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

  1. Moving Closer or Drifting Apart: Distributional Effects of Monetary Policy By Lucas Hafemann; Paul Rudel; Joerg Schmidt
  2. Central Bank Independence, financial instability and politics: new evidence for OECD and non-OECD countries By Barbara Pistoresi; Maddalena Cavicchioli; Giulio Brevini
  3. Managing the Tide; How Do Emerging Markets Respond to Capital Flows? By Atish R. Ghosh; Jonathan David Ostry; Mahvash S Qureshi
  4. Revisiting Speculative Hyperinflations in Monetary Models By Obstfeld, Maurice; Rogoff, Kenneth
  5. Catallactics misapplication: it impact on Africa’s economy By Tweneboah Senzu, Emmanuel
  6. Assessing the Predictive Ability of Sovereign Default Risk on Exchange Rate Returns By Claudia Foroni; Francesco Ravazzolo; Barbara Sadaba
  7. Further Results on Preference Uncertainty and Monetary Conservatism By Keiichi Morimoto
  8. Hopf Bifurcation from new-Keynesian Taylor rule to Ramsey Optimal Policy By Chatelain, Jean-Bernard; Ralf, Kirsten
  9. Transitions in currency denomination structure as supply disruption and demand distortion: Efficiency, Effectiveness and Bullwhip By Joshi Harit; Mukherjee, Saral
  10. The Distributional Consequences of Large Devaluations By Javier Cravino; Andrei A. Levchenko
  11. The Nexus of Monetary Policy and Shadow Banking in China By Kaiji Chen; Jue Ren; Tao Zha
  12. Foreign Exchange Intervention and the Dutch Disease By Julia Faltermeier; Ruy Lama; Juan Pablo Medina
  13. Determinants of Inflation in Azerbaijan By Vugar Rahimov; Shaig Adigozalov; Fuad Mammadov
  14. Exchange Rate Regimes in Central, Eastern and Southeastern Europe; A Euro Bloc and a Dollar Bloc? By Slavi T Slavov
  15. "On the Centrality of Redemption: Linking the State and Credit Theories of Money through a Financial Approach to Money" By Eric Tymoigne
  16. Foreign reserve holdings: an extended study through risk-inspired motives. By Shijaku, Gerti; Dushku, Elona
  17. When Multiple Objectives Meet Multiple Instruments: Identifying Simultaneous Monetary Shocks By Daniel Ordoñez-Callamand; Juan D. Hernandez-Leal; Mauricio Villamizar-Villegas
  18. The impact of macroprudential policies and their interaction with monetary policy: an empirical analysis using credit registry data By Gambacorta, Leonardo; Murcia, Andrés
  19. Should Unconventional Monetary Policies Become Conventional? By Dominic Quint; Pau Rabanal
  20. IW monetary outlook: The contribution of supply and demand factors to low inflation By Hüther, Michael; Demary, Markus
  21. Lower Bound Beliefs and Long-Term Interest Rates By Christian Grisse; Signe Krogstrup; Silvio Schumacher
  22. Foreign currency lending in Albania By Shijaku, Gerti
  23. Macroprudential Policy Coordination with International Capital Flows By William Chen; Gregory Phelan
  24. A Note on the Impact of Unconventional Monetary Policy Shocks in the US on Emerging Market REITs: A Qual VAR Approach By Rangan Gupta; Hardik A. Marfatia
  26. The role of money as an important pillar for monetary policy: the case of Albania By Shijaku, Gerti
  27. IW Monetary Outlook: ECB at the Crossroads By Demary, Markus; Hüther, Michael
  28. The long-run impact of monetary policy uncertainty and banking stability on inward FDI in EU countries By Claudiu Albulescu; Adrian Ionescu
  29. Monetary Policy, Fisal Federalism, and Capital Intensity By Nadav Ben Zeev; Ohad Raveh
  30. Currency choice in international trade: a new monetarist approach and firm-level evidence By Liu, Tao; Lu, Dong; Zhang, Ruifeng
  31. The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound By Orphanides, Athanasios

  1. By: Lucas Hafemann (Justus-Liebig-University Giessen); Paul Rudel (Justus-Liebig-University Giessen); Joerg Schmidt (Justus-Liebig-University Giessen)
    Abstract: Our paper picks up the current controversial debate about increasing (income) inequality due to recent monetary policy measures in major advanced economies. We use a VAR framework identified with sign restrictions to figure out how income inequality related measures react to monetary policy shocks in three different advanced economies with an independent monetary policy regime. We choose the U.S., Canada and Norway. While all economies experience an increase in Gini coecients of market income in the presence of an expansionary monetary policy shock, only the U.S. and Canada show a significant response in the Gini coefficient of disposable income when facing such shocks. To figure out how the transmission of monetary policy to overall income inequality works we pick up two major channels dominant in literature: The employment channel and the income composition channel. The latter is analyzed by data from national accounts concerning two different kinds of income households receive: Labor related income and capital payments, both net. We find that while in the U.S. as well as in Canada capital income recipients profit disproportionately from expansionary monetary policy, in Norway both types of (net) income benefit similarly from expansionary monetary policy shocks. We conclude that fiscal policy makers can successfully address and mitigate harmful effects of increased market income inequality.
