nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒04‒30
twenty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. How bubbly is the New Zealand dollar? By Daan Steenkamp
  2. The interest rate pass-through in the low interest rate environment: Evidence from Germany By Hennecke, Peter
  3. International Transmission of Japanese Monetary Shocks Under Low and Negative Interest Rates: A Global Favar Approach By Spiegel, Mark M.; Tai, Andrew
  4. Changing Macroeconomic Dynamics at the Zero Lower Bound By Francesco Zanetti; Philip Liu
  5. Achieving price stability by manipulating the central bank's payment on reserves By Robert E. Hall; Ricardo Reis
  6. Forward guidance through interest rate projections: does it work? By Leif Brubakk; Saskia ter Ellen; Hong Xu
  7. Exchange Rates and Monetary Spillovers By Guillaume Plantin; Hyun Song Shin
  8. The Welfare Cost of Inflation Risk Under Imperfect Insurance By Yann Algan; Olivier Allais; Edouard Challe; Xavier Ragot
  9. Explosiveness in G11 currencies By Daan Steenkamp
  10. Regional Heterogeneity and Monetary Policy By Martin Beraja; Andreas Fuster; Erik Hurst; Joseph Vavra
  11. The transmission of monetary policy shocks By Miranda-Agrippino, Silvia; Ricco, Giovanni
  12. Norwegian interbank market’s response to changes in liquidity policy By Q. Farooq Akram; Jon H. Findreng
  13. Safe Haven Currency and Market Uncertainty: Yen, renminbi, dollar, and alternatives By MASUJIMA Yuki
  14. Inflation and Economic Growth By BLINOV, Sergey
  15. What can we Learn from Euro-Dollar Tweets? By Vahid Gholampour; Eric van Wincoop
  16. Asymmetric exchange rate policy in inflation targeting developing countries By Benlialper, Ahmet; Cömert, Hasan; Öcal, Nadir
  17. What has publishing inflation forecasts accomplished? Central banks and their competitors By Pierre L. Siklos
  18. Exchange Rate Prediction Redux: New Models, New Data, New Currencies By Yin-Wong Cheung; Menzie D. Chinn; Antonio Garcia Pascual; Yi Zhang
  19. Prospects for information and communications technology-enabled services in Kenya: The case of the mobile money transfer industry By Dianah Ngui Muchai; Peter Kimuyu
  20. Understanding Survey Based Inflation Expectations By Travis J. Berge
  21. Exchange Rate Policies at the Zero Lower Bound By Manuel Amador; Javier Bianchi; Luigi Bocola; Fabrizio Perri
  22. The Effect of the Federal Reserve’s Securities Holdings on Longer-term Interest Rates By Brian Bonis; Jane E. Ihrig; Min Wei

  1. By: Daan Steenkamp (Reserve Bank of New Zealand)
    Abstract: This paper tests for the existence of bubbles in the value of the New Zealand dollar. A common definition of an asset price bubble is the existence of explosive dynamics. This paper tests for periods of explosiveness in the New Zealand dollar measured at a monthly and quarterly frequency. To determine whether, during any explosive changes, the exchange rate was disconnected from changes in relative economic fundamentals, these tests are also applied to three models of exchange rate determination. This paper finds no evidence of episodes when either the New Zealand dollar or its fundamentals were explosive.
    Date: 2017–04
  2. By: Hennecke, Peter
    Abstract: In this paper it is shown that the ECB's main refinance rate, measured by various Taylor-rules, is far too low for Germany for over half a decade. That entails risks for the stability of Germany's financial system. How strong these risks materialize depends on the extent to which German banks pass on the low policy rates to their customers. In this paper, the interest rate pass-through in Germany in the low interest era is investigated using error-correction models for various bank interest rates. The results indicate a stronger short-term pass-through as well as diminished interest rate margins that weigh on banks' profits. However, there is no evidence for structural changes in the long-term relationship between policy rates and banks' interest rates. While the latter might be soothing for monetary policy makers, the former is rather a reason for concern.
