|
on Monetary Economics |
| By: | Nautz, Dieter; Netsunajew, Aleksei; Strohsal, Till |
| Abstract: | We introduce structural VAR analysis as a tool for investigating the anchoring of inflation expectations. We show that U.S. consumers’ inflation expectations are anchored in the long run because macro-news shocks are long-run neutral for long-term inflation expectations. The identification of structural shocks helps to explain why inflation expectations deviate from the central bank’s target. |
| JEL: | E31 E52 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168075&r=mon |
| By: | Shirota, Toyoichiro |
| Abstract: | This study develops a framework to identify persistent and transitory shocks in exchange-rate movements and to estimate the shock-specific exchange-rate pass-through to domestic prices. The framework combines a dataset of a long time series of exchange-rate forecasts since the 1980s with a range restriction that is a natural generalization of the standard sign restriction. The empirical results show that exchange rate pass-through is higher when a persistent shock dominates exchange-rate movements. The composition of persistent and transitory shocks varies over time. This study asserts that time variations of exchange rate pass-through are at least partly attributable to differences in shock-specific pass-through rates and variations in the composition of shocks over time. Applying our identification procedure to disaggregated prices of the CPI, we also find that a correlation between pass-through coefficients and frequencies of price adjustments is shock dependent. Specifically, the positive correlation, which is reported in Gopinath and Itskhoki [2010], disappears, when exchange-rate movements are transitory. |
| Keywords: | exchange-rate pass-through, exchange-rate persistence, range restriction, survey expectation, |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:hok:dpaper:311&r=mon |
| By: | Nidhaleddine Ben Cheikh; Christophe Rault |
| Abstract: | In this paper, we evaluate the first-stage pass-through, namely the responsiveness of import prices to the exchange rate changes, for a sample of euro area (EA) countries. Our study aims to shed further light on the role of microeconomic factors vs. macroeconomic factors in influencing the extent of the exchange rate pass-through (ERPT). As a first step, we conduct a sectoral analysis using disaggregated import prices data. We find a much higher degree of pass-through for more homogeneous goods and commodities, such as oil and raw materials, than for highly differentiated manufactured products, such as machinery and transport equipment. Our results confirm that cross-country differences in pass-through rates may be due to divergences in the product composition of imports. The higher share of imports from sectors with lower degrees of pass-through, the lower ERPT for an economy will be. In a next step, we investigate for the impact of some macroeconomics factors or common events experienced by EA members on the extent of pass-through. Using the System Generalized Method of Moments within a dynamic panel-data model, our estimates indicate that decline of import-price sensitivity to the exchange rate is not significant since the introduction of the single currency. Our findings suggest instead that the weakness of the euro during the first three years of the monetary union significantly raised the extent of the ERPT. This outcome could explain why the sensitivity of import prices has not fallen since 1999. We also point out a significant role played by the inflation in the Eurozone, as the responsiveness of import prices to exchange rate fluctuations tends to decline in a low and more stable inflation environment. Overall, our findings support the view that the extent of pass-through is comprised of both macro- and microeconomic aspects that policymakers should take into account. |
| Keywords: | exchange rate pass-through, import prices, dynamic panel data |
| JEL: | E31 F31 F40 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6366&r=mon |
| By: | Djuric, Uros; Neugart, Michael |
| Abstract: | We fielded a representative survey among the German population randomly assigning respondents to various unconventional monetary policy scenarios that raise household income. We find that in all policy treatments people spend almost 40% of the transfer. Spending shares are independent of whether the transfer is debt financed and provided by the government or provided by the central bank as "helicopter money". |
| JEL: | E21 E52 E58 E63 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168062&r=mon |
| By: | Guillaume A. Khayat (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille) |
| Abstract: | Credit institutions borrow liquidity from the central bank’s lending facility and deposit (excess) reserves at its deposit facility. The central bank directly controls the corridor: the non-market interest rates of its lending and deposit facilities. Modifying the corridor changes the conditions on the interbank market and allows the central bank to set the short-term interest rate in the economy. This paper assesses the use of the corridor’s width as an additional tool for monetary policy. Results indicate that a symmetric widening of the corridor boosts output and welfare while addressing the central bank’s concerns over higher risk-taking in the economy. |