    Keywords: Income Inequality, Factor Income Distribution, Monetary Policy, VAR, Sign-Restrictions
    JEL: D31 D33 E24 E25 E52 E64
    Date: 2017
  2. By: Barbara Pistoresi; Maddalena Cavicchioli; Giulio Brevini
    Abstract: This paper analyses the determinants of a new index of central bank independence, recently provided by Dincer and Eichengreen (2014), using a large database of economic, political and institutional variables. Our sample includes data for 31 OECD and 49 non-OECD economies and covers the period 1998-2010. To this aim, we implement factorial and regression analysis to synthesize information and overcome limitations such as omitted variables, multicollinearity and overfitting. The results confirm the role of the IMF loans program to guide all the economies in their choice of more independent central banks. Financial instability, recession and low inflation work in the opposite direction with governments relying extensively on central bank money to finance public expenditure and central banks’ political and operational autonomy is inevitably undermined. Finally, only for non-OECD economies, the degree of central bank independence responds to various measures of strength of political institutions and party political instability.
    Keywords: central bank independence; economic, political and institutional determinants; multicollinearity; factor model; linear regression
    Date: 2017–05
  3. By: Atish R. Ghosh; Jonathan David Ostry; Mahvash S Qureshi
    Abstract: This paper examines whether—and how—emerging market economies (EMEs) respond to capital flows to mitigate their untoward consequences. Based on a sample of about 50 EMEs over 2005Q1–2013Q4, we find that EME policy makers respond proactively to capital inflows by using a combination of policy tools: central banks raise the policy interest rate to address economic overheating concerns; intervene in the foreign exchange market to resist currency appreciation pressures; tighten macroprudential measures to dampen credit growth; and deploy capital inflow controls in the face of competitiveness and financial-stability concerns. Contrary to conventional policy advice to EMEs, we find no evidence of counter-cyclical fiscal policy in the face of capital inflows. Overall, policies are more likely to respond, and used in combination, during inflow surges than in more normal times.
    Keywords: Central banks and their policies;capital flows; policy toolkit; capital controls; emerging market economies, capital flows, policy toolkit, capital controls, emerging market economies
    Date: 2017–03–27
  4. By: Obstfeld, Maurice; Rogoff, Kenneth
    Abstract: This paper revisits the debate on ruling out speculative hyperinflations in monetary models. Obstfeld and Rogoff (1983, 1986) argue that in pure fiat money models, where the government gives no backing whatsoever to currency, there is in fact no reasonable way to rule out speculative hyperinflations where the value of money goes to zero, even if the money supply itself is exogenous and constant. Such perverse equilibria are ruled out, however, if the government provides even a very small real backing to the currency, indeed the backing does not have to be certain. Cochrane (2011), however, argues that this result is wrong, and that fractional currency backing is a Maginot line that is insufficient to rule out hyperinflation. He goes on to claim that the fiscal theory of the price level provides a much better model of the price-level determination that avoids the multiplicity of problems that plague standard monetary models. We show here why, in fact, Cochrane's analysis is incorrect, and that the equilibrium he considers fails. Our baseline analysis uses a canonical money-in-the-utility-function setup building on Brock (1974, 1975); but following Wallace (1981), we show the same results go through in the overlapping-generations model of money. We go on to discuss why we believe that the fiscal theory of the price level simply sidesteps the problem of monetary determinacy but in no way resolves it.