    Keywords: low interest rates,interest rate pass-through,interest rate channel
    JEL: E43 E58
    Date: 2017
  3. By: Spiegel, Mark M. (Federal Reserve Bank of San Francisco); Tai, Andrew (Federal Reserve Bank of San Francisco)
    Abstract: We examine the implications of Japanese monetary shocks under recent very low and sometimes negative interest rates to the Japanese economy as well as three of its major trading partners: Korea, China and the United States. We follow the literature in using movements in 2-year Japanese government bond rates as proxies for changes in monetary conditions in the neighborhood of the zero lower bound. We examine the implications of shocks to the 2-year rate in a series of factor-augmented vector autoregressive—or FAVAR—models, in which both local and global conditions are proxied by latent factors generated from domestic economic indicators and weighted indicators of major trading partners, respectively. Our results suggest that shocks to 2-year Japanese rates do have substantive impacts on Japanese economic activity and inflation in conditions of low or even negative short-term rates. However, we find only modest global spillovers from Japanese monetary policy shocks, as their impact on the economic conditions of major Japanese trading partners is muted, particularly relative to the impact of innovations in 2-year U.S. Treasury yields over the same period.
    Date: 2017–02–28
  4. By: Francesco Zanetti; Philip Liu
    Abstract: Abstract This paper develops a change-point VAR model that isolates four major macroeconomic regimes in the US since the 1960s. The model identi es shocks to demand, supply, monetarypolicy, and spread yield using restrictions from a general equilibrium model. The analysis discloses important changes to the statistical properties of key macroeconomic variables and their responses to the identi ed shocks. During the crisis period, spread shocks became more important for movements in unemployment and in ation. A counterfactual exercise evaluates the importance of lower bond-yield spread during the crises and suggests that the Fed's largescale asset purchases helped lower the unemployment rate by about 0.6 percentage points, while boosting in ation by about 1 percentage point.
    Keywords: change-point VAR model, global nancial crisis, large-scale asset purchases
    JEL: E42 E52
    Date: 2017–04–23
  5. By: Robert E. Hall; Ricardo Reis
    Abstract: Today, all major central banks pay or collect interest on reserves, and stand ready to use the interest rate as an instrument of monetary policy. We show that by paying an appropriate rate on reserves, the central bank can pin the price level uniquely to a target. The essential idea is to index reserves to the market interest rate, the price level, and the target price level in a way that creates a contractionary financial force if the price level is above the target and an expansionary force if below. Our payment-on-reserves policy process does not require terminal conditions like Taylor rules, exogenous fiscal surpluses like the fiscal theory of the price level, liquidity preference as in quantity theories, or local approximations as in new Keynesian models. The process accommodates liquidity services from reserves, segmented financial markets where only some institutions can hold reserves, and nominal rigidities. We believe it would be easy to implement.
    JEL: F3 G3
    Date: 2016–10–16
  6. By: Leif Brubakk (Norges Bank (Central Bank of Norway)); Saskia ter Ellen (Norges Bank (Central Bank of Norway)); Hong Xu (Norges Bank (Central Bank of Norway))
    Abstract: Based on high-frequency data for Norway and Sweden, we investigate to what extent explicit forward guidance from monetary policy makers, by means of publishing the path of expected future policy rates, affects the market yield curve. We summarise movements in the yield curve by two latent factors (the 'target factor' and 'market path factor'), which capture market participants' assessment of all relevant monetary policy communication made available on announcement days. We then show that information contained in the published interest rate path has a signi cant effect on the market path, and can explain up to 47% of the market path factor. Hence, we conclude that 'explicit' forward guidance in the form of publishing the interest rate path succeeds in moving markets in the desired direction. Furthermore, our results show that central bank and market revisions of interest rate expectations are strongly correlated. This suggests that market participants to a large extent understand the monetary policy reaction pattern.
    Keywords: monetary policy, forward guidance, interest rates
    JEL: E43 E44 E52 E58 G12
    Date: 2017–04–19
  7. By: Guillaume Plantin (Département d'économie); Hyun Song Shin (Princeton University)
    Abstract: When does the combination of flexible exchange rates and inflation-targeting monetary policy guarantee insulation from global financial conditions? We examine a dynamic global game model of international investment flows where, for some combination of parameters, the unique equilibrium exhibits the observed empirical feature of prolonged episodes of capital inflows and appreciation of the domestic currency, followed by abrupt reversals where capital outflows go hand-in-hand with currency depreciation, a domestic bond market crash, and inflationary pressure.
