nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒05‒14
28 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Macroprudential Policy, Central Banks and Financial Stability: Evidence from China By Klingelhöfer, Jan; Sun, Rongrong
  2. Foreign Banks and The Bank Lending Channel By Denderski, Piotr; Paczos, Wojciech
  3. Asymmetric Monetary and Exchange Rate Policies in Latin America By Libman, Emiliano
  4. Reforming the European Monetary Union By Chari, V. V.; Dovis, Alessandro; Kehoe, Patrick J.
  5. Quantitative Easing in the Euro Area By Urbschat, Florian; Watzka, Sebastian
  6. Household Debt, Macroprudential Rules, and Monetary Policy By Nurlan Turdaliev; Yahong Zhang
  7. Monetary policy at work: Security and credit application registers evidence By José-Luis Peydró; Andrea Polo; Enrico Sette
  8. Negative interest rates in Switzerland: What have we learned? By Danthine, Jean-Pierre
  9. Privately issued money reduces GDP. By Musgrave, Ralph S.
  10. Rationalizing the Bias in Central Banks' Interest Rate Projections By Michael Frenkel; Jin-Kyu Jung; Jan-Christoph Rülke
  11. Controlling inflation with switching monetary and fiscal policies: expectations, fiscal guidance and timid regime changes By Ascari, Guido; Florio, Anna; Gobbi, Alessandro
  12. International financial integration, crises and monetary policy: evidence from the Euro area interbank crises By Puriya Abbassi; Falk Bräuning; Falko Fecht; José-Luis Peydró
  13. A Central Bank Theory of Price Level Determination By Benigno, Pierpaolo
  14. International financial integration, crises and monetary policy: evidence from the Euro area interbank crises By Puriya Abbassi; Falk Brauning; Falko Fecht; José-Luis Peydró
  15. The Determinants of the Benchmark Interest Rates in China: A Discrete Choice Model Approach By Hyeongwoo Kim; Wen Shi
  16. Uncertainty and monetary policy in good and bad times By Caggiano, Giovanni; Castelnuovo, Efrem; Nodari, Gabriela
  17. Flow effects of central bank asset purchases on euro area sovereign bond yields: evidence from a natural experiment By De Santis, Roberto A.; Holm-Hadulla, Fédéric
  18. Formation of inflation expectations in turbulent times. Recent evidence from the European Survey of Professional Forecasters By Tomasz Łyziak; Maritta Paloviita
  20. The impact of macroprudential policies and their interaction with monetary policy: an empirical analysis using credit registry data By Leonardo Gambacorta; Andrés Murcia Pabón
  21. Clustering and forecasting inflation expectations using the World Economic Survey: the case of the 2014 oil price shock on inflation targeting countries By Hector M. Zarate-Solano; Daniel R. Zapata-Sanabria
  22. Exchange rate regime and external adjustment: an empirical investigation for the U.S. By Alberto Fuertes
  23. Whatever it takes: The Real Effects of Unconventional Monetary Policy By Acharya, Viral V; Eisert, Tim; Eufinger, Christian; Hirsch, Christian
  24. A rank approach for studying cross-currency bases and the covered interest rate parity By Daniel Ordoñez-Callamand; Jose Eduardo Gomez-Gonzalez; Santiago Gomez-Malagon; Luis Fernando Melo-Velandia
  25. The Quanto Theory of Exchange Rates By Kremens, Lukas; Martin, Ian
  26. Disequilibrium as the origin, originality, and challenges of Clower's microfoundations of monetary theory By Plassard, Romain
  27. A CVAR scenario for a standard monetary model using theory-consistent expectations By Katarina Juselius
  28. Financial Fragility and Unconventional Central Bank Lending Operations By van der Kwaak, Christiaan

  1. By: Klingelhöfer, Jan; Sun, Rongrong
    Abstract: This paper studies the Chinese case to show that a central bank can use macroprudential policies to play an active role in safeguarding financial stability. The narrative approach is used to disentangle macropudential policy actions from those monetary. We show that many monetary policy tools, such as the reserve requirement, window guidance, supervisory pressure and housing-market policies, can be used for macroprudential purposes. Time series are constructed to measure macroprudential tightness/ease. The VAR estimates suggest that macroprudential policy has immediate and persistent impact on the credit cycle, but no significant effect on output. Macroprudential policy can be used either alone to retain financial stability, without harming the real economy; or as a complement to monetary policy to offset the buildup of financial vulnerabilities resulted from a monetary easing. Our analysis suggests that it is the multi-instrument framework that enables a central bank to achieve both macroeconomic and financial stability objectives. This finding has implications for the current debates on the post-crisis central bank’s operating regime.
