nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒06‒11
28 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Inflation Mechanism. An Empirical View By Liviu C. Andrei; Dalina Andrei
  2. Financial liberalization and long-run stability of money demand in Nigeria By Oludele E. Folarin; Simplice Asongu
  3. Monetary policy in an oil-dependent economy in the presence of multiple shocks By Drygalla, Andrej
  4. The eurozone (expected) inflation: an option’s eyes view. By Ricardo Gimeno; Alfredo Ibáñez
  5. Taper Tantrums: QE, its Aftermath and Emerging Market Capital Flows By Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
  6. The impact of news on US household inflation expectations By Wolfgang Karl Härdle; Shih-Kang Chao; Jeffrey Sheen; Stefan Trück; Ben Zhe Wang
  7. Unconventional Taxation Policy, Financial Frictions and Liquidity Traps By William John Tayler; Roy Zilberman
  8. Yields on sovereign debt, fragmentation and monetary policy transmission in the euro area: A GVAR approach By Victor Echevarria-Icaza; Simón Sosvilla-Rivero
  9. Monetary Neutrality with Sticky Prices and Free Entry By Bilbiie, Florin Ovidiu
  10. Home biased expectations and macroeconomic imbalances in a monetary union By Dennis Bonam; Gavin Goy
  11. Virtual Currencies and Beyond; Initial Considerations By Sheila Bassett; Anupam Basu; Tamim Bayoumi; Thomas Baunsgaard
  12. The effects of monetary policy shocks on inequality in Japan By Masayuki Inui; Nao Sudo; Tomoaki Yamada
  13. Money-Financed Fiscal Programs : A Cautionary Tale By William B. English; Christopher J. Erceg; J. David Lopez-Salido
  14. Did Negative Interest Rates Impact Bank Lending? By Phil Molyneux; Rue Xie; John Thornton; Alessio Reghezza
  15. Heterogeneity in Monthly Inflation Expectations in Brazil: Evidence with Aggregate Data from the Focus Survey By Roberto Meurer; Gilberto Tadeu Lima
  16. Macroprudential Policy Frameworks in Developing Asian Economies By Lee, Minsoo; Gaspar, Raymond; Villaruel, Mai Lin
  17. The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis. By Haroon Mumtaz; Konstantinos Theodoridis
  18. Implications for Aggregate Inflation of Sectoral Asymmetries : Generalizing Woodford By Koskinen Hannu; Vilmunen Jouko
  19. Stock Market Dynamics and the Central Bank in a General Equilibrium Model By Ilomaki Jukka; Laurila Hannu
  20. Macroprudential policy and the revolving door of risk: lessons from leveraged lending guidance By Kim, Sooji; Plosser, Matthew; Santos, Joao A. C.
  21. International Monetary Relations: Taking Finance Seriously By Obstfeld, Maurice; Taylor, Alan M.
  22. Currency Amounts in the SDR Basket - Proposed Changes to the Rounding Methodology By Olumuyiwa Adedeji; Ehtisham Ahmad
  23. Inflation, Default, and the Currency Composition of Sovereign Debt in Emerging Economies: Working Paper 2017-01 By Daniel Fried
  24. Welfare-Enhancing Distributional Effects of Central Bank Asset Purchases By Andreas Schabert
  25. Should Central Banks Worry About Nonlinearities of their Large-Scale Macroeconomic Models? By Vadym Lepetyuk, Lilia Maliar, Serguei Maliar
  26. The dynamic impact of macroeconomic news on long-term inflation expectations By Hachula, Michael; Nautz, Dieter
  27. Socioeconomic determinants of the mobile money adoption process: the case of Togo By Komivi Afawubo; Messan Agbaglah; Mawuli K. Couchoro; Tchapo Gbandi
  28. Macro Risks and the Term Structure of Interest Rates By Geert Bekaert; Eric Engstrom; Andrey Ermolov

  1. By: Liviu C. Andrei (National University of Political and Administration Sciences Bucharest, Faculty of Public Administration); Dalina Andrei (Economic Forecasting Institute, Romanian Academy)
    Abstract: We prefer to reconsider once again our larger paper published earlier, as we did it already for at least three of its revealed correlations: between nominal GDP and both monetary reserves and money supply (Andrei & Andrei 2014a, b) and between money multiplier and velocity (Andrei 2014), this time for something within our database (i.e. the Federal Reserves of Saint Lois State/FRED) that regards the inflation rate from nearby. Following our basic paper reference’s basics, inflation might be proper to both representative and fiat monies, but more deeply to the latter, although both monies again keep either the money supply and reserves as components. On the other hand, the same inflation is a so reach topic for theorists of all groups of thinking, e.g. there are some that identify it out of just money origins. This paper below tries to explain a monetary inflation mechanism in normal (out of crisis) environment.
