nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒07‒23
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. When the Fed sneezes - Spillovers from U.S. Monetary Policy to Emerging Markets By Annette Meinusch
  2. Shocks versus structure: explaining differences in exchange rate pass-through across countries and time By Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
  3. Interest-rate pegs, central bank asset purchases and the reversal puzzle By Gerke, Rafael; Giesen, Sebastian; Kienzler, Daniel; Tenhofen, Jörn
  4. The effects of central bank’s verbal guidance: evidence from the ECB By Maddalena Galardo; Cinzia Guerrieri
  5. The Dire Effects of the Lack of Monetary and Fiscal Coordination By Leonardo Melosi; Francesco Bianchi
  6. In Lands of Foreign Currency Credit, Bank Lending Channels Run Through? By Steven Ongena; Ibolya Schindele; Dzsamila Vonnák
  7. Macroprudential policy and bank risk By Altunbas, Yener; Binici, Mahir; Gambacorta, Leonardo
  8. Effects of commodity price shocks on inflation: A cross-country analysis By Atsushi Sekine; Takayuki Tsuruga
  9. Banks' trading after the Lehman crisis: The role of unconventional monetary policy By Podlich, Natalia; Schnabel, Isabel; Tischer, Johannes
  10. Monetary Policy Implementation in a Negative Rate Environment By Michael Boutros; Jonathan Witmer
  11. Tipping the Scale? The Workings of Monetary Policy through Trade By Gustavo Adler; Carolina Osorio Buitron
  12. Step away from the zero lower bound: small open economies in a world of secular stagnation By Corsetti, Giancarlo; Mavroeidi, Eleonora; Thwaites, Gregory; Wolf, Martin
  13. Euro area sovereign yields and the power of QE By António Afonso; Mina Kazemi
  14. Velocity in the Long Run: Money and Structural Transformation By Radek Stefanski
  15. Risk Shocks Close to the Zero Lower Bound By Martin Seneca
  16. Quantitative Easing and Portfolio Rebalancing: Micro Evidence from Irish Resident Banks By Bergant, Katharina
  17. The Exchange Rate as an Instrument of Monetary Policy By Heipertz, Jonas; Mihov, Ilian; Santacreu, Ana Maria
  18. Risk Taking Channel of Monetary Policy: A Review of the Evidence and Some Preliminary Results for India By Sarkar Sanjukta; Sensarma Rudra
  19. The Fisher paradox: A primer By Gerke, Rafael; Hauzenberger, Klemens
  20. Lending Relationships, Banking Crises and Optimal Monetary Policies By Russell Wong; Cathy Zhang; Guillaume Rocheteau
  21. Quantitative Easing and Long-Term Yields in Small Open Economies By Antonio Diez de los Rios; Maral Shamloo
  22. The E-Monetary Theory By Ngotran, Duong
  23. Market Structure and Monetary Non-Neutrality By Simon Mongey

  1. By: Annette Meinusch (Justus-Liebig-University Giessen)
    Abstract: This paper aims to shed light on the role mean and volatility spillovers of U.S. monetary policy played for asset markets of several emerging market economies in a period from January 2000 to October 2014. We employ multivariate GARCH models in which we distinguish between a conventional and an unconventional monetary policy phase to account for possible heterogeneity in spillover e ects. Our results suggest that the anticipation of loose U.S. monetary policy has diverse effects across monetary policy regimes. While spillovers have little impact on equity returns, they put pressure on local currencies. However, they increase conditional volatilities of both stock and exchange rate returns considerably in most emerging economies within the conventional monetary policy period. These effects can be stronger during unconventional monetary policy times. In accordance with these findings, we observe a tighter link between U.S. monetary policy and foreign asset markets during the unconventional monetary policy phase. Volatility impulse responses show that conditional volatilities of foreign asset markets mainly decrease in response to historical shocks. Particularly during unconventional monetary policy times, U.S. shocks gain importance in explaining the change in conditional volatilities especially fr countries with less geographical distance to the United States.
