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

  1. A trendy approach to UK inflation dynamics By Forbes, Kristin; Kirkham, Lewis; Theodoridis, Konstantinos
  2. The macroeconomic impact of the ECB's expanded asset purchase programme (APP) By Gambetti, Luca; Musso, Alberto
  3. The ability of the ECB to control inflation in a global environment By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance; Xavier Ragot
  4. U.K. Monetary Policy under Inflation Targeting By Anh Dinh Minh Nguyen
  5. Russia’s Monetary Policy in 2016 By Bozhechkova Alexandra; Trunin Pavel; Knobel Alexander; Kiyutsevskaya Anna
  6. The Currency-Plus-Commodity Basket: A Proposal for Exchange Rates in Oil-exporting Countries to Accommodate Trade Shocks Automatically By Jeffrey A. Frankel
  7. The implications of liquidity expansion in China for the US dollar By Kang, Wensheng; Ratti, Ronald. A.; Vespignani, Joaquin
  8. Unconventional Monetary Policy: Interest Rates and Low Inflation. A Review of Literature and Methods By Mariarosaria Comunale; Jonas Striaukas
  9. Rooms for extension of the ECB’s quantitative easing programme By Christophe Blot; Jérôme Creel; Paul Hubert
  10. Financial fragmentation in the Euro area By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  11. Negative interest rates: incentive or hindrance for the banking system? By Christophe Blot; Paul Hubert
  12. Understanding Monetary Policy Stance By Rasa Stasiukynaitë
  13. Uncertainty and the Real Effects of Monetary Policy Shocks in the Euro Area By Giovanni Pellegrino
  14. Do Term Premiums Matter? Transmission via Exchange Rate Dynamics By Mitsuru Katagiri; Koji Takahashi
  15. Monetary Policy, Financial Frictions and Structural Changes: A Markov-Switching DSGE Approach By Francis Leni Anguyo; Rangan Gupta; Kevin Kotzé
  16. Disagreement in inflation forecasts and inflation risk premia in Brazil By Doi, Jonas Takayuki; Fernandes, Marcelo; Nunes, Clemens V. de Azevedo
  17. An empirical assessment of the Swedish Bullionist Controversy By Nils Herger
  18. FISCAL SURPRISES AT THE FOMC By Croushore, Dean; van Norden, Simon
  19. Monetary Policy and Economic Performance in Resource Dependent Economies By Raimundo Soto; Bassem Kamar
  20. A Tie That Binds; Revisiting the Trilemma in Emerging Market Economies By Maurice Obstfeld; Jonathan David Ostry; Mahvash S Qureshi
  21. The impact of ECB policies on Euro area investment By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  22. Monetary Policy under Behavioral Expectations: Theory and Experiment By Cars Hommes; Domenico Massaro; Matthias Weber
  23. Currency co-movements in Asia-Pacific : The regional role of the Renminbi By Marconi, Daniela
  24. Monetary Aggregates and Monetary Policy in Peru By Lahura, Erick
  25. House prices and monetary policy in the euro area: evidence from structural VARs By Nocera, Andrea; Roma, Moreno
  26. Principal Payments on the Federal Reserve's Securities Holdings By Brian Bonis; John Kandrac; Luke Pardue
  27. Finance, farms, and the Fed's early years By Bruce Carlin; William Mann
  28. Fiscal- Monetary Interdependence and Exchange Rate Regimes in Oil Dependent Arab Economies By Ibrahim Elbadawi; Mohamed Goaied; Moez Ben Tahar

  1. By: Forbes, Kristin (MIT-Sloan School of Management, Bank of England and NBER); Kirkham, Lewis (Monetary Policy Committee Unit, Bank of England); Theodoridis, Konstantinos (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper uses a ‘trendy’ approach to understand UK inflation dynamics. It focuses on the time series to isolate a low-frequency and slow-moving component of inflation (the trend) from deviations around this trend. We find that this slow-moving trend explains a substantial share of UK inflation dynamics. International prices are significantly correlated with the short-term cyclical movements in inflation around its trend, and the exchange rate is significantly correlated with movements in the slow-moving, persistent trend. Other variables emphasized in standard inflation models — such as slack and inflation expectations — may also play some role, but their significance varies and the magnitude of their effects is substantially smaller than for commodity prices and the exchange rate. These results highlight the sensitivity of UK inflation dynamics to events in the rest of the world. They also provide guidance on when deviations of inflation from target are more likely to be temporary, and when (and how quickly) a monetary policy response is appropriate.
