nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒10‒08
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. US monetary regimes and optimal monetary policy in the Euro Area By Kostas Mavromatis
  2. Optimal quantitative easing By Harrison, Richard
  3. Unconventional Monetary Policy and the Interest Rate Channel: Signalling and Portfolio Rebalancing By Lloyd, S. P.
  4. What does “below, but close to, two percent” mean? Assessing the ECB’s reaction function with real time data By Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha
  5. On the Interplay between Monetary Policy and Macroprudential Policy: A Simple Analytical Framework By Øistein Røisland
  6. Monetary Policy Shifts and Central Bank Independence By Qureshi, Irfan
  7. Changes in Monetary Regimes and the Identification of Monetary Policy Shocks: Narrative Evidence from Canada By Julien Champagne; Rodrigo Sekkel
  8. Inflation and professional forecast dynamics: An evaluation of stickiness, persistence, and volatility By Elmar Mertens; James M. Nason
  9. Cross-border transmission of emergency liquidity By Kick, Thomas; Koetter, Michael; Storz, Manuela
  10. Macroeconomic effects of non-standard monetary policy measures in the euro area: the role of corporate bond purchases By Anna Bartocci; Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  11. ?Whatever it takes? to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects By Afonso, Ant¢nio; Arghyrou, Michael G; Gadea, Mar¡a Dolores; Kontonikas, Alexandros
  12. Empirical Findings on Inflation Expectations in Brazil: a survey By Wagner Piazza Gaglianone
  13. Monetary policy, asset prices, and liquidity under adverse selection By Florian Madison
  14. Banking Panics and Liquidity in a Monetary Economy By Tarishi Matsuoka; Makoto Watanabe
  15. Optimal inflation target: Insights from an agentbased model By Bouchaud, Jean-Philippe; Gualdi, Stanislao; Tarzia, Marco; Zamponi, Francesco
  16. The Effect of News Shocks and Monetary Policy By Luca Gambetti; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
  17. Funders-of-Last-Resort: Legal Issues Involved in Using Central Bank Balance Sheets to Bolster Economic Growth By Michael, Bryane; Dalko, Viktoria
  18. Computing long‐term market inflation expectations for countries without inflation expectation markets By Petra Gerlach-Kristen; Richhild Moessner; Rina Rosenblatt-Wisch
  19. Modernizing the financial system in Japan during the 19th century: National Banks in Japan in the Context of Free Banking By Masato Shizume; Masayoshi Tsurumi
  20. Estimating Nominal Interest Rate Expectations: Overnight Indexed Swaps and the Term Structure By Lloyd, S. P.
  21. Should unconventional monetary policies become conventional? By Quint, Dominic; Rabanal, Pau
  22. Spreading the word or reducing the term spread? Assessing spillovers from euro area monetary policy By Feldkircher, Martin; Gruber, Thomas; Huber, Florian
  23. Estimating the Credibility of Brazilian Monetary Policy using Forward Measures and a State-Space Model By Flávio de Freitas Val; Wagner Piazza Gaglianone; Marcelo Cabus Klotzle; Antonio Carlos Figueiredo Pinto
  24. Are all types of capital flows driven by the same factors? Evidence from Mexico By Ibarra-Ramírez Raúl; Téllez León Elizabeth
  25. Structural Reforms and Monetary Policies in a Behavioural Macroeconomic Model By De Grauwe, Paul; Ji, Yuemei
  26. The Effect of Central Bank Transparency on Exchange Rate Volatility By Christoph S. Weber
  27. Benefits of EMU Participation : Estimates using the Synthetic Control Method By Verstegen, Loes; van Groezen, Bas; Meijdam, Lex
