nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒07‒02
twenty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Communication of monetary policy in unconventional times By Coenen, Günter; Ehrmann, Michael; Gaballoz, Gaetano; Hoffmann, Peter; Nakov, Anton; Nardelli, Stefano; Persson, Eric; Strasser, Georg
  2. A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies By Obstfeld, Maurice; Ostry, Jonathan D.; Qureshi, Mahvash S.
  3. Measuring the World Natural Rate of Interest By Wynne, Mark A.; Zhang, Ren
  4. Age and Gender Group Differences in Employment Responses to Monetary Policy Shock in a Small Open Economy: The Case of Korea By Sungyup Chung
  5. The Role of Coins in the Development of the Economy of Ancient Greece VI-IV Centuries B.C. By Zakharov, Evgeny
  6. Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies By Carrillo Julio A.; Mendoza Enrique G.; Nuguer Victoria; Roldán-Peña Jessica
  7. The evolution of inflation expectations in Japan By Masazumi Hattori; James Yetman
  8. Narrow Banking with Modern Depository Institutions: Is there a Reason to Panic? By Hugo Rodríguez Mendizábal
  9. Identifying Dornbusch's Exchange Rate Overshooting with Structural VECs: Evidence from Mexico By Capistrán Carlos; Chiquiar Daniel; Hernández Juan R.
  10. Financial globalisation, monetary policy spillovers and macro-modelling: tales from 1001 shocks By Georgiadis, Georgios; Jančoková, Martina
  11. POSITIVE TREND INFLATION AND DETERMINACY IN A MEDIUM-SIZED NEW KEYNESIAN MODEL By Arias, Jonas E.; Ascari, Guido; Branzoli, Nicola; Castelnuovo, Efrem
  12. Are the Islamic and conventional money markets really highly correlated ? MGARCH-DCC and Wavelet approaches By Chen, Bai; Masih, Mansur
  13. Estimating the Natural Rate of Interest in an Open Economy By Wynne, Mark A.; Zhang, Ren
  14. The Impact of the Monetary Policy Interventions on the Insurance Industry By Loriana Pelizzon; Matteo Sottocornola
  15. Japanese and U.S. Inflation Dynamics in the 21st Century By Jeff Fuhrer
  16. 22 Years of inflation assessment and forecasting experience at the bulletin of EU & US inflation and macroeconomic analysis By Senra, Eva; Espasa Terrades, Antoni
  17. Central Bank Balance Sheet Analysis By Bagus, Philipp; Howden, David
  18. Monetary Policy According to HANK By Greg Kaplan; Benjamin Moll; Giovanni L. Violante
  19. Excess saving and low interest rates: Theory and empirical evidence By Bofinger, Peter; Ries, Mathias
  21. Time Varying VAR Analysis for Disaggregated Exchange Rate Pass-through in Tunisia By Dahem, Ahlem; Skander, Slim; Fatma, Siala Guermazi

  1. By: Coenen, Günter; Ehrmann, Michael; Gaballoz, Gaetano; Hoffmann, Peter; Nakov, Anton; Nardelli, Stefano; Persson, Eric; Strasser, Georg
    Abstract: Monetary policy communication is particularly important during unconventional times because high uncertainty about the economy, the introduction of new policy tools and possible limits to the central bank’s toolkit could hamper the predictability of policy actions. We study how monetary policy communication should and has worked under such circumstances. Our main results relate to announcements of asset purchase programmes and the use of forward guidance. We show that announcements of asset purchase programmes have lowered market uncertainty, particularly when accompanied by a contextual release of implementation details such as the envisaged size of the programme. We also show that forward guidance reduces uncertainty more effectively when it is state‐contingent or when it provides guidance about a long horizon than when it is open‐ended or covers only a short horizon, and that the credibility of forward guidance is strengthened if the central bank also has embarked on an asset purchase programme. JEL Classification: E43, E52, E58
    Keywords: asset purchase programme, central bank communication, forward guidance, unconventional monetary policy
    Date: 2017–06
  2. By: Obstfeld, Maurice; Ostry, Jonathan D.; Qureshi, Mahvash S.
    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.
