nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒06‒18
25 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Nominal exchange rate shocks and inflation in an open economy: towards a structuralist inflation targeting agenda By Eduardo F. Bastian; Mark Setterfield
  2. Monetary Polica and Currency Returns: the Foresight Saga By Borisenko, Dmitry; Pozdeev, Igor
  3. Financial Development and Monetary Policy Effectiveness in Africa By Effiong, Ekpeno; Esu, Godwin; Chuku, Chuku
  4. "Seeking price and macroeconomic stabilisation in the euro area: The role of house prices and stock prices" By Imran Hussain Shah; Simón Sosvilla-Rivero
  5. The interbank network across the global financial crisis: evidence from Italy By Massimiliano Affinito; Alberto Franco Pozzolo
  6. Monetary and Fiscal Policy in England during the French Wars (1793-1821) By P. Antipa; C. Chamley
  7. What Explains Month-End Funding Pressure in Canada? By Christopher S. Sutherland
  8. Did quantitative easing boost bank lending? The Slovak experience. By Lojschova, Adriana
  9. Association between inflation rates and inflation uncertainty in quantile regression By Alimi, R. Santos
  10. The financial stability dark side of monetary policy By Piergiorgio Alessandri; Antonio Maria Conti; Fabrizio Venditti
  11. Nonneutrality of Money in Dispersion: Hume Revisited By Jin, Gu; Zhu, Tao
  12. The collateral channel of unconventional monetary policy By Giuseppe Ferrero; Michele Loberto; Marcello Miccoli
  13. The shifting drivers of global liquidity By Stefan Avdjiev; Leonardo Gambacorta; Linda Goldberg; Stefano Schiaffi
  15. A summary of a survey on proposed African monetary unions By Asongu, Simplice; Nwachukwu, Jacinta; Tchamyou, Vanessa
  16. Monetary policy and wandering overinvestment cycles in East Asia and Europe By Schnabl, Gunther
  17. Monetary-fiscal interactions and the euro area's malaise By Jarociński, Marek; Maćkowiak, Bartosz
  18. Disinflation, External Vulnerability, and Fiscal Intransigence; Some Unpleasant Mundellian Arithmetic By Evan C Tanner
  19. Monetary Policy Transmission in a Macroeconomic Agent-Based Model By Schasfoort, Joeri; Godin, Antoine; Bezemer, Dirk; Caiani, Alessandro; Kinsella, Stephen
  20. Estimating the Threshold Level of Inflation for Thailand By Jiranyakul, Komain
  21. Macroprudential Policy Coordination in a Currency Union' By Pierre-Richard Agénor; Pengfei Jia
  22. The Transmission Mechanism of Credit Support Policies in the Euro Area By Boeckx, Jef; De Sola Perea, Maite; Peersman, Gert
  23. Illiquid Collateral and Bank Lending during the European Sovereign Debt Crisis By J. Barthélemy; V. Bignon; B. Nguyen
  24. Risks and opportunities of establishing a European Monetary Fund based on the European Stability Mechanism By Matthes, Jürgen
  25. How Have the Fed's Three Rate Hikes Passed Through to Selected Short-term Interest Rates? By Alyssa G. Anderson; Jane E. Ihrig; Mary-Frances Styczynski; Gretchen C. Weinbach

  1. By: Eduardo F. Bastian (Institute of Economics, Federal University of Rio de Janeiro (IE-UFRJ)); Mark Setterfield
    Abstract: This paper develops a model of inflation in an open economy. The model permits analysis of the susceptibility of open economies to permanent inflationary consequences arising from transitory foreign exchange shocks. Sources of structural vulnerability to such events are identified, and means of addressing these structural vulnerabilities are discussed. Ultimately, the paper arrives at a “structuralist inflation targeting agenda”. Based on a proper conception of inflation dynamics, this involves “getting inflation targeting right” rather than either accepting mainstream inflation targeting prescriptions or simply neglecting inflation altogether.