  28. Overnight Indexed Swap Market-Based Measures of Monetary Policy Expectations By Lloyd, S. P.
  29. Financial Crises and the Central Bank: Lessons from Japan during the 1920s By Masato Shizume
  30. Global Trade Flows: Revisiting the Exchange Rate Elasticities By Matthieu Bussière; Guillaume Gaulier; Walter Steingress
  31. Natural rates across the Atlantic By Stefano Neri; Andrea Gerali

  1. By: Kostas Mavromatis
    Abstract: Monetary policy in the US has been documented to have switched from reacting weakly to inflation fluctuations during the '70s, to fighting inflation aggressively from the early '80s onwards. In this paper, I analyze the impact of the US monetary policy regime switches on the Eurozone. I construct a New Keynesian two-country model where foreign (US) monetary policy switches regimes over time. I estimate the model for the US and the Euro Area using quarterly data and find that the US has switched between those two regimes, in line with existing evidence. I show that foreign regime switches affect home (Eurozone) inflation and output volatility and their responses to shocks, substantially, as long as the home central bank commits to a time invariant interest rate rule reacting to domestic conditions only. Optimal policy in the home country instead requires that the home central bank reacts strongly to domestic producer price inflation and to international variables, like imported goods relative prices. In fact, I show that currency misalignments and relative prices play a crucial role in the transmission of foreign monetary policy regime switches internationally. Interestingly, I show that only marginal gains arise for the Euro Area when the ECB adjusts its policy according to the monetary regime in the US. Thus, a simple time-invariant monetary policy rule with a strong reaction to PPI inflation and relative prices is enough to counteract the effects of monetary policy switches in the US.
    Keywords: Monetary Policy; Markov-switching DSGE and Bayesian estimation; optimal monetary policy; international spillovers
    JEL: C3 E52 F3 F41 F42
    Date: 2017–09
  2. By: Harrison, Richard (Bank of England)
    Abstract: I study optimal monetary policy in a simple New Keynesian model with portfolio adjustment costs. Purchases of long-term debt by the central bank (quantitative easing; ‘QE’) alter the average portfolio return and hence influence aggregate demand and inflation. The central bank chooses the short-term policy rate and QE to minimise a welfare-based loss function under discretion. Adoption of QE is rapid, with large-scale asset purchases triggered when the policy rate hits the zero bound, consistent with observed policy responses to the Global Financial Crisis. Optimal exit is gradual. Despite the presence of portfolio adjustment costs, a policy of ‘permanent QE’ in which the central bank holds a constant stock of long-term bonds does not improve welfare.
    Keywords: Quantitative easing; optimal monetary policy; zero lower bound
    JEL: E52 E58
    Date: 2017–09–25
  3. By: Lloyd, S. P.
    Abstract: In response to financial turmoil that began in 2007 and the effective lower bound for short-term interest rates that was reached in late-2008, the Federal Reserve adopted a raft of 'unconventional' monetary policies, notably: forward guidance and large-scale asset purchases. These policies transmit to the real economy, inter alia, via an interest rate channel, with two sub-channels: signalling and portfolio rebalancing. I apply the OIS-augmented decomposition of interest rates from Lloyd (2017a) to identify these two sub-channels. I demonstrate that US unconventional monetary policy announcements between November 2008 and April 2013 did exert significant signalling and portfolio balance effects on financial markets, reducing longer-term interest rates. Signalling effects were particularly powerful at horizons in excess of two years. As a result of these declines, unconventional monetary policy aided real economic outcomes. I show that the signalling channel exerted a more powerful influence on US industrial production and consumer prices than portfolio rebalancing. In terms of long-term bond yield and industrial production effects, the signalling channel is associated with around two-thirds to three-quarters of the total effects attributed to the two channels.
    Keywords: Unconventional Monetary Policy, Large-Scale Asset Purchases, Forward Guidance, Signalling, Portfolio Rebalancing, Interest Rates, Term Structure, Overnight Indexed Swaps
    JEL: E32 E43 E44 E52 E58 G12 G14
    Date: 2017–09–20
  4. By: Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha
    Abstract: We estimate the ECB’s monetary policy reaction function by using real time Eurosystem/ECB staff macroeconomic projection data, which are presented to the ECB’s Governing Council when it assesses the monetary policy stance in the euro area. Alternative specifications of the reaction function account for a possible credibility loss due to persistent deviations of past inflation from the ECB’s inflation target. The results provide support for two alternative interpretations of the definition of price stability. First, the ECB dislikes inflation rates above two percent more than rates below two percent. Second, the ECB policy responses to past inflation gaps are symmetric with respect to a target of 1.6 - 1.7 percent. The out-of-sample predictions of the reaction function based on the second interpretation of the definition of price stability track well an estimated shadow interest rate during the zero lower bound period.