    Keywords: emerging markets, monetary policy spillovers, multivariate GARCH, unconventional monetary policy, quantitative easing
    JEL: E43 E44 E52
    Date: 2017
  2. By: Forbes, Kristin (Bank of England); Hjortsoe, Ida (Bank of England); Nenova, Tsvetelina (Bank of England)
    Abstract: We show that exchange rate pass-through to consumer prices varies not only across countries, but also over time. Previous literature has highlighted the role of an economy’s ‘structure’ — such as its inflation volatility, inflation rate, use of foreign currency invoicing, and openness — in explaining these variations in pass-through. We use a sample of 26 advanced and emerging economies to show which of these structural variables are significant in explaining not only differences in pass-through across countries, but also over time. The ‘shocks’ leading to exchange rate movements can also explain variations in pass‑through over time. For example, exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher estimates of pass-through than those caused by demand shocks. The role of ‘shocks’ in driving pass-through over time can be as large as that of structural variables, and even larger for some countries. As a result, forecasts predicting how a given exchange rate movement will impact inflation at a specific point in time should take into account not just an economy’s ‘structure’, but also the ‘shocks’.
    Keywords: Pass-through; exchange rate; price level; inflation; monetary policy
    JEL: E31 E37 E52 F47
    Date: 2017–07–10
  3. By: Gerke, Rafael; Giesen, Sebastian; Kienzler, Daniel; Tenhofen, Jörn
    Abstract: We analyze the macroeconomic implications of a transient interest-rate peg in combination with a QE program in a non-linear medium-scale DSGE model. In this context, we re-examine what has become known as the reversal puzzle (Carlstrom, Fuerst and Paustian, 2015) and provide an analytical explanation for its appearance. We show that the puzzle is intimately related with agents' expectations. If, for instance, agents do not anticipate the peg, the reversal does not appear. The same is true if agents' inflation expectations are influenced by a monetary authority which follows a price-level-targeting rule instead of a standard Taylor rule. In this case, sign reversals do not occur even for very long durations of pegged nominal interest rates.
    Keywords: Unconventional Monetary Policy,Interest-Rate Peg,Perfect Foresight,Reversal Puzzle,Price-Level Targeting
    JEL: E32 E44 E52 E61
    Date: 2017
  4. By: Maddalena Galardo (Bank of Italy); Cinzia Guerrieri (LUISS Guido Carli)
    Abstract: In this paper we propose a new indicator of central bank’s verbal guidance, which measures communications about the future based on the frequency of future verbs in monetary policy statements. We consider the press conferences of the European Central Bank as a test case. First, we analyze the main determinants of our index and estimate the unexpected component. Second, we investigate the effects of the identified change in verbal guidance on daily movements in forward money market rates between September 2007 and December 2015. Our results show that financial markets’ expectations on future short-term interest rates react to a communication shock about the future: after controlling for the standard policy rate shock and the announcement of unconventional monetary policies, the effect turns out to be negative and larger for longer horizons. This suggests that verbal guidance has proven to be an effective policy instrument for signalling an accommodative monetary policy stance.
    Keywords: central bank communication, textual analysis, European Central Bank, signalling channel, unconventional monetary policy, event-study analysis
    JEL: E43 E44 E52 E58 E61 G14
    Date: 2017–07
  5. By: Leonardo Melosi (Federal Reserve Bank of Chicago); Francesco Bianchi (Duke University)
    Abstract: We study the problem of coordination between the monetary and the fiscal authorities at the zero lower bound. Lack of coordination between the monetary and fiscal authorities can lead to an explosive dynamics of inflation and large output losses. Policy makers can achieve the goal of mitigating the recession without giving up on long-run macroeconomic stability by committing to inflate away only the portion of debt resulting from an unusually large recession.