    Keywords: Asset bubbles; Fiscal theory of the price level; Hyperinflation; money demand
    JEL: E31 E41 E52 E63
    Date: 2017–05
  5. By: Tweneboah Senzu, Emmanuel
    Abstract: The paper seeks to solve the macroeconomic error that emerged from the dispensing of the monetary policy by the Central Banks of Africa. These monetary policies have refused to address the desired economic growth expected by individual developing and underdeveloped countries. It conclusively present a new mathematical model to determine the exact health status of an economy in developing and underdeveloped countries in Africa.
    Keywords: Monetary Economics, Monetary Policy, Fiscal Policy, Macroeconomics, Developmental Economics
    JEL: E5 E52 E58
    Date: 2015–07–20
  6. By: Claudia Foroni; Francesco Ravazzolo; Barbara Sadaba
    Abstract: Increased sovereign credit risk is often associated with sharp currency movements. Therefore, expectations of the probability of a sovereign default event can convey important information regarding future movements of exchange rates. In this paper, we investigate the possible pass-through of risk in the sovereign debt markets to currency markets by proposing a new risk premium factor for predicting exchange rate returns based on sovereign default risk. We compute it from the term structure at different maturities of sovereign credit default swaps and conduct an out-of-sample forecasting exercise to test whether we can improve upon the benchmark random walk model. Our results show that the inclusion of the default risk factor improves the forecasting accuracy upon the random walk model at short forecasting horizons.
    Keywords: Econometric and statistical methods, Exchange rates, International financial markets
    JEL: C22 C52 C53 F31
    Date: 2017
  7. By: Keiichi Morimoto (Meisei University)
    Abstract: This study re-examines the optimal delegation problem of monetary policy under preference uncertainty of the central banker. Liberal central bankers are desirable when uncertainty is strong, which is emphasized when the slope of the Phillips curve is flatter, as some empirical works report. However, appointing conservative central bankers is optimal with standard parameter values when monetary policies are conducted by committees, as in most actual economies.
    Keywords: monetary policy, delegation, uncertain preferences, committee
    JEL: E58
    Date: 2017–01
  8. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: This paper shows that a shift from Ramsey optimal policy under short term commitment (based on a negative-feedback mechanism) to a Taylor rule (based on positive-feedback mechanism) in the new-Keynesian model is in fact a Hopf bifurcation, with opposite policy advice. The number of stable eigenvalues corresponds to the number of predetermined variables including the interest rate and its lag as policy instruments for Ramsey optimal policy. With a new-Keynesian Taylor rule, however, these policy instruments are arbitrarily assumed to be forward-looking variables when policy targets (inflation and output gap) are forward-looking variables. For new-Keynesian Taylor rule, this Hopf bifurcation implies a lack of robustness and multiple equilibria if public debt is not set to zero for all observation.