    JEL: E52 E58
    Date: 2017–10–05
  5. By: Øistein Røisland (Norges Bank (Central Bank of Norway))
    Abstract: The paper provides a simple analytical framework for analyzing the interplay between monetary policy and macroprudential policy. Three questions are analyzed: (i) Under which assumptions is coordination necessary to implement an optimal policy mix? (ii) Are the two policy instruments substitutes or complements, i.e. should they move in opposite or the same direction as response to a shock? (iii) Can "leaning against the wind" in monetary policy lead to a negative inflation bias?
    Keywords: Monetary policy, Macroprudential policy, Coordination
    JEL: E52 E58 E61
    Date: 2017–10–02
  6. By: Qureshi, Irfan (The University of Warwick)
    Abstract: Why does low central bank independence generate high macroeconomic instability? A government may periodically appoint a subservient central bank chairman to exploit the inflation-output trade-off, which may generate instability. In a New Keynesian framework, time-varying monetary policy is connected with a “chairman effect.” To identify departures from full independence, I classify chairmen based on tenure (premature exits), and the type of successor (whether the replacement is a government ally). Bayesian estimation using cross-country data confirms the relationship between policy shifts and central bank independence, explaining approximately 25 (15) percent of inflation volatility in developing (advanced) economies. Theoretical analyses reveal a novel propagation mechanism of the policy shock.
    Keywords: Time-varying policy parameters ; macroeconomic volatility ; central bank independence ; type of chairman changes
    JEL: E30 E42 E43 E52 E58 E61 O11 O23 O57
    Date: 2017
  7. By: Julien Champagne; Rodrigo Sekkel
    Abstract: We use narrative evidence along with a novel database of real-time data and forecasts from the Bank of Canada's staff economic projections from 1974 to 2015 to construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada. We show that it is crucial to take into account the break in the conduct of monetary policy caused by the announcement of inflation targeting in 1991 when estimating the effects of monetary policy. For instance, we find that a 100-basis-point increase in our new shock series leads to a 1.0 per cent decrease in real GDP and a 0.4 per cent fall in the price level, while not accounting for the break leads to a permanent decrease in real GDP and a price puzzle. Finally, we compare our results with updated narrative evidence for the U.S. and the U.K. and argue that taking into account changes in the conduct of monetary policy in these countries also yields significantly different effects of monetary policy.
    Keywords: Business fluctuations and cycles, Central bank research, Econometric and statistical methods, Exchange rate regimes, Inflation and prices, Inflation targets, Interest rates, Monetary Policy, Monetary policy framework
    JEL: E31 E32 E43 E52 E58
    Date: 2017
  8. By: Elmar Mertens; James M. Nason
    Abstract: This paper studies the joint dynamics of real time U.S. inflation and the mean inflation predictions of the Survey of Professional Forecasters (SPF) on a 1968Q4 to 2017Q2 sample. The joint data generating process (DGP) is an unobserved components (UC) model of inflation and a sticky information (SI) prediction mechanism for SPF inflation predictions. We add drifting gap inflation persistence to a UC model that already has stochastic volatility (SV) afflicting trend and gap inflation. Another innovation puts a time-varying frequency of inflation forecast updating into the SI-prediction mechanism. The joint DGP is a nonlinear state space model (SSM). We estimate the SSM using Bayesian tools grounded in a Rao-Blackwellized auxiliary particle filter, particle learning, and a particle smoother. The estimates show (i) longer horizon average SPF inflation predictions inform estimates of trend inflation, (ii) gap inflation persistence is pro-cyclical, and SI inflation updating is frequent before the Volcker disinflation, and (iii) subsequently, trend inflation and its SV fall, gap inflation persistence turns counter-cyclical, and SI inflation updating becomes infrequent.
