nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒10‒01
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Interest on reserves and monetary policy of targeting both interest rate and money supply By Ngotran, Duong
  2. Capital Control, Exchange Rate Regime, and Monetary Policy: Indeterminacy and Bifurcation By William Barnett; Jingxian Hu
  3. Central Banks: Evolution and Innovation in Historical Perspective By Michael D. Bordo; Pierre L. Siklos
  4. International Spillovers of (Un)Conventional Monetary Policy: The Effect of the ECB and US Fed on Non-Euro EU Countries By Jan Hajek; Roman Horvath
  5. Optimal Monetary Policy when Information is Market-Generated By Kenza Benhima; Isabella Blengini
  6. Monetary Policy and Dark Corners in a stylized Agent-Based Model By Stanislao Gualdi; Marco Tarzia; Francesco Zamponi; Jean-Philippe Bouchaud
  7. On Targeting Frameworks and Optimal Monetary Policy By Martin Bodenstein; Junzhu Zhao
  8. Systemic Risk: A New Trade-Off for Monetary Policy? By Laséen, Stefan; Pescatori, Andrea; Turunen, Jarkko
  9. Privately Issued Money in the US By Jaremski, Matthew
  10. Competitive Supply of Money in a New Monetarist Model By Waknis, Parag
  11. Reaffirming the Influence of Milton Friedman on U.K. Economic Policy By Edward Nelson
  12. Doomed to Disappear? The Surprising Return of Cash Across Time and Across Countries By Jobst, Clemens; Stix, Helmut
  13. Modelling Return and Volatility Spillovers in Global Foreign Exchange Markets By Afees A. Salisu; Oluwatomisinn Oyewole; Ismail O. Fasanya
  14. Financial Innovation and Money Demand: Evidence from Sub-Saharan Africa By J. Paul Dunne; Elizabeth Kasekende
  15. On Interest Rate Policy and Asset Bubbles By Allen, Franklin; Barlevy, Gadi; Gale, Douglas
  16. Inflation at the Household Level By Kaplan, Greg; Schulhofer-Wohl, Sam
  17. Exchange Market Pressure and Monetary Policies in ASEAN5 By Ratnasari, Anggraeni; Widodo, Tri
  18. International Credit Supply Shocks By Ambrogio Cesa-Bianchi; Andrea Ferrero; Alessandro Rebucci
  19. The Demand for Money for EMU: A Flexible Functional Form Approach By William Barnett; Neepa B. Gaekwad
  20. Modeling Time-Varying Uncertainty of Multiple-Horizon Forecast Errors By Clark, Todd E.; McCracken, Michael W.; Mertens, Elmar
  21. How Does the Fed Adjust its Securities Holdings and Who is Affected? By Jane E. Ihrig; Lawrence Mize; Gretchen C. Weinbach
  22. Monopoly Without a Monopolist: An Economic Analysis of the Bitcoin Payment System By Huberman, Gur; Leshno, Jacob; Moalleni, Ciamac
  23. Why Grexit cannot save Greece (but staying in the Euro area might) By Chrysafis Iordanoglou; Manos Matsaganis

  1. By: Ngotran, Duong
    Abstract: We build a dynamic model with currency, demand deposits and bank reserves. The monetary base is controlled by the central bank, while the money supply is determined by the interactions between the central bank, banks and public. In banking crises when banks cut loans, a Taylor rule is not efficient. Negative interest on reserves or forward guidance is effective, but deflation is still likely to be persistent. If the central bank simultaneously targets both the interest rate and the money supply by a Taylor rule and a Friedman's k-percent rule, inflation and output are stabilized.