    Keywords: Capital Flows; emerging market economies; global financial cycle; trilemma
    JEL: F31 F36 F41
    Date: 2017–06
  3. By: Wynne, Mark A. (Federal Reserve Bank of Dallas); Zhang, Ren (Bowling Green State University)
    Abstract: This paper makes the first attempt to estimate the time-varying natural rate jointly with the output gap and trend potential output growth for the world as a whole using a simple unobserved components model broadly following the methodology developed by Laubach and Williams (2003). We find that the world natural rate has been trending down for the past few decades. Nearly half of the variation in the natural rate is accounted for by the trend potential output growth rate. However, the relationship between the world natural interest rate and the world trend growth is modest and not statistically significant.
    JEL: C32 E32 E4 E52
    Date: 2017–06–01
  4. By: Sungyup Chung
    Abstract: A Factor Augmented Vector Autoregressive model is constructed in a way that it resolves the price puzzle problem and separately identifies domestic and foreign monetary policy shocks by imposing a small-open economy structure. An analysis on the employment data grouped by age and gender reveals that only the young male worker group exhibits an inverse relationship between employment and domestic policy rates. In the case of the foreign (the United States) policy rate rise, however, the negative response of employment could be observed for all of the worker groups.
    Keywords: employment, monetory policy, FAVAR, small open economy, IRF
    Date: 2017–03–05
  5. By: Zakharov, Evgeny (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The economy of ancient states is a complex and diverse phenomenon. One of its essential components is monetary circulation, which from a certain moment is formed by circulation of coins. In this paper we will talk about the initial pages of the history of the money circulation of the ancient world.
    Date: 2017–05
  6. By: Carrillo Julio A.; Mendoza Enrique G.; Nuguer Victoria; Roldán-Peña Jessica
    Abstract: In a New Keynesian model with the BGG accelerator and risk shocks, we show that violations of Tinbergen's Rule and strategic interaction between economic authorities undermine the effectiveness of monetary and financial policies. Separate monetary and financial policy rules produce higher welfare than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to credit. Reaction curves for the policy-rule elasticities are nonlinear, which reflects shifts in these elasticities from strategic substitutes to complements. The Nash equilibrium is inferior to the Cooperative equilibrium, both are inferior to a first-best outcome, and both might produce tight money-tight credit regimes.
    Keywords: Financial Frictions;Monetary Policy;Financial Policy
    JEL: E44 E52 E58
    Date: 2017–06
  7. By: Masazumi Hattori; James Yetman
    Abstract: We model inflation forecasts as monotonically diverging from an estimated long-run anchor point towards actual inflation as the forecast horizon shortens. Fitting the model with forecaster-level data for Japan, we find that the estimated anchors across forecasters have tended to rise in recent years, along with the dispersion in estimates across forecasters. Further, the degree to which these anchors pin down inflation expectations at longer horizons has increased, but remains considerably lower than found in a similar study of Canadian and US forecasters. Finally, the wide dispersion in estimated decay paths across forecasters points to a diverse set of views across forecasters about the inflation process in Japan.
    Keywords: Inflation expectations, decay function, inflation targeting, deflation
    JEL: E31 E58
    Date: 2017–06
  8. By: Hugo Rodríguez Mendizábal
    Abstract: What would be the effect of imposing a 100 percent reserve require- ment to depository institutions? This paper contends that reserves do not compete with loans on the asset side of bank’s balance sheets. Thus, they only affect liquidity provision by banks indirectly through their impact on the cost of loan and deposit creation. This cost could be driven to zero if, as the Eurosystem does, central banks remunerated required reserves at the same rate of their refinancing operations. The paper argues that the crucial constraint imposed by a fully backed banking system is collateral availability by depository institutions.
    Keywords: narrow banking, endogenous money, interbank market, bank solvency, liquidity, monetary policy
    JEL: E4 E5 G21
    Date: 2017–01
  9. By: Capistrán Carlos; Chiquiar Daniel; Hernández Juan R.
    Abstract: In this paper we use data from Mexico to identify Dornbusch's (1976) exchange rate overshooting hypothesis. We specify and estimate a structural cointegrated VAR that considers explicitly the presence of a set of long-run theoretical relations on macroeconomic variables (a purchasing power parity, an uncovered interest parity, a money demand, and a relation between domestic and U.S. output levels). We then impose a recursiveness assumption to identify the response of domestic variables to a monetary policy shock. The long-run restrictions embedded in the model are themselves identified, estimated, and tested using an ARDL methodology that is robust to the degree of persistence of the time series and, in particular, to whether they are trend- or first-difference stationary. With this approach, we are able to find that the response of the exchange rate to monetary policy shocks is consistent with Dornbusch's model.