    Keywords: Inflation, unobserved components, professional forecasts, sticky information, stochastic volatility, time-varying parameters, Bayesian, particle filter
    JEL: E31 C11 C32
    Date: 2017–09
  9. By: Kick, Thomas; Koetter, Michael; Storz, Manuela
    Abstract: We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures of international banks, we can identify banks in Germany with access to U.S. facilities via internal capital markets. Using proprietary interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of German banks with access. Short-term loan rates charged to German corporates also decline, albeit with lags between two and four months. These spillover effects of U.S. monetary policy are confined to short-term rates.
    Keywords: Monetary policy transmission,emergency liquidity,internal capital markets,interest rates
    JEL: E52 E58 F23 G01 G21
    Date: 2017
  10. By: Anna Bartocci (Bank of Italy); Lorenzo Burlon (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of the corporate sector purchase programme (CSPP) implemented in the euro area by the Eurosystem. For this purpose we calibrate and simulate a monetary-union dynamic general equilibrium model. We assume that entrepreneurs can finance their spending by issuing bonds in the domestic corporate bond market and by borrowing from domestic banks. We found that the March 2016 CSPP boosts euro-area GDP by around 0.3% in the second year (peak level). Inflation rises too but by a smaller amount. Second, taking into account the programme’s extension in December 2016, its overall impact on GDP amounts to 0.6%. Third, the CSPP also stimulates banking activity, because the improvement in macroeconomic conditions leads to higher demand for loans from households and entrepreneurs. Fourth, an early exit from the CSPP negatively impacts its macroeconomic effectiveness, while forward guidance on monetary policy rate enhances it.
    Keywords: DSGE models, financial frictions, open-economy macroeconomics, non-standard monetary policy, corporate bonds, forward guidance, euro area
    JEL: E43 E44 E52 E58
    Date: 2017–09
  11. By: Afonso, Ant¢nio (ISEG-UL ? Universidade de Lisboa); Arghyrou, Michael G (Cardiff Business School); Gadea, Mar¡a Dolores (Department of Applied Economics, University of Zaragoza); Kontonikas, Alexandros (Essex Business School, University of Essex)
    Abstract: This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach. First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016. Second, we estimate the impact of ECB policy interventions on the time-varying risk factor sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk. Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis.
    Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy
    JEL: E43 E44 F30 G01 G12
    Date: 2017–09
  12. By: Wagner Piazza Gaglianone
    Abstract: This paper provides a collection of empirical findings and stylized facts about inflation expectations in Brazil. A set of 23 papers selected ad hoc from the literature is employed in order to provide a concise overview of several aspects of these expectations, such as disagreement, forecast bias, role of information, epidemiology, driving-forces of the inflation expectations’ formation process, and credibility of the monetary policy, among others. These findings form a practical guide about inflation expectations in Brazil, which might be useful for policymakers and academics interested in designing forward-looking policy rules as well as developing macroeconomic models for the Brazilian economy
    Date: 2017–09
  13. By: Florian Madison
    Abstract: The aim of this paper is to analyze the relationship between primary market investment, decentralized secondary market asset trades, and final goods consumption under asymmetric information regarding the quality of the traded assets. Using a search-theoretic dynamic general equilibrium model where money and real assets coexist, but only fiat money is accepted as a direct medium of exchange, I study bilateral bargaining on over-the-counter asset markets under private information and analyze impact of monetary policy on equilibrium allocations. The main results show that asymmetric information impairs the liquidity of the real asset on the over-the-counter market and reduces both trading volume and consumption. As a consequence, a positive liquidity differential between money and assets emerges, resulting in an increased demand for fiat money, as observed since the eruption of the global financial crisis. A policy intervention replacing information sensitive assets with government bonds or fiat money, as done in the asset-purchase program implemented by the Federal Reserve Bank, improves equilibrium consumption and overall welfare.