    Keywords: Bifurcation,Taylor rule,new-Keynesian model,Ramsey optimal policy,Finite horizon commitment
    JEL: C61 C62 E43 E47 E52 E58
    Date: 2017
  9. By: Joshi Harit; Mukherjee, Saral
    Abstract: Transition from one currency denomination structure to another is infrequent but not rare. Central Banks may adopt such transition for various reasons like prevention of counterfeiting or combating hyperinflation and may include demonetisation of specific denominations or introduction of new denominations. We study transitions in currency denomination from a supply chain perspective. Currency as a product flows through a three-stage supply chain in which currency denominations are substitutable products. We show that demand for a specific denomination depends on the denomination structure and distribution of transactions in the economy. During a transition from one denomination structure to another, the demand for a specific denomination is affected due to change in step size. In addition, the demand may be distorted due to hoarding resulting from supply shortages. Such transaction related hoarding behaviour may occur for lower denominations, in contrast to wealth accumulation related hoarding of higher denominations known in the literature, and can lead to a Bullwhip Effect. We propose efficiency and effectiveness related measures for the remonetisation process and study the impact of prioritisation of supply of one denomination over another on demand distortion. In doing so, we extend the literature on efficient transactions by introducing an aggregate transaction efficiency measure considering the transaction distribution and show how this measure is sensitive to transaction slabs, denomination structures and transaction distributions. Such analysis may inform Central Banks about relative vulnerabilities of different denominations to a supply disruption which distorts currency demand.
    Date: 2017–05–23
  10. By: Javier Cravino; Andrei A. Levchenko
    Abstract: We study the impact of large exchange rate devaluations on the cost of living at different points on the income distribution. Poor households spend relatively more on tradeable product categories, and consume lower-priced varieties within categories. Changes in the relative price of tradeables and of lower-priced varieties affect the cost of living of low-income relative to high-income households. We quantify these effects following the 1994 Mexican devaluation and show that they can have large distributional consequences. Two years post-devaluation, the cost of living for the bottom income decile rose 1.48 to 1.62 times more than for the top income decile.
    JEL: F31 F61
    Date: 2017–05
  11. By: Kaiji Chen; Jue Ren; Tao Zha
    Abstract: We estimate the quantity-based monetary policy system in China. We argue that China's rising shadow banking was inextricably linked to banks' balance-sheet risk and hampered the effectiveness of monetary policy on the banking system during the 2009-2015 period of monetary policy contractions. By constructing two micro datasets at the individual bank level, we substantiate this argument with three empirical findings: (1) in response to monetary policy tightening, nonstate banks actively engaged in intermediating shadow banking products; (2) these banks, in sharp contrast to state banks, brought shadow banking products onto the balance sheet via risky investments; (3) bank loans and risky investment assets in the banking system respond in opposite directions to monetary policy tightening, which makes monetary policy less effective. We build a theoretical framework to derive the above testable hypotheses and explore implications of the interaction between monetary and regulatory policies.
    JEL: E02 E5 G11 G12 G28
    Date: 2017–05
  12. By: Julia Faltermeier; Ruy Lama; Juan Pablo Medina
    Abstract: We study the optimal foreign exchange (FX) intervention policy in response to a positive terms of trade shock and associated Dutch disease episode in a small open economy model. We find that during a Dutch disease episode tradable production drops below the socially optimal level, resulting in lower welfare under learningby- doing (LBD) externalities. FX reserves accumulation improves welfare by preventing a large appreciation of the real exchange rate and by inducing an efficient reallocation between the tradable and non-tradable sectors. For an empirically plausible parametrization of LBD externalities, the model predicts that in response to a 10 percent increase in commodity prices FX reserves should increase by 1.5 percent of GDP. We also find that the welfare gains from optimally using FX reserves are twice as high as the gains from relying only on monetary policy. These results suggest that FX intervention is a beneficial policy to counteract the loss of competitiveness during a Dutch disease episode.
    Keywords: Central banks and their policies;Foreign exchange;Dutch Disease; Learning-by-Doing Externalities; Foreign Exchange Intervention, Dutch Disease, Learning-by-Doing Externalities, Foreign Exchange Intervention, Open Economy Macroeconomics
    Date: 2017–03–27
  13. By: Vugar Rahimov (Central Bank of Azerbaijan Republic); Shaig Adigozalov (Central Bank of Azerbaijan Republic); Fuad Mammadov (Central Bank of Azerbaijan Republic)
    Abstract: This paper assesses the main determinants of inflation in Azerbaijan during 2003-2015 years. Using quarterly data on CPI, trade partner’s CPI, nominal effective exchange rate (NEER), money supply (M2), real non-oil gross domestic product (NGDP) and credits we employ vector auto regression (VAR) analysis in order to conduct our study. Impulse response and variance decomposition analysis suggest that inflation is mostly explained by foreign inflation, fiscal policy, exchange rate and own shocks. Whereas monetary policy and supply shocks do not play any essential role in explaining inflation. Among these variables inflation expectations, foreign inflation and monetary policy (credit variable) have quick effect on domestic headline inflation, whereas the effect of fiscal variable is relatively slower: it takes two quarters to fully reflect on prices. We also find that appreciation of exchange rate has deflationary effect on domestic inflation.