    Keywords: inflation (rate), (required & excess) monetary reserves, Fed, cointegration, fiat money, money supply
    JEL: B1 C5 E5
    Date: 2017–01
  2. By: Oludele E. Folarin (Ibadan, Nigeria); Simplice Asongu (Yaoundé/Cameroun)
    Abstract: A stable money demand function is essential when using monetary aggregate as a monetary policy. Thus, there is need to examine the stability of the money demand function in Nigeria after the deregulation of the financial sector. To achieve this, the study employed CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests after using autoregressive distributive lag bounds test to determine the existence of a long run relationship between monetary aggregate and its determinant. Results of the study show that a long-run relationship holds and that the demand for money is stable in Nigeria. In addition, the inflation rate is found to be a better proxy for an opportunity variable when compared to interest rate. The main implication of the study is that interest rate is ineffective as a monetary policy instrument in Nigeria.
    Keywords: Stable; demand for money; bounds test
    JEL: E41 C22
    Date: 2017–06
  3. By: Drygalla, Andrej
    Abstract: Russian monetary policy has been challenged by large and continuous private capital outflows and a sharp drop in oil prices during 2014, with both ongoings having put a significant depreciation pressure on the ruble and having led the central bank to eventually give up its exchange rate management strategy. Against this background, this paper estimates a small open economy model for Russia, featuring an oil price sector and extended by a specification of the foreign exchange market to correctly account for systematic central bank interventions. We find that shocks to the oil price and private capital flows substantially affect domestic variables such as inflation, output and the exchange rate. Simulations of the model for the estimated actual strategy and five alternative regimes suggest that the vulnerability of the Russian economy to external shocks can substantially be lowered by adopting some form of an inflation targeting strategy. Foreign exchange intervention-based policy strategies to target the nominal exchange rate or the ruble price of oil, on the other hand, prove inferior to the policy in place.
    Keywords: monetary policy,exchange rate interventions,oil price,capital flows
    JEL: E52 F31 F41 G15
    Date: 2017
  4. By: Ricardo Gimeno (Banco de España); Alfredo Ibáñez (Instituto tecnológico autónomo de Mexico)
    Abstract: We estimate inflation risk-neutral densities (RNDs) in the Euro area since 2009. We use Euro inflation swaps and caps/floors options, and introduce a simple and parsimonious approach to jointly estimate the RNDs across horizons. This way, we obtain the implicit RND for forward measures, like the five-on-five years inflation rate, which, although it is not directly traded in the market, it is a key rate for monetary policy. Then, we discuss several indicators derived from the information content of the historical RNDs that are useful for monetary policy and compare them in the light of the ECB’s decisions and communication over the last few years. Specically, the evolution of tails risks (associated with deflation and high inflation); the balance of inflation risks; measures of risk aversion from the ECB’s Survey of Professional Forecasters (SPF); and how forward inflation rates react to the ECB’s non-conventional monetary policies (Longer Term Renancing Operations, LTRO, Securities Market Programme, SMP, Asset Purchase Programme, APP, and its variants and extensions)
    Keywords: inflation compensation, inflation options, risk-neutral densities, inflation risk aversion, balance of inflation risks
    JEL: E31 E44 G13
    Date: 2017–06
  5. By: Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
    Abstract: This paper provides a novel perspective on the impact of U.S. unconventional monetary policy (UMP) on emerging market capital flows and asset prices. Using high-frequency Treasury futures data to identify U.S. monetary policy shocks, we find, through the lens of an affine term structure model, that these shocks represent revisions to both the expected path of short-term interest rates and required risk compensation. The risk compensation component is especially important during the UMP periods. Further, we find that these high-frequency policy shocks do exhibit sizable effects on U.S. holdings of emerging market assets and their valuations. We also document that the relative effects of U.S. monetary policy shocks are larger for emerging asset returns relative to physical capital flows, and they are largest for emerging equity markets relative to fixed income markets. Last, these effects are largest when the Federal Reserve is engaged in “tapering” its large-scale asset purchase program.
