum; Benjamin K. Johannsen; Sergio Rebelo
    Abstract: This paper documents two facts about the behavior of floating exchange rates in countries where monetary policy follows a Taylor-type rule. First, the current real exchange rate is highly negatively correlated with future changes in the nominal exchange rate at horizons greater than two years. This negative correlation is stronger the longer is the horizon. Second, for most countries, the real exchange rate is virtually uncorrelated with future inflation rates both in the short and in the long run. We develop a class of models that can account for these and other key observations about real and nominal exchange rates.
    Keywords: Exchange rates and foreign exchange ; Monetary policy
    JEL: E52 F31
    Date: 2017–02
  16. By: Medel, Carlos A.
    Abstract: This article analyses the multihorizon predictive power of the Hybrid New Keynesian Phillips Curve (HNKPC) covering the period from 2000.1 to 2014.12, for the Chilean economy. A distinctive feature of this article is the use of a Global Vector Autoregression (GVAR) specification of the HNKPC to enforce an open economy version. Another feature is the use of direct measures of inflation expectations--Consensus Forecasts--differing from a fully-founded rational expectations model. The HNKPC point forecasts are evaluated using the Mean Squared Forecast Error (MSFE) statistic and statistically compared with several benchmarks, including combined forecasts. The results indicate that there is evidence to do not reject the hypothesis of the HNKPC for the Chilean economy, and it is also robust to alternative specifications. In predictive terms, the results show that in a sample previous to the global financial crisis, the evidence is mixed between atheoretical benchmarks and the HNKPC by itself or participating in a combined prediction. However, when the evaluation sample is extended to include a more volatile inflation period, the results suggest that the HNKPC (and combined with the random walk) delivers the most accurate forecasts at horizons comprised within a year. In the long-run the HNKPC deliver accurate results, but not enough to outperform the candidate statistical models.
    Keywords: New Keynesian Phillips Curve; inflation forecasts; out-of-sample comparisons; survey data; Global VAR; structured time-series models; forecast combinations
    JEL: C22 C26 C53 E31 E37
    Date: 2017–04–16
  17. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Chi Keng Marco Lau (Newcastle Business School, Northumbria University, Newcastle, UK); Ruipeng Liu (Department of Finance, Deakin Business School, Deakin University, Melbourne, Australia); Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, Chicago, USA)
    Abstract: In this paper, we analyze the degree of occasional large price changes and extreme volatility – known as jump intensity – in the Euro area, Japan, the UK and the US. We also measure the reaction of jump intensity in these markets to the US Federal Reserve meetings as well as of the country’s own monetary policy meetings. The results indicate that the conditional jump intensity in all the markets follows a highly persistent process. Evidence suggests that the US monetary policy positively impacts the jump intensity in the case of the UK, Euro, and the US, including in the sub-sample periods found by the structural break test. Moreover, in assessing the joint effects, we find that the US continues to maintain the central role in driving the jump intensities, with it having even a greater role than monetary policy of the country itself.
    Keywords: Jump intensity, Developed stock markets, Monetary policy committee meeting dates
    JEL: C22 G15
    Date: 2017–04
  18. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: This paper empirically assesses the effect of monetary policy on asset price bubbles and aims to disentangle the competing predictions of theoretical bubble models. First, we take advantage of the model averaging feature of Principal Component Analysis to estimate bubble indicators, for the stock, bond and housing markets in the United States and Euro area, based on the structural, econometric and statistical approaches proposed in the literature to measure bubbles. Second, we assess the linear and non-linear effect of monetary shocks on these bubble components using local projections. The main result of this paper is that monetary policy does not affect asset price bubble components, except for the US stock market for which we find evidence in favor of the prediction of rational bubble models.