    Keywords: macroprudential policy, monetary policy, credit cycle, financial stability, China
    JEL: E44 E52 E58
    Date: 2017–02–15
  2. By: Denderski, Piotr (University of Leicester); Paczos, Wojciech (Cardiff Business School)
    Abstract: We provide new evidence on the bank lending channel of monetary policy using bank-level data of 440 banks from eleven CEE transition economies between 1998 and 2012. Our findings are: i) banks adjust their loans to changes in host country’s monetary policy, ii) foreign-owned banks are less responsive to monetary policy of a host country than domestic-owned banks in both normal and crisis times, iii) foreign parent bank characteristics are irrelevant for the bank lending channel. We propose market segmentation hypothesis that can account for those facts better than the alternative, the internal market hypothesis. Foreign banks have a competitive advantage so that their loan portfolio adjusts less to changes in monetary policy. As a consequence, an increase in foreign penetration of the banking sector does not render monetary policy less effective.
    Keywords: banks, bank ownership, bank lending channel, monetary policy
    JEL: E44 E50 G21
    Date: 2016
  3. By: Libman, Emiliano
    Abstract: During the last decades, the number of countries that adopted more fexible exchange rate regimes, in particular Inflation Targeting, has been increasing steadily. Latin-America was no exception. Some authors have argued that there is a flaw in the way in which the system has been conducted in the region. When inflation falls, the Central Bank is reluctant to cut interest rates, but when inflation increases, the Central Bank is willing to raise interest rates very aggressively, adding an unnecessary bias to monetary and exchange rate policies. This paper analyzes the asymmetry of monetary and exchange rate policies in the five largest Latin-American Inflation Targeting countries, Brazil, Chile, Colombia, Mexico, and Peru. Using different econometric techniques, I find that the Central Banks, with the exception of Chile, suffer from "fear of floating". This is a more pronounced phenomenon for the case of Brazil and Mexico, as the literature has argued.
    Keywords: Exchange Rates, Exchange Rate Regimes, Inflation Targeting, Asymmetric Policy Rule, Markov-Switching Models, GMM, STAR Models.
    JEL: E58 F30 F41 F43
    Date: 2017–04–30
  4. By: Chari, V. V. (Federal Reserve Bank of Minneapolis); Dovis, Alessandro (University of Pennsylvania); Kehoe, Patrick J. (Federal Reserve Bank of Minneapolis)
    Abstract: We offer a theoretically based narrative that attempts to account both for the formation of the European Monetary Union (EMU) and for the challenges it has faced. Lack of commitment to policy plays a central role in this narrative and leads to four policy implications for EMU redesign.
    Date: 2017–05–08
  5. By: Urbschat, Florian; Watzka, Sebastian
    Abstract: We examine the effects of the Asset Purchase Programme (APP) gradually introduced by the European Central Bank from September 2014 onwards. Studying the short-term reaction of financial markets after APP press releases, we analyse the development of bond yields and spreads around these releases. More precisely, we try to estimate different asset price channels by quantifying the cumulative decrease of spreads and by running event regressions for several Euro Area countries. Focusing on the signalling channel, measured by the OIS rate, and the portfolio rebalancing channel, proxied by the conditional bond-OIS spread, we find that the effects in yield and spread reduction were most pronounced for the announcement on the Public Sector Purchase Programme (PSPP) but declined afterwards for additional announcements. Possible explanations for this are the declining degree to which the ECB surprised markets and the increasingly burdensome institutional set-up of the APP. Moreover, our evidence suggests that portfolio rebalancing had a far larger impact on periphery than core countries’ bonds, which supports argument made by Cúrdia and Woodford (2011).