    Date: 2017
  6. By: Steven Ongena (University of Lousanne); Ibolya Schindele (Magyar Nemzeti Bank (Central Bank of Hungary)); Dzsamila Vonnák (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: We study the impact of monetary policy on the supply of bank credit when bank lending is also denominated in foreign currencies. Accessing a comprehensive supervisory dataset from Hungary, we find that the supply of bank credit in a foreign currency is less sensitive to changes in domestic monetary conditions than the equivalent supply in the domestic currency. Changes in foreign monetary conditions similarly affect bank lending more in the foreign than in the domestic currency. Hence when banks lend in multiple currencies the domestic bank lending channel is weakened and international bank lending channels become operational.
    Keywords: Bank balance-sheet channel, monetary policy, foreign currency lending
    JEL: E51 F3 G21
    Date: 2017
  7. By: Altunbas, Yener; Binici, Mahir; Gambacorta, Leonardo
    Abstract: This paper investigates the effects of macroprudential policies on bank risk through a large panel of banks operating in 61 advanced and emerging market economies. There are three main findings. First, there is evidence suggesting that macroprudential tools have a significant impact on bank risk. Second, the responses to changes in macroprudential tools differ among banks, depending on their specific balance sheet characteristics. In particular, banks that are small, weakly capitalised and with a higher share of wholesale funding react more strongly to changes in macroprudential tools. Third, controlling for bank-specific characteristics, macroprudential policies are more effective in a tightening than in an easing episode.
    Keywords: bank risk; effectiveness; macroprudential policies
    JEL: E43 E58 G18 G28
    Date: 2017–07
  8. By: Atsushi Sekine; Takayuki Tsuruga
    Abstract: Since the 2000s, large fluctuations in commodity prices have become a concern among policymakers regarding price stability. This paper investigates the effects of commodity price shocks on headline inflation with a monthly panel consisting of 144 countries. We find that the effects of commodity price shocks on inflation virtually disappear within about one year after the shock. While the effect on the level of consumer prices varies across countries, this transitory effect is fairly robust, suggesting a low risk of a persistent second-round effect on inflation. Employing the smooth transition autoregressive models that use past inflation as the transition variable, we also explore the possibility that the effect of commodity price shocks could be persistent, depending on inflation regimes. In this specification, commodity price shocks may not have transitory effects when a country’s currency is pegged to the U.S. dollar. However, the effect remains transitory in countries with exchange-rate flexibility.
    Keywords: Commodity prices, inflation, pass-through, local projections, smooth transition autoregressive models
    JEL: E31 E37 Q43
    Date: 2017–07
  9. By: Podlich, Natalia; Schnabel, Isabel; Tischer, Johannes
    Abstract: Based on a detailed trade-level dataset, we analyze the proprietary trading behavior of German banks in the months directly preceding and following the Lehman collapse in September 2008. The default of Lehman Brothers was a shock to the German banking system that was both unexpected and exogenous. We examine banks' immediate reactions as well as their responses to unconventional monetary policy measures introduced shortly after the event - the introduction of full allotment and the change in eligibility criteria for collateral in central bank refinancing operations. Our results show that market liquidity tightened after the Lehman collapse but there is no evidence of fire sales in the German banking sector. Instead, we observe a broad-based flight to liquidity. The European Central Bank's unconventional monetary policy had a strong impact on banks' trading behavior by inducing shifts towards eligible securities and reducing pressure on market liquidity. This suggests that the ECB's measures contributed to stabilizing the financial system after the Lehman collapse.