    Keywords: Money, assets, over-the-counter, asymmetric information, signaling, undefeated equilibrium, search and matching
    JEL: D82 D83 E44 E52 G11 G12
    Date: 2017–09
  14. By: Tarishi Matsuoka (Tokyo Metropolitan University); Makoto Watanabe (VU Amsterdam; Tinbergen Institute, The Netherlands)
    Abstract: This paper studies banks' liquidity provision in the Lagos and Wright model of monetary exchanges. With aggregate uncertainty we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors' need of consumption smoothing. The banking panics can be eliminated by the zero-interest policy for the perfect risk sharing, but the first best can be achieved only at the Friedman rule. In our monetary equilibrium, the probability of banking panics is endogenous and increases with inflation, as is consistent with empirical evidence. The model derives a rich array of non-trivial effects of inflation on the equilibrium deposit and the bank's portfolio.
    Keywords: Money Search; Monetary Equilibrium; Banking panics; Liquidity
    JEL: E40
    Date: 2017–09–22
  15. By: Bouchaud, Jean-Philippe; Gualdi, Stanislao; Tarzia, Marco; Zamponi, Francesco
    Abstract: Which level of inflation should Central Banks be targeting? The authors investigate this issue in the context of a simplified Agent Based Model of the economy. Depending on the value of the parameters that describe the micro-behaviour of agents (in particular inflation anticipations), they find a surprisingly rich variety of behaviour at the macro-level. Without any monetary policy, our ABM economy can be in a high inflation/high output state, or in a low inflation/low output state. Hyper-inflation, stagflation, deflation and business cycles are also possible. The authors then introduce a Central Bank with a Taylor-rule-based inflation target, and study the resulting aggregate variables. The main result is that too low inflation targets are in general detrimental to a CB-controlled economy. One symptom is a persistent under-realisation of inflation, perhaps similar to the current macroeconomic situation. This predicament is alleviated by higher inflation targets that are found to improve both unemployment and negative interest rate episodes, up to the point where erosion of savings becomes unacceptable. The results are contrasted with the predictions of the standard DSGE model.
    Keywords: Agent based models,monetary policy,inflation target,Taylor rule
    JEL: E31 E32 E52
    Date: 2017
  16. By: Luca Gambetti (Universitat Autonomade Barcelona); Dimitris Korobilis (University of Essex); John D. Tsoukalas (University of Glasgow); Francesco Zanetti (Centre for Macroeconomics (CFM); University of Oxford)
    Abstract: A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline significantly, and durable spending rises signi cantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over in ation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, Business cycles, VAR models, DSGE models
    JEL: E20 E32 E43 E52
    Date: 2017–09
  17. By: Michael, Bryane; Dalko, Viktoria
    Abstract: What role does unconventional monetary policy – and particularly unconventional policies like private asset purchases under a quantitative easing or lender of last resort scheme – play in influencing economic growth directly? Emerging and developing countries’ central banks could contribute to GDP growth by following the example of jurisdiction like the US, UK and EU, by buying private sector and specific obligation public sector assets. Such a scheme would like most benefit jurisdictions like Greece, Bulgaria, Ukraine and others. Unsurprisingly, we find a weak relationship between these purchases and investment world-wide for the last 10 years. We also find the existence of a “sloth effect” – a pattern in the data whereby more central bank asset purchases actually coincides with lower investment. We estimate the gains to increasing central bank balance sheet sizes with these assets. We also show how statutory mandate for nominal GDP targeting set the best legal foundations for such asset purchases. We finally describe an internal audit engagement which would collect the specific data needed to verify the results in this study.
    Keywords: unconventional monetary policy,funder of last resort,nominal GDP targeting,central bank balance sheet,sloth effect,internal audit
    JEL: E58 E42 K23 O23
    Date: 2017
  18. By: Petra Gerlach-Kristen; Richhild Moessner; Rina Rosenblatt-Wisch
    Abstract: We derive daily market‐based domestic long‐term inflation expectations for eight countries without inflation swap markets. To do so, we use foreign inflation swaps together with (1) foreign and domestic interest rate swaps assuming that purchasing power parity (PPP) and uncovered interest rate parity (UIP) hold or together with (2) spot and forward exchange rates assuming that PPP, UIP and covered interest rate parity (CIP) hold. We confirm the plausibility of our PPP‐UIP and PPP‐UIC‐CIP measures by also applying these methods for countries with inflation swap markets. We moreover illustrate how the data can be used to answer such questions as whether inflation reacts to long‐term inflation expectations, whether these expectations are well‐anchored and how long‐term real interest rates have moved over the past decade.
