nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒08‒06
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Capital Flow Dynamics and Central Banks - Lessons from the Asian Financial Crisis and Challenges Ahead - By Sohei Iwai; Shingo Konaka; Marcel Hisamitsu; Hideki Nonoguchi
  2. Households' inflation expectations in India: Role of economic policy uncertainty and global financial uncertainty spill-over By Taniya Ghosh; Sohini Sahu; Siddhartha Chattopadhyay
  3. Why Did the BOJ Not Achieve the 2 Percent Inflation Target with a Time Horizon of About Two Years? -- Examination by Time Series Analysis -- By Takuji Kawamoto; Moe Nakahama
  4. Open Market Operations By Sylvia Xiao; Randall Wright; Guillaume Rocheteau
  5. Money's causal role in exchange rate: Do Divisia monetary aggregates explain more? By Taniya Ghosh; Soumya Bhadury
  6. Interest Rate Spreads and Forward Guidance By Christian Bredemeier; Christoph Kaufmann; Andreas Schabert
  7. The evolution of inflation expectations in Japan By Hattori, Masazumi; Yetman, James
  8. Monetary Policy and the Stock Market: Time Series Evidence By Michael Weber; Andreas Neuhierl
  9. Forward Guidance, Monetary Policy Uncertainty, and the Term Premium By Bundick, Brent; Smith, Andrew Lee; Herriford, Trenton
  10. What do the shadow rates tell us about future inflation? By Kuusela, Annika; Hännikäinen, Jari
  11. Financial Vulnerability and Monetary Policy By Fernando Duarte; Tobias Adrian
  12. Capital Controls, Macroprudential Regulation, and the Bank Balance Sheet Channel By Shigeto Kitano; Kenya Takaku
  13. The Transactions Demand for Paper and Digital Currencies By Koichiro Kamada
  14. Revisiting the Exchange Rate Pass-through in Emerging Markets By beldi, lamia; djelassi, mouldi; kadria, mohamed
  15. The Roadmap of Interest Rate Liberalization in China By Chong, Terence Tai Leung; Liu, Wenqi
  16. Are Fixed Exchange Rates Still a Mirage? By Michael Bleaney; Mo Tian
  17. Cross-border Flows and Monetary Policy By Teodora Paligorova; Horacio Sapriza; Andrei Zlate; Ricardo Correa
  18. 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
  19. Effects of euro area monetary policy on institutional sectors: the case of Portugal By António Afonso,; Jorge Silva
  20. Forecasting Inflation in Latin America with Core Measures By Pincheira, Pablo; Selaive, Jorge; Nolazco, Jose Luis
  21. Indeterminacy and Imperfect Information By Elmar Mertens; Christian Matthes; Thomas Lubik
  22. Breaking Badly: The Currency Union Effect on Trade By Douglas L. Campbell; Aleksandr Chentsov
  23. The interplay between quantitative easing and risk: the case of the Japanese banking By Emmanuel C. Mamatzakis; Anh N. Vu
  24. To Fed Watch or Not to Fed Watch: Equilibrium Analysis of Bank System Dynamics By William A. Brock; Joseph H. Haslag
  25. Making Money: Commercial Banks, Liquidity Transformation and the Payment System By Christine Parlour
  26. EQCHANGE: A World Database on Actual and Equilibrium Effective Exchange Rates By Couharde, Cecile; Delatte, Anne-Laure; Grekou, Carl; Mignon, Valerie; Morvillier, Florian
  27. Multiple lending, credit lines and financial contagion By Cappelletti, Giuseppe; Mistrulli, Paolo Emilio

  1. By: Sohei Iwai (Bank of Japan); Shingo Konaka (Bank of Japan); Marcel Hisamitsu (Bank of Japan); Hideki Nonoguchi (Bank of Japan)
    Abstract: Asian capital flow dynamics which had been on an inflow trend that started in the early 2000s, has shown signs of change against a background of the normalization of U.S. monetary policy. This is drawing attention towards the resilience of emerging economies against capital outflows. While various initiatives drawn from the lessons learned in the Asian financial crisis have enhanced the resilence of Asian countries against capital outflows, there are new concerns, such as the increase in foreign currency-denominated bonds and domestic bonds held by foreign investors. In addition, the change in capital flows presents Asian central banks with the challenge of firmly establishing a transmission mechanism for monetary policy by controlling domestic interest rates. Specifically, money markets need to be developed further by enhancing central banks' funds-providing operations and by stimulating transactions between market participants. The Bank of Japan has been providing international financial cooperation to support such efforts in Asia.