    Keywords: UK; inflation; UCSV; exchange rate; slack; inflation expectations; monetary policy
    JEL: E31
    Date: 2017–06–16
  2. By: Gambetti, Luca; Musso, Alberto
    Abstract: This paper provides empirical evidence on the macroeconomic impact of the expanded asset purchase programme APP) announced by the European Central Bank (ECB) in January 2015. The shock associated to the APP is identified with a combination of sign, timing and magnitude restrictions in the context of an estimated time-varying parameter VAR model with stochastic volatility. The evidence suggests that the APP had a significant upward effect on both real GDP and HICP inflation in the euro area during the first two years. The effect on real GDP appears to be stronger in the short term, while that on HICP inflation seems more marked in the medium term. Moreover, several channels of transmission appear to have been activated, including the portfolio rebalancing channel, the exchange rate channel, the inflation re-anchoring channel and the credit channel. JEL Classification: C32, E44, E52, E58
    Keywords: asset purchase programme, euro area, quantitative easing, time-varying VAR
    Date: 2017–06
  3. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques); Xavier Ragot (Observatoire français des conjonctures économiques)
    Abstract: In this paper, we study the global determinants of euro area inflation and show that they are large - they explain around 50% of inflation dynamics – and make it impossible for the ECB to fully control headline inflation. Nevertheless, we show that the ECB retains some control on the domestic part of euro area inflation. We therefore argue in favour of a change in the inflation target pursued by the ECB. Unless a change occurs, the ECB should promote cooperation with other central banks in order to match its CPI inflation target at 2% as 40 to 50% of CPI determinants is related to foreign yields and foreign output growths.
    JEL: E5
    Date: 2015–11
  4. By: Anh Dinh Minh Nguyen (Bank of Lithuania)
    Abstract: This paper considers a variety of reaction functions in the context of real time data to analyse U.K. monetary policy under inflation targeting adopted in 1992. In order to deal with lack of current and future data in real time, we construct the forecasts of expected variables in the first step and use the constructed data for the estimations of contemporaneous- and forward-looking rules. Moreover, we employ the impulse-indicator saturation method to deal with the issue of outliers and therefore obtain robust estimates of policy parameters. Our results show that the robust characteristics of monetary policy during the inflation targeting regime are forward-looking and raising the interest rate by more than one-to-one to movements in inflation, thereby satisfying the Taylor principle.
    Keywords: Real-time data, Taylor rule, Forecasting, Impulse indicator saturation, Autometrics
    JEL: C22 C52 C53 E52 E58
    Date: 2017–03–02
  5. By: Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Trunin Pavel (Gaidar Institute for Economic Policy); Knobel Alexander (Gaidar Institute for Economic Policy); Kiyutsevskaya Anna (Gaidar Institute for Economic Policy)
    Abstract: In 2016, the Bank of Russia implemented a conservative monetary policy aimed at mitigating inflation. Commercial banks decreased their demand for central bank refinancing as the Reserve Fund was spent, in which case the central bank had to employ a set of instruments to prevent an increase in the money supply. It happened twice over the course of the year – on June 14 and September 19 – that Russia’s central bank cut 0.5 percentage points off the key rate, to 10% p.a. With a declining inflation rate and inflation expectations available during the year, a rather moderate decline in the key rate suggested growth of the real interest rate in the money market. Maintaining a positive real rate in the money market helps prevent prices from hiking upwards as the savings appeal strengthened, although there is risk of economic slowdown.
