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on Monetary Economics |
| By: | Bernd Hayo (University of Marburg); Florian Neumeier (Ifo Institute–Leibniz Institute for Economic Research at the University of Munich) |
| Abstract: | Employing data from a representative population survey conducted in New Zealand in 2016, this paper examines factors that influence, or are at least associated with, public trust in the Reserve Bank of New Zealand (RBNZ). The large number of specifically designed questions allows studying the relationship between six dimensions and RBNZ trust: (i) economic situation, (ii) monetary policy knowledge, (iii) nonspecific trust, (iv) interest and information search, (v) politicians and government, and (vi) socio-demographic indicators. Using ordered logit models, we find that at least one indicator from each of these six dimensions has a statistically significant conditional correlation with individuals’ trust in RBNZ. Satisfaction with own financial situation, objective knowledge about the RBNZ’s main policy objective, responsibility for interest rate setting, subjective knowledge about inflation, trust in government institutions, desire to be informed about RBNZ, age, and full-time selfemployment have a positive relationship with RBNZ trust. The reverse is found for respondents who do not keep up with RBNZ and believe that politicians are long-term oriented. In terms of economic relevance, institutional trust has the largest single impact on RBNZ trust and the subjective and objective knowledge indicators show a strong combined influence. |
| Keywords: | Central Bank Trust, Survey, Public Attitudes, Reserve Bank of New Zealand, Monetary Policy |
| JEL: | E52 E58 Z1 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201728&r=mon |
| By: | George-Marios Angeletos (MIT); Chen Lian (MIT) |
| Abstract: | Forward guidance—and macroeconomic policy more generally—relies on shifting expectations, not only of future policy, but also of future economic outcomes such as income and inflation. These expectations matter through general-equilibrium mechanisms. Recasting these expectations and these mechanisms in terms of higher-order beliefs reveals how standard policy predictions hinge on the assumption of common knowledge. Relaxing this assumption anchors expectations and attenuates the associated general-equilibrium effects. In the context of interest, this helps lessen the forward-guidance puzzle, as well as the paradox of flexibility. More broadly, it helps operationalize the idea that policy makers may find it hard to shift expectations of economic outcomes even if they can easily shift expectations of policy. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:89&r=mon |
| By: | Philipp Kirchner (University of Kassel); Benjamin Schwanebeck (University of Kassel) |
| Abstract: | Using a DSGE framework, we discuss the optimal design of monetary policy for an economy where both retail banks and shadow banks serve as fi?nancial intermediaries. We get the following results. During crises times, a standard Taylor rule fails to reach sufficient stimulus. Direct asset purchases prove to be the most effective unconventional tool. When maximizing welfare, central banks should shy away from interventions in the funding process between retail and shadow banks. Liquidity facilities are the welfare-maximizing unconventional policy tool. The effectiveness of unconventional measures increases in the size of the shadow banking sector. However, the optimal response to shocks is sensitive to the resource costs of the implementation which may differ across central banks. Hence, optimal unconventional monetary policy is country-speci?c. |
| Keywords: | ?nancial intermediation; shadow banking; ?financial frictions; unconventional policy; optimal policy |
| JEL: | E44 E52 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201725&r=mon |
| By: | Hitoshi Sadakane |
| Abstract: | We examine multistage information transmission with voluntary monetary transfer in the framework of Crawford and Sobel (1982). In our model, an informed expert can send messages to an uninformed decision maker more than once, and the uninformed decision maker can pay money to the informed expert voluntarily whenever she receives a message. Our results are that under some conditions (i) the decision maker can obtain more detailed information from the expert than that in the Crawford and Sobel model and (ii) there exists an equilibrium whose outcome Pareto dominates all the equilibrium outcomes in the Crawford and Sobel model. Moreover, we find the upper bound of the receiver's equilibrium payoff, and provide a sufficient condition for it to be approximated by the receiver's payoff under a certain equilibrium. |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1006&r=mon |