    Date: 2017–07–26
  2. By: Taniya Ghosh (Indira Gandhi Institute of Development Research); Sohini Sahu (Indian Institute of Technology, Kanpur); Siddhartha Chattopadhyay (Indian Institute of Technology, Kharagpur)
    Abstract: Inflation expectations are an important marker for the conduct of monetary policy. Using a Bayesian structural VAR-X model that includes the inflation expectations of general public based on the Inflation Expectations Survey of Households (IESH), in a first of its kind of study using this dataset, we analyze the macroeconomic factors that determine inflation expectations in India with special focus on economic uncertainty. Besides the standard macroeconomic factors like real output, inflation rate and monetary policy, we also include economic policy uncertainty as a possible endogenous variable in our model that influences inflation expectations, while international financial volatility that has spill-over effects is an exogenous variable. Using non-recursive identification strategy, we find that economic policy uncertainty has considerable effects on households' expectations of inflation and in a longer horizon the international financial volatility also matters. Additionally, in presence of inflation expectations and economic policy uncertainty, we find that the monetary policy shock causes output and inflation to fall significantly; thereby solving the "price puzzle" that otherwise exists in the monetary transmission mechanism literature for India.
    Keywords: BVAR, Inflation Expectations, Economic Policy Uncertainty, Price Puzzle
    JEL: E41 E52 E58
    Date: 2017–05
  3. By: Takuji Kawamoto (Bank of Japan); Moe Nakahama (Bank of Japan)
    Abstract: This paper explores why the inflation rate of CPI -- which excludes volatile fresh foods -- failed to reach the 2 percent "price stability target" even after more than three years had passed since the Bank of Japan (BOJ) introduced the Quantitative and Qualitative Monetary Easing (QQE) in April 2013. Specifically, we provide empirical evidence for what factors caused the actual CPI inflation rate to fall short of the BOJ's original forecast made in April 2013, by using historical decomposition technique of simple VAR analysis. The empirical results show that among the deviation of the CPI inflation rate for fiscal 2015 from the original forecast of minus 1.9 percentage points -- the difference between the forecast of 1.9 percent and the actual result of 0.0 percent -- about 50 percent (minus 1.0 percentage points) can be attributed to the unexpected decline in oil prices. A little more than 10 percent (minus 0.3 percentage points) can be explained by the unexpected slump in output gap and a little more than 30 percent (minus 0.7 percentage points) by inflation-specific negative shocks. These inflation-specific negative shocks are measured as declines in the inflation rate which cannot be explained by fluctuations in the output gap, oil prices and the nominal exchange rate, and thus implies that inflation expectations did not rise as much as originally anticipated by the BOJ.
    Keywords: Monetary Policy; Inflation; Inflation Expectations; VAR
    JEL: C32 E31 E52
    Date: 2017–07–28
  4. By: Sylvia Xiao (University of Wisconsin-Madison); Randall Wright (University of Wisconsin); Guillaume Rocheteau (University of California, Irvine)
    Abstract: We develop models with liquid government bonds and currency to analyze monetary policy, especially open market operations. Various specifications are considered for market structure, and for the liquidity — i.e., acceptability or pledgeability — of money and bonds in their roles as media of exchange or collateral. Theory delivers sharp policy predictions. It can also generate negative nominal yields, endogenous market segmentation, liquidity traps, and nominal prices or interest rates that appear sluggish. Differences in acceptability or pledgeability are not simply assumed; they are endogenized using information frictions. This naturally generates multiple equilibria, but conditional on selection, we still deliver sharp predictions.
    Date: 2017
  5. By: Taniya Ghosh (Indira Gandhi Institute of Development Research); Soumya Bhadury (National Council of Applied Economic Research)
    Abstract: We investigate the predictive power of Divisia monetary aggregates in explaining exchange rate variations for India, Israel, Poland, UK and the US, in the years leading up to and following the 2007-08 recessions. One valid concern for the chosen sample period is that the interest rate has been stuck at or near the zero lower bound (ZLB) for some major economies. Consequently, the interest rate have become uninformative about the monetary policy stance. An important innovation in our research is to adopt the Divisia monetary aggregate as an alternative to the policy indicator variable. We apply bootstrap Granger causality method which is robust to the presence of non-stationarity in our data. Additionally, we use bootstrap rolling window estimates to account for the problems of parameter non-constancy and structural breaks in our sample covering the Great recession. We find strong causality from Divisia money to exchange rates. By capturing the time-varying link of Divisia money to exchange rate, the importance of Divisia is further established at ZLB.