    Keywords: Inflation, strato-inflation, nominal exchange rate shocks, conflicting claims, hysteresis, capital controls, industrial policy
    JEL: E12 E31 F31 F41
    Date: 2017–06
  2. By: Borisenko, Dmitry; Pozdeev, Igor
    Abstract: We document a drift in exchange rates before monetary policy changes across major economies. Currencies tend to depreciate by 0.7 percent over ten days before policy rate cuts and appreciate by 0.5 percent before policy rate increases. We show that available fixed income instruments allow to accurately forecast monetary policy decisions and thus that the drift is foreseeable and exploitable by investors. A simple trading strategy buying currencies against USD ten days ahead of predicted local interest rate hikes and selling currencies before predicted cuts earns on average a statistically significant return of 42 basis points per ten-day period. We further demonstrate that this return is robust to the choice of holding horizon and monetary policy forecast rule. Our results thus pose a major challenge for the risk-based explanations of the exchange rate dynamics.
    Keywords: Monetary Policy, Policy Expectations, Predictability, Overnight Index Swap, Foreign Exchange
    JEL: E43 E52 E58 F31 G12
    Date: 2017–05
  3. By: Effiong, Ekpeno; Esu, Godwin; Chuku, Chuku
    Abstract: As African countries await the birth of her monetary union, the link between economic policies and the real economy will continue to dominate policy debate. This paper investigates whether financial development influences the effectiveness of monetary policy on output and inflation in Africa. We apply standard panel data techniques to annual data from 1990--2015 for a panel of 39 African countries, and find a weak relationship between financial development and monetary policy effectiveness in Africa. The results show no statistical evidence of the relationship for output growth, whereas a negative relationship exist in the case of inflation, but only at their contemporaneous levels. Thus, there is need to strengthen the monetary transmission mechanism in African countries through deliberate efforts to deepen financial sector development.
    Keywords: Financial Development; Monetary Policy; Africa.
    JEL: C33 E52 G21 O55
    Date: 2017–05–31
  4. By: Imran Hussain Shah (Faculty of Humanities & Social Sciences, University of Bath); Simón Sosvilla-Rivero (Complutense Institute for International Studies, Universidad Complutense de Madrid; 28223 Madrid, Spain.)
    Abstract: We propose an Economic Stability Index (ESI) incorporating house prices and stock prices as components of the measure of the inflation rate in order to allow the European Central Bank (ECB) to achieve both price and macroeconomic stability. We use an optimisation approach to estimate target weights for different sectoral prices in the broader price index, which depend on sectoral parameters other than those used to compute the Harmonised Index of Consumer Prices applied by the ECB to gauge price stability in the euro area (EA). Our results suggest that if the ECB had targeted the ESI, it would have implemented a different monetary policy which would had increased stability in the EA’s economic activity and would have helped to create adequate preconditions for sustainable economic growth and job creation.
    Keywords: Stock prices; House prices; Inflation targeting; Macroeconomic stabilization; Euro area. JEL classification:C32, D53, E31, E52, E58, G12, 052, R31.
    Date: 2017–05
  5. By: Massimiliano Affinito (Bank of Italy); Alberto Franco Pozzolo (Università degli Studi del Molise)
    Abstract: This study examines the effects of the global financial crisis (GFC) on interbank market connectivity using network analysis. More specifically, using data on Italian banks’ bilateral interbank positions between 1998 and 2013, we analyze the impact of the following events on each bank’s network centrality: the liquidity crisis in August 2007, the collapse of Lehman Brothers in September 2008, Eurosystem’s long term refinancing operations (LTROs) between 2009 and 2012, the sovereign debt crisis in July 2011, and the announcement of Outright Monetary Transactions (OMT) in 2012. The results show that the 2007 liquidity crisis and especially the collapse of Lehman Brothers are associated with a marked reduction of the relative interconnectedness of the Italian banking sector (i.e., a shift in the distribution of banks’ centrality to the left, away from the most connected bank). In the following years, the system progressively recovered its initial patterns of integration among banks, which coincided wih the main Eurosystem’s monetary policy interventions. However, the average outcome conceals different results across banks, depending on their characteristics and initial positions within the system.