    Keywords: Vector error correction models;exchange rate overshooting;monetary policy shock
    JEL: C32 C51 E10 E17
    Date: 2017–06
  10. By: Georgiadis, Georgios; Jančoková, Martina
    Abstract: Financial globalisation and spillovers have gained immense prominence over the last two decades. Yet, powerful cross-border financial spillover channels have not become a standard element of structural monetary models. Against this background, we hypothesise that New Keynesian DSGE models that do not feature powerful financial spillover channels confound the effects of domestic and foreign disturbances when confronted with the data. We derive predictions from this hypothesis and subject them to data on monetary policy shock estimates for 29 economies obtained from more than 280 monetary models in the literature. Consistent with the predictions from our hypothesis we find: Monetary policy shock estimates obtained from New Keynesian DSGE models that do not account for powerful financial spillover channels are contaminated by a common global component; the contamination is more severe for economies that are more susceptible to financial spillovers in the data; and the shock estimates imply implausibly similar estimates of the global output spillovers from monetary policy in the US and the euro area. None of these findings applies to monetary policy shock estimates obtained from VAR and other statistical models, financial market expectations and the narrative approach. JEL Classification: F42, E52, C50
    Keywords: financial globalisation, monetary policy shocks, New Keynesian DSGE models, spillovers
    Date: 2017–06
  11. By: Arias, Jonas E. (Federal Reserve Bank of Philadelphia); Ascari, Guido (University of Oxford, University of Pavia, and Bank of Finland); Branzoli, Nicola (Bank of Italy); Castelnuovo, Efrem (University of Melbourne and University of Padova)
    Abstract: This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops significantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates.
    Keywords: trend inflation; determinacy; monetary policy
    JEL: C22 E3 E52
    Date: 2017–06–21
  12. By: Chen, Bai; Masih, Mansur
    Abstract: Criticisms of Islamic banks and financial products motivate us to re-examine whether the profit rate of Islamic financial products and conventional interest rate are highly related or not. It is well known that interest rate is highly influenced by the economic policies, so, in this research we will check the relation between several rates (Islamic and conventional) of return and economic policy uncertainty index respectively to make a judgement on the criticisms. We applied MGARCH-DCC and Continuous Wavelet Transform analyses to see the relations of these variables among different time scales with data collected from different sources. Unlike previous studies, economic policy is incorporated in the analyses in order to explain the issue. Our results tend to indicate that the Islamic profit- and- loss sharing (PLS) rates have divergent relations with interest rates. Islamic Murabahah profit rate is less correlated with LIBOR, while Islamic Mudarabah profit rate is highly correlated with LIBOR. That shows both the uniqueness and similarity of Islamic financial products with the conventional interest rate. Hence the policy makers, if they intend to, can make Islamic money market more independent of the influence of conventional market.
    Keywords: MGARCH; Wavelet; PLS; Islamic profit rate; Murabahah; Mudarabah; LIBOR
    JEL: C58 E44 G11 G15
    Date: 2017–06–12
  13. By: Wynne, Mark A. (Federal Reserve Bank of Dallas); Zhang, Ren (Bowling Green State University)
    Abstract: The concept of the natural or equilibrium rate of interest has attracted a lot of attention from monetary policymakers in recent years. Most attempts to estimate the natural rate use a closed economy framework. We argue that in the face of greater integration of global product and capital markets, an open economy framework is more appropriate. We provide some initial estimates of the natural rate for the United States and Japan in a two-country framework. Our identifying assumptions include a close relationship between the time-varying natural rate of interest and the low-frequency fluctuations of potential output growth in both the home country and the foreign country. Our results suggest that the natural rates in both countries are mainly determined by their own trend growth rates of potential output. Nevertheless, the other country's trend growth plays an important role in several specific periods. The gap between the actual real interest rate and our estimated natural rate offers valuable insights into the recent stance of monetary policy in both of these two countries.