    Keywords: consumer price index, inflation, determinants of inflation, historical decomposition, developing country, structural vector autoregression
    JEL: E31 E50
    Date: 2016–10–12
  14. By: Slavi T Slavov
    Abstract: There are 13 countries in Central, Eastern and Southeastern Europe (CESEE) with floating exchange rate regimes, de jure. This paper uses the framework pioneered by Frankel and Wei (1994) and extended in Frankel and Wei (2008) to show that most of them have been tracking either the euro or the US dollar in recent years. Eight countries, all of them current or aspiring EU members, track the euro. Of the five countries keying on the US dollar in various degrees, all but one belong to the Commonwealth of Independent States. The paper shows that the extent to which each country’s currency tracks the euro (or the dollar) is correlated with the structure of its external trade and finance. However, some countries appear to track the EUR or USD to an extent which appears inconsistent with inflation targeting, trade or financial integration, or the extent of business cycle synchronization. The phenomenon is particularly pronounced among the countries in the CESEE euro bloc, which may be deliberately gravitating around the euro in anticipation of eventually joining the Euro Area.
    Keywords: Foreign exchange;United States;Western Hemisphere;Central, Eastern and Southeastern Europe; exchange rate regimes; fixed versus floating; de jure versus de facto, Eastern and Southeastern Europe, exchange rate regimes, fixed versus floating, de jure versus de facto, International Monetary Arrangements and Institutions
    Date: 2017–03–31
  15. By: Eric Tymoigne
    Abstract: The paper presents a financial approach to monetary analysis that links the credit and state theories of money. A premise of the functional approach to money is that "money is what money does." In this approach, monetary and mercantile mechanics are conflated, which leads to the conclusion that unconvertible monetary instruments are worthless. The financial approach to money strictly separates the two mechanics and argues that major monetary disruptions occurred when the two were conflated. Monetary instruments have always been promissory notes. As such, their financial characteristics are central to their value and liquidity. One of the main financial requirements of any monetary instrument is that it be redeemable at any time. As long as this is the case, the fair value of an unconvertible monetary instrument is its face value. While the functional approach does not recognize the centrality of redemption, the paper shows that redemption plays a critical role in the state and credit views of money. Payments due to issuer and/or convertibility on demand are central to the possibility of par circulation. The paper shows that this has major implications for monetary analysis, both in terms of understanding monetary history and in terms of performing monetary analysis.
    Keywords: Credit Theory of Money; State Theory of Money; Net Present Value; Monetary Systems
    JEL: E31 E42 G12
    Date: 2017–05
  16. By: Shijaku, Gerti; Dushku, Elona
    Abstract: This paper examines the demand for foreign reserve holdings for the Albanian small open economy. The model is estimated through the Vector Error Correction Model approach. Results provide supportive evidence that reserve accumulation is more sensitive to precautionary motives rather than mercantilist ones. Other results reconfirm that current account patterns and fiscal imbalances are the main driving forces behind reserve holding. By contrast, reserve was yet again found less sensitive regarding the opportunity cost and mercantilist motives.