    Keywords: Large Scale Asset Purchase; Yield curve; Quantitative Easing; APP; Event study
    JEL: E43 E44 E52 E58 G14
    Date: 2017–05
  6. By: Nurlan Turdaliev (Department of Economics, University of Windsor); Yahong Zhang (Department of Economics, University of Windsor)
    Abstract: Today's Canadian economy features a historic high of household debt and persistently low growth rate. The average debt-to-GDP ratio has reached the level experienced in the U.S. just prior to the recent financial crisis. Should monetary policy lean against the household indebtedness or are macroprudential policies better suited for the task? To provide a quantitative answer, this paper develops a small open economy dynamic stochastic general equilibrium model featuring a banking sector that channels funds between household savers and borrowers. We estimate the model using the Canadian data from 1991Q1 to 2015Q3 and conduct policy experiments. We find that using monetary policy that reacts to household indebtedness increases inflation volatility and lowers borrowers' welfare, while using macroprudential policies such as lowering the loan-to-value ratio limit increases borrowers' welfare.
    Keywords: household debt, macroprudential rules, monetary policy
    JEL: E32 E44 E52
    Date: 2017–05
  7. By: José-Luis Peydró; Andrea Polo; Enrico Sette
    Abstract: The potency of the bank lending channel of monetary policy may be limited if banks rebalance their portfolios towards securities, e.g. to pursue risk-shifting or liquidity hoarding. To test for the bank lending and risk-taking (reach-for-yield) channels, we therefore analyze banks’ securities trading, in addition to credit supply, in turn allowing us to also study the empirical relevance of key financial frictions. For identification, since the creation of the euro, we exploit the security and credit application registers owned by the central bank of Italy. In crisis times, we find that, with softer monetary policy, less capitalized banks prefer buying securities rather than increasing credit supply (not due to lack of good loan applications), thereby impacting firm-level real outcomes. Moreover, more – not less – capitalized banks reach-for-yield, which is inconsistent with the risk-shifting hypothesis. Results suggest that the main drivers at work are access to liquidity and risk-bearing capacity, and not regulatory capital arbitrage. Finally, in pre-crisis times, when financial frictions are limited, less capitalized banks do not expand securities holdings over credit supply.
    Keywords: monetary policy, securities, loan applications, bank capital, reach-for-yield, held to maturity, available for sale, trading book, haircuts, regulatory arbitrage, sovereign debt
    JEL: E51 E52 E58 G01 G21
    Date: 2017–04
  8. By: Danthine, Jean-Pierre
    Abstract: The Swiss National Bank has introduced negative interest rates of minus 75bp in mid-January 2015. Large exemptions on commercial bank holdings at the SNB result in the average rate being significantly less negative than the marginal rate. With this constellation the policy transmission to the real economy is asymmetric. It fully satisfies the needs of a SOE in search of a negative interest differential, not those of an economy aiming at "classical" monetary stimulus at the zero bound. While the Swiss design would make it possible to impose rates that are significantly more negative with modest complementary features, the unpopularity of negative rates makes it likely that the ambition to totally free monetary policy of the ZLB will be thwarted by democratic realities in the near future.
    Keywords: Cashless economy; Negative Interest Rates; Zero-Lower-Bound
    Date: 2017–04
  9. By: Musgrave, Ralph S.
    Abstract: The majority of the money supply is issued by private banks, not central banks. However a system that restricts money creation to central banks has been advocated for many years by leading economists. There is no reason interest rates would not be at some sort of genuine free market rate under the latter system. In contrast, when private bank money is allowed, those banks undercut the free market rate of interest because it costs them nothing to come by the money they lend out: they effectively just print it, much as counterfeiters print money. The result is a sub-optimum or “non GDP maximising” rate of interest and an above optimum amount of debt. An additional misallocation of resources is that if private corporations are to be allowed to create money, there is no good reason why money lenders (i.e. private banks) should be allowed to do that and not car manufacturers or any other set of corporations. I.e. a second reason why letting private banks create money misallocates resources and reduces GDP is that different types of corporation do not compete on a level playing field. In contrast, the field is level if only central banks create money.