    Keywords: Russian economy, monetary policy, money market, exchange rate, inflation, balance of payments
    JEL: E31 E43 E44 E51 E52 E58
    Date: 2017
  6. By: Jeffrey A. Frankel (Harvard Kennedy School, Harvard University)
    Abstract: The paper proposes an exchange rate regime for oil-exporting countries. The goal is to achieve the best of both flexible and fixed exchange rates. The arrangement is designed to deliver monetary policy that counteracts rather than exacerbates the effects of swings in the oil market, while yet offering the day-to-day transparency and predictability of a currency peg. The proposal is to peg the national currency to a basket, but a basket that includes not only the currencies of major trading partners (in particular, the dollar and the euro), but also the export commodity (oil). The plan is called Currency-plus-Commodity Basket (CCB). The paper begins by fleshing out the need for an innovative arrangement that allows accommodation to trade shocks. The analysis provides evidence from six Gulf countries that periods when their currencies were “undervalued”, in the sense that the actual foreign exchange value lay below what it would have been under the CCB proposal, were periods of overheating as reflected in high inflation and of external imbalance as reflected in high balance of payments surpluses. Conversely, periods when the currencies were “overvalued,” in the sense that their foreign exchange value lay above what it would have been under CCB, featured unusually low inflation and low balance of payments. These results are suggestive of the implication that the economy would have been more stable under CCB. The last section of the paper offers a practical blueprint for detailed implementation of the proposal.
    Date: 2017–06–22
  7. By: Kang, Wensheng (Kent State University); Ratti, Ronald. A. (Economics, Finance and Property, Western Sydney University); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: The value of the US dollar is of major importance to the world economy. Global liquidity has grown sharply in recent years with growing importance of China’s money supply to global liquidity. We develop out-of-sample forecasts of the US dollar exchange rate value using US and non-US global data on price level, output, interest rates, and liquidity on the US, China and non-US/non-China liquidity. Monetary model forecasts significantly outperform a random walk forecast in terms of MSFE in the long run. A monetary model/ECM with sticky prices performs best. Rolling sample analysis indicates changes over time in the influence of variables in forecasting the US dollar. China’s liquidity has a distinct, significant and changing influence on the US dollar exchange rate. Increases in the growth rate in the relative US-China M2 forecast a significantly higher value for the US dollar 1- and 6-month later.
    Keywords: China’s liquidity, trade-weighted US dollar, forecasting US dollar exchange rate
    JEL: E41 E51 F31 F41
    Date: 2016–02
  8. By: Mariarosaria Comunale (Bank of Lithuania); Jonas Striaukas (Bank of Lithuania)
    Abstract: In this paper we provide an overview of the different approaches identified to capture monetary policy in a period of Zero Lower Bound (ZLB). We focus here on the methods closely linked to interest rates, which include: spreads, synthetic indices from principal component analysis and different shadow rates. In the second section of this review we calculate these measures for the euro area and also draw comparisons among different approaches and look at the effects on main macroeconomic variables, with a special focus on inflation. The impact of unconventional monetary policy shocks on inflation is found to be significantly positive by the majority of the studies and by using different methods. Ultimately, we provide a summary of the literature on the Natural Real Rate of Interest, which may be useful for assessing how long low (real) interest rates in a ZLB may stay in place; also suggesting some possible improvement in the estimations which would lead to more accurate policy recommendations.
    Keywords: Unconventional monetary policy, zero lower bound, shadow rates, natural interest rate, inflation
    JEL: E43 E52 E58 F42
    Date: 2017–02–24
  9. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: The announcement of an extension of quantitative easing (QE) until March 2017, at least, has cast doubts on the strength of the Euro area recovery and it has raised concerns about the credibility of the ECB. In this contribution, we argue that the current design of QE prevents unlimited monetary accommodation and, meanwhile, it may reduce the effectiveness of QE. Extending QE again through a modification in its design is thus possible. It will be effective provided governments and the ECB are able to cooperate.
    JEL: E5
    Date: 2016–02
  10. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: Fragmentation has increased since the financial crisis. It remains, though, that differences in cross-border financial flows have been strong across Euro area member states since the creation of the Euro. We show that the transmission of ECB policies to the interest rates on loans to non-financial corporations is quite uneven in the Euro area: the pass-through is much stronger in the periphery than in the core since the Global financial crisis. Consequently, the ECB is able to reduce the spread between the periphery and the core. We also show that the monetary policy transmission to NFC rates is stronger when fragmentation is low. Limiting fragmentation is thus crucial to improve the interest-rate channel in the Euro area . We argue that TLTRO II and QE should be targeted towards peripheral countries in order to limit Euro area fragmentation. Moreover, institutional improvements to make banking systems more homogenous across Euro area should be advocated.