    Keywords: global financial crisis, interbank markets, networks, central bank operations
    JEL: E52 E58 G21
    Date: 2017–06
  6. By: P. Antipa; C. Chamley
    Abstract: The French Wars (1793-1815) exerted unprecedented pressures on Britain's fiscal and monetary policy settings. Policy makers had to constantly adjust the policy mix as events unfolded. This meant implementing monetary and fiscal policy innovations, such as the suspension of the gold standard and the instauration of Britain's first income tax. These adjustments signalled the government's commitment to undertake the necessary to win the war, without jeopardizing fiscal sustainability. Drawing on new hand-collected data, we also show that the Bank of England played an essential role in two successive phases of the war. The Bank granted ample liquidity to the domestic payment system, by discounting large amounts of private bills. It also financed the decisive phase of the wars by purchasing large amounts of public debt. The successful winding down of the balance sheet and the resumption of the gold standard influenced the Bank's policies and shaped the political and financial landscape for the century to come.
    Keywords: Interactions between monetary and fiscal policies, central bank balance sheet, unconventional monetary policy, open market operations.
    JEL: N13 H63 E58 E62
    Date: 2017
  7. By: Christopher S. Sutherland
    Abstract: The Canadian overnight repo market persistently shows signs of latent funding pressure around month-end periods. Both the overnight repo rate and Bank of Canada liquidity provision tend to rise in these windows. This paper proposes three non-mutually exclusive hypotheses to explain this phenomenon. First, month-end funding pressure may be caused by search frictions. Market participants place a premium on liquidity around month-end periods because of the confluence of a generalized liquidity preference, heightened month-end forecast uncertainty, and resultant search frictions in the repo market. Second, this funding pressure could be attributed to spillovers from the US overnight repo market. Third, month-end funding pressure might be associated with large Canadian banks’ end-of-month repo adjustments. By combining market, central-bank and payments data, this paper provides evidence that the first hypothesis explains the latent funding pressure observed on the first day of the month. Using market and non-public regulatory data, this paper further argues that the second and third hypotheses are much less plausible.
    Keywords: Financial markets, Interest rates, Monetary policy framework, Monetary policy implementation, Transmission of monetary policy
    JEL: E41 E43 E52 E58 F36 G15 G14 G21
    Date: 2017
  8. By: Lojschova, Adriana
    Abstract: We find evidence that households in Slovakia do benefit from the ECB asset purchase programme. On the individual bank-level data of 26 financial institutions (full representation of the banking sector) we establish and confirm a traditional relationship between bank lending and changes to deposit ratio. We find the long-run relationship to be twice as strong in the household sector as in the sector of non-financial corporations. Controlling for interest rate changes and other factors, we also introduce asset purchases into the model. We document some, although limited, evidence of the presence of the bank lending channel of asset purchases in the household sector.
    Keywords: Bank lending channel, quantitative easing, panel data
    JEL: E52 G21
    Date: 2017–05
  9. By: Alimi, R. Santos
    Abstract: Inflation and its associated uncertainty impose costs on real economic output in every economy. In developing economies, this welfare cost is higher than those obtainable in developed countries because inflation rate is still higher than desired, mostly double-digit in Africa. In contrast to conventional conditional mean approaches, this study employed quantile regressions and cross-sectional data from 44 African countries for the period 1986 to 2015 to examine the relationship between the level of inflation and inflation uncertainty. This study considers two measures of inflation – Inflation rate and mean inflation, and three different measures of inflation uncertainty – standard deviation, relative variation and median deviation of the inflation rate. The study found evidence of positive and significant association between inflation and its uncertainty across quantiles. It also found that higher inflation brings about more inflation variability, thereby supporting the Friedman-Ball hypothesis and on the other hand high inflation uncertainty prompts rises in inflation, confirming the Cukierman-Meltzer hypothesis. The study therefore recommend that policy makers should target low average inflation rates in order to reduce the negative consequences of inflation uncertainty, which in turn can improve economic performance in Africa.