| Keywords: | Monetary policy, interbank market, heterogeneous interbank frictions, the corridor, excess reserves, financial intermediation |
| JEL: | E52 E58 E44 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1735&r=mon |
| By: | Levrero, Enrico Sergio; Deleidi, Matteo |
| Abstract: | The aim of this paper is to assess – on both theoretical and empirical grounds – the two main views regarding the money creation process,namely the endogenous and exogenous money approaches. After analysing the main issues and the related empirical literature, we will apply a VAR and VECM methodology to the United States in the period 1959-2016 to assess the causal relationship between a number of critical variables that are supposed to determine the money supply, i.e., the monetary base, bank deposits and bank loans. The empirical analysis carried out supports several propositions of the endogenous money approach. In particular, it shows that for the United States in the years 1959-2016 (i) bank loans determine bank deposits and (ii) bank deposits in turn determine the monetary base. Our conclusion is that money supply is mainly determined endogenously by the lending activity of commercial banks. |
| Keywords: | Money endogeneity; USA; Money Supply |
| JEL: | C32 E40 E50 E51 G21 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:81970&r=mon |
| By: | Chris McDonald (Reserve Bank of New Zealand) |
| Abstract: | Forecasts of non-tradables inflation have been produced using Phillips curves, where capacity pressure and inflation expectations have been the key drivers. The Bank had previously used the survey of 2-year ahead inflation expectations in its Phillips curve. However, from 2014 non-tradables inflation was weaker than the survey and estimates of capacity pressure suggested. Bank research indicated the weakness in non-tradables inflation may have been linked to low past inflation and its impact on pricing behaviour. This note evaluates whether measures of past inflation could have been used to produce forecasts of inflation that would have been more accurate than using surveys of inflation expectations. It does this by comparing forecasts for annual non-tradablesinflation one year ahead. Forecasts are produced using Phillips curves that incorporate measures of past inflation or surveys of inflation expectations, and other information available at the time of each Monetary Policy Statement (MPS). This empirical test aims to determine the approach that captures pricing behaviour best, highlighting which may be best for forecasting going forward. The results show that forecasts constructed using measures of past inflation have been more accurate than using survey measures of inflation expectations, including the 2-year ahead survey measure previously used by the Bank. In addition, forecasts constructed using measures of past inflation would have been significantly more accurate than the Bank’s MPS forecasts since 2009, and only slightly worse than these forecasts before the global financial crisis (GFC). The consistency of forecasts using past-inflation measures reduces the concern that this approach is only accurate when inflation is low, and suggests it may be a reasonable approach to forecasting non-tradables inflation generally. From late 2015, the Bank has assumed that past inflation has affected domestic price-setting behaviour more than previously. As a result, monetary policy has needed to be more stimulatory than would otherwise be the case. This price-setting behaviour is assumed to persist, and is consistent with subdued non-tradables inflation and low nominal wage inflation in 2017. |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2017/04&r=mon |
| By: | Carlo Altavilla (Name: European Central Bank and CSEF); Miguel Boucinha (European Central Bank); José-Luis Peydró (ICREA-UPF, CREI, BGSE) |
| Abstract: | We analyse the impact of standard and non-standard monetary policy measures on bank profitability. For empirical identification, the analysis focuses on the euro area, thereby exploiting substantial bank and country heterogeneity within a monetary union where the central bank has implemented a broad range of unconventional policies, including quantitative easing and negative interest rates. We use both proprietary and commercial data on individual bank balance sheets and financial market prices. Our results show that monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Importantly, our analysis indicates that the main components of bank profitability are asymmetrically affected by accommodative monetary conditions, with a positive impact on loan loss provisions and non-interest income largely offsetting the negative one on net interest income. We also find that a protracted period of low interest rates might have a negative effect on profits that, however, only materialises after a long period of time and tends to be counterbalanced by improved macroeconomic conditions. In addition, while more operationally efficient banks benefit more from monetary policy easing, banks engaging more extensively in maturity transformation experience a higher increase in profitability after a steepening of the yield curve. Finally, we assess the impact of unconventional monetary policies on market-based measures of expected bank profitability and credit risk, by employing an event study analysis using high frequency data, and find that accommodative monetary policies tend to increase bank stock returns and reduce credit risk. |
