nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒08‒20
fourteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy in a Low Interest Rate World By Michael T. Kiley; John M. Roberts
  2. Monetary Policy in the Capitals of Capital By Gerko, Elena; Rey, Hélène
  3. Assessing the effectiveness of the monetary policy instrument during the inflation targeting period in South Africa By Bonga-Bonga, Lumengo
  4. The risk-taking channel of monetary policy in the US : Evidence from corporate loan data By Delis, Manthos D.; Hasan, Iftekhar; Mylonidis, Nikolaos
  5. The profitability of banks in a context of negative monetary policy rates: the cases of Sweden and Denmark By Madaschi, Christophe; Nuevo, Irene Pablos
  6. Exchange Rate Pass-Through to Domestic Prices By Reddan, Paul; Rice, Jonathan
  7. Rational vs. long-run forecasters: Optimal monetary policy and the role of inequality By Beqiraj Elton; Di Bartolomeo Giovanni; Serpieri Carolina
  8. Foreign Currency Debt and Fixed Exchange Rate Regimes: the importance of implicit guarantees against currency devaluations By Marcio M. Janot; Márcio G. P. Garcia
  9. The Size of Fiscal Multipliers and the Stance of Monetary Policy in Developing Economies By Jair N. Ojeda-Joya; Oscar E. Guzman
  10. The PPP Puzzle: An Update By Razzak, Weshah
  11. Social representations of money: Contrast between citizens and local complementary currency members By Ariane TICHIT
  12. Modeling the spillovers between stock market and money market in Nigeria By Afees A. Salisu; Kazeem Isah
  13. Systematic Managed Floating By Jeffrey A. Frankel
  14. Nominal Exchange Rates and Net Foreign Assets' Dynamics: the Stabilization Role of Valuation Effects By Sara Eugeni

  1. By: Michael T. Kiley; John M. Roberts
    Abstract: Nominal interest rates may remain substantially below the averages of the last half-century, as central bank’s inflation objectives lie below the average level of inflation and estimates of the real interest rate likely to prevail over the long run fall notably short of the average real interest rate experienced over this period. Persistently low nominal interest rates may lead to more frequent and costly episodes at the effective lower bound (ELB) on nominal interest rates. We revisit the frequency and potential costs of such episodes in a low-interest-rate world in a dynamic-stochastic-general-equilibrium (DSGE) model and large-scale econometric model, the FRB/US model. Several conclusions emerge. First, monetary policy strategies based on traditional policy rules lead to poor economic performance when the equilibrium interest rate is low, with economic activity and inflation more volatile and systematically falling short of desirable levels. Moreover, the frequency and length of ELB episodes under such policy approaches is significantly higher than in previous studies. Second, a risk-adjustment to a simple rule in which monetary policymakers are more accommodative, on average, than prescribed by the rule ensures that inflation achieves its 2 percent objective and requires that policymakers aim at inflation near 3 percent when the ELB is not binding. Third, commitment strategies in which monetary accommodation is not removed until either inflation or economic activity overshoot their long-run objectives are very effective in both the DSGE and FRB/US model. Finally, our results suggest that the adverse effects associated with the ELB may be substantial at inflation targets near 2 percent if r* is low and monetary policy follows a traditional policy approach. Whether such adverse effects could justify a higher inflation target depends on whether monetary policy strategies substantially different from traditional approaches are feasible and an assessment of the effects of the inflation target on economic welfare.
    Keywords: Interest rates ; Model comparison ; Monetary policy
    JEL: E52 E58
    Date: 2017–08–10
  2. By: Gerko, Elena; Rey, Hélène
    Abstract: The importance of financial markets and international capital flows has increased greatly since the 1990s. How does this affect the effectiveness of monetary policy? We analyse the transmission of monetary policy in two important financial centres, the United States and the United Kingdom. Studying the responses of mortgage and corporate spreads, we find evidence in favour of an important financial channel in both countries. Our identification strategy allows us to study effects of the policy rate and of forward guidance, broadly defined. We also analyse international financial spillovers, which we find to be asymmetric.
    Keywords: high frequency identification; international financial spillovers; monetary policy
    JEL: E4 E52 E58 F41 G15
    Date: 2017–08
  3. By: Bonga-Bonga, Lumengo
    Abstract: This paper assesses how inflation reacts to monetary policy shocks in South Africa during the inflation targeting period by making use of the structural vector error correction model (SVECM). The results of the impulse response function obtained from the SVECM show that, on average, contractionary monetary policy that intends to curb inflationary pressure has been impotent in South Africa. However, the contractionary monetary policy shocks managed to reduce output. The paper suggests that it is time a dual target, inflation and output, be considered in South Africa to avoid the harm caused on output growth from monetary policy actions related to the constraint of inflation targeting.