    JEL: E5 E52 E58 E65 F3 F32 F42 G11 G12 G13
    Date: 2017–06
  6. By: Wolfgang Karl Härdle; Shih-Kang Chao; Jeffrey Sheen; Stefan Trück; Ben Zhe Wang
    Abstract: Analysis of monthly disaggregated data from 1978 to 2016 on US household in ation expectations reveals that exposure to news on in ation and monetary policy helps to explain in ation expectations. This remains true when controlling for household personal characteristics, their perceptions of the e ectiveness of government policies, their expectations of future interest rates and unemployment, and their sentiment levels. We nd evidence of an asymmetric impact of news on in ation expectations particularly after 1983, with news on rising in ation and easier monetary policy having a stronger e ect in comparison to news on lowering in ation and tightening monetary policy.
    Keywords: In ation expectations, news impact, forecast disagreement
    JEL: D83 D84 E31
    Date: 2017–04
  7. By: William John Tayler; Roy Zilberman
    Abstract: This paper studies the cyclical properties of private asset income taxation in a New Keynesian model with financial frictions. We argue that optimal state-contingent variations in asset income taxation increase welfare, alter the monetary policy transmission mechanism and insure against liquidity traps. These findings are explained by an endogenous association amongst taxation, the effective rate of return on assets, the inflationary output gap and credit spreads. Such unique link operates via a working-capital cost channel, and affords the policy maker an additional degree of freedom in stabilizing the economy. Optimal policy calls for lowering (increasing) asset income taxation following financial (demand) shocks.
    Keywords: Asset Taxation, Optimal Policy, Risk Premium, Credit Cost Channel, Zero Lower Bound
    JEL: E32 E44 E52 E58 E62 E63
    Date: 2017
  8. By: Victor Echevarria-Icaza (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.); Simón Sosvilla-Rivero (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)
    Abstract: The divergence in sovereign yields has been presented as a reason for the lack of traction of monetary policy. We use a GVAR framework to assess the transmission of monetary policy in the period 2005-2016. We identify sovereign yield divergence as a key mechanism by which the leverage channel of monetary policy worked. Unconventional monetary policy was successful in mitigating this effect. When exploring the channels through which yields may affect the heterogeneous transmission of monetary policy, we find that the reaction of bank leverage depended substantially on where the sovereign yield originated, thus providing a mechanism that explains this heterogeneity. Second, large spillover effects meant that yield divergence decreased the traction of monetary policy even in anchor countries. Third, the heterogeneity in the transmission mechanism can be in part attributed to contagion from euro area wide sovereign stress. Fiscal credibility, therefore, may be an appropriate tool to enhance the output effect of monetary policy. Given the importance of spillovers, this credibility may be achieved by changes in the institutional make up and policies in the euro area.
    Keywords: Monetary policy; Spillovers; Euro area crisis.
