nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒10‒15
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Explaining Central Bank Trust in an Inflation Targeting Country: The Case of the Reserve Bank of New Zealand By Bernd Hayo; Florian Neumeier
  2. Does Central Bank Transparency and Communication Affect Financial and Macroeconomic Forecasts? By Thomas Lustenberger; Enzo Rossi
  3. The Reaction of Inflation to Macroeconomic Shocks: The Case of Zimbabwe (2009 – 2012) By William Kavila; Pierre Le Roux
  4. "Quantitative Easing and Asset Bubbles in a Stock-flow Consistent Framework" By Cameron Haas; Tai Young-Taft
  5. Designing QE to overcome the lower bound constraint on interest rates in a fiscally sound monetary union By Bletzinger, Tilman; von Thadden, Leopold
  6. The International Credit Channel of U.S. Monetary Policy and Financial Shocks By Andrej Sokol; Ambrogio Cesa-Bianchi
  7. Managing Capital Flows in the Presence of External Risks By Ricardo M. Reyes-Heroles; Gabriel Tenorio
  8. Faster Payments : Market Structure and Policy Considerations By Aaron Rosenbaum; Garth Baughman; Mark D. Manuszak; Kylie Stewart; Fumiko Hayashi; Joanna Stavins
  9. How to Make Monetary Policy More Effective By Steve Ambler
  10. International Medium of Exchange: Privilege and Duty By Ryan Chahrour
  11. The Stabilizing Role of Forward Guidance: A Macro Experiment By Ahrens, Steffen; Lustenhouwer, Joep; Tettamanzi, Michele
  12. Endogenous Regime Switching Near the Zero Lower Bound By Lansing, Kevin J.
  13. An Exchange Rate Floor as an Instrument of Monetary Policy: An Ex-post Assessment of the Czech Experience By Jan Bruha; Jaromir Tonner
  14. Measuring Inflation Anchoring and Uncertainty : A US and Euro Area Comparison By Olesya V. Grishchenko; Sarah Mouabbi; Jean-Paul Renne
  15. Dealing with Time-inconsistency: Inflation Targeting vs. Exchange Rate Targeting By Ippei Fujiwara; Scott Davis
  16. International credit supply shocks By Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Rebucci, Alessandro
  17. The Effect of News Shocks and Monetary Policy By Gambetti, L; Korobilis, D; Tsoukalas, J; Zanetti, F
  18. Risk-Taking Channel of Unconventional Monetary Policies in Bank Lending By Kiyotaka Nakashima; Masahiko Shibamoto; Koji Takahashi