    Keywords: Bank; money; money creation; counterfeit; central bank.
    JEL: E4 E43 E51 E58 G21
    Date: 2017–05–02
  10. By: Michael Frenkel; Jin-Kyu Jung; Jan-Christoph Rülke
    Abstract: In this paper, we study the bias in interest rate projections for four central banks, namely for Czech Republic, New Zealand, Norway, and Sweden. We examine whether central bank projections are based on an asymmetric loss function and report evidence that central banks perceive an overprojection of their longer-term interest rate forecasts as twice as costly as an underprojection of the same size. We document that rationality is consistent with biased interest rate projections which contribute to explaining the central banks’ behavior.
    Keywords: Interest rate forecasts, Central bank communication, Asymmetric loss
    JEL: E43 E47 E58
    Date: 2017–04–26
  11. By: Ascari, Guido; Florio, Anna; Gobbi, Alessandro
    Abstract: Inflation depends on both monetary and fiscal policies and on how agents believe that these policies will evolve in the future. Can monetary policy control inflation, when both monetary and fiscal policies are allowed to change over time? To analyse this problem, we study a model in which both monetary and fiscal policies may switch according to a Markov process. Controlling inflation entails a unique and Ricardian solution. We propose a natural generalisation of the original Leeper (1991) taxonomy, introducing the concepts of globally active (or passive) and globally switching policies to define the conditions that allow monetary policy to control inflation under Markov switching. First, monetary and fiscal policies need to be globally balanced to guarantee a unique equilibrium: globally active monetary policies need to be coupled with globally passive fiscal policies, and switching monetary policies with switching fiscal policies. Second, this distinction characterises the nature of the solutions: a globally AM/PF regime is Ricardian, while a globally switching regime features expectation and wealth effects. Third, the strength of policy deviations across regimes is key, insofar a globally active (or passive) policy allows only timid deviations. Finally, our framework can rationalise the impulse responses from a Bayesian VAR on U.S. data for the recent zero lower bound period as being due to "timidity" in fiscal actions that have been unable to spur inflation.
    JEL: E58 E63
    Date: 2017–05–05
  12. By: Puriya Abbassi; Falk Bräuning; Falko Fecht; José-Luis Peydró
    Abstract: We analyze how financial crises affect international financial integration, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower-day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home—but independently of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial re-integration.
    Keywords: financial integration, financial crises, cross-border lending, monetary policy, euro area sovereign crisis, liquidity
    JEL: E58 F30 G01 G21 G28
    Date: 2017–04
  13. By: Benigno, Pierpaolo
    Abstract: A theory in which the central bank controls the price level is put forward as an alternative to the fiscal theory of the price level. It is not necessary to have a fiscal stimulus to avoid liquidity traps nor a fiscal anchor to disallow inflationary spirals. A central bank appropriately capitalized can succeed to control the price level by setting the interest rate on reserves, holding risk-free assets and rebating its income to the treasury -- from which it has to maintain financial independence. If the central bank undertakes unconventional open-market operations, either it has to give up its financial independence or leaves the economy exposed to self-fulfilling inflationary spirals or chronic liquidity traps.
    Date: 2017–04
  14. By: Puriya Abbassi; Falk Brauning; Falko Fecht; José-Luis Peydró
    Abstract: We analyze how financial crises affect international financial integration, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower-day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home—but independently of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial re-integration.