    Keywords: Monetary Policy; Divisia Monetary Aggregates; Simple Sum; Nominal Exchange Rate; Real Effective Exchange Rate; Bootstrap Granger Causality
    JEL: C32 C43 E41 E51 E52 F31 F41
    Date: 2017–07
  6. By: Christian Bredemeier; Christoph Kaufmann; Andreas Schabert
    Abstract: Announcements of future monetary policy rate changes have been found to be imperfectly passed through to various interest rates. We provide evidence for rates of return on less liquid assets to respond by less than, e.g., treasury rates to forward guidance announcements of the US Federal Reserve, suggesting that single-interest-rate models tend to overestimate their macroeconomics effects. We apply a macroeconomic model with interest rate spreads stemming from differential pledgeability of assets, implying that assets provide liquidity services to different extents. Consistent with empirical evidence, announcements of future reductions in the policy rate lead to an increase in liquidity premia. The output effects of forward guidance do not increase with length of the guidance period and are substantially less pronounced than they are predicted to be by a standard New Keynesian model. We thereby provide a solution to the so-called ”forward guidance puzzle”.
    Date: 2017–07–26
  7. By: Hattori, Masazumi; Yetman, James
    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: Michael Weber (University of Chicago); Andreas Neuhierl (University of Notre Dame)
    Abstract: We construct a slope factor from changes in federal funds futures of different horizons. Slope predicts stock returns at the weekly frequency: faster monetary policy easing positively predicts excess returns. Investors can achieve increases in weekly Sharpe ratios of 20% conditioning on the slope factor. The tone of speeches by the FOMC chair correlates with the slope factor. Slope predicts changes in future interest rates and forecast revisions of professional forecasters. Our findings show that the path of future interest rates matters for asset prices, and monetary policy affects asset prices throughout the year and not only at FOMC meetings.
    Date: 2017
  9. By: Bundick, Brent (Federal Reserve Bank of Kansas City); Smith, Andrew Lee (Federal Reserve Bank of Kansas City); Herriford, Trenton (Federal Reserve Bank of Kansas City)
    Keywords: Monetary policy; Bond Forward Guidance; Policy Uncertainty; Term Premium
    JEL: E32 E52
    Date: 2017–07–12
  10. By: Kuusela, Annika; Hännikäinen, Jari
    Abstract: This paper investigates whether shadow interest rates contain predictive power for U.S. inflation in a data-rich environment. We find that shadow rates are useful leading indicators of inflation. Shadow rates contain substantial in-sample and out-of-sample predictive power for inflation in both the zero lower bound (ZLB) and non-ZLB periods. We find that the shadow rate suggested by Wu and Xia (2016) contains more information about future inflation than the shadow rate suggested by Krippner (2015b).
    Keywords: shadow interest rates, zero lower bound, unconventional monetary policy, inflation forecasting, data-rich environment, factor models
    JEL: C38 C53 E37 E43 E44 E58
    Date: 2017–08–01
  11. By: Fernando Duarte (Federal Reserve Bank of New York); Tobias Adrian (Federal Reserve Bank of New York)
    Abstract: We present a parsimonious New Keynesian model that features financial vulnerabilities. The vulnerabilities generate time varying downside risk of GDP growth by driving the dynamics of risk premia. Monetary policy impacts the output gap directly via the IS curve, and indirectly via its impact on financial vulnerabilities. The optimal monetary policy rule always depends on financial vulnerabilities in addition to output, inflation, and the real rate. We show that a classic Taylor rule exacerbates downside risk of GDP growth relative to an optimal Taylor rule, thus generating welfare losses associated with negative skewness of GDP growth.
    Date: 2017
  12. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We develop a sticky price, small open economy model with financial frictions à la Gertler and Karadi (2011), in combination with liability dollarization. An agency problem between domestic financial intermediaries and foreign investors of emerging economies introduces financial frictions in the form of time-varying endogenous balance sheet constraints on the domestic financial intermediaries. We consider a shock that tightens the balance sheet constraint and show that capital controls, the effects of which are rigorously examined as a policy tool for the emerging economies, can be a credit policy tool to mitigate the negative shock.