    Keywords: Inflation expectations, market‐based inflation expectations, anchoring of inflation expectations, long‐term real interest rates
    JEL: E31 E44 E58
    Date: 2017
  19. By: Masato Shizume (Faculty of Political Science and Economics, Waseda University); Masayoshi Tsurumi (Institute of Comparative Economic Studies, Hosei University)
    Abstract: In this paper, we explore the role of competing concepts of the banking system in the process of modernizing the financial system in Japan. The country has a long history of its own version of private note issuance dating back to the early 17th century. In the late 19th century, the Japanese government considered two options for modernizing its financial system, national/free banking as in the United States, and central banking as in Europe. It first decided to adopt the former because the Japanese economy was decentralized and more closely resembled the economy of the United States than that of the European countries. However, the Japanese government customized the banking system for the Japanese situation. After some trial and error, the government turned to the latter option and established the central bank in 1882.
    Keywords: the modern banking system, free banking, national banks, the Bank of Japan
  20. By: Lloyd, S. P.
    Abstract: Financial market participants and policymakers closely monitor the evolution of interest rate expectations. At any given time, the term structure of interest rates contains information regarding these expectations. No-arbitrage dynamic term structure models have regularly been used to estimate interest rate expectations and term premia, but daily frequency estimates of these models fail to accurately capture the evolution of interest rate expectations implied by surveys and financial market instruments. I propose the augmentation of no-arbitrage Gaussian affine dynamic term structure models (GADTSMs) with overnight indexed swap (OIS) rates in order to better estimate the evolution of interest rate expectations and term premia across the whole term structure. I augment the model with 3 to 24-month OIS rates, which provide accurate information about interest rate expectations. The OIS-augmented model that I propose, estimated between January 2002 and December 2016 for the US, generates estimates of the expected path of short-term interest rates, up to the 10-year horizon, that closely correspond to those implied by federal funds futures rates and survey expectations at a range of horizons, and accurately depict their daily frequency evolution. Against these metrics, the interest rate expectation estimates from OIS-augmented models are superior to estimates from existing GADTSMs.
    Keywords: Term Structure of Interest Rates, Overnight Indexed Swaps, Monetary Policy Expectations, Dynamic Term Structure Model.
    JEL: C32 C58 E43 E47 G12
    Date: 2017–09–20
  21. By: Quint, Dominic; Rabanal, Pau
    Abstract: The large recession that followed the Global Financial Crisis of 2008-09 triggered unprecedented monetary policy easing around the world. Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity on a large scale after short-term policy rates had reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should continue to be used once economic conditions and interest rates have normalized. In particular, we study the optimality of asset purchase programs by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States. We find that the benefits of using such UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits of using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. By contrast, when more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.
    Keywords: Unconventional Monetary Policy,Banking,Optimal Rules
    JEL: C32 E32 E52
    Date: 2017
  22. By: Feldkircher, Martin; Gruber, Thomas; Huber, Florian
    Abstract: As a consequence of asset purchases by the European Central Bank (ECB), longer- term yields in the euro area decline, and spreads between euro area long-term yields narrow. To assess spillovers of these recent financial developments, we use a Bayesian variant of the global vector autoregressive (BGVAR) model that uses shrinkage priors coupled with stochastic volatility. We find positive and signif- icant spillovers to industrial production in Central, Eastern and Southeastern Europe (CESEE) and other non-euro area EU member states. These effects are transmitted via the financial channel (mainly through interest rates and equity prices) and outweigh costs of appreciation pressure on local currencies vis-a-vis the euro (trade channel). That both shocks yield rather similar results adds narrowing longer-term yields in the euro area as a viable alternative to the pol- icymakers' toolkit. While these results represent general trends, we also find evidence for both cross-country heterogeneity of effects within the euro area and region-specific spillovers thereof.