    Keywords: proprietary trading,fire sales,flight to liquidity,Lehman crisis,market liquidity,unconventional monetary policy
    JEL: E44 E50 G01 G11 G21
    Date: 2017
  10. By: Michael Boutros; Jonathan Witmer
    Abstract: Monetary policy implementation could, in theory, be constrained by deeply negative rates since overnight market participants may have an incentive to invest in cash rather than lend to other participants. To understand the functioning of overnight markets in such an environment, we add the option to exchange central bank reserves for cash to the standard workhorse model of monetary policy implementation (Poole 1968). Importantly, we show that monetary policy is not constrained when just the deposit rate is below the yield on cash. However, it could be constrained when the target overnight rate is below the yield on cash. At this point, the overnight rate equals the yield on cash instead of the target rate. Modifications to the implementation framework, such as a tiered remuneration of central bank deposits contingent on cash withdrawals, can work to restore the implementation of monetary policy such that the overnight rate equals the target rate.
    Keywords: Interest rates, Monetary policy framework, Monetary policy implementation
    JEL: E4 E40 E42 E43 G G0
    Date: 2017
  11. By: Gustavo Adler; Carolina Osorio Buitron
    Abstract: Monetary policy entails demand augmenting and demand diverting effects, with its impact on the trade balance—and spillovers to other countries—depending on the relative magnitude of these opposing effects. Using US data, and a sign-restricted structural VAR identification strategy, we investigate how monetary policy shocks affects the trade balance, shedding light on the importance of the two effects. Overall, the results indicate that monetary policy has a meaningful impact on the trade balance. A monetary loosening (tightening) leads to a strengthening (weakening) of the overall trade balance, indicating that, on average, demand diversion dominates. This effect of monetary policy on trade is revealed in full when distinguisging between trading partners with fixed exchange rates—for which only demand augmenting operates—and flexible exchange rates—for which both effects operate. We also explore spillover differences between conventional and unconventional monetary policy, as well as changes in spillovers in the postcrisis period (due to an impaired monetary transmission mechanism). While our results suggest that monetary policy comes with spillovers through trade, they should not be interpreted as evidence against the use of this policy instrument as such. From a global perspective, optimal monetary policy should be assessed in conjunction with deployment of other policy measures, inclluding the ability of recipient countries to deploy their own policy measures to offset undesirable spillovers.
    Date: 2017–06–28
  12. By: Corsetti, Giancarlo (Cambridge University); Mavroeidi, Eleonora (Bank of England); Thwaites, Gregory (Bank of England); Wolf, Martin (University of Bonn)
    Abstract: We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities’ ability to rescue the economy from stagnation.
    Keywords: Small open economy; secular stagnation; capital controls; optimal policy; zero lower bound
    JEL: E62 F41
    Date: 2017–07–17
  13. By: António Afonso; Mina Kazemi
    Abstract: We assess the determinants of long-term sovereign yield spreads using a panel of 10 Euro area countries over the period 1999.01–2016.07 notably regarding the ECB (standard and non-standard) quantitative easing measures. Our findings indicate that the international risk, the bid-ask spread and real effective exchange rate increased the 10-year sovereign bond yield spreads. Moreover, quantitative easing, notably Longer-term Refinancing Operations (LTROs), Targeted LTROs and the Securities Market Program decreased the yield spreads. Key Words: sovereign bonds, non-conventional monetary policy, panel data
    JEL: C23 E52 G10
    Date: 2017–06
  14. By: Radek Stefanski (University of St Andrews)
    Abstract: Monetary velocity declines as economies grow. We argue that this is due to the process of structural transformation - the shift of workers from agricultural to non-agricultural production associated with rising income. A calibrated, two-sector model of structural transformation with monetary and non-monetary trade accurately generates the long run monetary velocity of the US between 1869 and 2013 as well as the velocity of a panel of 92 countries between 1980 and 2010. Three lessons arise from our analysis: 1) Developments in agriculture, rather than non-agriculture, are key in driving monetary velocity; 2) Inflationary policies are disproportionately more costly in richer than in poorer countries; and 3) Nominal prices and inflation rates are not ‘always and everywhere a monetary phenomenon’: the composition of output influences money demand and hence the secular trends of price levels.