| By: | Carlos Carvalho (Central Bank of Brazil and PUC-Rio); Tiago Fl´orido (Harvard University); Eduardo Zilberman (PUC-Rio) |
| Abstract: | We assemble a novel dataset on transitions in central bank leadership in several countries, and study how monetary policy is conducted around those events. We find that policy is tighter both at the last meetings of departing governors and first meetings of incoming leaders. This finding cannot be fully explained by endogenous transitions, the effects of the zero lower bound, surges in inflation expectations, omitted variables such as fiscal policy and uncertainty nor electoral cycles. We conclude by offering two possible, perhaps complementary, explanations for these results. One based on a simple signalling story, another based on career and reputation concerns.Creation-Date: 2017-07 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:657&r=mon |
| By: | Michael Funke; Julius Loermann; Richhild Moessner |
| Abstract: | We derive risk-neutral probability densities for future euro/Swiss franc exchange rates as implied by option prices. We find that the credibility of the Swiss franc floor somewhat decreased as the spot exchange rate approached the lower bound of 1.20 CHF per euro. We also compare the forecasting performance of a random walk benchmark model with an error-correction model (ECM) augmented with option-implied break probabilities of breaching the currency floor. We find some evidence that the augmented ECM has an informational advantage over the random walk when using one-month break probabilities. But we find that one-month option-implied densities cannot predict the entire range of exchange rate realizations. |
| Keywords: | Swiss franc, forecasting, options, risk-neutral probability densities |
| JEL: | C53 F31 F37 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:652&r=mon |
| By: | Cheng-Zhong Qin (Dept. of Economics, UC Santa Barbara); Thomas Quint (Dept. of Mathematics, University of Nevada, Reno); Martin Shubik (Cowles Foundation, Yale University) |
| Abstract: | An adequate description of economic dynamics requires the introduction of a monetary system including default penalties and expectations in a society whose economy utilizes money and credit. This essay notes and discusses several of the factors involved in the use of money and credit in a process oriented economy. It links these observations with the general equilibrium treatment of the same underlying economy and formulates a government guidance game where the government sets several key parameters in a monetary economy sufficient to select a unique equilibrium. Low information and error correction are noted. The links to the first and second welfare theorems of GE are also considered as is the setting of the price level. |
| Keywords: | General equilibrium, Strategic market games, Uniqueness, Aggregation, Information, Disequilibrium, Minimal institutions, Playable games |
| JEL: | C7 D50 E4 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2095&r=mon |
| By: | Kota Watanabe (Canon Institute for Global Studies(CIGS) and University of Tokyo); Tsutomu Watanabe (Graduate School of Economics, University of Tokyo) |
| Abstract: | Japan has failed to escape from deflation despite extraordinary monetary policy easing over the past four years. Monetary easing undoubtedly stimulated aggregate demand, leading to an improvement in the output gap. However, since the Phillips curve was almost flat, prices hardly reacted. Against this background, the key question is why prices were so sticky. To examine this, we employ sectoral price data for Japan and seven other countries including the United States, and use these to compare the shape of the price change distribution. Our main finding is that Japan differs significantly from the other countries in that the mode of the distribution is very close to zero for Japan, while it is near 2 percent for other countries. This suggests that whereas in the United States and other countries the "default" is for firms to raise prices by about 2 percent each year, in Japan the default is that, as a result of prolonged deflation, firms keep prices unchanged. |
| Keywords: | deflation; price stickiness; Phillips curve; inflation expectations; inflation norms; quantitative easing; menu cost models; sectoral price data |
| JEL: | E31 E5 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utppwp:078&r=mon |
| By: | MOLTENI, Francesco, PAPPA, Evi |