    Keywords: Euro area monetary policy,quantitative easing,spillovers
    JEL: C30 E52 F41 E32
    Date: 2017
  23. By: Flávio de Freitas Val; Wagner Piazza Gaglianone; Marcelo Cabus Klotzle; Antonio Carlos Figueiredo Pinto
    Abstract: The objective of this study is to estimate the credibility of the monetary policy followed by the Central Bank of Brazil (BCB) during the period from January 2006 to July 2017. To estimate this credibility, we use the Kalman filter in two measures of inflation expectations (breakeven inflation and Focus survey) with a medium/long-term forecast horizon. The results indicate four shifts in the perceived credibility based on breakeven inflation: (i) decline in mid-2008, during the U.S. subprime mortgage crisis; (ii) relative stability from early 2009 to mid-2015; (iii) strong decline by the end of 2015; and (iv) recovery from mid-2016 until mid-2017 (end of the sample). The credibility measure based on the Focus survey showed a more regular behavior, reflecting the degree of anchoring of the survey-based inflation expectations for the considered horizon. By associating the estimated credibility with financial and macroeconomic variables, we have also found that credibility is relatively persistent and seems not to be influenced by short-run movements of such variables
    Date: 2017–09
  24. By: Ibarra-Ramírez Raúl; Téllez León Elizabeth
    Abstract: In this paper we analyze the impact and persistence of shocks to global (push) and domestic (pull) factors on each component of the financial account for the Mexican Balance of Payments at the highest degree of disaggregation, including investment by foreign residents in Mexican public and private sector securities, as well as investment by domestic residents in foreign securities. To this end, we estimate impulse response functions from vector autoregressive models for the period 1995-2015. We find that an increase in the foreign interest rate leads to lower portfolio investment, particularly in Mexican public sector securities. An increase in global risk generates lower portfolio investment, particularly in private sector securities. Foreign investors respond to a higher extent to foreign interest rate and liquidity shocks compared to domestic investors.
    Keywords: Capital Flows;Push Factors;Pull Factors;Vector Autoregression
    JEL: F21 F32 F41 F47
    Date: 2017–09
  25. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We use a New Keynesian behavioral macroeconomic model to analyze how structural reforms affect the nature of the business cycle and the capacity of the central bank to stabilize output and inflation. We find that structural reforms that increase the flexibility of wages and prices can have profound effects on the dynamics of the business cycle. Our main finding here is that there is an optimal level of flexibility (produced by structural reforms). We also find that in a rigid economy the central bank in general faces a tradeoff between output and inflation volatility. This tradeoff disappears when the economy becomes sufficiently flexible. In that case the central bank's efforts at stabilizing inflation and output are always welfare improving.
    Keywords: behavioural macroeconomics; Structural reforms
    Date: 2017–09
  26. By: Christoph S. Weber
    Abstract: The increase in central bank transparency was one of the main developments in central banking in the last two decades. This leads to the question of which effect central bank transparency has on the volatility of exchange rates. According to theoretical considerations, more information could either lead to more precise forecasts or to more noise trading. This raises the need for an empirical estimation of the relationship. The study shows that the effect of central bank transparency on exchange rate volatility depends on the development of countries. While there is no effect of central bank transparency in the composite sample and for developing countries, transparency increases exchange rate fluctuations in developed countries.
    Keywords: Central Bank Transparency, Exchange Rate Volatility, Monetary Policy
    JEL: E24 E58 F31
    Date: 2017–09
  27. By: Verstegen, Loes (Tilburg University, Center For Economic Research); van Groezen, Bas (Tilburg University, Center For Economic Research); Meijdam, Lex (Tilburg University, Center For Economic Research)
    Abstract: This paper investigates quantitatively the benefits from participation in the Economic and Monetary Union for individual Euro area countries. Using the synthetic control method, we estimate how real GDP per capita would have developed for the EMU member states, if those countries had not joined the EMU. The estimates show that most countries have profited from having the euro, though the crisis leads to negative effects of EMU membership. The PIGS countries, in particular, would have been better off if they had not been an EMU member during the crisis, however, Greece, Portugal and Spain experienced the largest benefits of EMU participation in the pre-crisis period.