    JEL: C32 E32 E4 E52
    Date: 2017–06–20
  14. By: Loriana Pelizzon; Matteo Sottocornola (EIOPA)
    Abstract: This paper investigates the effect of the conventional and unconventional (e.g. Quantitative Easing) monetary policy intervention on the insurance industry. We first analyse the impact on the stock performances of 166 (re)insurers of the last Quantitative Easing programme launched by the ECB by constructing an event study around the announcement date. Then we enlarge the scope by looking at the monetary policy surprise effects on the same sample of (re)insurers over a timeframe of 8 years. Our evidences suggest that a single intervention extrapolated from the comprehensive strategy cannot be utilized to estimate the effect of the monetary policy intervention on the market. On the impact of monetary policies we show how the effect of interventions changes over time. The expansionary monetary policy interventions, when generating an instantaneous reduction of interest rates, had an immediate positive effect on the stock market and on the insurance industry from 2008 till 2013. However, the effect fades away in 2014-2015. This period includes the last ECB QE intervention and it is characterized by already extreme low interest rates shows statistically non-significant effects on the (re)insurers stock returns.
    Keywords: Insurance, monetary policy, financial stability
    JEL: G22 G28 E27
    Date: 2016–12
  15. By: Jeff Fuhrer (Federal Reserve Bank of Boston (E-mail: jeff.
    Abstract: This paper examines the behavior of inflation in the U.S. and Japan over the past twenty-five years. The paper estimates structural models of inflation dynamics for both countries, relying on survey measures as proxies for expectations. The results suggest some promising directions for inflation modeling in both countries. First, the use of survey expectations as proxies for the expectations in conventional models appears to be helpful, aiding in identification of the inflation process in both countries. Second, methods for endogenizing such expectations are tractable and replicable. They require the measurement of longer-term expectations, but such data are available for many key variables in many developed economies. Third, models that incorporate such expectations identify a rationale for the behavior of US and Japanese inflation: a. Long-run expectations anchor the process, although long-run expectations can be influenced over time by persistent deviations of inflation (or output) from their long-run equilibria; b. Short-run expectations are tied to their long-run counterparts, but they can deviate quite persistently from long-run expectations, due to persistent deviations of output from potential, and due to intrinsic persistence in the expectations; c. Inflation appears well-explained by short-run expectations and a traditional output gap; Fourth, the balance sheet actions in Japan appear to have boosted short-run inflation expectations, compared to where they would have been without such actions. The estimates in this paper suggest that this in turn has helped to raise realized inflation by about one-half percentage point.
    Keywords: Inflation dynamics, Intrinsic Persistence, Survey expectations
    JEL: E31 E32 E52 D84
    Date: 2017–06
  16. By: Senra, Eva; Espasa Terrades, Antoni
    Abstract: The Bulletin of EU & US Inflation and Macroeconomic Analysis (BIAM) is a monthly publication that has been reporting real time analysis and forecasts for inflation and other macroeconomic aggregates for the Euro Area, the US and Spain since 1994. The BIAM inflation forecasting methodology stands on working with useful disaggregation schemes, using leading indicators when possible and applying outliers' correction. The paper relates this methodology to corresponding topics in the literature and discusses the design of disaggregation schemes. It concludes that those schemes would be useful if they were formulated according to economic, institutional and statistical criteria aiming to end up with a set of components with very different statistical properties for which valid single-equation models could be built. The BIAM assessment, which derives from a new observation, is based on (a) an evaluation of the forecasting errors (innovations) at the components' level. It provides information on which sectors they come from and allows, when required, for the appropriate correction in the specific models. (b) In updating the path forecast with its corresponding fan chart. Finally, we show that BIAM real time Euro Area inflation forecasts compare successfully with the consensus from the ECB Survey of Professional Forecasters, one and two years ahead.
    Keywords: Outliers; Indirect forecast; Disaggregation
    JEL: C13
    Date: 2017–06
  17. By: Bagus, Philipp; Howden, David
    Abstract: Balance sheet analysis is standard practice for assessing private sector businesses. No such analysis has been applied to central banks previously. We provide the theoretical foundation and rationale for such analysis. This foundation is rooted in the quality theory of money which places special emphasis on subjective factors as a complement to the more conventional quantitative factors that determine money’s purchasing power. The balance sheet of a central bank reveals the quality of the assets backing a currency and serves as an indicator of future monetary policy. Several accounting ratios proxy the quality of money in terms of assets held by the central bank, alluding to potential shifts in its purchasing power. These ratios can also be used to estimate the scope of future monetary policies that are feasible by the central bank.