| Keywords: | bank profitability, monetary policy, lower bound, quantitative easing, negative rates |
| JEL: | E52 E43 G01 G21 G28 |
| Date: | 2017–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:486&r=mon |
| By: | Raphael A. Auer; Claudio Borio; Andrew Filardo |
| Abstract: | Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional trade-based measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation. |
| Keywords: | globalization, inflation, Phillips curve, monetary policy, global value chain, production structure, international inflation synchronisation, input-output linkages, supply chain |
| JEL: | E31 E52 E58 F02 F41 F42 F14 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6387&r=mon |
| By: | Giovanni Caggiano (Department of Economics, Monash University); Efrem Castelnuovo (Melbourne Institute of Applied Economic and Social Research); Gabriela Nodari (Reserve Bank of Australia) |
| Abstract: | We investigate the role played by systematic monetary policy in the United States in tackling the real effects of uncertainty shocks in recessions and expansions. We model key indicators of the business cycle with a nonlinear vector autoregression model that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated with jumps in financial volatility. Our results show that uncertainty shocks hitting in recessions trigger a more abrupt drop and a faster recovery in real economic activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic US monetary policy in stabilising real activity in the aftermath of an uncertainty shock is greater in expansions. Finally, we provide empirical and narrative evidence pointing to a risk management approach by the Federal Reserve. |
| Keywords: | uncertainty shocks; nonlinear smooth transition vector autoregressions; generalised impulse response functions; systematic monetary policy |
| JEL: | C32 E32 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2017-06&r=mon |
| By: | Brunnhuber, Stefan |
| Abstract: | This talk aims to provide an argument for a parallel, optional, complementary currency system in order to overcome the constraints of the global economy and finance social and ecological projects on a global level. This argument goes beyond regulatory efforts and co-financed redistribution. The advantages of implementing this or a similar mechanism are manifold: firstly, it can be implemented in a fast and targeted manner and is relatively cheap. Secondly, it would have an anticyclical, antiinflationary and resilient impact on our trading and payment system. Thirdly, it builds on findings in systems theory, thus avoiding the tedious discussion between the different schools of economics. Fourthly, it addresses the magnitude, volume and significance of the global challenges ahead. In short: this argument is based on a new kind of thinking on how to design a monetary ecosystem to make the world a better place. |
| Keywords: | Sustainable Development Goals (SDGs),financing global commons,parallel optional currency |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:128&r=mon |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research); Deepak Kumar Agarwal |
| Abstract: | We examine the strength and efficacy of transmission from the policy rate and liquidity provision to market rates in India, using event window regression analysis. We find the interest rate transmission channel is dominant, but the quantity channel has an indirect impact in increasing the size of interest rate pass through. The speed of response is faster where there is more market depth. Short term liquidity matters for short term rates, especially where markets are thin and long-term liquidity for longer term government securities. Asymmetry, or more transmission during tightening, finds little support, but pass through is faster during tightening. Market rates respond similarly to policy rate changing direction. The quantum channel directly contributes more when in sync with the interest rate channel only occasionally, but contributes indirectly by increasing the size of coefficients. Implications for policy are drawn out. |
| Keywords: | Monetary transmission; Repo Rate; market rates; short and long-term liquidity |
| JEL: | E51 E58 E42 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2017-017&r=mon |
| By: | Francis Leni Anguyo (School of Economics, University of Cape Town, Rondebosch, South Africa and Research Department, Bank of Uganda, Kampala, Uganda); Rangan Gupta (University of Pretoria, Pretoria, South Africa and IPAG Business School, Paris, France); Kevin Kotzé (School of Economics, University of Cape Town, Rondebosch, South Africa) |