    Date: 2017
  15. By: Martin Seneca (Bank of England)
    Abstract: Risk shocks give rise to cost-push effects in the canonical New Keynesian model if they are large relative to the distance between the nominal interest rate and its zero lower bound (ZLB). Therefore, stochastic volatility introduces occasional trade-offs for monetary policy between inflation and output gap stabilisation. The trade-off inducing effects operate through expectational responses to the interaction between perceived shock volatility and the ZLB. At the same time, a given monetary policy stance becomes less effective when risk is high. Optimal monetary policy calls for potentially sharp reductions in the interest rate when risk is elevated, even if this risk never materialises. If the underlying level of risk is high, inflation will settle potentially materially below target in a risky steady state even under optimal monetary policy.
    Date: 2017
  16. By: Bergant, Katharina (Central Bank of Ireland)
    Abstract: This Economic Letter examines whether the portfolio rebalancing channel has been effective for Irish resident banks after the introduction of the ongoing Extended Asset Purchasing Programme (EAPP) initiated by the European Central Bank (ECB) in March 2015. Using a unique security level dataset on the programme’s purchases and banks’ holdings, I find that banks did not change purchasing trends regarding securities eligible to be bought under the EAPP. This is consistent with the hypothesis about exogenous constraints that might limit the pass-through of asset purchases to the real economy through the banking system.
    Date: 2017–06
  17. By: Heipertz, Jonas; Mihov, Ilian; Santacreu, Ana Maria
    Abstract: Most of the theoretical research in small open economies has typically focused on corner solutions regarding the exchange rate: either the currency rate is fixed by the central bank or it is left to be freely determined by market forces. We build an open-economy model with external habits in consumption to study the properties of a new class of monetary policy rules, in which the exchange rate serves as the instrument for stabilizing business cycle fluctuations. Instead of using a short-term interest rate, the monetary authority announces a path for currency appreciation or depreciation as a reaction to fluctuations in inflation and the output gap. We find that, under a wide range of modeling assumptions, the exchange rate rule outperforms a standard Taylor rule in terms of stabilizing both output and inflation. The reduction in volatility is more pronounced for more open economies and for economies with lower sensitivity to movements in the interest rate. We show that differences between the two rules are driven by two key factors: (i) paths of the nominal exchange rate and the interest rate under each rule, and (ii) the time variation in the risk premium, which leads to deviations from uncovered interest parity.
    Keywords: Exchange rate management; External habit; monetary policy rules; Risk premium
    JEL: E52 F31 F41
    Date: 2017–07
  18. By: Sarkar Sanjukta (Indian Institute of Management Kozhikode); Sensarma Rudra (Indian Institute of Management Kozhikode)
    Abstract: Some recent papers have studied the link between the stance of monetary policy and the risktaking behavior of banks. Loose monetary policy can encourage banks to reach for yield, which will increase their share of risky assets and also induces banks to take more risks on account of a rise in asset values. On the funding side, loose monetary policy increases incentives to use more short term funding. This paper provides a comprehensive review of the evidence on the risk taking channel of monetary transmission and empirically examines the existence of the risk taking channel in Indian banking. The paper’s novelty also lies in the fact that it incorporates the role of ownership and empirically tests the response of banks in terms of a wide array of risks,i.e., asset, default and market risks in the face of easy and tight monetary stances adopted by the central bank.
    Keywords: Banks, Risk, Monetary Policy
    Date: 2017–05
  19. By: Gerke, Rafael; Hauzenberger, Klemens
    Abstract: The neo-Fisherian view does not consider a negative interest rate gap a prerequisite for boosting inflation. Instead, a negative interest rate gap is said to lower inflation. We discuss this counterintuitive response - known as the Fisher paradox - in a prototypical new-Keynesian model. We draw the following conclusions. First, with a temporarily pegged nominal rate during a liquidity trap (given an otherwise standard Taylor rule) the model generally produces multiple equilibrium paths: some of these paths are consistent with the neo-Fisherian view, others are not. Second, the unique optimal monetary policy at the lower bound on interest rates, which can be implemented in the model with interest rate rules and state-contingent forward guidance, does not result in a paradox. Third, if the assumption of perfect foresight or rational expectations is relaxed, the model produces an equilibrium that is not consistent with the neo-Fisherian view.