    Date: 2017
  9. By: Bilbiie, Florin Ovidiu
    Abstract: Monetary policy is neutral even with fixed prices, if there is free entry and variety is determined optimally as in Dixit and Stiglitz (1977). When individual prices are sticky, entry substitutes for price flexibility in the welfare-based price index. In response to aggregate demand expansions, the intensive (quantity produced of each good) and extensive (number of goods being produced) margins move in offsetting ways, leaving aggregate production unchanged. Deviations from neutrality thus occur only when variety is not optimally determined (preferences are not Dixit-Stiglitz) or when entry is subject to frictions.
    Keywords: Dixit-Stiglitz; Entry; monetary policy; monopolistic competition; neutrality; product variety; sticky prices; sunk costs
    JEL: D42 E52 E58 L16
    Date: 2017–05
  10. By: Dennis Bonam; Gavin Goy
    Abstract: Under monetary union, economic dynamics may diverge across countries due to regional inflation differentials and a pro-cyclical real interest rate channel, yet stability is generally ensured through endogenous adjustment of the real exchange rate. The speed of adjustment depends, inter alia, on the way agents form expectations. We propose a model in which agents' expectations are largely based on domestic variables, and less so on foreign variables. We show that such home bias in expectations strengthens the real interest rate channel and causes country-specific shocks to generate larger and more prolonged macroeconomic imbalances.
    Keywords: monetary union; macroeconomic imbalances; home biased expectations; E-stability
    JEL: E03 F44 F45
    Date: 2017–05
  11. By: Sheila Bassett; Anupam Basu; Tamim Bayoumi; Thomas Baunsgaard
    Abstract: New technologies are driving transformational changes in the global financial system. Virtual currencies (VCs) and the underlying distributed ledger systems are among these. VCs offer many potential benefits, but also considerable risks. VCs could raise efficiency and in the long run strengthen financial inclusion. At the same time, VCs could be potential vehicles for money laundering, terrorist financing, tax evasion and fraud. While risks to the conduct of monetary policy seem less likely to arise at this stage given the very small scale of VCs, risks to financial stability may eventually emerge as the new technologies become more widely used. National authorities have begun to address these challenges and will need to calibrate regulation in a manner that appropriately addresses the risks without stifling innovation. As experience is gained, international standards and best practices could be considered to provide guidance on the most appropriate regulatory responses in different fields, thereby promoting harmonization and cooperation across jurisdictions.
    Date: 2016–06–20
  12. By: Masayuki Inui; Nao Sudo; Tomoaki Yamada
    Abstract: The impacts of monetary easing on inequality have been attracting increasing attention recently. In this paper, we use the micro-level data on Japanese households to study the distributional effects of monetary policy. We construct quarterly series of income and consumption inequality measures from 1981 to 2008, and estimate their response to a monetary policy shock. We find that monetary policy shocks do not have a statistically significant impact on inequality across Japanese households in a stable manner. When considering inequality across households whose head is employed, we find evidence that, before the 2000s, an expansionary monetary policy shock increased income inequality through a rise in earnings inequality. Such procyclical responses are, however, scarcely observed when the current data are included in the sample period, or when earnings inequality across all households is considered. We also find that transmission of income inequality to consumption inequality is minor, including during the period when procyclicality of income inequality was pronounced. Using a two-sector dynamic general equilibrium model with attached labor inputs, we show that labor market flexibility is central to the dynamics of income inequality after monetary policy shocks. We also use the micro-level data on households' balance sheets and show that distributions of households' financial assets and liabilities do not play a significant role in the distributional effects of monetary policy.
    Keywords: Monetary policy, income, consumption, wealth inequality
    JEL: E3 E4 E5
    Date: 2017–06
  13. By: William B. English; Christopher J. Erceg; J. David Lopez-Salido
    Abstract: A number of prominent economists and policymakers have argued that money-financed fiscal programs (helicopter drops) could be efficacious in boosting output and inflation in economies facing persistent economic weakness, very low inflation, and significant fiscal strains. We employ a fairly conventional macroeconomic model to explore the possible effects of such policies. While we do find that money-financed fiscal programs, if communicated successfully and seen as credible by the public, could provide significant stimulus, we underscore the risks that would be associated with such a program. These risks include persistently high inflation if the central bank fully adhered to the program; or alternatively, that such a program would be ineffective in providing stimulus if the public doubted the central bank’s commitment to such an extreme strategy. We also highlight how more limited forms of monetary and fiscal cooperation – such as a promise by the central bank to be more accommodative than usual in response to fiscal stimulus – may be more credible and easier to communicate, and ultimately more effective in providing economic stimulus.