| Abstract: | This paper analyzes jointly the effects of monetary and fiscal policy shocks in the US economy using a factor augmented vector autoregressive model with drifting coefficients and stochastic volatility. The time varying structure of the model allows to assess the impact of monetary policy shocks in the same periods when fiscal policy shocks identified via the narrative approach are also at play. In this way we study how the monetary policy transmission changes conditional on expansionary or contractionary exogenous fiscal policies, which are determined by the discretionary intervention of the fiscal authority and are not the response of business cycle fluctuations or the reaction to monetary policy. We find that fiscal policy strongly affects the impulse responses to monetary policy shocks through the aggregate demand channel. These results are relevant to understand the implications of different policy mixes. |
| Keywords: | TVP FAVAR, monetary policy shocks, fiscal policy shocks |
| JEL: | E52 E62 E63 E65 C32 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:mwp2017/13&r=mon |
| By: | Richard H. Clarida |
| Abstract: | This paper highlights some of the theoretical and practical implications for monetary policy and exchange rates that derive specifically from the presence of a global general equilibrium factor embedded in neutral real policy rates in open economies. Using a standard two country DSGE model, we derive a structural decomposition in which the nominal exchange rate is a function of the expected present value of future neutral real interest rate differentials plus a business cycle factor and a PPP factor. Country specific “r*” shocks in general require optimal monetary policy to pass these through to the policy rate, but such shocks will also have exchange rate implications, with an expected decline in the path of the real neutral policy rate reflected in a depreciation of the nominal exchange rate. We document a novel empirical regularity between the equilibrium error in the VECM representation of the empirical Holston Laubach Williams (2017) four country r* model and the value of the nominal trade weighted dollar. In fact, the correlation between the dollar and the 12 quarter lag of the HLW equilibrium error is estimated to be 0.7. Global shocks to r* under optimal policy require no exchange rate adjustment because passing though r* shocks to policy rates ‘does all the work’ of maintaining global equilibrium. We also study a richer model with international spill overs so that in theory there can be gains to international policy cooperation. In this richer model we obtain a similar decomposition for the nominal exchange rate, but with the added feature that r* in each country is a function global productivity and business cycle factors even if these factors are themselves independent across countries. We argue that in practice, there could well be significant costs to central bank communication and credibility under a regime formal policy cooperation, but that gains to policy coordination could be substantial given that r*’s are unobserved but are correlated across countries. |
| JEL: | E4 F31 F33 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23562&r=mon |
| By: | Sergio Cesaratto |
| Abstract: | The paper is a contribution to a long-run theory of effective demand with elements from monetary circuit theory, Modern Monetary Theory and endogenous finance analysis. Some shortcomings of the still influential neo-Kaleckian growth model and monetary circuit theory are underlined, and the Sraffian supermultiplier is indicated as the most promising heterodox approach to growth and instability in capitalism. The Sraffian supermultiplier allows full consideration of the autonomous components of aggregate demand as the ultimate sources of growth and instability in modern capitalism. Following Steindl, capital gains are included among these components. Autonomous demand and investment are typically fed by endogenous finance. The paper articulates the relation between autonomous demand and investment on one hand, and endogenous finance on the other, in the light of Keynes’s distinction between initial and final finance. |
| Keywords: | Supermultiplier, endogenous money, monetary circuit theory, modern monetary theory, autonomous demand |
| JEL: | B51 E11 E12 E42 E5 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:757&r=mon |
| By: | Avdjiev, Stefan; Gambacorta, Leonardo; Goldberg, Linda S.; Schiaffi, Stefano |
| 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 Fed2 "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: | Capital Flows; Global liquidity; international bank lending; international bond flows |
| JEL: | F34 G10 G21 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12127&r=mon |
| By: | Ji Zhang (Tsinghua University); Jing Cynthia Wu (University of Chicago) |