    JEL: E5
    Date: 2016–09
  11. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Since 2014, the ECB has applied a negative interest rate on the excess reserves (and deposit facilities) of commercial banks. This policy is complementary to Quantitative Easing (QE), a program whereby the ECB purchases securities on financial markets. Indeed, the QE provides liquidity to the banks and negative interest rates encourage them to reallocate this liquidity. The negative reserve rate amplifies the fall in short-term and long-term market rates and reinforces the incentive for commercial banks to operate reallocation on their portfolios towards riskier assets. The total amount of liquidity subject to a negative interest rate is 1047 billion euros. Negative interest rates should reduce interest rate margins but the impact on profitability is mitigated by the capital gains banks realise when selling securities to the ECB under QE, by the possibility banks have to finance themselves at negative rates, by a decrease in the risk of default and by the possibility to raise non-interest income.
    JEL: E5
    Date: 2016–11
  12. By: Rasa Stasiukynaitë (Bank of Lithuania)
    Abstract: The paper discusses monetary policy stance assessment in times of both conventional and unconventional monetary policy. Prior to the financial crisis, many central banks had one primary target and one instrument, the short-term rate. Over the years there was a consensus that the rule-of-thumb characterization known as the Taylor rule could broadly outline the policy and supplement discretionary policy. In the post-crisis period, one instrument was no longer sufficient and unconventional measures, such as large-scale asset purchases and forward guidance, were put in the policy makers' agendas. Therefore, assessing the impact of the implemented unconventional measures and understanding the overall monetary policy stance in traditional ways no longer suffices, while finding new suitable ways is not an easy task. The shadow rate literature is able to circumvent the lower bound constraint and incorporate the monetary policy accommodation provided by the asset purchase programmes. However, application of the shadow rate estimates, in order to assess monetary policy stance, has to be done with caution since the estimates lack robustness.
    Keywords: monetary policy stance, Taylor rule, equilibrium real rate of interest, unconventional monetary policy, shadow rates
    Date: 2017–03–24
  13. By: Giovanni Pellegrino (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper estimates a nonlinear Interacted-VAR model to investigate whether the effectiveness of monetary policy shocks in the Euro area is influenced by the level of European uncertainty. Generalized Impulse Response Functions à la Koop et al. (1996) suggest that the peak and cumulative effects of monetary policy shocks are lower during uncertain times than during tranquil times, and significantly so once times of very high and very low uncertainty are considered.
    Keywords: Monetary policy shocks, Non-Linear Structural Vector Auto-Regressions, Interacted-VAR, Generalized Impulse Response Functions, uncertainty
    JEL: C32 E32 E52
    Date: 2017–06
  14. By: Mitsuru Katagiri (Bank of Japan); Koji Takahashi (Bank of Japan)
    Abstract: The macroeconomic effect of term premiums is a controversial issue both theoretically and quantitatively. In this paper, we explore the possibility that term premiums affect inflation and the real economy via exchange rate dynamics. For this purpose, we construct a small open economy model with limited asset market participation, focusing particularly on the empirical fact that uncovered interest parity (UIP) tends to hold for longer-term interest rate differentials. In a quantitative exercise, we estimate parameters using Japanese and U.S. data and show that changes in the term premiums of both Japanese and U.S. long-term yields have sizable effects on Japanese inflation rates via the yen-U.S. dollar exchange rate. This result implies that although decreasing domestic term premiums increased Japan's inflation rates via the exchange rate channel to some extent, it is almost equally influenced by foreign factors such as a rise in U.S. term premium.