    Keywords: financial integration, financial crises, cross-border lending, monetary policy, euro area sovereign crisis, liquidity
    JEL: E58 F30 G01 G21 G28
    Date: 2017–05
  15. By: Hyeongwoo Kim; Wen Shi
    Abstract: This paper empirically investigates the determinants of the two key benchmark interest rates in China using an array of constrained ordered probit models for quarterly frequency data from 1987 to 2013. Specifically, we estimate the behavioral equation of the People's Bank of China that models its decision-making process for revisions of the benchmark deposit rate and the lending rate. Our findings imply that the PBC's policy decisions are better understood as responses to changes in inflation and money growth, while output gaps and the exchange rate play negligible roles. We also implement in-sample fit analyses and out-of-sample forecast exercises. Our empirical findings show robust and reasonably good performances of our models in understanding dynamics of these benchmark interest rates.
    Keywords: Monetary Policy; People's Bank of China; Ordered Probit Model; Deposit Rate; Lending Rate; In-Sample Fit; Out-of-Sample Forecast
    JEL: E52 E58
    Date: 2017–05
  16. By: Caggiano, Giovanni; Castelnuovo, Efrem; Nodari, Gabriela
    Abstract: We investigate the role played by systematic monetary policy in tackling the real effects of uncertainty shocks in U.S. recessions and expansions. We model key indicators of the business cycle with a nonlinear VAR that allows for different dynamics in busts and booms. Uncertainty shocks are identi ed by focusing on historical events that are associated to jumps in nancial volatility. Uncertainty shocks hitting in recessions are found to trigger a more abrupt drop and a faster recovery in real activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic monetary policy in stabilizing real activity is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve.
    JEL: C32 E32
    Date: 2017–05–04
  17. By: De Santis, Roberto A.; Holm-Hadulla, Fédéric
    Abstract: We estimate the response of euro area sovereign bond yields to purchase operations under the ECBs Public Sector Purchase Programme (PSPP), using granular data on all PSPP-eligible securities at daily frequency. To avoid simultaneity bias in the estimated relationship between yields and purchase volumes, we exploit a PSPP design feature that renders certain securities temporarily ineligible for reasons unrelated to their yields. Using these temporary purchase restrictions as an instrument to identify exogenous variation in purchase volumes, we find that the “flow effect” of PSPP operations has, on average, led to a temporary 7 basis-point decline in sovereign bond yields on the day of purchase. This impact estimate is well above those found in similar studies for the US; at the same time, our results imply that flow effects have accounted for only a limited share of the downward pressure of PSPP on sovereign yields, most of which instead derived from anticipation and announcement effects at the onset of the programme. JEL Classification: E52, E58, E65, G12
    Keywords: monetary policy, natural experiment, quantitative easing, sovereign yields
    Date: 2017–05
  18. By: Tomasz Łyziak (Narodowy Bank Polski); Maritta Paloviita (Bank of Finland)
    Abstract: This paper analyses formation of inflation expectations in the euro area. At the beginning we analyse forecast accuracy of ECB inflation projections relative to private sector forecasts. Then, using the ECB Survey of Professional Forecasters, we estimate a general model integrating two theoretical concepts, i.e. the hybrid model of expectations, including rational and static expectations, and the sticky-information (epidemiological) model. Among determinants of inflation expectations we consider – except backward-looking factors – rational expectations assumption and the effects of the ECB inflation projections. We examine whether ECB inflation projections are still important in expectations’ formation once the impact of forwardlookingness of economic agents has been taken into account. We also assess the consistency of implicit (perceived) inflation targets with the ECB inflation target. Our analysis indicates that recent turbulent times have contributed to changes in expectations’ formation in the euro area, as the importance of backward-looking mechanisms has decreased and the importance of the perceived inflation target has increased. We also find that the perceived inflation target has remained broadly consistent with the official ECB inflation target in the medium-term. However, the downward trend of the perceived target signals some risks of de-anchoring of inflation expectations. The importance of ECB inflation projections for mediumterm private sector inflation expectations has increased over time, but the magnitude of this effect is rather small. However, SPF inflation forecasts remain consistent with the ECB communication, being ether close to ECB projections or between ECB projections and the inflation target.