  19. The Sensitivity of the U.S. Dollar Exchange Rate to Changes in Monetary Policy Expectations By Stephanie E. Curcuru
  20. Macroprudential Policy in the New Keynesian World By Gersbach, Hans; Hahn, Volker; Liu, Yulin
  21. Rethinking fiscal policy lessons from the European Monetary Union (EMU) By Saraceno, Francesco.
  22. The Sovereign Money Initiative in Switzerland: An Economic Assessment By Philippe Bacchetta
  23. Policy experiments in an agent-based model with credit networks By Assenza, Tiziana; Cardaci, Alberto; Delli Gatti, Domenico; Grazzini, Jakob
  24. Household Debt and Monetary Policy: Revealing the Cash-Flow Channel By Flodén, Martin; Kilström, Matilda; Sigurdsson, Jósef; Vestman, Roine
  25. Determinants of the Public Budget Balance: The Role of Official Capital Flows By Steiner, Andreas
  26. Quantitative Easing in the Euro Area - An Event Study Approach By Urbschat, Florian; Watzka, Sebasitan
  27. “Whatever it takes†to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects By Afonso, A; Arghyrou, MG; Gadea, MD; Kontonikas, A
  28. Policy Rules for Capital Controls By Gurnain Pasricha
  29. Exchange rate dynamics and monetary integration in the EAC contries By Cuiabano, Simone; Opoku-Afari, Maxwell

  1. By: Bernd Hayo; Florian Neumeier
    Abstract: Employing data from a representative population survey conducted in New Zealand in 2016, this paper examines factors that influence, or are at least associated with, public trust in the Reserve Bank of New Zealand (RBNZ). The large number of specifically designed questions allows studying the relationship between six dimensions and RBNZ trust: (i) economic situation, (ii) monetary policy knowledge, (iii) nonspecific trust, (iv) interest and information search, (v) politicians and government, and (vi) socio‐demographic indicators. Using ordered logit models, we find that at least one indicator from each of these six dimensions has a statistically significant conditional correlation with individuals’ trust in RBNZ. Satisfaction with own financial situation, objective knowledge about the RBNZ’s main policy objective, responsibility for interest rate setting, subjective knowledge about inflation, trust in government institutions, desire to be informed about RBNZ, age, and full‐time selfemployment have a positive relationship with RBNZ trust. The reverse is found for respondents who do not keep up with RBNZ and believe that politicians are long‐term oriented. In terms of economic relevance, institutional trust has the largest single impact on RBNZ trust and the subjective and objective knowledge indicators show a strong combined influence.
    JEL: E52 E58 Z10
    Date: 2017
  2. By: Thomas Lustenberger; Enzo Rossi
    Abstract: In a large sample of countries across different geographic regions and over a long period of time, we find limited country- and variable-specific effects of central bank transparency on forecast accuracy and their dispersion among a large set of professional forecasts of financial and macroeconomic variables. More communication even increases forecast errors and Dispersion.
    Keywords: Central bank transparency, central bank communication,central bank independence, inflation targeting, forward guidance, macroeconomic forecasts, financial forecasts, panel data models with truncated data
    JEL: C23 C53 E37 E58 D8
    Date: 2017
  3. By: William Kavila; Pierre Le Roux
    Abstract: This paper empirically investigates the reaction of inflation to macro-economic shocks using the Vector Error Correction modelling approach (VECM) with monthly data from 2009:01 to 2012:12. The Zimbabwean economy was dollarised during this period, after having abandoned its own currency in 2009, following the hyperinflation episode of 2007-2008. The empirical findings show that the reaction of price formation in Zimbabwe to external shocks, such as the appreciation or depreciation of the South African rand against the US dollar and the increase in international food and oil prices is immediate with permanent effects. Specifically, the study found that an appreciation of the South African rand against the US dollar, results in a sharp increase in inflation during the first 6 months and the effects are permanent. Similarly, a positive shock to international oil prices also results in a sharp increase in inflation, during the first 6 months, remaining high over the forest period. The impact of a positive shock to food prices, is however, transitory, only felt during the first 4 months, before declining during the next 4 months and remaining at a moderately high level over the forecast period. The policy implication from this analysis is a need for Zimbabwean authorities to put in place measures to mitigate the negative impact of external shocks on inflation, given that the country lost its monetary policy autonomy when it dollarised in 2009.
    Keywords: Inflation; Dollarised economy, Macro-economic shocks, Vector Error Correction Model, Impulse responses, Variance decomposition.
    Date: 2017–09
  4. By: Cameron Haas; Tai Young-Taft
    Abstract: Ever since the Great Recession, central banks have supplemented their traditional policy tool of setting the short-term interest rate with massive buyouts of assets to extend lines of credit and jolt flagging demand. As with many new policies, there have been a range of reactions from economists, with some extolling quantitative easing's expansionary virtues and others fearing it might invariably lead to overvaluation of assets, instigating economic instability and bubble behavior. To investigate these theories, we combine elements of the models in chapters 5, 10, and 11 of Godley and Lavoie's (2007) Monetary Economics with equations for quantitative easing and endogenous bubbles in a new model. By running the model under a variety of parameters, we study the causal links between quantitative easing, asset overvaluation, and macroeconomic performance. Preliminary results suggest that rather than being pro- or countercyclical, quantitative easing acts as a sort of phase shift with respect to time.