    Keywords: Inflation, inflation uncertainty, inflation taergeting, quantile regression
    JEL: E3 E31 P44
    Date: 2017–06–12
  10. By: Piergiorgio Alessandri (Bank of Italy); Antonio Maria Conti (Bank of Italy); Fabrizio Venditti (Bank of Italy)
    Abstract: Since monetary policy affects risk premiums, and these appear to have a stronger influence on economic activity when they rise than when they fall, temporary monetary expansions may both stimulate the economy and sow the seeds of damaging financial market corrections in the future. We investigate this possibility by using local projection methods to examine the propagation of monetary shocks through US corporate bond markets. We find that, while the transmission of monetary shocks is symmetric, the impact of macroeconomic data releases is asymmetric: spreads are more responsive to bad news. Crucially, these responses precede economic slowdowns rather than directly cause them.
    Keywords: monetary policy, financial stability, risk premia, macro news, local projections
    JEL: C32 E32 F34
    Date: 2017–06
  11. By: Jin, Gu; Zhu, Tao
    Abstract: For a class of standard and widely-used preferences, a one-shot money injection in a standard matching model can induce a significant and persistent output response by dispersing the distribution of wealth. Decentralized trade matters for both persistence and significance. In the presence of government bonds the injection has a liquidity effect and the inflation rate right following the injection may be below the steady-state rate level.
    Keywords: Nonneutrality, Money Injection, Phillips Curve, Nominal Rigidity
    JEL: E31 E40 E5 E50
    Date: 2017–06–05
  12. By: Giuseppe Ferrero (Bank of Italy); Michele Loberto (Bank of Italy); Marcello Miccoli (Bank of Italy)
    Abstract: We build a general equilibrium model - along the lines of Williamson (2012) - where financial assets can be used as collateral in secured interbank markets to obtain reserves (central bank money). In this framework, frictions in the exchange process give rise to a liquidity premium for assets. An open market operation that provides reserves in exchange for assets decreases the availability of collateral by increasing its liquidity premium (and decreasing its return). The magnitude of the effect depends on assets' pledgeability properties (haircuts). We explore the positive implications of the model shown in the data. Focusing on the period 2009-2014, we analyse the relationship between yields of euro-area government bonds and the relative amount of bonds and central bank reserves held by the euro-area banking sector. We find evidence consistent with our model: yields decrease when reserves increase relative to bonds, with the effect being stronger at lower levels of haircuts. The results are confirmed after several robustness checks.
    Keywords: unconventional monetary policy, secured interbank market, asset prices
    JEL: E43 E58 G12
    Date: 2017–06
  13. By: Stefan Avdjiev; Leonardo Gambacorta; Linda Goldberg; Stefano Schiaffi
    Abstract: The post-crisis period has seen a considerable shift in the composition and drivers of international bank lending and international bond issuance, the two main components of global liquidity. The sensitivity of both types of flow to US monetary policy rose substantially in the immediate aftermath of the Global Financial Crisis, peaked around the time of the 2013 Fed "taper tantrum", and then partially reverted towards pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably post-crisis and became similar to that of international debt securities. The increased sensitivity of international bank flows to US monetary policy has been driven mainly by post-crisis changes in the behaviour of national lending banking systems, especially those that ex ante had less well capitalized banks. By contrast, the post-crisis fall in the sensitivity of international bank lending to global risk was mainly due to a compositional effect, driven by increases in the lending market shares of better-capitalized national banking systems. The post-2013 reversal in the sensitivities to US monetary policy partially reflects the expected divergence of the monetary policy of the US and other advanced economies, highlighting the sensitivity of capital flows to the degree of commonality of cycles and the stance of policy. Moreover, global liquidity fluctuations have largely been driven by policy initiatives in creditor countries. Policies and prudential instruments that reinforced lending banks' capitalization and stable funding levels reduced the volatility of international lending flows.