    Keywords: interest on reserves; negative interest on reserves; forward guidance; monetary base; endogenous money supply
    JEL: E4 E42 E5 E51
    Date: 2017–08–30
  2. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Jingxian Hu (Department of Economics, The University of Kansas;)
    Abstract: Will capital controls enhance macro economy stability? How will the results be influenced by the exchange rate regime and monetary policy reaction? Are the consequences of policy decisions involving capital controls easily predictable, or more complicated than may have been anticipated? We will answer the above questions by investigating the macroeconomic dynamics of a small open economy. In recent years, these matters have become particularly important to emerging market economies, which have often adopted capital controls. We especially investigate two dynamical characteristics: indeterminacy and bifurcation. Four cases are explored, based on different exchange rate regimes and monetary policy rules. With capital controls in place, we find that indeterminacy depends upon how inflation and output gap coordinate with each other in their feedback to interest rate setting in the Taylor rule. When forward-looking, both passive and positive monetary policy feedback can lead to indeterminacy. Compared with flexible exchange rates, fixed exchange rate regimes produce more complex indeterminacy conditions, depending upon the stickiness of prices and the elasticity of substitution between labor and consumption. We find Hopf bifurcation under capital control with fixed exchange rates and current-looking monetary policy. To determine empirical relevance, we test indeterminacy empirically using Bayesian estimation. Fixed exchange rate regimes with capital controls produce larger posterior probability of the indeterminate region than a flexible exchange rate regime. Fixed exchange rate regimes with current-looking monetary policy lead to several kinds of bifurcation under capital controls. We provide monetary policy suggestions on achieving macroeconomic stability through financial regulation.
    Keywords: Capital controls, open economy monetary policy, exchange rate regimes, Bayesian methods, bifurcation, indeterminacy.
    JEL: F41 F31 E52 C11 C62
    Date: 2017–09
  3. By: Michael D. Bordo; Pierre L. Siklos
    Abstract: Central banks have evolved for close to four centuries. This paper argues that for two centuries central banks caught up to the strategies followed by the leading central banks of the era; the Bank of England in the eighteenth and nineteenth centuries and the Federal Reserve in the twentieth century. It also argues that, by the late 20th century, small open economies were more prone to adopt a new policy regime when the old one no longer served its purpose whereas large, less open, and systemically important economies were more reluctant to embrace new approaches to monetary policy. Our study blends the quantitative with narrative explanations of the evolution of central banks. We begin by providing an overview of the evolution of monetary policy regimes taking note of the changing role of financial stability over time. We then provide some background to an analysis that aims, via econometric means, to quantify the similarities and idiosyncrasies of the ten central banks and the extent to which they represent a network of sorts where, in effect, some central banks learn from others.
    JEL: E02 E31 E32 E42 E58
    Date: 2017–09
  4. By: Jan Hajek; Roman Horvath
    Abstract: We estimate a global vector autoregression model to examine the effects of euro area and US monetary policy stances, together with the effect of euro area consumer prices, on economic activity and prices in non-euro EU countries using monthly data from 2001-2016. Along with some standard macroeconomic variables, our model contains measures of the shadow monetary policy rate to address the zero lower bound and the implementation of unconventional monetary policy by the European Central Bank and US Federal Reserve. We find that these monetary shocks have the expected qualitative effects but their magnitude differs across countries, with Southeastern EU economies being less affected than their peers in Central Europe. Euro area monetary shocks have greater effects than those that emanate from the US. We also find certain evidence that the effects of unconventional monetary policy measures are weaker than those of conventional measures. The spillovers of euro area price shocks to non-euro EU countries are limited, suggesting that the law of one price materializes slowly.
    Keywords: Global VAR, international spillovers, monetary policy, shadow rate
    JEL: E52 E58
    Date: 2017–09
  5. By: Kenza Benhima; Isabella Blengini
    Abstract: Endogenous - i.e. market-generated - signals observed by firms have crucial implications for monetary policy. When information is endogenous, firms gather a demand signal from their market that is both real and nominal. As a result, the traditional surprise channel of monetary policy is absent. Instead, monetary policy works through a signaling channel, as it affects firms' information through the demand signal. The optimal policy is then the signaling policy, i.e. the policy that maximizes the information content of the demand signal. In our setup, the signaling policy targets a positive correlation between money supply and prices, which emphasizes the natural response of prices to real shocks. On the contrary, in the more traditional case of exogenous information, optimal monetary policy would stabilize prices as it acts through the surprise channel. We show that the signaling policy is optimal regardless of the amount of attention that firms pay to central bank communication.