    Keywords: Capital control; Macroprudential regulation; Financial frictions; Financial intermediaries; Balance sheets; Small open economy; Liability dollarization; DSGE; Welfare
    JEL: E69 F32 F41
    Date: 2017–07
  13. By: Koichiro Kamada (Deputy Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper investigates optimal currency choice, particularly the choice between paper and digital currencies, when currency is utilized solely as a medium of exchange. The Baumol-Tobin model of transactions demand for money is extended to derive conditions under which digital currency is preferred to paper currency, taking into consideration the network externality in the choice of currencies. The model is applied to explain potential variations in currency preferences across countries, especially between advanced and developing economies. Also discussed is how the introduction of negative interest rates, currency taxes, and central bank digital currency affect optimal currency choice.
    Keywords: Digital currency, Money demand, Network externality, Negative interest rate, Currency tax
    JEL: E41 E58 E20 P44
    Date: 2017–07
  14. By: beldi, lamia; djelassi, mouldi; kadria, mohamed
    Abstract: This paper aims to investigate the links between exchange rate pass-through (ERPT) and monetary policy. We examine the degree of ERPT to consumer prices for 11 emerging markets (6 inflation targeters and 5 non-inflation targeters) using both multivariate cointegrated VAR (CVAR) and impulse responses derived from the vector error correction model (VECM). Results of cointegration analyses suggest that the degree of ERPT is lower in ITers than in non-ITers. Besides, the impulse response estimates at 48 months are extremely close to the cointegration estimates in IT countries compared to those non-IT countries. The adjustment process is fully completed during the considered time horizon in the impulse response analysis. This finding confirms the literature review on the importance of the inflation environment and the monetary policy credibility in determining ERPT. The level of ERPT tend to decline in the countries where monetary policy moved strongly towards stabilizing inflation.
    Keywords: Exchange Rate pass-through; Domestic prices; Cointegration; Emerging Markets.
    JEL: E31 F31
    Date: 2017
  15. By: Chong, Terence Tai Leung; Liu, Wenqi
    Abstract: This paper examines the roadmap of interest rate liberalization in China, including the current dual-track interest rate system and the future benchmark rate system. It provides a theoretical foundation for China to develop its own benchmark interest rate. A Vector autoregression model (VAR) is estimated to investigate the effectiveness of Chinese market interest rates, Shanghai Interbank Offered Rate (SHIBOR), and repo rates against different factors such as market size, volatility, transmission channels of monetary policy, and term structures of interest rates. The result shows that SHIBOR affects both the market and the economy. As SHIBOR promptly reflects the changes in currency markets, we argue that it has the potential to become China’s benchmark interest rate.
    Keywords: SHIBOR, interest rate liberalization, shadow banking.
    JEL: G21
    Date: 2016–04–13
  16. By: Michael Bleaney; Mo Tian
    Abstract: In the twenty-first century, pegged exchange rates have become increasingly fixed: parity changes have become significantly rarer than in the 1980s and 1990s. Analysis of what triggers parity changes suggests that the high frequency of parity changes in the late twentieth century reflected the inflationary conditions of the time rather than a permanent shift associated with financial globalization.
    Keywords: exchange rates regimes, inflation, capital flows
    Date: 2017
  17. By: Teodora Paligorova (Bank of Canada); Horacio Sapriza (Federal Reserve Board); Andrei Zlate (Federal Reserve Bank of Boston); Ricardo Correa (Board of Governors of the Federal Reserve System)
    Abstract: We analyze the impact of monetary policy on cross-border bank flows using BIS Locational Banking Statistics data from 1995 to 2014. We find that monetary policy in the source countries is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border portfolio reallocation channel that works in parallel with the traditional bank lending channel. As tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate credit away from relatively risky domestic borrowers toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for banks in source countries with higher prevalence of household credit and weaker financial sectors. Also, the reallocation is directed especially toward foreign non-bank borrowers in advanced economies, or those in economies with investment grade sovereign rating. Thus, our study highlights the spillovers from domestic monetary policy on the dynamics of domestic and foreign credit, enhancing the understanding of the domestic and international monetary transmission mechanisms in the presence of global banks.