    Keywords: DSGE Model ; Fiscal policy ; Liquidity Trap ; Monetary policy ; Currency union
    JEL: E52 E58
    Date: 2017–06
  14. By: Phil Molyneux (Bangor University); Rue Xie (Bangor University); John Thornton (Bangor University); Alessio Reghezza (Bangor University)
    Abstract: Since 2012 several central banks have introduced a negative interest rate policy (NIRP) aimed at boosting real spending by facilitating an increase in the supply and demand for bank loans. We employ a bank-level dataset comprising 16,675 banks from 33 OECD member countries over 2012-2016 and a difference-in-differences methodology to analyze whether NIRP resulted in a change in bank lending in NIRP-adopter countries compared to those that did not adopt the policy. Our results suggest that following the introduction of negative interest rates, bank lending was weaker in NIRP-adopter countries than in countries that did not adopt the policy. The result is robust to a wide range of checks. This adverse NIRP effect appears to have been stronger for banks that were smaller, more dependent on retail deposit funding, less well capitalized, had business models reliant on interest income, and operate in more competitive markets. NIRP also appears to have canceled out the stimulus impact of other forms of unconventional monetary policy
    Keywords: Negative interest rates, monetary policy transmission, bank lending, difference in differences estimation
    JEL: E43 E44 E52 G21 F34
    Date: 2017–05
  15. By: Roberto Meurer; Gilberto Tadeu Lima
    Abstract: In this paper the heterogeneity in the inflation expectations gathered by the Central Bank of Brazil is analyzed through descriptive statistics and econometric estimations for the median, dispersion, amplitude and recurrence of the presence of institutions in the Top 5 group, which includes those survey participants with the highest level of accuracy in inflation forecasting. Aggregate expectations for the IPCA consumer price index from January 2003 to August 2016 are employed. Our results include an almost perfect correlation between the forecasts of the set of all survey participants and the forecasts made by the Top 5, a gradual adjustment of expectations, the significance of the reference day for the selection for the Top 5, and a positive relation between changes in the median and its dispersion. For the set of all survey participants there is a positive relation between changes in the median and its dispersion and a negative one with the inflation rate in the previous month. This relationship was not found for the Top 5. Recurrence of a given institution in the Top 5 for two consecutive months is a condition positively related with the dispersion of expectations over the month and negatively related with the forecast errors in the previous month. These results indicate that the Top 5 reward system seems to induce a relevant proportion of the survey participants to keep their forecasts updated.
    Keywords: Inflation expectations; heterogeneity; Central Bank of Brazil
    JEL: E31 E37 E58
    Date: 2017–06–01
  16. By: Lee, Minsoo (Asian Development Bank); Gaspar, Raymond (Asian Development Bank); Villaruel, Mai Lin (Asian Development Bank)
    Abstract: Over the last decade, developing Asia’s deeper global financial linkages have been accompanied by greater financial integration. As the region becomes more interconnected, a key priority is to ensure that the dynamic environment is supported by better coordinated and potentially consistent macroprudential policies to adequately control systemic risks. Within the context of global financial developments, this paper presents a general macroprudential policy framework that highlights important aspects to conducting policy. It also provides an overview of how some Asian economies, New Zealand, and the euro area implement their macroprudential policies. It reviews existing macroprudential policy frameworks of five high-growth developing economies—Cambodia, Mongolia, Myanmar, Sri Lanka, and Viet Nam—identifying improvements and continuing challenges for their financial systems, which will likely grow more complex. Identifying and addressing key issues will help improve their existing macroprudential policy frameworks.