| Abstract: | We propose a New Keynesian model with the shadow rate, which is the federal funds rate during normal times. At the zero lower bound, we establish empirically the negative shadow rate summarizes unconventional monetary policy with its resemblance to private interest rates, the Fed's balance sheet, and Taylor rule. Theoretically, we formalize our shadow rate New Keynesian model with QE and lending facilities. Our model generates data-consistent results: a negative supply shock is always contractionary. %Relatedly, the government multiplier is under 1. It also salvages the New Keynesian model from the zero lower bound induced structural break. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:11&r=mon |
| By: | Steve Ambler (Département des sciences économiques, ESG UQAM, Canada; C.D. Howe Institute, Canada; The Rimini Centre for Economic Analysis) |
| Abstract: | Quantitative easing in the US has meant a massive increase in the size of the Fed’s balance sheet and the monetary base without a commensurate increase in inflation. Instead, velocity has decreased dramatically. The only comparable episode in recent economic history was Japan’s experiment with quantitative easing in the early 2000s, where inflation remained low or negative and which ended in 2006 when the Bank of Japan reduced the size of its balance sheet to a level compatible with the growth path it was on before quantitative easing. We show that this is precisely what we would expect in a standard New Keynesian model in response to an increase in the money supply that is expected to be temporary. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:17-14&r=mon |
| By: | Arsenios Skaperdas |
| Abstract: | US monetary policy was constrained from 2008 to 2015 by the zero lower bound, during which the Federal Reserve would likely have lowered the federal funds rate further if it were able to. This paper uses industry-level data to examine how growth was affected. Despite the zero bound constraint, industries historically more sensitive to interest rates, such as construction, performed relatively well in comparison to industries not typically affected by monetary policy. Further evidence suggests that unconventional policy lowered the effective stance of policy below zero. |
| Keywords: | Industry heterogeneity ; Unconventional monetary policy ; Zero lower bound |
| JEL: | E32 E43 E47 E52 |
| Date: | 2017–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-73&r=mon |
| By: | Phiri, Andrew |
| Abstract: | Using the recently-introduced quantile autoregression methodology (QAR), this study contributes to the ever-expanding empirical literature by investigating the persistence in inflation for BRICS countries using quarterly time series data collected between 1996 to 2016. Our empirical analysis reveals two crucial findings. Firstly, for all estimated regressions, persistence in moderate to high inflation rates in the QAR regression exhibits unit root tendencies. Secondly, we note that inflation persistence varies across different time horizons corresponding to periods priori and subsequent to the global financial crisis. These findings have important implications for Central Banks in BRICs countries. |
| Keywords: | BRICS; Emerging economies; Inflation persistence; Quantile regression. |
| JEL: | C31 E31 |
| Date: | 2017–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:79956&r=mon |
| By: | Aditya Maheshwari; Andrey Sarantsev |
| Abstract: | We consider a model when private banks with interbank cash flows as in (Carmona, Fouque, Sun, 2013) borrow from the outside economy at a certain interest rate, controlled by the central bank, and invest in risky assets. The cash flow between private banks is also facilitated by the central bank. Each private bank aims to maximize its expected terminal logarithmic utility. The central bank, in turn, aims to control the overall size of financial system, and the rate of circulation between banks. A default occurs when the net worth of a bank goes below a certain threshold. We consider systemic risk by studying probability of a certain number of defaults over fixed finite time horizon. |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1707.03542&r=mon |
| By: | Dong, Feng (Shanghai Jiao Tong University); Wen, Yi (Federal Reserve Bank of St. Louis) |
| Abstract: | In responding to the extremely weak global economy after the financial crisis in 2008, many industrial nations have been considering or have already implemented negative nominal interest rate policy. This situation raises two important questions for monetary theories: (i) Given the widely held doctrine of the zero lower bound on nominal interest rate, how is a negative interest rate (NIR) policy possible? (ii) Will NIR be effective in stimulating aggregate demand? (iii) Are there any new theoretical issues emerging under NIR policies? This article builds a model to show that (i) money injections can remain effective even when the nominal bank lending rate has reached zero or become negative; (ii) it is a good policy to keep the nominal interest rate as low as possible by purchasing government bonds with money; and (iii) the conventional wisdom on the notion of the liquidity trap and the Fisherian decomposition between the nominal and real interest rate can be invalid. |