    Keywords: Foreign reserve holdings, trade openness; short-term capital movements, VECM
    JEL: C52 F32
    Date: 2017
  17. By: Daniel Ordoñez-Callamand (Banco de la República de Colombia); Juan D. Hernandez-Leal (Banco de la República de Colombia); Mauricio Villamizar-Villegas (Banco de la República de Colombia)
    Abstract: Central banks generally target multiple objectives while having at least the same number of monetary instruments. However, some instruments can be inadvertently collinear, leading to indeterminacy and identification failures. Paradoxically, most empirical studies have shied away from this dependence. In this paper we propose a novel method of identifying simultaneous monetary shocks by introducing a Tobit model within a VAR. An advantage of our method is that it can be easily estimated using only least squares and a maximum likelihood function. Also, the impulse-response analysis can be carried out as in the traditional time-series setting and can be applied in a structural framework. Hence, we model a dual process consisting of a censored foreign exchange intervention policy along with a linear interest rate intervention policy. In simulation exercises we show that our method outperforms a benchmark case of estimating policy functions separately. In fact, as the covariance between shocks increases, so does the performance of our method. In our empirical approach, we estimate the policy covariance for the case of Colombia and Turkey and find significant differences when compared to the benchmark case. Classification JEL: C34, E52, E58
    Keywords: Simultaneous policies, Instrumental VAR; Tobit-VAR; Central bank intervention; Monetary trilemma
    Date: 2017–05
  18. By: Gambacorta, Leonardo; Murcia, Andrés
    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: bank lending; credit registry data; macroprudential policies; meta-analysis
    JEL: E43 E58 G18 G28
    Date: 2017–05
  19. By: Dominic Quint; Pau Rabanal
    Abstract: The large recession that followed the Global Financial Crisis of 2008-09 triggered unprecedented monetary policy easing around the world. Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity at a large scale after shortterm policy rates reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should still be used when economic conditions and interest rates normalize. In particular, we study the optimality of asset purchase programs by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States. We find that the benefits of using such UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits from using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. When more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.
    Keywords: United States;Banking;Western Hemisphere;Unconventional Monetary Policy, Optimal Rules, Time-Series Models, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–03–31
  20. By: Hüther, Michael; Demary, Markus
    Abstract: Eurozone inflation underperforms since the beginning of 2013 and monetary policy struggles to stabilize it since then. The items of the aggregate inflation rate indicate that low inflation is due to both supply and demand factors and weak demand is caused by indebtness and unemployment. Additional monetary policy measures are not required in the current situation because monetary policy has long lags when economies are indebted and it already helped to reduce cyclical unemployment.
    Date: 2016
  21. By: Christian Grisse; Signe Krogstrup; Silvio Schumacher
    Abstract: We study the transmission of changes in the believed location of the lower bound to longterm interest rates since the introduction of negative interest rate policies. The expectations hypothesis of the term structure combined with a lower bound on policy rates suggests that normal policy transmission is reduced when policy rates approach this lower bound. We show that if market participants revise downward the believed location of the lower bound, this may in itself reduce long-term yields. Moreover, normal policy transmission to long-term rates increases. A cross-country event study suggests that such effects have been empirically relevant during the recent negative interest rate episode.
    Keywords: Monetary policy;Negative interest rates;lower bound, yield curve, term structure, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–03–22
  22. By: Shijaku, Gerti
    Abstract: The growth of lending in foreign currency in many Central, Eastern and South Eastern European (CESEE) countries has driven to the expansion of analyses and researches in this regard. In Albania, similar to the other regional countries, the study of main determinants of foreign currency-lending is rather important. FCL accounts for 65% of lending to private sector. This paper examines the determinants of FCL to the private sector by means of the bound test approach to Autoregressive Distributed Lag approach, based on demand and supply indicators. The results provide evidence that foreign currency lending is mainly driven by the availability of bank foreign funding deposits and minimum variance portfolio share. Foreign currency lending is more preferred under higher interest rate differentials, inflation volatility and lower exchange rate volatility. The study identifies a long-run cointegrated and stable relationship.