    Keywords: Exchange Rate; Term Premium; Uncovered Interest Rate Parity
    JEL: E31 E52 E58
    Date: 2017–06–09
  15. By: Francis Leni Anguyo (School of Economics, University of Cape Town, Rondebosch, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa and IPAG Business School, Paris, France); Kevin Kotzé (School of Economics, University of Cape Town, Rondebosch, South Africa)
    Abstract: This paper considers the use of regime-switching dynamic stochastic general equilibrium models for monetary policy analysis and forecasting purposes. The model incorporates financial frictions that are introduced through the activities of heterogeneous agents in the household and several other features that are incorporated in most small open-economy models. Two variants of regime-switching models are considered: one includes switching in the monetary policy rule (only) and the other employs switching in both the monetary policy rule and the volatility of the shocks. The models are applied to the quarterly macroeconomic data for Uganda and most of the parameters are estimated with the aid of Bayesian techniques. The results of the extensive in- and out-of-sample evaluation suggest that the model parameters do not remain constant over the two regimes. In addition, the transition probabilities suggest that the nature of the regime-switching is consistent with the existence of isolated pulse effects that relate to significant shocks which affected the Ugandan economy, rather than level shifts in the central bank policy rule. It is also noted that the forecasting performance of the regime-switching models is possibly superior to the model that excludes these features.
    Keywords: Monetary policy, inflation-targeting, financial frictions, small open-economy, low income country, dynamic stochastic general equilibrium model, Bayesian estimation.
    JEL: E32 E52 F41
    Date: 2017–06
  16. By: Doi, Jonas Takayuki; Fernandes, Marcelo; Nunes, Clemens V. de Azevedo
    Abstract: The aim of this study is to investigate the link between the inflation risk premia implied by the term structures of nominal and real interest rates in Brazil and disagreements in inflation forecasts. We gauge the former by the difference between the breakeven inflation rate and agents’ inflation median expectations in the Focus Survey published by the Central Bank of Brazil. To proxy for disagreement, we employ the standard deviation of the 12-month inflation expectations in the Focus Survey. We first estimate the impact of disagreement on inflation risk premia across different horizons using a VAR approach. We find that shocks in inflation forecast disagreement significantly affect the 9-, 12-, 24- and 36-month inflation risk premia. The impact is positive, increasing with maturity at least up to 12 months. We then estimate an alternative VAR specification that summarizes the term structure of inflarion risk premia by means of level, slope and curvature factors. It turns out that shocks in disagreement do not affect the slope and curvature factors, resulting only in parallel shifts in the inflation premium term structure. This is in line with the fact that the higher the dispersion in inflation expectations, the higher is the compensation that investors will require to hold fixed rate bonds.
    Date: 2017–06–13
  17. By: Nils Herger (Study Center Gerzensee)
    Abstract: In the eighteenth century, a fierce political debate broke out in Sweden about the causes of an extraordinary depreciation of its currency. More specifically, the dete- riorating value of the Swedish daler was discretionarily blamed on monetary causes, e.g. the overissuing of banknotes, or nonmonetary causes, such as balance of payments deficits. This paper provides a comprehensive empirical assessment of this so-called "Swedish Bullionist Controversy". The results of vector autoregressions suggest that increasing amounts of paper money did give rise to in ation and a depreciation of the exchange rate. Conversely, nonmonetary factors were probably less important for these developments.
    Date: 2017–06
  18. By: Croushore, Dean (Federal Reserve Bank of Philadelphia); van Norden, Simon (Federal Reserve Bank of Philadelphia)
    Abstract: This paper provides a detailed examination of a new set of fiscal forecasts for the U.S. assembled by Croushore and van Norden (2017) from FOMC briefing books. The data are of particular interest because (1) they afford a look at fiscal forecasts over six complete business cycles and several fiscal policy regimes, covering both peacetime and several wars, (2) the forecasts were precisely those presented to monetary policymakers, (3) they include frequently updated estimates of both actual and cyclically adjusted deficits, (4) unlike most other U.S. fiscal forecasts, they were neither partisan nor constrained by unrealistic assumptions about future fiscal policy, and (5) forecasts for other variables (GDP growth, inflation) from the same forecasters are known to compare favorably with most other available forecasts. We detail the performance of forecast federal expenditures, revenues, surpluses, and structural surpluses in terms of accuracy, bias, and efficiency. We find that (1) fiscal forecast errors can be economically large, even at relatively short forecast horizons, (2) while the accuracy of unemployment rate forecast errors improved after 1990, that of most fiscal variables deteriorated considerably, (3) there is limited evidence of forecast bias, and most of this evidence is confined to the period before 1993, (4) the forecasts appear to be efficient with respect to both the fed funds rate and CBO projections, and (5) cyclically adjusted deficit forecasts appear to be over-optimistic around both business cycle peaks and troughs.