    Keywords: Optimal monetary policy; information frictions; expectations; central bank communication
    JEL: D83 E32 E52
    Date: 2017–07
  6. By: Stanislao Gualdi (CentraleSupélec); Marco Tarzia (LPTMC - Laboratoire de Physique Théorique de la Matière Condensée - UPMC - Université Pierre et Marie Curie - Paris 6 - CNRS - Centre National de la Recherche Scientifique); Francesco Zamponi (LPTENS - Laboratoire de Physique Théorique de l'ENS - ENS Paris - École normale supérieure - Paris - UPMC - Université Pierre et Marie Curie - Paris 6 - CNRS - Centre National de la Recherche Scientifique); Jean-Philippe Bouchaud (CFM - Capital Fund Management - Capital Fund Management)
    Abstract: We generalise the stylised macroeconomic Agent-Based model introduced in our previous paper [1], with the aim of investigating the role and efficacy of monetary policy of a 'Central Bank', that sets the interest rate such as to steer the economy towards a prescribed inflation and employment level. Our major finding is that provided its policy is not too aggressive (in a sense detailed in the paper) the Central Bank is successful in achieving its goals. However, the existence of different equilibrium states of the economy, separated by phase boundaries (or " dark corners "), can cause the monetary policy itself to trigger instabilities and be counter-productive. In other words, the Central Bank must navigate in a narrow window: too little is not enough, too much leads to instabilities and wildly oscillating economies. This conclusion strongly contrasts with the prediction of DSGE models.
    Keywords: Agent-based Computational Economics
    Date: 2016
  7. By: Martin Bodenstein; Junzhu Zhao
    Abstract: Speed limit policy, a monetary policy strategy that focuses on stabilizing inflation and the change in the output gap, consistently delivers better welfare outcomes than flexible inflation targeting or flexible price level targeting in empirical New Keynesian models when policymakers lack the ability to commit to future policies. Even if the policymaker can commit under an inflation targeting strategy, the discretionary speed limit policy performs better for most empirically plausible model parameterizations from a normative perspective.
    Keywords: Delegation ; Inflation targeting ; Optimal monetary policy ; Price level targeting ; Speed limit policy
    JEL: E52 E58
    Date: 2017–09–22
  8. By: Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Pescatori, Andrea (International Monetary Fund); Turunen, Jarkko (International Monetary Fund)
    Abstract: We introduce time-varying systemic risk (à la He and Krishnamurthy, 2014) in an otherwise standard New-Keynesian model to study whether simple leaning-against-the-wind interest rate rules can reduce systemic risk and improve welfare. We find that while financial sector leverage contains additional information about the state of the economy that is not captured in inflation and output leaning against financial variables can only marginally improve welfare because rules are detrimental in the presence of falling asset prices. An optimal macroprudential policy, similar to a countercyclical capital requirement, can eliminate systemic risk raising welfare by about 1.5%. Also, a surprise monetary policy tightening does not necessarily reduce systemic risk, especially during bad times. Finally, a volatility paradox a la Brunnermeier and Sannikov (2014) arises when monetary policy tries to excessively stabilize output.