    Keywords: Asset price bubbles; Monetary polikcy; Quantitative easing; Federal Reserve; ECB
    JEL: E44 G12 E52
    Date: 2017–02
  19. By: Ayse Kabukcuoglu (Koc University); Enrique Martínez-García (Federal Reserve Bank of Dallas and Southern Methodist University); Mehmet Ali Soytas (Ozyegin University)
    Abstract: We investigate empirically the inflation dynamics in New Zealand, a small open economy and a pioneer in inflation targeting, under various open-economy Phillips curve specifications. Our forecasting exercise suggests that open-economy Phillips curves under standard measures of global slack do not help forecast domestic inflation, possibly indicating measurement problems with global slack itself. In turn, under a stable inflation target we still find that (i) global inflation or (ii) global inflation or oil prices have information content for headline CPI and core CPI inflation over the 1997:Q3-2015:Q1 period and appear to be reliable proxies for global slack in forecasting inflation.
    Keywords: Inflation Dynamics; Open-Economy Phillips Curve; Inflation Targeting; Inflation Forecasting.
    JEL: C21 C23 C53 F41 F47 F62
    Date: 2017–04
  20. By: Daniel Heller (Peterson Institute for International Economics)
    Abstract: Bitcoin is the first digital currency to have received widespread recognition and interest from users, developers, investors, central banks, and regulators, largely because of its “distributed ledger” technology, which allows it to provide relatively low-cost peer-to-peer transfers of money. Users own the bitcoin system and can make changes to the rules and protocol only by consensus or a supermajority of 95 percent. This communitarian ownership model and the fact that payments in bitcoin can be easily made from one end of the globe to another have led many to believe and hope that bitcoin will one day replace sovereign currencies—and the central banks that issue them. In addition, some observers see bitcoin as the origin of a fundamental transformation of the financial system toward a more decentralized structure. As a medium of exchange, bitcoin is still small compared with traditional channels, and it is held largely for speculation rather than transactions. Its lack of a mechanism for dampening the price effect of an increase in demand or reducing supply in case of a demand slump means that adopting bitcoin as a currency would be like reverting to a currency based on gold coins. As long as central banks continue to pursue stability-oriented monetary policies, they will have little reason to fear that the bitcoin system will replace them.
    Date: 2017–04
  21. By: Georg Feigl (Institute of Anatomy); Markus Marterbauer; Miriam Rehm; Matthias Schnetzer; Sepp Zuckerstätter; Lars Andersen; Thea Nissen; Signe Dahl; Peter Hohlfeld; Benjamin Lojak; Thomas Theobald; Achim Truger; null null (Macroeconomic Policy Institute (IMK)); Guillaume Allegre (Observatoire français des conjonctures économiques); Céline Antonin (Observatoire français des conjonctures économiques); Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Bruno Ducoudre (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Sabine Lebayon; Sandrine Levasseur (Observatoire français des conjonctures économiques); Hélène Périvier (Observatoire français des conjonctures économiques); Raul Sampognaro (Observatoire français des conjonctures économiques); Aurélien Saussay (Observatoire français des conjonctures économiques); Vincent Touze (Observatoire français des conjonctures économiques); Sébastien Villemot (Observatoire français des conjonctures économiques); Xavier Timbeau (Observatoire français des conjonctures économiques)
    Abstract: Since 2009, central banks have implemented expansionary policies to support activity and prevent industrialized economies from falling into deflation. In a recessionary environment, policy rates reached an effective lower bound (ELB) which has led central banks to resort to unconventional measures. These policies have resulted in an expansion of their balance sheets, reflecting liquidities provided by central banks to the financial system and asset purchases. These actions have raised many questions about their impact on real activity because recovery has been weak in the Eurozone, notably compared to the United States and the United Kingdom (see chapter 1). In the following, we focus on ECB policies’ impact on investment (section a) and on the impact of credit conditions on investment (section b). Questions have also been raised concerning the possible responsibility of monetary policy in generating financial bubbles (section c). The end of QE finally raises the issue of next engine of growth for the euro area (section d).
    Keywords: Policy Mix; Monetary Policy; Credit; Investment
    Date: 2016–12

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