    Keywords: developing Asia; financial stability; macroprudential framework; systemic risk
    JEL: G01 G28 L51
    Date: 2017–03–01
  17. By: Haroon Mumtaz; Konstantinos Theodoridis
    Abstract: This paper identifies shocks to the Federal Reserve's inflation target as VAR innovations that make the largest contribution to future movements in long-horizon inflation expectations. The effectiveness of this scheme is documented via Monte-Carlo experiments. The estimated impulse responses indicate that a positive shock to the target is associated with a large increase in inflation, GDP growth and long-term interest rates. Target shocks are estimated to be a vital factor behind the increase in inflation during the pre-1980 period and are an important driver of the decline in long-term interest rates over the last two decades.
    Keywords: SVAR, DSGE model, inflation target
    JEL: C5 E1 E5 E6
    Date: 2017
  18. By: Koskinen Hannu; Vilmunen Jouko (Faculty of Management, University of Tampere)
    Abstract: This paper develops and simulates a simple two sector DSGE model for studying aggregate inflation and output dynamics under sectoral adjustment asymmetries. The CES aggregate consumption bundle consists of two different groups of goods with imperfect substitutability between as well as within the groups. Allowing for different within group CES aggregators implies that the degree of substitutability between goods in a group is group-specific. To generate sector-specific price rigidities the model assumes sector-specific Calvo pricing. The paper focuses on potential post-shock divergences across sectors as well as on the implications for aggregate inflation and output of the sectoral asymmetries and identifies an important role for the sectoral relative price for aggregate dynamics. More specifically, the paper generalizes Woodford (2003), which only allows for the price rigidity to differ across sectors. Incorporating sector-specific price elasticities is important and well in line with the micro-level evidence on individual as well as sectoral prices. From the point of view of allocational efficiency and welfare, relative price movements occupy a central role in models incorporating Calvo pricing. This particular feature underscores the perceived macroeconomic benefits of low and stable inflation. This paper takes this logic a step further by incorporating movements both in individual and sectoral relative prices.
    JEL: E12 E17 D52
    Date: 2017–05
  19. By: Ilomaki Jukka; Laurila Hannu (Faculty of Management, University of Tampere)
    Abstract: We introduce a general equilibrium model with potentially inefficient stock markets consisting of asymmetrically informed investors. Prices are sticky in the goods market, but the labor market adjusts perfectly. The central bank aims to maximize the life-time wealth of the households in every period by keeping inflation in the steady state and stock markets in the fair value by adjusting the rate of return on risk-free investments. We find that the “leaning against the wind” policy works, which means that positive stock market bubbles can be eliminated by raising the risk-free rate.
    Keywords: interest rate; monetary policy; portfolio choice
    JEL: E44 E52 G11
    Date: 2017–05
  20. By: Kim, Sooji (Federal Reserve Bank of New York); Plosser, Matthew (Federal Reserve Bank of New York); Santos, Joao A. C. (Federal Reserve Bank of New York, Nova School of Business and Economics)
    Abstract: We investigate the U.S. experience with macroprudential policies by studying the interagency guidance on leveraged lending. We find that the guidance primarily impacted large, closely supervised banks, but only after supervisors issued important clarifications. It also triggered a migration of leveraged lending to nonbanks. While we do not find that nonbanks had more lax lending policies than banks, we unveil important evidence that nonbanks increased bank borrowing following the issuance of guidance, possibly to finance their growing leveraged lending. The guidance was effective at reducing banks’ leveraged lending activity, but it is less clear whether it accomplished its broader goal of reducing the risk that these loans pose for the stability of the financial system. Our findings highlight the importance of supervisory monitoring for macroprudential policy goals, and the challenge that the revolving door of risk poses to the effectiveness of macroprudential regulations.