    Keywords: Monetary Policy; Endogenous Financial Risk; DSGE models; Non-Linear Dynamics; Policy Evaluation
    JEL: E30 E44 E52 E58 E61 G12 G20
    Date: 2017–08–01
  9. By: Jaremski, Matthew (Department of Economics, Colgate University)
    Abstract: In recent years, there has been a revival of privately issued money. Due to the general lack of successful or even widely circulating private currency, it can be challenging to get a clear view of its efficiency using modern data. The U.S. historical period, however, offers a unique environment to examine the topic as private bank money made up a sizable portion of the money supply. Moreover, the period presents a wide range of regulation, including spans with and without the presence of a central bank or monetary authority. This chapter begins by highlighting the general history of privately issued money in the United States from 1790 through its elimination in the 1930s. Topics include the rise of state bank notes, the switch to national bank notes, clearinghouse currency, the Aldrich-Vreeland emergency currency associations, and the decline of private currency. It then examines open topics in the literature and provides suggestions for study going forward.
    Keywords: private currency, banks, bank notes, clearinghouses, and financial regulation
    JEL: E42 G21 N11
    Date: 2017–09–20
  10. By: Waknis, Parag
    Abstract: Whether currency can be efficiently provided by private competitive money suppliers is arguably one of the fundamental questions in monetary theory. It is also one with practical relevance because of the emergence of multiple competing financial assets as well as competing cryptocurrencies as means of payments in certain class of transactions. In this paper, a dual currency version of Lagos and Wright (2005) money search model is used to explore the answer to this question. The centralized market sub-period is modeled as infinitely repeated game between two long lived players (money suppliers) and a short lived player (a continuum of agents), where longetivity of the players refers to the ability to influence aggregate outcomes. There are multiple equilibria, however we show that equilibrium featuring lowest inflation tax is weakly renegotiation proof, suggesting that better inflation outcome is possible in an environment with currency competition.
    Keywords: currency competition, repeated games, long lived- short lived players, inflation tax, money search, weakly renegotiation proof.
    JEL: E52 E61
    Date: 2017–09–11
  11. By: Edward Nelson
    Abstract: This paper finds a significant influence of Milton Friedman on U.K. economic policy from the 1970s onward, and especially during the period of the Thatcher Government. The finding is based on a consideration of statements by policymakers and key economic advisers, as well as an analysis of Friedman’s commentary in the 1970s, 1980s, and 1990s on U.K. economic developments. Explicit, public acknowledgments of Friedman's influence were given by Margaret Thatcher, Chancellor of the Exchequer Geoffrey Howe, Bank of England officials, and others in policy circles. Examples of Friedman's influence include the absorption into U.K. policy doctrine of the permanent income hypothesis and the natural rate hypothesis, the rejection from 1979 onward of incomes policy as a weapon against inflation, and U.K. officials' repeated appeals to monetary sovereignty when arguing against monetary union or a sterling peg. Evidence of influence by Friedman on privatization policy and on the official perspective on the current account deficit can also be discerned. Although he had only limited interaction with U.K. policymakers, Friedman had a major influence, reflected in the adoption into actual U.K. policymaking of recommendations made in his writings and in the fact that those writings-which were studied closely by a number of senior U.K. economic advisers-helped alter U.K. economists' conceptual framework and thereby fostered doctrinal changes in U.K. economic policy. This paper's analysis also shows that two prominent critics of the Thatcher economic policy-Labour's Harold Wilson and the Conservatives' Edward Heath-saw this policy as partly due to the influence of Friedman, whom each of them had met before the Thatcher era.
    Keywords: Incomes policy ; Milton Friedman ; Monetarism ; U.K. economic policy
    JEL: E51 E52 E58
    Date: 2017–09–22
  12. By: Jobst, Clemens; Stix, Helmut
    Abstract: The circulation of cash has increased in many economies over the past decade. To understand this development we provide evidence from two perspectives. First, we analyze long time series from the late 19th century to 2015 for several economies. Second, we collect evidence from 70 economies from 2001 to 2014. The descriptive account provides two main findings: (i) Recent increases for the euro, the US dollar and the Swiss franc are strong if seen over a 100 year horizon, (ii) increases can be observed in the majority of the 72 economies over the period from 2001 to 2014. Panel money demand models show that interest rates or GDP can only partially explain the increases in cash demand. The size of the shadow economy is not found to be an important factor for this period. We find that cash demand has evolved in line with a standard money demand model in economies with no record of financial crises. For economies that had a financial crisis in 2008, we find an increase in cash demand, on average. However, an "unexplained" increase is also obtained for wealthier economies that did not have a financial crisis in 2007/08 but before. We conjecture that the level shift in cash demand is related to increased uncertainty.