| Abstract: | This paper considers the measurement of inflation persistence in Uganda and how this has changed over time. As the data does not follow a normal distribution, we make use of the quantile regression approach to investigate how various shocks may affect the rate of inflation within different quantiles. The measures of inflation include headline inflation, the central bank's measure of core inflation, and an alternative measure of core inflation. The results suggest that while a unit root is found in many of the upper quantiles of headline inflation, there is evidence of mean reversion within the lower quantiles. In addition, we find higher levels of persistence after 2006 and during the inflation-targeting period. When considering the degree of persistence in the central bank's measure of core inflation, the results suggest that there is a unit root in this measure during the inflation-targeting period. In addition, the alternative measure of core inflation, which is derived from a wavelets transformation, provides similar results. However, this measure is less volatile and more correlated with headline inflation. All the results suggest that large positive deviations from the mean would influence the permanent behaviour of inflation, while small negative deviations are relatively short-lived. |
| Keywords: | Inflation persistence, Quantile regression, Structural break, monetary policy |
| JEL: | C22 E31 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201772&r=mon |
| By: | Raquel A. Ramos (Centre d'Economie de l'Université de Paris Nord (CEPN)) |
| Abstract: | The currencies of a few emerging market economies (EME) have being following a specific dynamic since the early 2000s: they are strongly connected to financial markets internationally, appreciating in moments of tranquility and presenting sharp depreciations in peaks of uncertainty. What is the mechanism behind this specific dynamic that contradicts mainstream exchange-rate theories? To answer this question, this article applies the Minskyan framework to the context of money managers and their portfolio allocation decisions. The approach allows the analysis of these currencies through money managers’ decisions, putting forward that these might float according to their balance-sheet constraints - reasons not related to the currencies themselves, but to money managers’ assets, liabilities, and currency mismatch. The result is a dynamic characterized by deviation-amplifying system, the opposite of the equilibrium-seeking mechanism needed for clearing markets, and high frequency of depreciations associated to the global extent of these institutions’ balance-sheet. |
| Keywords: | Exchange rates, emerging market economies, Minsky |
| JEL: | F41 F31 B50 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:upn:wpaper:2017-18&r=mon |
| By: | Raphael A. Auer; Andrei A. Levchenko; Philip Sauré |
| Abstract: | We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disination and high inflation. |
| Keywords: | international inflation synchronization, globalization, inflation, input linkages, monetary policy, global value chain, production structure, input-output linkages, supply chain |
| JEL: | E31 E52 E58 F02 F14 F33 F41 F42 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6395&r=mon |
| By: | Jef Boeckx; Maite De Sola Perea; Gert Peersman |
| Abstract: | We use an original monthly dataset of 131 individual euro area banks to examine the effectiveness and transmission mechanism of the Eurosystem’s credit support policies since the start of the crisis. First, we show that these policies have indeed been succesful in stimulating the credit flow of banks to the private sector. Second, we find support for the “bank lending view†of monetary transmission. Specifically, the policies have had a greater impact on loan supply of banks that are more constrained to obtain unsecured external funding, i.e. small banks (size effect), banks with less liquid balance sheets (liquidity effect), banks that depend more on wholesale funding (retail effect) and low-capitalized banks (capital effect). The role of bank capital is, however, ambiguous. Besides the above favorable direct effect on loan supply, lower levels of bank capitalization at the same time mitigate the size, retail and liquidity effects of the policies. The drag on the other channels has even been dominant during the sample period, i.e. better capitalized banks have on average responded more to the credit support policies of the Eurosystem as a result of more favourable size, retail and liquidity effects. |
| Keywords: | unconventional monetary policy, bank lending, monetary transmission mechanism |
| JEL: | E51 E52 E58 G01 G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6442&r=mon |
| By: | Jonathan Chiu (Bank of Canada); Thorsten Koeppl (Queen's University) |
| Abstract: | How well can a cryptocurrency serve as a means of payment? We study the optimal design of cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade. The challenge for cryptocurrencies is to overcome double-spending by relying on competition to update the blockchain (costly mining) and by delaying settlement. We estimate that the current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and relies exclusively on money growth rather than transaction fees to finance mining rewards. We also point out that cryptocurrencies can potentially challenge retail payment systems provided scaling limitations can be addressed. |
| Keywords: | Cryptocurrency, Blockchain, Bitcoin, Double Spending, Payment Systems |
| JEL: | E4 E5 L5 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1389&r=mon |