    Keywords: Central Bank Balance Sheet, Quality of Money, Balance sheet analysis, Monetary Policy, Inflation
    JEL: E31 E52 E58 E59 M4 M40
    Date: 2016
  18. By: Greg Kaplan (University of Chicago and NBER (E-mail: gkaplan@; Benjamin Moll (Princeton University and NBER (E-mail:; Giovanni L. Violante (Princeton University, CEPR and NBER (E-mail:
    Abstract: We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of wealth and marginal propensities to consume because of two features: uninsurable income shocks and multiple assets with different degrees of liquidity and different returns. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where the substitution channel drives virtually all of the transmission from interest rates to consumption. Failure of Ricardian equivalence implies that, in HANK models, the fiscal reaction to the monetary expansion is a key determinant of the overall size of the macroeconomic response.
    Keywords: Monetary Policy, Heterogeneous Agents, New Keynesian, Consumption, Liquidity, Inequality
    JEL: D14 D31 E21 E52
    Date: 2017–06
  19. By: Bofinger, Peter; Ries, Mathias
    Abstract: The debate on low real long-term interest rates is dominated by the loanable funds theory (LFT). 'Excess saving' above all due to demographic factors, is regarded as a main cause of low rates. We show that LFT is not a useful theoretical framework. It is based on a commodity paradigm ('real analysis') which cannot represent a financial system with flow of funds consisting of money. In a 'monetary analysis' saving is disconnected from the supply of funds. Funds are provided by banks which create money and investors that are willing to give up liquidity. A simple model which is based on the 'monetary analysis' is the IS/LM-model. In this model even at the zero lower bound 'excess saving' is not possible. The empirical evidence for 'excess saving' is weak. At the global level and for the United States the net saving rate and the gross household saving rate have declined significantly since the 1980s. For the United States in line with the monetary analysis a 'financing glut' can be identified for the period preceding the Great Recession. It was followed by a 'borrowing dearth'. For the postwar period, the real rates of the early 1980s can be identified as an outlier so that the trend decline since this period can be regarded as a reversion to the mean.
    Keywords: Flow of Funds; interest rates; monetary policy
    JEL: E43 E50 E52
    Date: 2017–06
  20. By: Pippenger, John
    Abstract: Uncovered interest parity is widely used in open economy macroeconomics. But the evidence rejects UIP and implies forward bias. There are many suggested explanations for the failure of UIP and forward bias, but none are widely accepted, at least partially because none explain the related puzzles discussed below. This paper shows how the liquidity effects of open market operations and sterilized “leaning against the wind†can explain the failure of UIP and forward bias even when expectations are rational. They also appear to be able to explain the related puzzles better than any of the alternatives.
    Keywords: Social and Behavioral Sciences, risk premiums, rational expectations, uncovered interest parity, intervention, covered interest parity, forward bias, liquidity effects.
    Date: 2017–06–26
  21. By: Dahem, Ahlem; Skander, Slim; Fatma, Siala Guermazi
    Abstract: Our paper follows the "Time Varying Parameter VAR with Stochastic Volatility" (TVP VAR) approach developed by Primiceri (2005): Bayesian estimation with time varying coefficients and stochastic volatility. Our paper contributes to the literature by examining if the impact of monetary and exchange rate shocks have varied over time in Tunisia through a disaggregated analysis of exchange rate pass-through by introducing time variability in two ways; firstly, by assuming That all the coefficients of the VAR model are variant in time, and secondly, in the temporal variance-covariance matrix, that is the error term’s volatility of the VAR model. The multivariate stochastic volatility aims at capturing the heteroskedasticity of shocks and non linearities in the simultaneous relationships between the variables of the model. In fact, it allows us to capture abrupt and progressive changes in state variables. Given the structural and institutional changes in the Tunisian economy over the last few decades, it is important to emphasize the possibility of such a temporal variation in the empirical methodology. To the best of our knowledge, this work is among the first to apply the TVP-VAR approach with stochastic volatility to the shocks of monetary and exchange rate policies in Tunisia. Overall, the findings confirm that the modeling approch; i.e the TVP-VAR, is the best tool to analyze the impact of these shocks in Tunisia. The results of the study can help the short- and long-term decision-makers in Tunisia to adopt appropriate strategies for conducting monetary policy as well as containing inflation.
    Keywords: TVP VAR approach – Bayesian estimation – Disaggregate Analysis – Exchange rate Pass-through – Monetary policy – Tunisia
    JEL: C11 C32 E31 E42 E52 E61 F31 F41 O55
    Date: 2017

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