| Keywords: | Monetary Policy; Quantitative Easing; Liquidity Preference; Liquidity Trap; Banking; Money Demand |
| JEL: | E12 E13 E31 E32 E41 E43 E51 |
| Date: | 2017–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2017-019&r=mon |
| By: | Jeff W. Huther; Jane E. Ihrig; Elizabeth C. Klee |
| Abstract: | We explore the historical composition of the Federal Reserve's Treasury portfolio and its effect on Treasury yields. Using data from 1985 to 2016, we show that the divergence of the composition of the Federal Reserve's portfolio from overall Treasury securities outstanding is associated with a statistically significant effect on interest rates. In aggregate, when the Federal Reserve's portfolio has shorter maturity than overall Treasury debt outstanding, measures of the term premium are higher at all horizons; likewise, when the Federal Reserve's portfolio has longer maturity, term premiums are lower. In addition, at the individual security level, differences in Federal Reserve holdings from overall Treasury debt outstanding are correlated with measures of pricing errors and liquidity premiums. We discuss the mechanism for this effect, which could include elements of preferred-habitat theory as well as the fiscal theory of the price level. |
| Keywords: | Federal Reserve ; SOMA portfolio ; Treasury securities ; Portfolio composition |
| JEL: | E42 E52 N12 O23 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2017-75&r=mon |
| By: | Stefan Avdjiev; Leonardo Gambacorta; Linda S. 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. |
| JEL: | F34 G10 G21 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23565&r=mon |
| By: | Goran Jovičić (The Croatian National Bank, Croatia); Davor Kunovac (The Croatian National Bank, Croatia) |
| Abstract: | In this paper we estimate and identify a small open economy Bayesian VAR model in order to disentangle the contribution of individual domestic, euro area-specific and global shocks to domestic macroeconomic developments. Our identification suggests that foreign (global and euro area - specific) shocks have a large impact on the variability of domestic variables - they account for approximately 40% of variation in GDP growth and around 50% of variation in inflation. Looking at the contribution of individual structural shocks our results emphasize two particular findings. First, low oil prices have played an important role for muted inflation in Croatia during the last two years while, at the same time, domestic real activity has not benefited much. We show how this finding depends crucially on the specific mix of economic shocks underlying the movements in oil prices (demand vs supply shocks). Second, our results suggest that the large-scale asset purchase programme launched by the ECB at the beginning of 2015 resulted in favourable, albeit limited, spillover effects on domestic economy. |
| Keywords: | Small open economy, BVAR with sign and zero restrictions, Oil prices, ECB monetary policy |
| JEL: | E30 E10 E50 Q43 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:hnb:wpaper:49&r=mon |
| By: | Dagfinn Rime; Andreas Schrimpf; Olav Syrstad |
| Abstract: | This paper studies the violation of the most basic no-arbitrage condition in international finance - Covered Interest Parity (CIP). To understand the CIP conundrum, it is key to (i) account for funding frictions in U.S. dollar money markets, and (ii) to study the challenges of swap intermediaries when funding liquidity evolves differently across major currency areas. We find that CIP holds remarkably well for most potential arbitrageurs when applying their marginal funding rates. With severe funding liquidity differences, however, it becomes impossible for dealers to quote prices such that CIP holds across the full rate spectrum. A narrow set of global top-tier banks enjoys risk-less arbitrage opportunities as dealers set quotes to avert order flow imbalances. We show how a situation with persistent arbitrage profits arises as an equilibrium outcome due to the constellation of market segmentation, the abundance of excess reserves and their remuneration in central banks' deposit facilities. |
| Keywords: | Covered interest parity, money market segmentation, funding liquidity premia, FX swap market, U.S. dollar funding |
| JEL: | E43 F31 G15 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:651&r=mon |