    Keywords: Currency appreciation; Capital flows; Global games
    JEL: F32 F33 F34
    Date: 2016
  8. By: Yann Algan (Département d'économie); Olivier Allais (Laboratoire de Recherche sur la Consommation); Edouard Challe (Department of Economics); Xavier Ragot (Observatoire français des conjonctures économiques)
    Abstract: What are the costs of inflation fluctuations and who bears those costs? In this paper, we investigate this question by means of a quantitative incomplete-market, heterogenous-agent model wherein households hold real and nominal assets and are subject to both idiosyncratic labor income shocks and aggregate inflation risk. Inflation risk is found to generate significant welfare losses for most households, i.e., between 1 and 1.5 percent of permanent consumption. The loss is small or even negative for households at the very top of the productivity and/or wealth distribution. A key feature of our analysis is a nonhomothetic specification for households’ preferences towards money and consumption goods. Unlike traditional specifications, ours allows the model to reproduce the broad features of the distribution of monetary assets (in addition to being consistent with the joint distribution of nonmonetary assets and consumption).
    Keywords: Money-in-the-utility; Incomplete markets; Inflation risk; Welfare
    JEL: E21 E32 E41
    Date: 2016–02
  9. By: Daan Steenkamp (Reserve Bank of New Zealand)
    Abstract: This paper tests for explosiveness in G11 currencies in daily data using a methodology that accounts for the possibility of non-stationary volatility. The results suggest that bouts of explosiveness in exchange rates are uncommon at a daily frequency. However, periods of explosiveness tend to last for several days. Such episodes only involve small changes in actual currency levels, which usually reverse shortly after. This paper identifies the currency in a currency pair that is experiencing explosive dynamics by also considering the dynamics of effective exchange rates of different currencies. There is high concordance with explosiveness in the broad value of the US dollar exchange rate, suggesting that there are relatively few instances where explosiveness in individual cross- rates reflected country-specific factors.
    Date: 2017–04
  10. By: Martin Beraja; Andreas Fuster; Erik Hurst; Joseph Vavra
    Abstract: We argue that the time-varying regional distribution of housing equity influences the aggregate consequences of monetary policy through its effects on mortgage refinancing. Using detailed loan-level data, we show that regional differences in housing equity affect refinancing and spending responses to interest rate cuts but that these effects vary over time with changes in the regional distribution of house price growth and unemployment. We then build a heterogeneous household model of refinancing and use it to explore the aggregate implications for monetary policy arising from our regional evidence. We find that the 2008 equity distribution made spending in depressed regions less responsive to interest rate cuts, thus dampening aggregate stimulus and increasing regional consumption inequality, whereas the opposite occurred in some earlier recessions. Taken together, our results strongly suggest that monetary policy makers should track the regional distribution of equity over time.
    JEL: E21 E32 E5 R1 R2
    Date: 2017–03
  11. By: Miranda-Agrippino, Silvia (Bank of England); Ricco, Giovanni (University of Warwick)
    Abstract: Despite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identification that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections. We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely misspecified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles.
    Keywords: Monetary policy; local projections; VARs; expectations; information rigidity; survey forecasts; external instruments
    JEL: C11 C14 E52 G14
    Date: 2017–04–21
  12. By: Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Jon H. Findreng
    Abstract: We investigate pricing and activity in the Norwegian unsecured overnight interbank market in response to a shift in the central bank's liquidity policy. In october 2011, to encourage interbank trading, banks were allotted quotas for their overnight deposits with remuneration at the key policy rate while that on overnight deposits beyond allotted quotas was set one percentage point lower. In addition, a target range for banks' total overnight deposits was introduced and supported by open market operations to counteract not only temporary liquidity shortfalls, but also surpluses. We document substantially higher interbank trading, lower interbank interest rates relative to the policy rate as well as lower interest rate volatility following the policy shift. Notably, while overnight interbank interest rates were generally above the key policy rate before the policy shift, they have been close to but generally below the key policy rate afterwards.