    Keywords: inflation targeting policy, structural vector error correction model, South Africa
    JEL: C50 E52 E58
    Date: 2017–01–14
  4. By: Delis, Manthos D.; Hasan, Iftekhar; Mylonidis, Nikolaos
    Abstract: To study the presence of a risk-taking channel in the US, we build a comprehensive dataset from the syndicated corporate loan market and measure monetary policy using different measures, most notably Taylor (1993) and Romer and Romer (2004) residuals. We identify a negative relation between monetary policy rates and bank risk-taking, especially in the run up to the 2007 financial crisis. However, this effect is purely supply-side driven only when using Taylor residuals and an ex ante measure of bank risk-taking. Our results highlight the sensitivity of the potency of the risk-taking channel to the measures of monetary policy innovations.
    JEL: G21 G01 E43 E52
    Date: 2017–08–07
  5. By: Madaschi, Christophe; Nuevo, Irene Pablos
    Abstract: This paper looks at how the profitability of banks in Sweden and Denmark has evolved in the context of negative interest rates. Overall, it finds that profitability has continued to improve, even with negative monetary policy rates. Data and modelbased evidence confirm that the monetary policy transmission to bank lending rates has so far not been impaired, though they point to a downward stickiness in the bank deposit rate. Swedish and Danish banks rely mainly on wholesale funding to finance their activities, and the fall in wholesale funding costs has led to a significant decline in interest expenses, thereby bolstering the resilience of the net interest income margin. All in all, this has created the prerequisites for positive credit supply developments, and possible unintended consequences of negative monetary policy rates, such as a reduction in credit supply, have not materialised. However, according to Sveriges Riksbank and Danmarks Nationalbank, the prevailing low level of interest rates has aggravated financial stability risks stemming from the large exposure of the banking sector to the housing market in both economies, in a context of rapidly rising housing prices and the resultant growing indebtedness of the household sector. JEL Classification: E58
    Keywords: banks’ profitability, monetary policy pass-through
    Date: 2017–08
  6. By: Reddan, Paul (Central Bank of Ireland); Rice, Jonathan (Central Bank of Ireland)
    Abstract: Even by euro area standards, Irish goods inflation remained very weak throughout 2016. This Letter provides empirical evidence that Irish consumer goods price inflation is particularly exposed to movements in the euro-sterling exchange rate - notwithstanding factors such as global prices, interest rates and domestic consumption. This exposure of Irish consumer prices to sterling currency movements is shown to closely explain price dynamics throughout 2016, in particular for the period following the British vote to leave the EU.
    Date: 2017–07
  7. By: Beqiraj Elton; Di Bartolomeo Giovanni; Serpieri Carolina
    Abstract: This paper builds a stylized simple sticky-price New Keynesian model where agents' beliefs are not homogeneous. We assume that agents choose optimal plans while considering forecasts of macroeconomic conditions over an infinite horizon. A fraction of them (boundedly rational agents) use heuristics to forecast macroeconomic variables over an infinite horizon. In our framework, we study optimal policies consistent with a second-order approximation of the policy objective from the consumers' utility function, assuming that the steady state is not distorted.
    Date: 2017–01
  8. By: Marcio M. Janot; Márcio G. P. Garcia
    Abstract: Since the mid 1990s, theories of speculative attacks have argued that fixed exchange rate regimes induce excessive borrowing in foreign currency as an optimal response to implicit guarantes that the government will not devalue the domestic currency. Using data on Brazilian firms before and after the end of the fixed exchange rate regime in 1999, we estimate the relevance of the implicit guarantees by comparing the changes in foreign debt of two groups of firms: those that hedged their foreign currency debt prior to the exchange rate float and those that did not. Using the difference-in-differences approach, in which firm-specific characteristics are introduced as control variables, we exclude macroeconomic effects of the change in the exchange rate regime and possible differences in foreign debt trends of the two groups of firms, thus obtaining an estimate of the impact of the implicit guarantees on borrowing in foreign currency. The results suggest that the implicit guarantees do not induce excessive borrowing in foreign currency
    Date: 2017–08
  9. By: Jair N. Ojeda-Joya (Banco de la República de Colombia); Oscar E. Guzman (Contraloría de la República)
    Abstract: In this paper we estimate the effect of government consumption shocks on GDP using a panel of 21 developing economies. Our goal is to better understand the reasons for the low fiscal multipliers found in the literature by performing estimations for alternative exchange rate regimes, business-cycle phases, and monetary policy stances. In addition, we perform counterfactual simulations to analyze the possible gains from fiscal-monetary policy coordination. The results imply that government consumption shocks are usually followed by monetary policy tightening in developing economies with flexible regimes. Our simulations show that this reaction partially explains the presence of low fiscal multipliers in these economies. Government consumption shocks imply lower multipliers in developing economies during flexible regimes, economic slowdowns or monetary contractions. In addition, implementing fiscal programs during monetary expansions seems to improve significantly their economic stimulus. Classification JEL: E62, E63, F32
    Keywords: Fiscal Policy, Monetary Policy, Structural Vector Autoregression, Exchange Rate Regime, Panel VAR
    Date: 2017–08
  10. By: Razzak, Weshah
    Abstract: We show that the Purchasing Power Parity (PPP) puzzle, whereby the half-life of the shock to the real exchange rate is long and unjustifiable by monetary and financial shocks, is a result of specification and estimation issues. We provide an alternative specification for PPP and show that the half-life of the shock could be as short as 6.8 months and as long as 2 years, which is considerably shorter than what have been reported in the literature.