    Keywords: Foreign currency lending, dollarization, minimum variance portfolio, ARDL approach
    JEL: C32 C51 E44 E51 F31 G11 G21
    Date: 2016
  23. By: William Chen (Williams College); Gregory Phelan (Williams College)
    Abstract: We theoretically illustrate how macroprudential policy spillovers through international cap- ital flows can lead to uncoordinated policy choices that are tighter than would occur with coor- dination. We consider a symmetric two-country macro model in which countries have limited ability to issue state-contingent contracts in international markets. Accordingly, output en- dogenously depends on the relative share of wealth held by each country. Because markets are incomplete, welfare can be improved by regulating countries’ borrowing positions. Tighter macroprudential policy in country A (limiting leverage or capital inflows) stabilizes country A and endogenously increases the frequency with which A is relatively more wealthy than coun- try B. Thus, tight policy in A provides incentives for B to choose tight policy as well so that B is not poor on average relative to A. We numerically solve for the coordinated and uncoordinated equilibria when countries choose among countercyclical macroprudential policies.
    Keywords: International Capital Flows, Capital Controls, Macroeconomic Instability, Macroprudential Regulation, Policy Coordination, Spillovers, Financial Crises
    JEL: E44 F36 F38 F42 G15
    Date: 2017–05
  24. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, Chicago, USA)
    Abstract: In this paper, we estimate a Qualitative Vector Autoregressive (Qual VAR) model, which combines binary information of Quantitative Easing (QE) announcements with an otherwise standard VAR model that includes US and emerging market Real Estate Investment Trusts (REITs) returns. The Qual VAR uncovers the Federal Reserve’s latent, unobservable propensity for QE and generates impulse responses for the emerging market REITs returns. The results show that QE has (strong) positively significant, but short-lived, effects on the returns of emerging market REITs.
    Keywords: Qual VAR, Unconventional Monetary Policy, Emerging Markets, REITs
    JEL: C32 E52 R33
    Date: 2017–05
  25. By: Bruno Albuquerque (-)
    Abstract: I investigate the extent to which a common US monetary policy affects regional asymmetries through different household debt levels across states. After constructing a novel indicator of consumer prices at the state level, I compute a state-specific monetary policy stance measure as deviations from an aggregate Taylor rule for a panel of 30 states. Using local projection methods over 1999-2015, I find that a common monetary policy contributes to amplifying regional asymmetries. While a looser monetary policy stance stimulates borrowing and growth in states with low household debt, it is only the case in the short term for high debt states: household debt and real GDP decline over the medium to longer run in high debt states.
    Keywords: Monetary policy, Household debt, Regional asymmetries, Local Projections, Taylor rule
    JEL: C33 E32 E52 G21
    Date: 2017–05
  26. By: Shijaku, Gerti
    Abstract: The main focus of this paper is to appraise the money demand function and the velocity of broad money, M3, in the medium and long-term, given its role as a second pivotal pillar for the monetary policy of the Bank of Albania, in accordance with its primary objective, that of price stability. The results show that the demand for money is stable, even in the aftermath of global financial crisis, as well as its performance contains important information for the inflation trend.
    Keywords: Monetary policy, quantitative theory, Phillips curve, reference value, VECM, P-STAR approach
    JEL: C32 C51 C52 E31 E41
    Date: 2016
  27. By: Demary, Markus; Hüther, Michael
    Abstract: The ECB has left its policy interest rates unchanged despite inflationary pressures stemming from a strengthened recovery and from rising oil prices. Although the ECB's Governing Council did not discuss a renewal of the long-term refinancing operations, which will expire in 2020, its monetary policy stance is still too accommodative.
    Date: 2017
  28. By: Claudiu Albulescu (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Adrian Ionescu (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In the present paper, we assess the long-run relationship between FDI inflows and the financial environment in 16 EU countries. For this purpose, we use a cointegration technique for heterogeneous panels and the FMOLS and DOLS estimators, over the period 2001 to 2015. We show that financial conditions are important for FDI inflows. More precisely, the monetary uncertainty, calculated as the difference between the recorded and the forecasted interest rate values, negatively affects the FDI inflows. In addition, the banking stability, measured through different Z-score specifications, positively influences the foreign investment. However, this result is influenced by the way the Z-score is calculated. We further report a positive relationship between the business cycle and the FDI entrance. The robustness analyses based on alternative specifications of monetary uncertainty and banking stability confirm our findings. These results are also supported by a PMG estimation. Therefore, authorities must pay special attention to monetary policy predictability and to banking stability in order to facilitate the investors' access to finance and their investment decision.