| By: | Forti Grazzini, Caterina; Rieth, Malte |
| Abstract: | The paper studies the relation between the US-Dollar/Euro exchange rate and US and euro area interest rates during normal and crisis times. We describe each asset price within a multifactor model and identify the causal contemporaneous relations through heteroskedasticity. We find that US rates and macroeconomic conditions dominate exchange rate and interest rate movements before and during the global financial crisis, while this pattern sharply reverses during the European debt crisis. |
| JEL: | E44 F31 G1 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168281&r=mon |
| By: | Altavilla, Carlo; Boucinha, Miguel; Peydró, José-Luis |
| Abstract: | We analyse the impact of standard and non-standard monetary policy measures on bank profitability. For empirical identification, the analysis focuses on the euro area, thereby exploiting substantial bank and country heterogeneity within a monetary union where the central bank has implemented a broad range of unconventional policies, including quantitative easing and negative interest rates. We use both proprietary and commercial data on individual bank balance sheets and financial market prices. Our results show that monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Importantly, our analysis indicates that the main components of bank profitability are asymmetrically affected by accommodative monetary conditions, with a positive impact on loan loss provisions and non-interest income largely offsetting the negative one on net interest income. We also find that a protracted period of low interest rates might have a negative effect on profits that, however, only materialises after a long period of time and tends to be counterbalanced by improved macroeconomic conditions. In addition, while more operationally efficient banks benefit more from monetary policy easing, banks engaging more extensively in maturity transformation experience a higher increase in profitability after a steepening of the yield curve. Finally, we assess the impact of unconventional monetary policies on market-based measures of expected bank profitability and credit risk, by employing an event study analysis using high frequency data, and find that accommodative monetary policies tend to increase bank stock returns and reduce credit risk. JEL Classification: E52, E43, G01, G21, G28 |
| Keywords: | bank profitability, lower bound, monetary policy, negative rates, quantitative easing |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172105&r=mon |
| By: | Quint, Dominic; Rabanal, Pau |
| Abstract: | After the recent crisis, central banks deployed unconventional monetary policies (UMP) to affect credit conditions and to provide liquidity at a large scale. We study if UMP should still be used when economic conditions normalize. Using an estimated non-linear DSGE model with a banking sector and long-term debt for the US, we show that the benefits of using UMP in normal times are substantial. However, the benefits are shock-dependent and mostly arise when the economy is hit by financial shocks. |
| JEL: | C32 E32 E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc17:168218&r=mon |
| By: | Yaneer Bar-Yam; Jean Langlois-Meurinne; Mari Kawakatsu; Rodolfo Garcia |
| Abstract: | We consider the relationship between economic activity and intervention, including monetary and fiscal policy, using a universal dynamic framework. Central bank policies are designed for growth without excess inflation. However, unemployment, investment, consumption, and inflation are interlinked. Understanding dynamics is crucial to assessing the effects of policy, especially in the aftermath of the financial crisis. Here we lay out a program of research into monetary and economic dynamics and preliminary steps toward its execution. We use principles of response theory to derive implications for policy. We find that the current approach, which considers the overall money supply, is insufficient to regulate economic growth. While it can achieve some degree of control, optimizing growth also requires a fiscal policy balancing monetary injection between two dominant loop flows, the consumption and wages loop, and investment and returns loop. The balance arises from a composite of government tax, entitlement, subsidy policies, corporate policies, as well as monetary policy. We show empirically that a transition occurred in 1980 between two regimes--an oversupply to the consumption and wages loop, to an oversupply of the investment and returns loop. The imbalance is manifest in savings and borrowing by consumers and investors, and in inflation. The latter increased until 1980, and decreased subsequently, resulting in a zero rate largely unrelated to the financial crisis. Three recessions and the financial crisis are part of this dynamic. Optimizing growth now requires shifting the balance. Our analysis supports advocates of greater income and / or government support for the poor who use a larger fraction of income for consumption. This promotes investment due to growth in demand. Otherwise, investment opportunities are limited, capital remains uninvested, and does not contribute to growth. |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1710.06285&r=mon |