    Keywords: macroprudential regulation; leveraged loans; banks; enforcement; supervision; shadow banking
    JEL: G18 G21 G23
    Date: 2017–05–01
  21. By: Obstfeld, Maurice; Taylor, Alan M.
    Abstract: In our book, Global Capital Markets: Integration, Crisis, and Growth, we traced out the evolution of the international monetary system using the framework of the "international monetary trilemma": countries can enjoy at most two from the set {exchange-rate stability, open capital markets, and domestic monetary autonomy}. The events of the past decade or more highlight the further complications for this framework posed by financial stability issues. Here we update and qualify our prior analysis, drawing on recent experience and research. Under the classical gold standard, scant attention was paid to macro management, either to stabilize output and employment or to ensure financial stability. The interwar years highlighted the changing demands for modern central bank interventions in the economy. Financial instability, followed by WWII, left a world with sharply constricted financial markets and little private cross-border capital mobility. Due to this historical accident, the Bretton Woods system agreed in 1944 focused not at all on financial stability, and focused on issues like adjustment, exchange rate misalignment, and international liquidity (defined in terms of official, not private, capital-account transactions). Post 1970s floating rates permitted, but did not require, liberalization of the capital account. But the political equilibrium had shifted in favor of financial interests, signaled by the push toward European integration and the later reform process in emerging markets starting in the 1990s. This development, however, opened the door once again to domestic financial crises and their international transmission. Countries now become more susceptible to a new species of "capital account crises, - fueled by bank and bond lending, and its sudden withdrawal. These developments, in fact, made evident a different, "financial trilemma" : countries can pick at most two from {financial stability, open capital markets, and autonomy over domestic financial policy}. We distill the main lessons as to the interactions between the monetary and financial trilemmas, and policies that could best address the resulting weaknesses.
    Keywords: financial stability; international monetary system; macroeconomic stability; trilemma
    Date: 2017–06
  22. By: Olumuyiwa Adedeji; Ehtisham Ahmad
    Abstract: Currency amounts are used to determine the daily value of the SDR. Currency amounts are the number of units of each currency in the SDR basket. The value of the SDR (in U.S. dollars) is the sum of these amounts, valued at daily exchange rates of the currencies against the U.S. dollar. These currency amounts are determined on the last business day before the new SDR basket becomes effective (transition date) such that they correspond to the currency weights determined by the IMF Executive Board in the context of the SDR Review, and remain fixed over the SDR valuation period. To facilitate SDR users in adjusting their portfolios to the new basket, the IMF publishes illustrative currency amounts in the lead up to the transition date.
    Date: 2016–08–05
  23. By: Daniel Fried
    Abstract: In emerging market economies, governments issue debt denominated both in their own currency and in foreign currencies. I develop a theory of the optimal composition of sovereign debt between local and foreign currencies. In a model with a micro-founded monetary framework a government controls monetary policy and has the ability to borrow from abroad using both local and foreign currency bonds. In this model, local currency bonds differ from foreign currency bonds in two important ways. Unlike foreign currency bonds, local currency bonds function as a contingent claim, allowing governments to
    JEL: F30 F33
    Date: 2017–02–02
  24. By: Andreas Schabert
    Abstract: This paper shows that central bank interventions in secondary markets for private debt can enhance social welfare. We apply a model with idiosyncratic risk and limited contract enforcement, while abstracting from unusually large disruptions in financial market. By purchasing debt at above-market prices the central bank induces an increase in credit supply, by which rather borrowers than debt holders gain. We show that asset purchases can not only replicate a tax/subsidy that addresses pecuniary externalities induced by a collateral constraint, but can even improve upon the constrained efficient allocation. We further demonstrate that countercyclical asset purchases are desirable under aggregate risk, which reduce the build-up of debt in favorable times.