    Keywords: Quantitative Easing; Stock-flow Consistency; Macroeconomics
    JEL: E12 E44 E58 E21
    Date: 2017–09
  5. By: Bletzinger, Tilman; von Thadden, Leopold
    Abstract: This paper develops a model of a fiscally sound monetary union and analyses central bank purchases of long-term debt (QE). Employing the portfolio balance channel, we show that there exists an interest rate rule augmented by QE at the lower bound which replicates the equilibrium allocation and the welfare level of a hypothetically unconstrained economy. We show further that the symmetry of QE depends on whether the monetary union is characterised by asymmetric shocks or asymmetric structures.
    JEL: E43 E52 E61 E63
    Date: 2017
  6. By: Andrej Sokol (Bank of England); Ambrogio Cesa-Bianchi (Bank of England)
    Abstract: We provide novel evidence on the existence of an `international credit chan- nel' for the transmission of US shocks across borders. Using a two-country SVAR for the U.S. and the U.K., we show that U.S. monetary policy shocks, identified using high frequency surprises around policy announcements as external instruments, can significantly affect credit spreads in both coun- tries, but less so U.K. economic activity. We then recover a U.S. financial shock, which we identify within the same model using sign restrictions, and show that financial shocks are quickly transmitted internationally, with effects on credit spreads that are similar to the ones of monetary policy shocks. Unlike monetary policy shocks, however, financial shocks have a sizeable impact on economic activity and consumer prices in both coun- tries. Our results are in line with general equilibrium open economy models with credit market imperfections and a high degree of financial integration.
    Date: 2017
  7. By: Ricardo M. Reyes-Heroles; Gabriel Tenorio
    Abstract: We introduce external risks, in the form of shocks to the level and volatility of world interest rates, into a small open economy model subject to the risk of sudden stops—large recessions together with abrupt reversals in capital inflows| and characterize optimal macroprudential policy in response to these shocks. In the model, collateral constraints create a pecuniary externality that leads to "overborrowing" and sudden stops that arise when the constraints bind. The typical sudden stop generated by the model replicates existing empirical evidence for emerging market economies: Low and stable external interest rates reinforce "overborrowing" and lead to greater exposure to crises typically accompanied by abrupt increases in interest rates and a persistent rise in their volatility. We solve for the optimal policy and argue that the size of a tax on international borrowing that implements the policy depends on two factors, the incidence and the severity of potential future crises. We show quantitatively that these taxes respond to both the level and volatility of interest rates even though optimal decisions in the competitive equilibrium do not respond substantially to changes in volatility, and that the size of the optimal tax is non-monotonic with respect to external shocks.
    Keywords: Macroprudential policy ; time-varying volatility ; sudden stops ; financial crises ; external interest rates
    JEL: E3 E6 F3 F4 G1 G2
    Date: 2017–09
  8. By: Aaron Rosenbaum; Garth Baughman; Mark D. Manuszak; Kylie Stewart; Fumiko Hayashi; Joanna Stavins
    Abstract: The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. How this market for faster payments will evolve will be shaped by a range of economic forces, such as economies of scale and scope, network effects, switching costs, and product differentiation. Emerging technologies could alter these forces and lead to new organizational arrangements or market structures that are different from those in legacy payment markets to date. In light of this uncertainty, this paper examines three hypothetical market structures that may emerge: a dominant-operator environment, a multi-operator environment, and a decentralized environment. Each of these market structures has different implications for the public policy objectives of efficiency, safety, and ubiquity. The paper also considers tools to promote positive outcomes in each market structure.