    Keywords: Formation of inflation expectations, survey data, euro area, financial crisis, low inflation
    JEL: D84 E52 E58
    Date: 2017
  19. By: Rüdiger Bachmann; Sebastian Rüth (-)
    Abstract: What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? In a structural VAR, GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
    Keywords: loan-to-value ratios, monetary policy, residential investment, structural VAR, Cholesky identification, Taylor rules
    JEL: E30 E32 E44 E52
    Date: 2017–04
  20. By: Leonardo Gambacorta; Andrés Murcia Pabón
    Abstract: This paper summarises the results of a joint research project by eight central banks in the Americas region to evaluate the effectiveness of macroprudential tools and their interaction with monetary policy. In particular, using meta-analysis techniques, we summarise the results for five Latin American countries (Argentina, Brazil, Colombia, Mexico and Peru) that use confidential bank-loan data. The use of granular credit registry data helps us to disentangle loan demand from loan supply effects without making strong assumptions. Results from another three countries (Canada, Chile and the United States) corroborate the analysis using data for credit origination and borrower characteristics. The main conclusions are that (i) macroprudential policies have been quite effective in stabilising credit cycles. The propagation of the effects to credit growth is more rapid (they materialise after one quarter) for policies aimed at curbing the cycle than for policies aimed at fostering resilience (which take effect within a year); and (ii) macroprudential tools have a greater effect on credit growth when reinforced by the use of monetary policy to push in the same direction.
    Keywords: macroprudential policies, bank lending, credit registry data, meta-analysis
    Date: 2017–05
  21. By: Hector M. Zarate-Solano (Banco de la República de Colombia); Daniel R. Zapata-Sanabria (Banco de la República de Colombia)
    Abstract: This paper examines inflation expectations of the World Economic Survey for ten inflation targeting countries. First, by a Self Organizing Maps methodology, we cluster the trajectory of agents inflation expectations using the beginning of the oil price shock occurred in June of 2014 as a benchmark in order to discriminate between those countries that anticipated the shock smoothly and those with brisk changes in expectations. Then, the expectations are modeled by artificial neural networks forecasting models. Second, for each country we investigate the information content of the quantitative survey forecast by comparing it to the average annual inflation based on national consumer price indices. The results indicate the presence of heterogeneity among countries to anticipate inflation under the oil shock and, also different patterns of accuracy to predict average annual inflation were found depending on the observed inflation trend. Classification JEL: C02, C222, C45, C63, E27
    Keywords: Inflation expectations, machine learning, self-organizing maps, nonlinear autoregressive neural network, expectation surveys
    Date: 2017–05
  22. By: Alberto Fuertes (Banco de España)
    Abstract: This paper analyses the relationship between the U.S. net external position and the exchange rate regime. I find a structural break in the U.S. net external position at the end of the Bretton Woods system of fixed exchange rates that changed both the mean and variance of the series. On average, the U.S. changed from a creditor to a debtor position and the variance of the external position increased during the floating period. This increase is to a large extent due to the valuation component of external adjustment, which accounts for 54% of the variance of the U.S. external position during the floating period but only 29% during the fixed exchange rate period. Further analysis shows that the exchange rate regime mainly affects the valuation channel of external adjustment. There is also evidence of another structural break in the U.S. external position around the time of the introduction of the euro. Finally, I document asset pricing implications from the relationship between the exchange rate regime and the external adjustment process, as external imbalances predict future exchange rate developments once the exchange rate regime is taken into account.
    Keywords: external adjustment, exchange rate regime, structural breaks, valuation adjustment
    JEL: F31 F33
    Date: 2017–05
  23. By: Acharya, Viral V; Eisert, Tim; Eufinger, Christian; Hirsch, Christian
    Abstract: Launched in Summer 2012, the European Central Bank (ECB)'s Outright Monetary Transactions (OMT) program indirectly recapitalized European banks through its positive impact on periphery sovereign bonds. However, the stability reestablished in the banking sector did not fully translate into economic growth. We document zombie lending by banks that remained undercapitalized even post-OMT. In turn, firms receiving loans used these funds not to undertake real economic activity such as employment and investment but to build up cash reserves. Creditworthy firms in industries with a high zombie firm prevalence suffered significantly from this credit misallocation, which further slowed down the economic recovery.