    Keywords: Keywords: Global liquidity, international bank lending, international bond flows, capital flows
    JEL: G10 F34 G21
    Date: 2017–06
  14. By: Ahmet F. Aysan; Mustafa Disli; Huseyin Ozturk (-)
    Abstract: We examine the interest rate sensitivity of both deposits and credits at Islamic and con- ventional banks in Turkey. We find that the bank lending channel is especially operative for Islamic banks. Impulse responses for conventional and Islamic banks reveal that Islamic bank depositors’ sensitivity to policy rate changes are substantially larger than that of con- ventional bank depositors. Next to heavily dependence on deposit funding, we consider that inertia in Islamic bank deposit rates impedes these banks to keep those depositors who con- sider the opportunity cost of monetary policy rates is unbearable. At the lending side, we obtain similar results, implying that tight monetary policy leads to a larger contraction in Islamic bank credits. This finding is a reflection of the favorable attitude of Islamic banks towards SME financing. When similar relationships are analysed for currency and inflation shocks, we again find larger responses for Islamic banks showing the cyclical nature of SME credits.
    Keywords: Lending channel, Monetary transmission, Islamic banks, SMEs
    JEL: E44 E51 E52 G21
    Date: 2017–05
  15. By: Asongu, Simplice; Nwachukwu, Jacinta; Tchamyou, Vanessa
    Abstract: This review summarises a survey of about 70 empirical studies on proposed African monetary unions published during the past fifteen years. Four main strands are outlined in four tables. They include the: (i) West African Monetary Zone (WAMZ), (ii) East African Monetary Union (EAMU), (iii) Southern African Monetary Union (SAMU) and (iv) African Monetary Union (AMU). A number of concerns are apparent from the feasibility and/or desirability of potential monetary unions. They are variations in: empirical strategies, selection of variables, considered periodicities and sampled countries. The Hegelian dialectics are used to establish selective expansion as the predominant mode of monetary integration. Some studies make the case for strong institutions and pegs as alternatives to currency unions. The employment of cluster analysis, distinguishing shocks from responses in the examination of business cycle synchronisation and the disaggregation of panels into sub-samples provide more subtle policy implications.
    Keywords: Currency Area; Policy Coordination; Africa
    JEL: F15 F36 F42 O55 P52
    Date: 2017–03
  16. By: Schnabl, Gunther
    Abstract: The paper analyses the role of monetary policy for cyclical movements of investment and asset markets in East Asia and Europe based on a Mises-Hayek overinvestment framework. It is shown how the gradual global decline of interest rates has triggered wandering overinvestment cycles in Japan, Southeast Asia and China. Similarly, it is shown how a one-size monetary policy within the European Monetary Union has not preserved the European Monetary Union from idiosyncratic economic development and crisis because of uncoordinated fiscal policies. With monetary policy crisis management being argued to impede financial and economic restructuring, a timely exit from ultra-expansionary monetary policies is recommended for both East Asia and Europe to reconstitute economic stability and growth.
    Keywords: Hayek,Mises,East Asia,European Monetary Union,monetary overinvestment theory,fiscal policy,asymmetric shocks,secular stagnation
    JEL: E52 E58 F42 E63
    Date: 2017
  17. By: Jarociński, Marek; Maćkowiak, Bartosz
    Abstract: When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB’s objective. JEL Classification: E31, E32, E63
    Keywords: eurobond, fiscal theory of the price level, self-fulfilling expectations, zero lower bound
    Date: 2017–06
  18. By: Evan C Tanner
    Abstract: This paper examines the policy challenges a country faces when it wants to both reduce inflation and maintain a sustainable external position. Mundell’s (1962) policy assignment framework suggests that these two goals may be mutually incompatible unless monetary and fiscal policies are properly coordinated. Unfortunately, if the fiscal authority is unwilling to cooperate—a case of fiscal intransigence—central banks that pursue a disinflation on a ‘go it alone’ basis will cause the country’s external position to further deteriorate. A dynamic analysis shows that if the central bank itself lacks credibility in its inflation goal, it must rely even more on cooperation from the fiscal authority than otherwise. Echoing Sargent and Wallace’s (1981) ‘unpleasant monetarist arithmetic,’ in these circumstances, a ‘go it alone’ policy may successfully stabilize prices and output, but only on a short-term basis.