    Keywords: Faster payments ; Market structure and competition ; Payment system improvement ; Public policy ; Retail payments
    JEL: D4 G2 L1 E42
    Date: 2017–09–25
  9. By: Steve Ambler (Département des sciences économiques, ESG UQAM, Canada; C.D. Howe Institute, Canada; The Rimini Centre for Economic Analysis)
    Abstract: Nine years after the beginning of the Great Recession in 2008 and at least seven years since the recovery from the Great Recession began, industrialized economies are experiencing sluggish growth and inflation that is persistently under targeted rates. The unconventional monetary policies that have been tried by different central banks have not generally been successful in achieving their goals. We suggest here that quantitative easing could be made much more effective by making expansions of the monetary base permanent. In turn, a commitment to permanent monetary expansion would be more credible if central banks adopted targets for nominal aggregates such as the price level or nominal GDP. A level target would also allay fears of runaway inflation.
    Date: 2017–10
  10. By: Ryan Chahrour (Boston College; Boston College)
    Abstract: The United States enjoys an “exorbitant privilege” that allows it to borrow at especially low interest rates. Meanwhile, the dollarization of world trade appears to shield the U.S. from international disturbances. We provide a new theory that links dollarization and exorbitant privilege through the need for an international medium of exchange. We consider a two-country world where international trade happens in decentralized matching markets, and must be collateralized by assets — a.k.a. currencies — issued by one of the two countries. Traders have an incentive to coordinate their currency choices and a single dominant currency arises in equilibrium. With small heterogeneity in traders’ information, the model delivers a unique mapping from economic conditions to the dominant currency. Nevertheless, the model delivers a dynamic multiplicity: in steady-state either currency can serve as the international medium of exchange. The economy with the dominant currency enjoys lower interest rates and the ability to run current account deficits indefinitely. Currency regimes are stable, but sufficiently large shocks or policy changes can lead to transitions, with large welfare implications.
    Keywords: Home Bias, Information Choice, Portfolio Choice, Dynamics
    JEL: F3 G11 G15 D8 D83
    Date: 2017–10–06
  11. By: Ahrens, Steffen; Lustenhouwer, Joep; Tettamanzi, Michele
    Abstract: We study if central banks can manage market expectations by means of forward guidance in a New Keynesian learning-to-forecast experiment. Subjects observe public inflation projections by the central bank along with the historic development of the economy and subsequently submit their own inflation forecasts. We find that the central bank can significantly manage market expectations through forward guidance and that this management strongly supports monetary policy in stabilizing the economy.
    JEL: C92 E32 E37 E58
    Date: 2017
  12. By: Lansing, Kevin J. (Federal Reserve Bank of San Francisco)
    Abstract: This paper develops a New Keynesian model with a time-varying natural rate of inter-est (r-star) and a zero lower bound (ZLB) on the nominal interest rate. The representative agent contemplates the possibility of an occasionally binding ZLB that is driven by switching between two local rational expectations equilibria, labeled the "targeted" and "deflation" solutions, respectively. Sustained periods when the real interest rate remains below the central bank's estimate of r-star can induce the agent to place a substantially higher weight on the deflation equilibrium, causing it to occasionally become self-fulling. I solve for the time series of stochastic shocks and endogenous forecast rule weights that allow the model to exactly replicate the observed time paths of the U.S. output gap and quarterly inflation since 1988. In model simulations, raising the central bank's inflation target to 4% from 2% can reduce, but not eliminate, the endogenous switches to the deflation equilibrium.
    JEL: E31 E43 E52
    Date: 2017–09–28
  13. By: Jan Bruha; Jaromir Tonner
    Abstract: In November 2013 the Czech National Bank introduced a floor for the Czech koruna exchange rate as its monetary policy instrument. The rationale for this action was to prevent the risk of deflation in a zero-lower-bound environment where policy rates could not be lowered any further. The goal of this paper is to assess ex post the effect of the exchange rate floor on the Czech economy - inflation and the main real aggregates. The paper uses two different approaches. First, the official DSGE forecasting model is used to simulate the counterfactual macroeconomic dynamics of no introduction of a floor. Second, the paper applies an empirical approach: the synthetic control method and its generalised variant are used to estimate these counterfactual trajectories. Both approaches show that the floor prevented inflation from turning negative. Moreover, both methods indicate likely positive effects on macro variables and on various measures of inflation, although strongly statistically significant effects are only obtained for core inflation. The statistical significance for other variables is weaker or zero. We conclude that the introduction of the exchange rate floor was a correct policy action that has retrospectively been successful.