    Date: 2017
  18. By: Corsetti, Giancarlo; Mavroeidi, Eleonora; Thwaites, Gregory; Wolf, Martin
    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: beggar-thy-neighbour; capital controls; Deflation; depreciation; monetary policy; zero lower bound
    JEL: E62 F41
    Date: 2017–07
  19. By: António Afonso,; Jorge Silva
    Abstract: We study the effects of the euro area monetary policy on the institutional sectors in Portugal during the period 2000:4-2015:4. Our results show that the single monetary policy affected some variables that are proxies for the funding of each institutional sector of the economy: general government, other monetary financial institutions, non-financial corporations, households and the external sector. The period of the economic and financial adjustment programme influenced all institutional sectors, and financial integration in the euro area had an effect on the funding for the economy: there was a reduction of long term-to-GDP ratio, external funding to the Portuguese other MFIs, and new loans to households Key Words: monetary policy, euro area, Portugal, non-conventional instruments, institutional sectors, financial integration
    JEL: C20 E44 E52 E62 G01
    Date: 2017–07
  20. By: Pincheira, Pablo; Selaive, Jorge; Nolazco, Jose Luis
    Abstract: We explore the ability of core inflation to predict headline CPI annual inflation for a sample of 8 developing economies in Latin America during the period January 1995-May 2017. Our in-sample and out-of-sample results are roughly consistent in providing evidence of predictability in the great majority of our countries, although, as usual, a slightly stronger evidence of predictability comes from the in-sample analysis. The bulk of the out-of-sample evidence of predictability concentrates at the short horizons of 1 and 6 months. In contrast, at longer horizons of 12 and 24 months, we only find evidence of predictability for two countries: Chile and Colombia. This is both important and challenging, given that monetary authorities in our sample of developing countries are currently implementing or given steps toward the future implementation of inflation targeting regimes, which are heavily based on long run inflation forecasts.
    Keywords: Inflation, Forecasting, Time Series, Monetary Policy, Core Inflation, Developing Countries.
    JEL: E31 E37 E4 E47 E50 E52 E58 F4 F41 F47 O11 O23 O54
    Date: 2017–07–17
  21. By: Elmar Mertens (Bank of International Settlements); Christian Matthes (Federal Reserve Bank of Richmond); Thomas Lubik (Federal Reserve Bank of Richmond)
    Abstract: We study equilibrium determination in an environment where two kinds of agents have different information sets: The fully informed agents know the structure of the model and observe histories of all exogenous and endogenous variables. The less in-formed agents observe only a strict subset of the full information set. All types of agents form expectations rationally, but agents with limited information need to solve a dynamic signal extraction problem to gather information about the variables they do not observe. We show that for parameters values that imply a unique equilibrium under full information, the limited information rational expectations equilibrium can be indeterminate. In a simple application of our framework to a monetary policy problem we show that limited information on part of the central bank implies indeterminate outcomes even when the Taylor Principle holds.
    Date: 2017
  22. By: Douglas L. Campbell (New Economic School (NES)); Aleksandr Chentsov (New Economic School)
    Abstract: As several European countries debate entering, or exiting, the Euro, a key policy question is how much currency unions (CUs) affect trade. Recently, Glick and Rose (2016) confirmed that currency unions increase trade on average by 100%, and that the Euro has increased trade by a still-large 50%. In this paper, we find that the apparent large impact of CUs on trade is driven by other major geopolitical events correlated with CU switches, including communist takeovers, decolonization, warfare, ethnic cleansing episodes, the fall of the Berlin Wall and the whole history of European integration. We find that moving from robust standard errors to multi-way clustered errors alone reduces the t-score of the Euro impact by 75%. Looking at individual CUs, we find that in no cases does the time series evidence support a large trade effect, and that the effect breaks particularly badly once we find suitable control groups. Overall, we find that intuitive controls and omitting the CU switches coterminous with war and missing data render the trade impact of the Euro and all CUs together statistically insignificant.
    Keywords: The Euro, Currency Unions and Trade, Gravity Regressions for Policy Analysis
    JEL: F15 F33 F54
    Date: 2017–06
  23. By: Emmanuel C. Mamatzakis (University of Sussex); Anh N. Vu (University of Sussex)
    Abstract: The Japanese banking industry is an interesting one, given chronic problems related to notorious non-performing loans, originated back in the 1990s, but also due to an unprecedented monetary expansion. In this paper, we focus on the impact of quantitative easing on bank level risk, while controlling for bank competition. We opt for a measure of bank specific risk-taking based on a new data set of bankrupt and restructured loans. Given issues related to endogeneity among the main variables, we adopt dynamic panel threshold and panel vector autoregression analyses that address such criticism. Results demonstrate that quantitative easing reduces bankrupt and restructured loan ratios, though we do not observe a similar impact on bank stability. Given the adoption of negative rates in January 2016 by the Bank of Japan, our study comes is timely and provides insightful implications for future research.