    Keywords: cash; Demand for currency; Financial crises; international comparison; monetary history
    JEL: E41 E42 N10
    Date: 2017–09
  13. By: Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan); Oluwatomisinn Oyewole (Department of Economics, College of Management Sciences Federal University of Agriculture, Abeokuta, Nigeria); Ismail O. Fasanya (Department of Economics, College of Management Sciences Federal University of Agriculture, Abeokuta, Nigeria)
    Abstract: In this paper, we measure return and volatility spillovers in global foreign exchange (FX) markets using six most traded currency pairs in the world namely the aussie, cable, euro, gropher, loonie and swissie. We employ the Diebold and Yilmaz (2012) approach and consequently, we compute Total Spillover, Directional Spillover and Net Spillover indexes. We utilize daily data from Jaunary 01 1999 to December 31, 2014. We also carry out rolling sample analyses in order to capture secular and cyclical movements in global FX markets. We find evidence of interdependence among the major traded currency pairs based on the spillover indexes. In addition, return spillovers exhibit mild trends and bursts while volatility spillovers exhibit significant bursts but no trends. We also identify crisis episodes that seem to have influenced the recorded fluctuations in returns and volatilities of global FX markets. Our results are robust to the VAR lag structure, forecast horizon and rolling window width.
    Keywords: FX market, Returns, Volatilities, Vector autoregression (VAR), Forecast error variance, Spillover index
    JEL: Q54 F31 G15
    Date: 2017–09
  14. By: J. Paul Dunne (School of Economics, University of Cape Town); Elizabeth Kasekende (Bank of Uganda)
    Abstract: While the effect of financial innovation on money demand has been widely researched in industrialised countries, because of its major role in monetary policy, few studies have focussed on developing countries. This is surprising given the considerable growth in financial innovation in Sub-Saharan Africa in recent years and its potential implications for developing country macroeconomic policy. This paper investigates the development of financial innovation and its impact on money demand in the region using panel data estimation techniques for 34 countries between 1980 and 2013. The results indicate that there is a negative relationship between financial innovation and money demand. This implies that financial innovation plays a crucial role in explaining money demand in Sub-Saharan Africa and given innovations such as mobile money in the region this can have important implications for future policy design.
    Date: 2017
  15. By: Allen, Franklin (Imperial College London); Barlevy, Gadi (Federal Reserve Bank of Chicago); Gale, Douglas (New York University)
    Abstract: In a provocative paper, Galí (2014) showed that a policymaker who raises interest rates to rein in a potential bubble will only make a bubble bigger if one exists. This poses a challenge to advocates of lean-against-the-wind policies that call for raising interest rates to mitigate potential bubbles. In this paper, we argue there are situations in which the lean-against-the wind view is justified. First, we argue Galí’s framework abstracts from the possibility that a policymaker who raises rates will crowd out resources that would have otherwise been spent on the bubble. Once we modify Galí’s model to allow for this possibility, policymakers can intervene in ways that raise interest rates and dampen bubbles. However, there is no reason policymakers should intervene to dampen the bubble in this case, since the bubble that arises in Galí’s setup is not one that society would be better off without. We then further modify Galí’s model to generate the type of credit-driven bubbles that alarm policymakers, and argue there may be justification for intervention in that case.