    Keywords: DSGE modelling, exchange rate policy, monetary policy in a zero interest rate environment, synthetic control method
    JEL: C21 E58 F47
    Date: 2017–09
  14. By: Olesya V. Grishchenko; Sarah Mouabbi; Jean-Paul Renne
    Abstract: We use several US and euro-area surveys of professional forecasters to estimate a dynamic factor model of inflation featuring time-varying uncertainty. We obtain survey-consistent distributions of future inflation at any horizon, both in the US and the euro area. Equipped with this model, we propose a novel measure of the anchoring of inflation expectations that accounts for inflation uncertainty. Our results suggest that following the Great Recession, inflation anchoring improved in the US, while mild de-anchoring occurred in the euro-area. As of our sample end, both areas appear to be equally anchored.
    Keywords: Anchoring of inflation expectations ; Dynamic factor model ; Inflation ; Stochastic volatility ; Surveys of professional forecasters ; Term structure of inflation expectations and inflation uncertainty
    JEL: C32 E41 E44
    Date: 2017–10–03
  15. By: Ippei Fujiwara (Keio University / ANU); Scott Davis (Federal Reserve Bank of Dallas)
    Abstract: Abandoning an objective function with multiple targets and adopting a single mandate is an effective way for a central bank to overcome the classic time-inconsistency problem. We show that the choice of a particular single mandate depends on a country's level of trade openness. Both inflation targeting and nominal exchange rate targeting come with their own costs. We show that the costs of inflation targeting are increasing in a country's level of trade openness while the costs of exchange rate targeting are decreasing in trade openness. Thus a relatively closed economy will prefer an inflation targeting mandate and a very open economy will prefer an exchange rate target. Empirical results show that as central banks become less credible they are more likely to adopt a pegged exchange rate, and crucially the empirical link between central bank credibility and the tendency to peg depends on trade openness.
    Date: 2017
  16. By: Cesa-Bianchi, Ambrogio (Bank of England); Ferrero, Andrea (University of Oxford); Rebucci, Alessandro (John Hopkins University Carey Business School)
    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 fuelling 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.
    Keywords: Cross-border claims; capital flows; credit supply shock; leverage; exchange rates; house prices; international financial intermediation
    JEL: C32 E44 F44
    Date: 2017–10–06
  17. By: Gambetti, L; Korobilis, D; Tsoukalas, J; Zanetti, F
    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 significantly 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 inflation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, Business cycles, VAR models,, DSGE models
    Date: 2017–09–26
  18. By: Kiyotaka Nakashima (Faculty of Economics, Konan University, Japan); Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Koji Takahashi (Department of Economics, University of California, San Diego, USA)
    Abstract: We investigate the effects of unconventional monetary policy on bank lending, using a bank-firm matched dataset in Japan from 1999 to 2015 by disentangling conventional and unconventional monetary policy shocks employed by the Bank of Japan over the past 15 years. We find that a rise in the share of the unconventional assets held by the Bank of Japan boosts lending to firms with a lower distance-to-default ratio from banks with a lower liquid assets ratio and higher risk appetite. In contrast to the composition shock, the monetary base shock of increasing the Bank of Japan’s balance sheet size does not have heterogeneous effects on bank lending. Furthermore, we find that interest rate cuts stimulate lending to risky firms from banks with a higher leverage ratio.
    Keywords: Unconventional monetary policy; Quantitative and qualitative monetary easing; Matched lender-borrower data; Risk-taking channel; News shock
    JEL: E44 E52 G21
    Date: 2017–09
  19. By: Stephanie E. Curcuru
    Abstract: This note summarizes recent work in the International Finance Division of the Federal Reserve Board on the relationship between movements in exchange rates and monetary policy expectations.