    Date: 2017–04
  24. By: Daniel Ordoñez-Callamand (Banco de la República de Colombia); Jose Eduardo Gomez-Gonzalez (Banco de la República de Colombia); Santiago Gomez-Malagon (Banco de la República de Colombia); Luis Fernando Melo-Velandia (Banco de la República de Colombia)
    Abstract: We use the recently developed panel rank-cointegration test proposed by Pedroni et al. [2015] to check for the stability conditions of the cross-country money market interest rate bases. Using weekly information on short-term interest rates and spot and forward exchange rates for a set of 20 European economies during 2005-2017, we show that in most cases these bases are non-stationary, implying the failure of the Covered Interest Rate Parity condition. Concretely, a mean-reverting behavior is encountered in only two cases. The first includes Greece, Italy and Portugal, while the second Belgium, France and Germany. Classification JEL: C12, C33, E43
    Keywords: Covered Interest Rate Parity; Nonparametric rank tests; Cointegration; Time series
    Date: 2017–05
  25. By: Kremens, Lukas; Martin, Ian
    Abstract: We present a new, theoretically motivated, forecasting variable for exchange rates that is based on the prices of quanto index contracts, and show via panel regressions that the quanto forecast variable is a statistically and economically significant predictor of currency appreciation. We also test the quanto variable's ability to forecast differential currency appreciation out of sample, and find that it outperforms predictions based on uncovered interest parity, on purchasing power parity, and on a random walk.
    Keywords: carry trade; currency; Exchange rate; exchange rate forecast; Forecasting; predictability; quanto contracts
    JEL: F31 F37 F47 G12 G15
    Date: 2017–04
  26. By: Plassard, Romain
    Abstract: Robert W. Clower’s article “A Reconsideration of the Microfoundations of Monetary Theory” (1967) deeply influenced the course of modern monetary economics. On the one hand, it questioned Don Patinkin’s (1956) project to integrate monetary and Walrasian value theory. On the other hand, it was the fountainhead of the cash-in-advance models à la Robert J. Lucas (1980), one of the most widely used approaches to monetary theory since the 1980s. Despite this influence, Clower’s (1967) project to integrate monetary and value theory remains an enigma. My paper intends to resolve it. This is a difficult task since Clower never completed the monetary theory outlined in his 1967 article. To overcome this difficulty, I characterize the intellectual context from which Clower’s (1967) contribution emerged and have recourse to a reconstruction of his project. This reconstruction is based on the analysis of published and unpublished materials, written by Clower before and after the 1967 article. It is argued that Clower (1967) sought to elaborate a disequilibrium monetary theory whilst retaining the two pillars of Patinkin’s integration, i.e., the introduction of money into utility functions and the real-balance effect. I trace the origins, account for the originality, and discuss the challenges of this project.
    Keywords: integration of monetary and value theory, microfoundations of macroeconomics, disequilibrium, Clower, Patinkin.
    JEL: B21 D46 D5
    Date: 2017–04
  27. By: Katarina Juselius (Department of Economics, University of Copenhagen)
    Abstract: A theory-consistent CVAR scenario describes a set of testable regularities capturing basic assumptions of the theoretical model. Using this concept, the paper considers a standard model for exchange rate determination and shows that all assumptions about the model?s shock structure and steady-state behavior can be formulated as testable hypotheses on common stochastic trends and cointegration. While the scenario was rejected on essentially all counts, the results were informative about the cause of the empirical failure. It was the stationarity assumptions that were too restrictive to explain the long persistent swings in the real exchange rate and the interest rate differential.
    Keywords: Theory-Consistent CVAR, Expectations, International Puzzles, Long Swings, Persistence, Imperfect Knowledge
    JEL: F31 F41 G15 G17
    Date: 2017–04–10
  28. By: van der Kwaak, Christiaan (Groningen University)
    Date: 2017

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