    Keywords: Neo-Fisherian,Interest Rates,Inflation,Multiple Equilibria,Rational Expectations
    JEL: E31 E43 E52
    Date: 2017
  20. By: Russell Wong (Federal Reserve Bank of Richmond); Cathy Zhang (Purdue University); Guillaume Rocheteau (University of California, Irvine)
    Abstract: This paper develops a dynamic model of lending relationships and monetary policy. Entrepreneurs can finance idiosyncratic investment opportunities through external finance -- by forming lending relationships with banks -- or internal finance -- by accumulating partially liquid assets. We study the dynamic response of lending rates, inflation, and investment to a banking crisis that severs lending relationships. We characterize optimal monetary policy in the aftermath of a crisis and show it involves a positive nominal interest rate that trades off the need to reduce the cost of self insurance by unbanked entrepreneurs and the need to promote the creation of lending relationships with banks. We calibrate the model to the U.S. economy and study quantitatively the optimal policy problem in and out of steady state, with and without commitment by the policymaker.
    Date: 2017
  21. By: Antonio Diez de los Rios; Maral Shamloo
    Abstract: We compare the Federal Reserve’s asset purchase programs with those implemented by the Bank of England and the Swedish Riksbank, and the Swiss National Bank’s reserve expansion program. We decompose government bond yields into (i) an expectations component, (ii) a global term premium and (iii) a country-specific term premium to analyze two-day changes in 10-year yields around announcement dates. We find that, in contrast to the Federal Reserve’s asset purchases, the programs implemented in these smaller economies have not been able to affect the global term premium and, consequently, their effectiveness in lowering long-term yields has been limited.
    Keywords: Financial markets, Interest rates, Monetary Policy
    JEL: E43 E52 E58 G12
    Date: 2017
  22. By: Ngotran, Duong
    Abstract: We build a dynamic monetary model with two types of electronic money: reserves for transactions between bankers and zero-maturity deposits for transactions in the non-bank private sector. Using this model, we discuss about unconventional monetary policy during the Great Recession. Committing to keep the federal funds rate at the zero lower bound for a long time is very effective in the short run, but it creates deflation and lowers output in the long run. At the time of raising interest on reserves, if the central bank also commits to target the growth of money supply in responding to inflation, both output and inflation paths will be smooth. In short, “raise rate and raise money supply” is a good way to get out of the zero lower bound.
    Keywords: reserves; interest on reserves; zero lower bound; quantitative easing; money supply
    JEL: E4 E40
    Date: 2017–07–10
  23. By: Simon Mongey (NYU)
    Abstract: Canonical macroeconomic models of pricing under nominal rigidities assume markets consist of atomistic firms. Most US retail markets are dominated by a few large firms. To bridge this gap, I extend an equilibrium menu cost model to allow for a continuum of sectors with two large firms in each sector. Compared to a model with monopolistically competitive markets, and calibrated to the same good-level data on price adjustment, the duopoly model generates output responses to monetary shocks that are more than twice as large. Firm-level prices respond equally to idiosyncratic shocks, but less to aggregate shocks in the calibrated duopoly model. Under duopoly, the response of low priced firms to an increase in money is dampened: a falling real price at its competitor weakens both the incentive to increase prices, and price conditional on adjustment. The dynamic duopoly model also implies (i) large first order welfare losses from nominal rigidities, (ii) lower menu costs, (iii) a U-shaped relationship between market concentration and price flexibility, forwhich I find strong evidence in the data, (iv) a source of downward bias in markup estimates attained from inverting a static oligopoly model.
    Date: 2017

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