    Keywords: PPP, unit root, half-life of shocks
    JEL: C13 C18 F31
    Date: 2107–08–12
  11. By: Ariane TICHIT (Centre d'Etudes et de Recherches sur le Développement International(CERDI))
    Abstract: This article analyses the social representations of money from survey data. More specifically, it tests how organizers of a complementary currency system have a distinct perception of money compared to other citizens. The main results confirm the existence of significant differences between the two groups. The structure of their representations shows that for the local currency members money is less tied to official institutions, to the symbol of the sovereign State, to labour and to wages than for the representative population segment. This confirms a number of theoretical studies that see these social innovations as forms of protest against the standard system, questioning the sovereign State currency and close to the concept of unconditional income. Local currencies, through the different social representations of money they contain, could well be drivers of societal change.
    Keywords: Social representations of money, Survey data, Abric method, Complementary currencies.
    JEL: Z13 E42
    Date: 2017–08
  12. By: Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan); Kazeem Isah (Centre for Econometric and Allied Research, University of Ibadan)
    Abstract: This study examines the spillovers between stock market and money market in Nigeria over the period January 2000 to July 2015. Based on relevant pre-tests, the VARMA-CCC-GARCH is selected and consequently employed to model the spillovers. The study finds significant cross-market return and shock spillovers between the two markets. Thus, a shock to one market is more likely to spill over to the other market. It is also observed that shocks have persistent effects on stock market volatility but transitory effects on money market volatility. In other words, shocks to the money market die out over time while shocks to stock market tend to persist over time. In addition, including lagged own shocks and lagged own conditional variance when forecasting the future volatility of both return series may enhance their forecast performance.
    Keywords: Return Spillover, Shock Spillover, Shork Persistence, VARMA-CCC-GARCH
    JEL: C58 G10
    Date: 2017–08
  13. By: Jeffrey A. Frankel
    Abstract: A majority of countries neither freely float their currencies nor firmly peg. But most of the remainder in practice also don’t obey such well-defined intermediate exchange rate regimes as target zones. This paper proposes to define an intermediate regime, to be called “systematic managed floating,” as an arrangement where the central bank regularly responds to changes in total exchange market pressure by allowing some fraction to be reflected as a change in the exchange rate and the remaining fraction to be absorbed as a change in foreign exchange reserves. An operational criterion for judging systematic managed floaters is a high correlation between exchange rate changes and reserve changes. The paper rejects the view that exchange rate regimes make no difference. In regressions to test effects on real exchange rates, we find that positive external shocks tend to cause real appreciation for most systematic managed-floaters; more strongly so for pure floaters; and not at all for most firm peggers. Two measures of exogenous external shocks are used: (i) for commodity-exporters, a country-specific index of global prices of the export commodities and (ii) for other Asian emerging market economies, the VIX.
    JEL: F31 F33 F41
    Date: 2017–08
  14. By: Sara Eugeni (Durham Business School)
    Abstract: This paper proposes a theory of nominal exchange rate determination to shed light on its role in countries’ portfolio choices and its impact on the dynamics of net foreign assets through valuation effects. The model can rationalize the behavior of the US external position over the past 20 years, which has been characterized by persistent current account deficits and stabilizing valuation effects, as a consequence of the increase in emerging market countries’ share of world GDP. We also show quantitatively that the valuation channel is a key component of the process of external adjustment, consistently with the empirical literature.
    Keywords: nominal exchange rate determination, valuation effects, endogenous portfolio choice, net foreign assets’ dynamics, incomplete markets, overlapping-generations economies
    JEL: F31 F32 F36 F41
    Date: 2017–08

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