    Keywords: economic growth; euro area; synthetic control method; monetary union
    JEL: C23 E65 F33 F36 F43
    Date: 2017
  28. By: Lloyd, S. P.
    Abstract: A growing literature has begun to use overnight indexed swap (OIS) rates to measure market expectations of future short-term interest rates. In this paper, I assess the empirical success of OIS rates in predicting the future path of monetary policy. I first compare US OIS rates to federal funds futures (FFFs), which have regularly been used to construct financial market-based measures of interest rate expectations. For the 2002-2016 period, I find that 1 to 11-month OIS rates provide measures of investors' interest rate expectations that are as good as those from comparable-horizon FFFs contracts. More generally, I find that, on average, 1 to 24-month US, UK, Eurozone and Japanese OIS rates accurately measure expectations of future short-term interest rates. To date, many methods used by monetary economists rely on FFFs data to measure monetary policy expectations. This has limited the application of these methods to US data only. Motivated by the results in this paper, researchers can look to OIS rates as a globally-comparable measure of monetary.
    Keywords: Federal Funds Futures, Overnight Indexed Swaps, Monetary Policy Expectations
    JEL: E43 E44 E52 G1
    Date: 2017–09–20
  29. By: Masato Shizume (Faculty of Political Science and Economics, Waseda University)
    Abstract: A series of financial crises following a boom during World War I marked the turning point for the emergence of prudential policy in Japan. An economic backlash after the war created mounting bad loans. After the Great Kanto Earthquake in 1923, the Bank of Japan (BOJ) introduced a special treatment facility for the devastated area. The BOJ hoped to rescue solvent but illiquid financial institutions, but the facility was abused by banks that were already in financial distress, paving the way toward a financial crisis. Banking panic spread nationwide in the spring of 1927. In 1928, the authorities introduced new arrangements for prudential policy with mergers and acquisitions, new types of regulations, and dual inspection by the Ministry of Finance and the BOJ. These arrangements restored financial stability while imposing a new constraint on monetary policy.
    Date: 2016–11
  30. By: Matthieu Bussière; Guillaume Gaulier; Walter Steingress
    Abstract: This paper contributes to the debate on the magnitude of exchange rate elasticities by providing a set of price and quantity elasticities for 51 advanced and emerging-market economies. Specifically, for each of these countries we report the elasticity of trade prices and trade quantities on both the export and on the import sides, as well as the reaction of the trade balance. To that end, we use a large unified database of highly disaggregated bilateral trade flows, covering 5,000 products and more than 160 trading partners. We present a range of estimates using not only standard regression techniques but also generated regressors that aim to address key omitted variable biases, particularly relating to unobserved marginal costs and competitor prices in the importing market. Our results show that quantity elasticities are significantly below one, pass-through is incomplete and export prices react significantly to exchange rate changes. Despite low quantity elasticities, the trade balance reacts positively to a depreciation in all countries because export and import prices adjust. Overall, our findings suggest that changes in the exchange rate can play an important role in addressing global trade imbalances.
    Keywords: Exchange rates, Inflation and prices, International topics
    JEL: C51 F14 F31 F33 F41
    Date: 2017
  31. By: Stefano Neri (Bank of Italy); Andrea Gerali (Bank of Italy)
    Abstract: The paper estimates a closed-economy medium-scale model for the United States and the euro area to assess the current level of the natural rate of interest and shed light on its drivers. The dynamics of the model are driven by permanent and transitory shocks that bear some connection to the explanations put forward in the literature to explain the secular downward trend in interest rates. The analysis shows that the natural rate has declined, contributing to a lowering of nominal and real rates. Risk premium shocks, a short-cut for changes in agents’ preference for safe assets, have been an important driver in the euro area; in the United States, shocks to the risk premium and to the efficiency of investment, which proxy the functioning of the financial sector, have played a major role. These differences in the importance of the shocks underscore the need to adopt a structural model with a rich stochastic structure, featuring permanent and transitory shocks.
    Keywords: natural rate of interest, monetary policy, DSGE model, Bayesian methods
    JEL: C51 E32 E43 E52
    Date: 2017–09

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