    Keywords: Interest rate; monetary policy; asset bubble
    JEL: E43 E52
    Date: 2017–09–17
  16. By: Kaplan, Greg (University of Chicago); Schulhofer-Wohl, Sam (Federal Reserve Bank of Chicago)
    Abstract: We use scanner data to estimate inflation rates at the household level. Households' inflation rates have an annual interquartile range of 6.2 to 9.0 percentage points. Most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods. Lower-income households experience higher inflation, but most cross-sectional variation is uncorrelated with observables. Households' deviations from aggregate inflation exhibit only slightly negative serial correlation. Almost all variability in a household's inflation rate comes from variability in household-level prices relative to average prices, not from variability in aggregate inflation.
    Keywords: Inflation; heterogeneity; households; low income
    JEL: D12 D30 E31
    Date: 2017–09–17
  17. By: Ratnasari, Anggraeni; Widodo, Tri
    Abstract: The aim of this research is to analyze the relationship between Exchange Market Pressure (EMP) and monetary policies in ASEAN5 (Indonesia, Malaysia, the Philippines, Thailand, and Singapore). This research applies Vector Error Correction Model (VECM) and monthly data for the periods January 2006 – December 2016 for individual country estimation. The results show that the ASEAN5 monetary authorities have responded the increase of EMP by contracting domestic credit in the non-crisis periods, and by providing more liquidity to the bank system in the crisis periods. In addition, in the case of ASEAN5 the increase in interest rate differential has reduced the EMP.
    Keywords: Exchange Market Pressure, Domestic Credit, Interest Rates Differential, Monetary Policy
    JEL: F31 F33 F37
    Date: 2017–09–22
  18. By: Ambrogio Cesa-Bianchi; Andrea Ferrero; Alessandro Rebucci
    Abstract: House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.
    JEL: C33 E44 F3 F44 R0
    Date: 2017–09
  19. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Neepa B. Gaekwad (Department of Economics, The University of Kansas;)
    Abstract: Monetary aggregates have a special role under the "two pillar strategy" of the ECB. Hence, the need for a theoretically consistent measure of monetary aggregates for the European Monetary Union (EMU) is needed. This paper analyzes aggregation over monetary assets for the EMU. We aggregate over the monetary services for the EMU-11 countries, which include Estonia, Finland, France, Germany, Ireland, Italy, Luxembourg, Malta, Netherlands, Slovakia, and Slovenia. We adopt the Divisia monetary aggregation approach, which is consistent with index number theory and microeconomic aggregation theory. The result is a multilateral Divisia monetary aggregate in accordance with Barnett (2007). The multilateral Divisia monetary aggregate for the EMU-11 is found to be more informative and a better signal of economic trends than the corresponding simple sum aggregate. We then analyze substitutability among monetary assets for the EMU-11 within the framework of a representative consumer's utility function, using Barnett’s (1983) locally flexible functional form, the minflex Laurent Indirect utility function. The analysis of elasticities with respect to the asset’s user-cost prices shows that: (i) transaction balances (TB) and deposits redeemable at notice (DRN) are income elastic, (ii) the DRN display large variation in price elasticity, and (iii) the monetary assets are not good substitutes for each other within the EMU-11. Simple sum monetary aggregation assumes that component assets are perfect substitutes. Hence simple sum aggregation distorts measurement of the monetary aggregate. The ECB has Divisia monetary aggregates provided to the Governing Council at its meetings, but not to the public. Our European Divisia monetary aggregates will be expanded and refined, in collaboration with Wenjuan Chen at the Humboldt University of Berlin, to a complete EMU Divisia monetary aggregates database to be supplied to the public by the Center for Financial Stability in New York City.
    Keywords: Divisia monetary aggregation, European Monetary Union, monetary aggregation theory, multilateral aggregation, minflex Laurent, elasticities of demand.