    Date: 2017–09–22
  20. By: Gersbach, Hans; Hahn, Volker; Liu, Yulin
    Abstract: We integrate banks and the coexistence of bank and bond financing into an otherwise standard New Keynesian Framework with capital, and derive the microfounded, bank-augmented IS and Phillips Curves for the corresponding two-sector economy. We study the interplay of monetary and macroprudential policies. We examine how policy-making could be operationalized by loss functions for monetary and macroprudential policy-making. Finally, we investigate the optimal institutional structures.
    JEL: E52 E58 G28
    Date: 2017
  21. By: Saraceno, Francesco.
    Abstract: This paper challenges the ideological and empirical basis of the “New Consensus” to macroeconomic policy, which advocates limited government intervention to correct short-term deviations from the growth path constrained by a rules-based framework. Based on the recent experience of the United States and the Economic and Monetary Union of the European Union (EMU), the paper argues that the New Consensus has yielded a policy stance that is excessively “hands off”, slow to respond to economic downturns, and has led to premature austerity, all of which have stifled the recovery. This provides lessons for not only developed countries, but also developing and emerging economies seeking to design macroeconomic policy frameworks to cope with the economic cycle and spillovers from the globalized economy.
    Keywords: fiscal policy, macroeconomics, EMU, USA
    Date: 2017
  22. By: Philippe Bacchetta
    Abstract: The Sovereign Money Initiative will be submitted to the Swiss people in 2018. This paper reviews the arguments behind the initiative and discusses its potential impact. I argue that several arguments are inconsistent with empirical evidence or with economic logic. In particular, controlling sight deposits neither stabilizes credit nor avoids financial crises. Also, assuming that deposits at the central bank are not a liability has implications for fiscal and monetary policy; and Benes and Kumhof (2012) do not provide support for the reform as they do not analyze the proposed Swiss monetary reform and their closed-economy model does not fit the Swiss economy. Then, using a simple model with monpolistically competitive banks, the paper assesses quantitatively the impact of removing sight deposits from commercial banks balance sheets. Even though there is a gain for the state, the overall impact is negative, especially because depositors would face a negative return. Moreover, the initiative goes much beyond what would be the equivalent of full reserve requirement and would impose severe constraints on monetary policy; it would weaken financial stability rather then reinforce it; and it would threaten the trust in the Swiss monetary system. Finally, there is high uncertainty both on the details of the reform and on its impact.
    Keywords: Reserve requirements; sovereign money; money creation
    JEL: E42 E51 E41
    Date: 2017–09
  23. By: Assenza, Tiziana; Cardaci, Alberto; Delli Gatti, Domenico; Grazzini, Jakob
    Abstract: In this paper the authors build upon Assenza et al. (Credit networks in the macroeconomics from the bottom-up model, 2015), which include firm-bank and bank-bank networks in the original macroeconomic model in Macroeconomics from the bottom-up (Delli Gatti et al., Macroeconomics from the Bottom-up, 2011). In particular, they extend that framework with the inclusion of a public sector and other modifications in order to carry out different policy experiments. More specifically, the authors test the implementation of a monetary policy by means of a standard Taylor rule, an unconventional monetary policy (i.e. cash in hands) and a set of macroprudential regulations. They explore the properties of the model for such different scenarios. Their results shed some light on the effectiveness of monetary and macroprudential policies in an economy with an interbank market during times of crises.