    Keywords: Overnight interbank market, liquidity policy, regime-switching models
    JEL: G21 E43 E58
    Date: 2017–04–19
  13. By: MASUJIMA Yuki
    Abstract: This paper investigates the relationship between market uncertainty and exchange rate movements of safe haven currencies that tend to appreciate during the risk-off episodes. A safe haven index—the tendency of currency movements to a change in market uncertainty as measured by the Chicago Board Options Exchange (CBOE)'s volatility index (VIX)—are calculated to assess if a currency has a safe haven tendency. The results indicate that the yen is a safe haven currency and its status is robust. The offshore traded renminbi (CNH) has a vulnerable status to the U.S. dollar and the yen, while having lost its safe haven status to the euro since mid-2014. The won, rupiah, and Singapore dollar tend to be vulnerable. Higher market uncertainty with policy swings may increase safe haven demand for alternative assets such as gold and bitcoin, but not substituting for the yen and the dollar due to limited liquidity. Safe haven gauges help explain the uncovered interest rate parity puzzle associated with carry trade. The implication from the results suggests the yen's strength driven by its safe haven status may slow down the post-crisis recovery via exports, masking the vulnerability of government finance with massive monetary easing. The CNH's shift to a vulnerable status could accelerate capital outflows, supporting export-driven growth. The yen's safe haven status would help balance capital flows within Asia, contributing to post-crisis economic recovery in the area.
    Date: 2017–03
  14. By: BLINOV, Sergey
    Abstract: Attempts to establish a link between inflation and economic growth are made quite regularly. The aim of such attempts is not only to determine the impact of inflation on economic growth but also to assess efficiency of the inflation rein-in policy, for example, the policy of inflation targeting. This work reveals the nature of the inter-connection between inflation and economic growth and explains why this inter-connection cannot be sustainable without considering the third parameter, i.e. money supply.
    Keywords: Monetary Policy; Price Level; Inflation; Deflation; Economic Growth; Business Cycles;
    JEL: E30 E31 E32 E51 E52 E58 N10 O11 O40 O42
    Date: 2017–04–08
  15. By: Vahid Gholampour; Eric van Wincoop
    Abstract: We use 633 days of tweets about the Euro/dollar exchange rate to determine their information content and the profitability of trading based on Twitter Sentiment. We develop a detailed lexicon used by FX traders to translate verbal tweets into positive, negative and neutral opinions. The methodologically novel aspect of our approach is the use of a model with heterogeneous private information to interpret the data from FX tweets. After estimating model parameters, we compute the Sharpe ratio from a trading strategy based on Twitter Sentiment. The Sharpe ratio outperforms that based on the well-known carry trade and is precisely estimated.
    JEL: F31 F41 G12 G14
    Date: 2017–03
  16. By: Benlialper, Ahmet; Cömert, Hasan; Öcal, Nadir
    Abstract: In the last decades, many developing countries abandoned their existing policy regimes and adopted inflation targeting (IT) by which they aimed to control inflation through the use of policy interest rates. During the period before the crisis, most of these countries experienced large appreciations in their currencies. Given that appreciation helps central banks curb inflationary pressures, we ask whether central banks in developing countries have different policy stances with respect to depreciation and appreciation in order to hit their inflation targets. To that end, we analyze central banks' interest rate decisions by estimating a nonlinear monetary policy reaction function for a set of IT developing countries using a panel threshold model. Our findings suggest that during the period under investigation (2002-2008), central banks in developing countries implementing IT tolerated appreciation by remaining inactive in the case of appreciation, but fought against depreciation pressures beyond some threshold. We are unable to detect a similar asymmetric response for IT advanced countries suggesting that an asymmetric policy stance is particular to IT developing countries. Although there is a vast literature on asymmetric responses of various central banks to changes in inflation and output, an asymmetric stance with regards to the exchange rate has not been analyzed yet in a rigorous way especially within the context of IT developing countries. In this sense, our study is the first in the literature and thus is expected to fill an important gap.