    Keywords: Risk premium;External Vulnerability, Assignment Problem, General, Open Economy Macroeconomics, International Policy Coordination and Transmission
    Date: 2017–05–22
  19. By: Schasfoort, Joeri; Godin, Antoine; Bezemer, Dirk; Caiani, Alessandro; Kinsella, Stephen (Groningen University)
    Date: 2017
  20. By: Jiranyakul, Komain
    Abstract: This paper analyzes the relationship between inflation and economic growth in Thailand using annual dataset during 1990 and 2015. The threshold model is estimated for different levels of threshold inflation rate. The results suggest that the threshold level of inflation above which inflation significantly slow growth is estimated at 3 percent. The negative relationship between inflation and growth is apparent above this threshold level of inflation. In other words, the inflation rate that is higher than this threshold level can jeopardize the growth rate of the country.
    Keywords: Inflation, growth, threshold model
    JEL: C13 E31
    Date: 2017–06
  21. By: Pierre-Richard Agénor; Pengfei Jia
    Abstract: This paper evaluates, using a game-theoretic approach, the benefits of coordinating macroprudential policy (in the form of reserve requirements) in a two-country model of a currency union with credit market imperfections. Financial stability is first defined in terms of the volatility of the credit-to-output ratio. The gains from coordination are measured by comparing outcomes under a centralized regime, where a common regulator sets the required reserve ratio to minimize union-wide financial volatility, and a decentralized (Nash) regime, where each country regulator sets that ratio to minimize its own policy loss. Experiments show that, under asymmetric real and financial shocks, the gains from coordination are significant at the union level. Moreover, these gains are higher when the common and national regulators have asymmetric preferences with respect to output stability, when financial markets are more integrated, and when the degree of asymmetry in credit markets between members is larger. Implications of the analysis for macroprudential policy coordination in the euro area are also discussed.
    Date: 2017
  22. By: Boeckx, Jef; De Sola Perea, Maite; Peersman, Gert
    Abstract: Using a sample of 131 banks, we Önd that the Eurosystemís credit support policies have been successful in stimulating bank credit to the private sector: the impact was greater on the loan supply of smaller, less liquid, less capitalized banks and those more dependent on wholesale funding. The role of bank capital is, however, ambiguous. Besides the above favorable direct e§ect on loan supply, lower levels of bank capitalization at the same time mitigate the size, retail and liquidity e§ects of these policies. The low capital drag on the other channels has even been dominant during the sample period.
    Date: 2017–06
  23. By: J. Barthélemy; V. Bignon; B. Nguyen
    Abstract: We assess the effect of accepting illiquid assets as collateral at the central bank on banks’ lending activity. We study the lending activity of the 177 largest banks in the Euro area between 2011m1 and 2014m12 and the composition of their pool of collateral pledged with the Eurosystem. Panel regression estimates show that the banks that pledged more illiquid collateral with the Eurosystem increased their lending to non-financial firms and households: a one standard deviation increase in the volume of illiquid collateral increase lending by 0.6%..
    Keywords: collateral, loans, central bank, euro crisis.
    JEL: E52 E58 G01 G21
    Date: 2017
  24. By: Matthes, Jürgen
    Abstract: The French presidential elections could lead to more fiscal integration in the euro area. The proposal to establish a European Monetary Fund (EMF) based on the European Stability Mechanism (ESM), which would probably be possible without treaty changes, is evaluated in this paper. Potential EMF instruments are divided into two categories. Firstly, to strengthen the rules-based EMU framework the EMF could not only replace the IMF in crisis programmes, but could also monitor the implemen-tation of EMU rules by the EU Commission. However, problematic implementation issues could arise. Moreover, in order to strengthen financial market discipline, the EMF could become both platform and agent for an effective and reliable sovereign debt restructuring mechanism. However, as this idea will meet with considerable political resistance, it could probably be only a part of a larger political compromise. [...]
    Date: 2017
  25. By: Alyssa G. Anderson; Jane E. Ihrig; Mary-Frances Styczynski; Gretchen C. Weinbach
    Abstract: Since December 2015, the Federal Open Market Committee (FOMC) has increased the target range for the federal funds rate by 25 basis points three times, bringing the target range from 0 to 25 basis points in late 2015 to 75 to 100 basis points in March 2017. This Note examines how this cumulative 75 basis point increase in the target range for the Fed's policy rate has transmitted to other short-term interest rates.
    Date: 2017–06–02

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