    Date: 2017–06–02
  25. By: Vadym Lepetyuk, Lilia Maliar, Serguei Maliar
    Abstract: How wrong could policymakers be when using linearized solutions to their macroeconomic models instead of nonlinear global solutions? This question became of much practical interest during the Great Recession and the recent zero lower bound crisis. We assess the importance of nonlinearities in a scaled-down version of the Terms of Trade Economic Model (ToTEM), the main projection and policy analysis model of the Bank of Canada. In a meticulously calibrated “baby” ToTEM model with 21 state variables, we find that local and global solutions have similar qualitative implications in the context of the recent episode of the effective lower bound on nominal interest rates in Canada. We conclude that the Bank of Canada’s analysis would not improve significantly by using global nonlinear methods instead of a simple linearization method augmented to include occasionally binding constraints. However, we also find that even minor modifications in the model's assumptions, such as a variation in the closing condition, can make nonlinearities quantitatively important.
    Keywords: Business fluctuations and cycles, Econometric and statistical methods, Economic models
    JEL: C61 C63 C68 E31 E52
    Date: 2017
  26. By: Hachula, Michael; Nautz, Dieter
    Abstract: Well-anchored inflation expectations should not react to short-term oriented macroeconomic news. This paper analyzes the dynamic response of inflation expectations to macro news shocks in a structural VAR model. As identification of structural macro news shocks is controversial, we use a proxy SVAR model where, by construction, unobservable macro news shocks correlate with observable surprises from macroeconomic news announcements. Our results confirm that macro news shocks have no impact on U.S. long-term inflation expectations in the long run. In the short run, however, the degree of expectations de-anchoring is non-negligible.
    Keywords: dynamics of inflation expectations,expectations anchoring,macroeconomic news,proxy SVAR
    JEL: E31 E52 C32
    Date: 2017
  27. By: Komivi Afawubo (CEREFIGE-Universite de Lorraine;CRESE-Universite de Franche-Comte); Messan Agbaglah (Labour Program, Government of Canada; GREDI); Mawuli K. Couchoro (CERFEG-Universite de Lome); Tchapo Gbandi (INSEED-Togo)
    Abstract: Togo is lagging in the adoption of mobile money in the West African Economic and Monetary Union (WAEMU). The country’s share in the WAEMU is less than one percent of account opening, volume, and level of transactions. To understand this delay, it is essential to identify the socioeconomic factors that determine the adoption of the usage of mobile money services in Togo. Departing from the traditional literature which considers the adoption of mobile money as a one-shot phenomenon, this paper models the adoption of mobile money as a five-step process and identifies the likelihood of its adoption based on an Ordered Logit model applied on data from a survey conducted on a sample of 5,197 individuals. We find that social groups, including religious groups and student associations, are powerful vehicles for the adoption of mobile money in Togo. In addition, the ability to read and write and being a customer of a bank or a Microfinance Institution (MFI) positively impact the mobile money adoption process. In contrast, being unemployed decreases the likelihood to adopt mobile money.
    Keywords: Mobile money; Innovation; Adoption; Process.
    JEL: O31 O33 Z13
    Date: 2017–04
  28. By: Geert Bekaert; Eric Engstrom; Andrey Ermolov
    Abstract: We use non-Gaussian features in U.S. macroeconomic data to identify aggregate supply and demand shocks while imposing minimal economic assumptions. Recessions in the 1970s and 1980s were driven primarily by supply shocks, later recessions were driven primarily by demand shocks, and the Great Recession exhibited large negative shocks to both demand and supply. We estimate "macro risk factors" that drive "bad" (negatively skewed) and "good" (positively skewed) variation for supply and demand shocks. The Great Moderation is mostly accounted for by a reduction in good variance. In contrast, bad variances for both supply and demand shocks, which account for most recessions, shows no secular decline. We document that macro risks significantly contribute to the variation yields, risk premiums and return variances for nominal bonds. While overall bond risk premiums are counter-cyclical, an increase in demand variance lowers risk premiums.
    Keywords: Bond return predictability ; Business cycle ; Great moderation ; Macroeconomic volatility ; Term premium
    JEL: E31 E32 E43 E44 G12 G13
    Date: 2017–06

This nep-mon issue is ©2017 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.