    Keywords: cointegration, EU countries,FDI inflows, monetary uncertainty, banking stability, Z-score
    Date: 2017–02–01
  29. By: Nadav Ben Zeev; Ohad Raveh
    Abstract: Does monetary policy play a role in scal federalism? This paper presents a novel implication of monetary policy shocks by studying their heterogeneous e ects across federal-states and their consequent connection to scal equalization. A two-region monetary union DSGE model with a federal equalization mechanism shows that capital intensive states experience a relatively larger contraction following a positive monetary policy shock, due to the greater share that capital takes in their production process. This, in turn, brings them greater in ows of federal grants. We show that state-heterogeneity in capital intensity is explained by levels of natural resource abundance over large periods, and hence by pre-determined geographical characteristics. Based on this identi cation strategy, we test the model's predictions using a panel of U.S. states over the period 1969-2007 and nd that following a one standard deviation monetary policy shock, output growth (output share of federal transfers) in capital intensive states contemporaneously decreases (increases) by 1% relative to their counterparts, on average. In addition, we nd no di erential e ects on other state-level economic indicators, consistent with the model.
    Keywords: natural monetary policy, fiscal federalism, capital intensity
    JEL: E52 H77
    Date: 2017
  30. By: Liu, Tao; Lu, Dong; Zhang, Ruifeng
    Abstract: Financial market imperfections severely restrict currency use in international trade. We develop a unified search-based framework with financial frictions to address the determinants for currency, emphasizing the roles of trade finance and financial market development, as well as macro, micro factors and firm-level bargaining power. In an open economy monetary search model with financial intermediation, the usage of a particular currency will emerge endogenously and strategic complementarities among exporters, importers, and financial intermediation reinforce the status of international currency. With highly disaggregated data from Colombia, we provide firm-level evidence that financial factors significantly affect the patterns of currency usage. We show that exporters prefer the currency with a more developed financial market, especially for small firms in financially vulnerable sectors. In particular, a developing country with medium-level of financial development could enhance its currency usage by more than 10% if they further develop their financial market. Meanwhile, bad monetary policy and low bargaining power of exporters will hurt the popularity of currency, although empirically firm-level bargaining power only has a secondary effect. These results provide important policy implications for developing countries that seek to improve the international role of its own currency but suffer from financial market underdevelopment, unstable monetary policy, and inferior bargaining positions of firms, emphasizing the role of finaical market development and macroeconomic stability.
    Keywords: Invoicing currency; Trade finance; Financial intermediation; Financial development; Monetary search
    JEL: F1 F31 F41
    Date: 2017–05–15
  31. By: Orphanides, Athanasios
    Abstract: This paper explores the reasons for the suboptimal fiscal-monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved. A comparison of fiscal and monetary policies and of economic outcomes in the euro area and the United States suggests that both fiscal and monetary policy in the euro area have been overly tight. Fiscal policy has been hampered by the institutional framework which constrains individual states and lacks instruments to secure an appropriate aggregate stance. ECB monetary policy has been hampered by the distributional effects of balance sheet policies which needed to be adopted at the zero lower bound, and by discretionary decisions taken before the crisis such as the reliance on credit rating agencies for determining collateral eligibility for monetary operations. The compromising of the "safe asset" status of euro area sovereign debt during the crisis complicated fiscal and monetary policy. Changes in the discretionary decisions governing the implementation of monetary policy in the euro area can potentially reduce the distributional effects of policy and improve the fiscal-policy mix and longer-term prospects for the euro area.
    Keywords: collateral eligibility; credit risk.; ECB; Euro crisis; loss sharing; Quantitative easing; redenomination risk; safe assets; Sovereign debt; zero lower bound
    JEL: E52 E58 E61 E62 G01
    Date: 2017–05

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