    JEL: C43 C82 D12 E51 F33
    Date: 2017–09
  20. By: Clark, Todd E. (Federal Reserve Bank of Cleveland); McCracken, Michael W. (Federal Reserve Bank of St. Louis); Mertens, Elmar (Bank for Inernational Settlements)
    Abstract: We develop uncertainty measures for point forecasts from surveys such as the Survey of Professional Forecasters, Blue Chip, or the Federal Open Market Committee’s Summary of Economic Projections. At a given point of time, these surveys provide forecasts for macroeconomic variables at multiple horizons. To track time-varying uncertainty in the associated forecast errors, we derive a multiple-horizon specification of stochastic volatility. Compared to constant-variance approaches, our stochastic-volatility model improves the accuracy of uncertainty measures for survey forecasts.
    Keywords: Stochastic volatility; survey forecasts; fan charts;
    JEL: C53 E37
    Date: 2017–09–25
  21. By: Jane E. Ihrig; Lawrence Mize; Gretchen C. Weinbach
    Abstract: The Federal Open Market Committee indicated in its September 2017 post-meeting statement that it will initiate in October a balance sheet normalization program to gradually reduce its securities holdings. This action will put in place a policy of reinvesting and redeeming portions of the principal payments received by the Federal Reserve from its holdings of Treasury and agency securities. How are these adjustments to the Federal Reserve’s securities holdings transacted and who is affected? This paper provides a primer regarding how the Federal Reserve accounts for these securities transactions. It also illustrates the numerous ways that the Federal Reserve's actions can play out across other sectors of the economy, including those that engage directly with the Federal Reserve and those that are involved indirectly as funds change hands.
    Keywords: FOMC ; Federal Reserve Board and Federal Reserve System ; Balance sheet management ; Balance sheet policy ; Monetary policy normalization ; Securities redemption ; Securities reinvestment
    JEL: E52 E58 M41
    Date: 2017–09–22
  22. By: Huberman, Gur; Leshno, Jacob; Moalleni, Ciamac
    Abstract: Owned by nobody and controlled by an almost immutable protocol the Bitcoin payment system is a platform with two main constituencies: users and profit seeking miners who maintain the system's infrastructure. The paper seeks to understand the economics of the system: How does the system raise revenue to pay for its infrastructure? How are usage fees determined? How much infrastructure is deployed? What are the implications of changing parameters in the protocol? A simplified economic model that captures the system's properties answers these questions. Transaction fees and infrastructure level are determined in an equilibrium of a congestion queueing game derived from the system's limited throughput. The system eliminates dead-weight loss from monopoly, but introduces other inefficiencies and requires congestion to raise revenue and fund infrastructure. We explore the future potential of such systems and provide design suggestions.
    Keywords: Bitcoin; blockchain; cryptocurrency; market design; queueing; Two-sided markets
    JEL: D20 D40 L10 L50
    Date: 2017–09
  23. By: Chrysafis Iordanoglou; Manos Matsaganis
    Abstract: Grexit was narrowly averted in summer 2015. Nevertheless, the view that Greece might be better off outside the Euro area has never really gone away. Moreover, although Marine Le Pen’s bid for the French presidency was frustrated in May 2017, in Italy a disparate coalition, encompassing Beppe Grillo’s Movimento Cinque Stelle as well as Matteo Salvini’s Lega Nord, has called for a referendum on exiting the Euro. In this context, our argument that Grexit cannot save Greece may be of some relevance to national debates elsewhere in Europe. The paper examines the case for Grexit by offering a detailed account of its likely effects. Its structure is as follows. Section 2 analyses the transition, with the two currencies (old and new) coexisting. Section 3 charts the challenges facing the Greek economy in the short term, after the new national currency has become legal tender. Section 4 assesses prospects in the medium term, with Grexit complete and the new currency drastically devalued. Section 5 reviews the underlying weaknesses of Greece’s growth regime and explains why these are unrelated to the nominal exchange rate. Section 6 discusses the conditions for an investment-led recovery, and shows why tackling them would be more difficult outside the Euro area. Section 7 sums up and concludes.
    Keywords: Greece, Grexit, Eurozone, growth regime
    Date: 2017–08

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