    Keywords: Inflation Targeting,Central Banking,Developing Countries,Exchange Rates
    JEL: E52 E58 E31 F31
    Date: 2017
  17. By: Pierre L. Siklos
    Date: 2017–04
  18. By: Yin-Wong Cheung; Menzie D. Chinn; Antonio Garcia Pascual; Yi Zhang
    Abstract: Previous assessments of nominal exchange rate determination, following Meese and Rogoff (1983) have focused upon a narrow set of models. Cheung et al. (2005) augmented the usual suspects with productivity based models, and "behavioral equilibrium exchange rate" models, and assessed performance at horizons of up to 5 years. In this paper, we further expand the set of models to include Taylor rule fundamentals, yield curve factors, and incorporate shadow rates and risk and liquidity factors. The performance of these models is compared against the random walk benchmark. The models are estimated in error correction and first-difference specifications. We examine model performance at various forecast horizons (1 quarter, 4 quarters, 20 quarters) using differing metrics (mean squared error, direction of change), as well as the “consistency” test of Cheung and Chinn (1998). No model consistently outperforms a random walk, by a mean squared error measure, although purchasing power parity does fairly well. Moreover, along a direction-of-change dimension, certain structural models do outperform a random walk with statistical significance. While one finds that these forecasts are cointegrated with the actual values of exchange rates, in most cases, the elasticity of the forecasts with respect to the actual values is different from unity. Overall, model/specification/currency combinations that work well in one period will not necessarily work well in another period
    JEL: F31 F47
    Date: 2017–03
  19. By: Dianah Ngui Muchai; Peter Kimuyu
    Abstract: The mobile money transfer industry has been the most successful information and communications technology-enabled service in Kenya, having recorded an exponential growth relative to its neighbours within the East Africa region. This could be attributed to Kenya’s status as a leading commercial and logistics hub in the region, coupled with the competitive strengths of smaller regional peers such as Rwanda, providing a unique opportunity to expand the industry’s services and maximize the economies of scale required for its success and expansion. This can be achieved if Kenya identifies its market niche, generates investment prospects, and addresses the accompanying risks.
    Date: 2017
  20. By: Travis J. Berge
    Abstract: Survey based measures of inflation expectations are not informationally efficient yet carry important information about future inflation. This paper explores the economic significance of informational inefficiencies of survey expectations. A model selection algorithm is applied to the inflation expectations of households and professionals using a large panel of macroeconomic data. The expectations of professionals are best described by different indicators than the expectations of households. A forecast experiment finds that it is difficult to exploit informational inefficiencies to improve inflation forecasts, suggesting that the economic cost of the surveys' deviation from rationality is not large.
    Keywords: Informational efficiency ; Phillips curve ; Survey based inflation expectations ; Boosting ; Inflation forecasting ; Machine learning
    JEL: C53 E31 E37
    Date: 2017–04
  21. By: Manuel Amador; Javier Bianchi; Luigi Bocola; Fabrizio Perri
    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 arbitrage in international capital markets. If the nominal interest rate that is consistent with interest rate parity is positive, the central bank can achieve its exchange rate objective by choosing that interest rate, a well-known result in international finance. However, if the rate consistent with parity is negative, pursuing an exchange rate objective necessarily results in zero nominal interest rates, deviations from parity, capital inflows, and welfare costs associated with the accumulation of foreign reserves by the central bank. In this latter case, all changes in external conditions that increase inflows of capital toward the country are detrimental, while policies such as negative nominal interest rates or capital controls can reduce the costs associated with an exchange rate policy. We provide a simple way of measuring these costs, and present empirical support for the key implications of our framework: when interest rates are close to zero, violations in covered interest parity are more likely, and those violations are associated with reserve accumulation by central banks.
    JEL: F31 F32
    Date: 2017–03
  22. By: Brian Bonis; Jane E. Ihrig; Min Wei
    Abstract: In an effort to promote more accommodative financial conditions following the financial crisis of 2008 and the ensuing recession, and at a time when the conventional monetary policy tool--the federal funds rate--was at its effective lower bound, the Federal Reserve conducted large-scale asset purchases (LSAPs) and a maturity extension program (MEP). This note outlines a way to estimate by how much Federal Reserve securities holdings resulting from these purchase programs reduce longer-term interest rates. In this note, we focus on another channel through which LSAPs may affect the economy: the portfolio balance channel.
    Date: 2017–04–20

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