    Keywords: fiscal policy; deficits; forecasting; FOMC; Greenbook
    JEL: E62 H68
    Date: 2017–06–20
  19. By: Raimundo Soto (Catholic University of Chile); Bassem Kamar
    Abstract: The aim of this paper is to explore and quantify the role of monetary policy on economic performance in resource-based economies, with a particular focus on Middle East economies. We consider two dimensions of performance: long-run economic growth and price instability (inflation). At the international level, there is mixed evidence regarding the long-run growth record of resource-abundant economies. In some countries, natural resources have turned into a curse of protracted inefficiency, low economic growth and perpetual instability. In other economies, natural resources have played an important role in fostering stability and sustained economic growth. Furthermore, resource rich economies tend to suffer from higher and more unstable levels of price inflation; nevertheless, this malaise is less pronounced in oil exporters. A crucial component in our study is to assess the role of exchange rate regimes and their interplay with monetary and fiscal policies.
    Date: 2017–07–20
  20. By: Maurice Obstfeld; Jonathan David Ostry; Mahvash S Qureshi
    Abstract: This paper examines the claim that exchange rate regimes are of little salience in the transmission of global financial conditions to domestic financial and macroeconomic conditions by focusing on a sample of about 40 emerging market countries over 1986–2013. Our findings show that exchange rate regimes do matter. Countries with fixed exchange rate regimes are more likely to experience financial vulnerabilities—faster domestic credit and house price growth, and increases in bank leverage—than those with relatively flexible regimes. The transmission of global financial shocks is likewise magnified under fixed exchange rate regimes relative to more flexible (though not necessarily fully flexible) regimes. We attribute this to both reduced monetary policy autonomy and a greater sensitivity of capital flows to changes in global conditions under fixed rate regimes.
    Date: 2017–06–08
  21. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: We analyze the reasons for which the very accommodative policy led by the ECB has not triggered a rebound of investment. After examining the evolutions of investment in the euro area, we observe a large heterogeneity both across sectors and countries. Consequently, it is questionable that the ECB’s monetary policy can increase investment in the whole area. Therefore, we study the extent to which monetary policy impacts investment. We use a counterfactual analysis and compute the level of investment had the ECB’s decisions been different. We observe the importance of the ECB in support to investment. Indeed, the investment in the euro area would have sunk without accommodative – first conventional, then unconventional – monetary policy. Finally, we lay the emphasis on the role of credit demand as one of the main determinants of investment since the 2008 crisis, which has depended among others on the impact of deleveraging and fiscal consolidation.
    JEL: E5
    Date: 2016–06
  22. By: Cars Hommes (Amsterdam School of Economics (University of Amsterdam) & Tinbergen Institute); Domenico Massaro (Universit? Cattolica del Sacro Cuore & Complexity Lab in Economics); Matthias Weber (Bank of Lithuania & Faculty of Economics, Vilnius University)
    Abstract: Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under rational expectations and under a behavioral model of expectation formation. We show how the economy behaves in the alternative scenarios with a focus on inflation volatility. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions in a learning-to-forecast experiment. The results support the behavioral model and the claim that output stabilization can lead to less volatile inflation.
    Keywords: Experimental macroeconomics; Heterogeneous expectations; LtFE; Tradeoff inflation and output gap
    JEL: C90 E03 E52 D84
    Date: 2017–03–30
  23. By: Marconi, Daniela
    Abstract: The internationalization of China’s currency, the renminbi (RMB) bolsters the growing economic and political influence of China in the Asia-Pacific region. This paper assesses the evolution of RMB exchange rate co-movements against the US dollar (USD) within the region. While the RMB’s influence is growing, it is also found to be asymmetric and varying over time depending on the global movement of the USD. The trend is strong when the USD depreciates, but fades when the USD appreciates.