    Keywords: Quantitative easing; bank risk-taking; Japan
    JEL: G21 C23 E52
    Date: 2017–05
  24. By: William A. Brock (Department of Economics, University of Wisconsin-Madison and Department of Economics, University of Missouri-Columbia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia; University of Missouri-Columbia)
    Abstract: We build a model economy in which Fed watching occurs. There is a huge number of blogs, financial letters, and news reporting that talks about what the Federal Reserve is likely to do. We model this behavior by allowing for banks to Fed watch, meaning that the bank will apply a costly forecasting technology to predict next period’s price level. Here, the banks accept deposits to insure against idiosyncratic liquidity shocks. Within this model economy, we characterize the price-level dynamics. Our findings have direct implications for the notion of banking crises though related precisely to the role of insurance, not output fluctuations. We derive conditions in which there are endogenous oscillations between price level spikes and price-level falls; in other words, the model economy generates boom-andbusts cycles as real balances fluctuate from high to low values. We extend the model economy to consider how heterogeneity exists with the set of central bankers as they could have heterogeneous forecasts of the next-period price level.
    Keywords: random relocation, heterogeneous forecasts, banks, fed watching
    JEL: C62 E31 E44 E52
    Date: 2017–08
  25. By: Christine Parlour (UC Berkeley)
    Abstract: We consider the interaction between the roles of a bank as a facilitator of payments in the economy and as a lender. In our model, banks make loans by issuing digital claims to an entrepreneur, who then uses them to pay for inputs. Issuing digital claims has two effects on a bank’s liquidity. First, some of these claims used as payment are cashed in before the project is over, necessitating transfers in the inter-bank market to meet these intermediate liquidity needs. Second, the lending bank must transfer reserves to the other banks when the project is done to settle its claims. Each of these transfers has a cost; the endogenous interest rate in the inter-bank market and a settlement cost for final transfers. These costs, in turn, are frictions that affect bank lending. Banks in our model are strategic. If productivity is similar, a high cost of final transfers leads to a coordination friction and multiple equilibria, with each bank trying to match the average number of digital claims issued by other banks. We consider the effects of financial innovations (i.e., FinTech) on the payments system and show that a reduction in the need for intermediate liquidity can lead to an increase in the inter-bank interest rate, because it also induces each bank to increase its lending. We also show that innovations may shift investments from more productive to less productive regions.
    Date: 2017
  26. By: Couharde, Cecile; Delatte, Anne-Laure; Grekou, Carl; Mignon, Valerie; Morvillier, Florian
    Abstract: The aim of this paper is to present EQCHANGE the new database developed by the CEPII on effective exchange rates. EQCHANGE includes two sub-databases containing data on (i) nominal and real effective exchange rates, and (ii) equilibrium real effective exchange rates and corresponding currency misalignments for advanced, emerging and developing countries. More specifically, the first sub-database delivers effective exchange rates for 187 countries that are computed under three different weighting schemes and two panels of trading partners (186 and top 30) over the 1973-2016 period. The second sub-database provides behavioral equilibrium exchange rate (BEER) estimates and corresponding currency misalignments for 182 economies over the 1973-2016 period. We describe the construction of the two datasets and illustrate some possible uses by presenting results concerning the evolution and main characteristics of currency misalignments in the world from 2015 to 2016. By providing publicly available indicators of equilibrium exchange rates, EQCHANGE aims to contribute to key debates in international macroeconomics.
    Keywords: Exchange rates; Equilibrium exchange rates; Currency misalignments
    JEL: C23 C82 F31
    Date: 2017–07
  27. By: Cappelletti, Giuseppe; Mistrulli, Paolo Emilio
    Abstract: Multiple lending has been widely investigated from both an empirical and a theoretical perspective. Nevertheless, the implications of multiple lending for the stability of the banking system still need to be understood. By lending to a common set of borrowers, banks are interconnected and then exposed to financial contagion phenomena, even if not directly. In this paper, we investigate a specific type of externality that originates from those borrowers that obtain liquidity from more than one bank. In this case, contagion may occur if a bank hit by a liquidity shock calls in some loans and borrowers then pay them back by drawing money from other banks. We show that, under certain circumstances that make other sources of liquidity unavailable or too costly, multiple lending might be responsible for a large liquidity shortage. JEL Classification: G21, G28
    Keywords: credit lines, financial contagion, interbank market, multiple lending, systemic risk
    Date: 2017–07

This nep-mon issue is ©2017 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.