    Keywords: Agent-based models,monetary policy,credit network
    JEL: C63 E51 E52
    Date: 2017
  24. By: Flodén, Martin (Sveriges Riksbank and CEPR); Kilström, Matilda (IIES, Stockholm University); Sigurdsson, Jósef (IIES, Stockholm University); Vestman, Roine (Stockholm University and SHoF)
    Abstract: We examine the cash-flow channel of monetary policy, i.e. the effect of monetary policy on spending when households hold debt linked to short-term rates such as adjustable rate mortgages (ARMs). Using registry-based data on Swedish households, we estimate substantial heterogeneity in consumption responses to a change in monetary policy through the cash-flow channel. Our findings imply that monetary policy has a stronger effect on real economic activity when households are highly indebted and have ARMs. For homeowners with a debtto- income ratio of around 3 and ARMs, the estimated response is equivalent to a marginal propensity to consume of 0.5.
    Keywords: Monetary policy; consumption; household debt; variable interest rates; adjustable rate mortgages
    JEL: D14 E21 E52 G11
    Date: 2017–09–01
  25. By: Steiner, Andreas
    Abstract: Central banks invest their foreign exchange reserves predominantly in government securities. By means of a panel data analysis we examine the relationship between reserve currency status and public budget balance during different constellations of the international monetary system: the sterling period (1890-1935) and the dollar dominance (since World War II). We show for both periods that reserve currency status significantly lowers the public budget balance of the center countries.
    JEL: F31 F33 F41 H62 E62 C23
    Date: 2017
  26. By: Urbschat, Florian; Watzka, Sebasitan
    Abstract: We examine the effects of the QE programme started by the ECB in 2015. Studying the short-term reaction of bond markets, we try to quantify different asset price channels such as the portfolio rebalance channel by running event regressions for several Euro Area countries. Our analysis suggests that the ECB’s policy had strong and desired effects on bond markets at the very beginning, but less so subsequently. Possible explanations are the increasingly burdensome institutional set-up of the APP.
    JEL: E43 E44 E52 E58 G14
    Date: 2017
  27. By: Afonso, A; Arghyrou, MG; Gadea, MD; Kontonikas, A
    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
    Date: 2017–09
  28. By: Gurnain Pasricha
    Abstract: This paper attempts to borrow the tradition of estimating policy reaction functions in monetary policy literature and apply it to capital controls policy literature. Using a novel weekly dataset on capital controls policy actions in 21 emerging economies over the period 1 January 2001 to 31 December 2015, I examine the mercantilist and macroprudential motivations for capital control policies. I introduce a new proxy for mercantilist motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. There is clear evidence that past emerging-market policy systematically responds to both mercantilist and macroprudential motivations. The choice of instruments is also systematic: policy-makers respond to mercantilist concerns by using both instruments — inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. I also find that policy is acyclical to foreign debt but is countercyclical to domestic bank credit to the private non-financial sector. The adoption of explicit financial stability mandates by central banks or the creation of inter-agency financial stability councils increased the weight of macroprudential factors in the use of capital controls policies. Countries with higher exchange rate pass-through to export prices are more responsive to mercantilist concerns.
    Keywords: Exchange rate regimes, Financial stability, Financial system regulation and policies, International topics
    JEL: F3 F4 F5 G0 G1
    Date: 2017
  29. By: Cuiabano, Simone; Opoku-Afari, Maxwell
    Abstract: A major challenge for most countries in Sub-Saharan Africa is the evaluation of the exchange rate. This is more so in the East African Community (EAC) where macroeconomic and exchange rate management has been in particular challenged by massive foreign aid inflows partly as a result of Heavily Indebted Poor Countries (HIPC) initiative and other debt reliefs. In addition; improved macroeconomic management in the last decade attracted both short and medium to long term inflows to the region, as foreign investors turn to developing and emerging economies for yield. In this paper we estimate the fundamental equilibrium exchange rate (FEER) model for all the countries in the EAC and we assess the convergence of existing exchange rate regimes in the EAC. Our main contribution is that this exercise may contribute as a useful background for the ultimate decision of which exchange rate management framework will best fit the region during the transition period to monetary union.
    Keywords: Real exchange rates; EAC countries; cointegration; exchange rate regimes
    JEL: C32 F31 F41
    Date: 2017–09

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