    JEL: F31 F33
    Date: 2017–06–13
  24. By: Lahura, Erick (Banco Central de Reserva del Perú)
    Abstract: This paper investigates empirically the usefulness of monetary aggregates as information variables in the conduct of monetary policy. For this purpose, some recent advances on the topic were used, which include the analysis of both real-time and revised final data, and the application of Bayesian model averaging to allow for model uncertainty regarding the lag length and number of cointegrating relationships. In this paper, money is considered as an information variable for Wt (e.g. output or prices) if the following two criteria are satisfied: (i) Mt is strongly exogenous, and (ii) Mt Granger-causes Wt. Strong exogeneity is relevant because it validates conditional forecasting of Wt using monetary aggregates as conditioning variables. The results show no strong evidence supporting the usefulness of monetary aggregates as information variables for prices or output. However, this does not preclude their potential use as information variables for other macroeconomic targets such as financial stability. It is worth mentioning that the results do not imply that monetary policy in Peru is not useful.
    Keywords: Bayesian Model Averaging, cointegration, Granger causality, monetary aggregates, monetary policy, real-time data, strong exogeneity
    JEL: C32 E52 E58
    Date: 2017–06
  25. By: Nocera, Andrea; Roma, Moreno
    Abstract: We use a Bayesian stochastic search variable selection structural VAR model to investigate the heterogeneous impact of housing demand shocks on the macroeconomy and the role of house prices in the monetary policy transmission, across euro area countries. A novel set of identification restrictions, which combines zero and sign restrictions, is proposed. By exploiting the cross-sectional dimension of our data, we explore the differences in the propagation channels of house prices and monetary policy and the challenges they pose in the process of real and nominal convergence in the Eurozone. Among the main results, we find a comparatively stronger housing wealth effect on consumption in Ireland and Spain. We provide new evidence in support of the financial accelerator hypothesis, showing that house prices play an important role in the availability of loans. A significant and highly heterogeneous effect of monetary policy on house price dynamics is also documented. JEL Classification: C22, E21, E31, E44, E52
    Keywords: Bayesian vector autoregression, house prices, identified VARs, monetary policy, policy counterfactuals
    Date: 2017–06
  26. By: Brian Bonis; John Kandrac; Luke Pardue
    Abstract: As noted in the Policy Normalization Principles and Plans issued in September 2014, when the Federal Open Market Committee (FOMC) judges that it is appropriate to begin the process of normalizing the size of the balance sheet, it intends to gradually reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities (MBS). This note provides data sources for information on current SOMA holdings and offers background information to help understand how principal payments on SOMA securities combined with a change in reinvestment policy will reduce these holdings.
    Date: 2017–06–16
  27. By: Bruce Carlin; William Mann
    Abstract: We provide causal evidence that discount rate changes by the Federal Reserve affected economic output in the 1920s. Our identification strategy exploits county-level variation in access to the Fed's discount window, and we implement this strategy with hand-collected data on banking and agriculture in Illinois in the early 20th century. The mechanism for the Fed's effect on agriculture was a bank credit channel, operating independently of any deflationary effect on money supply. Our findings suggest that the Fed deliberately managed transitory shocks during 1920-1921, mitigating debt burdens with which farms would struggle in the years leading to the Great Depression.
    JEL: B26 G21 G28
    Date: 2017–06
  28. By: Ibrahim Elbadawi; Mohamed Goaied (IHEC Carthage); Moez Ben Tahar
    Abstract: This paper contributes to the literature on the interdependence between fiscal and monetary policies in resource-dependent economies. In the context of this general theme we analyze the fiscal foundation of the choice of monetary regimes and the extent of pro-cyclicality of fiscal policy during the post mid-1990s oil boom in the relatively under-research oil-dependent Arab economies. We find preliminary evidence on the existence of a threshold effect for oil rents per capita, below which countries tend to be subject to fiscal dominance and pro-cyclical fiscal policy. This might explain the country experiences of low rents per capita and relatively populous Sudan and Yemen, compared to the GCC member countries of Oman, Saudi Arabia, the UAE as well as Algeria. The latter managed to sustain credible de facto pegged exchange rate regimes and convertible currencies (for the GCC) or graduate to flexible regime (for Algeria). Instead, the former had to abandon their pegged regimes as a result of their unsuccessful exchange rate-based stabilization programs. However, the contrast with resource-dependent Chile and Norway suggests that for the Arab oil economies to accommodate future oil busts they need to establish explicit fiscal rules and high technical capabilities for conducting monetary policy.
    Date: 2017–06–07

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