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

  1. Unconventional Monetary Policy in a Financially Heterogeneous Monetary Union By Benjamin Schwanebeck
  2. CNB Transparency and Monetary Policy By Katja Gattin Turkalj; Igor Ljubaj
  3. The international transmission of monetary policy through financial centres: evidence from the United Kingdom and Hong Kong. By Hills, Robert; Ho, Kelvin; Reinhardt, Dennis; Sowerbutts, Rhiannon; Wong, Eric; Wu, Gabriel
  4. Can inflation contract discipline central bankers when agents are learning? By Marine Charlotte André; Meixing Dai
  5. Effects of the central bank’s communications in Colombia. A content analysis By Luis E. Arango; Javier Pantoja; Carlos Velásquez
  6. Monetary Policy Uncertainty By Lucas F. Husted; John H. Rogers; Bo Sun
  7. The Sovereign Money Initiative in Switzerland: An Economic Assessment By Bacchetta, Philippe
  8. The Effect of News Shocks and Monetary Policy By Luca Gambetti; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
  9. The Liquidity-Augmented Model of Macroeconomic Aggregates By Athanasios Geromichalos; Lucas Herrenbrueck
  10. Monetary dynamics in the euro area : a disaggregate panel approach By J. Liu; C.J.M. Kool
  11. Intermediation Markups and Monetary Policy Passthrough By Andreas Schrimpf; Semyon Malamud
  12. An Unintended Consequence of Uncoordinated International Monetary Policy on Central America By Monica Hernandez
  13. Monetary Policy through Production Networks: Evidence from the Stock Market By Ali Ozdagli; Michael Weber
  14. The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model By Vogel, Lukas; Hohberger, Stefan; Priftis, Romanos
  15. "The Paper Money of Colonial North Carolina, 1712-1774" By Farley Grubb
  16. Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios By Ruediger Bachmann; Sebastian Rüth
  17. Financial Constraints and Nominal Price Rigidities By Almut Balleer; Nikolay Hristov; Dominik Menno
  18. Long-run Money Demand in Switzerland By Gerlach, Stefan
  19. Macroeconomic Stabilization, Monetary-Fiscal Interactions, and Europe's Monetary Union By Corsetti, Giancarlo; Dedola, Luca; Jarocinski, Marek; Mackowiak, Bartosz Adam; Schmidt, Sebastian
  20. Interest rates and house prices in the United States and around the world By Gregory Sutton; Dubravko Mihaljek; Agnė Subelytė
  21. Central Bank Communication and the Yield Curve By Paul Whelan; Gyuri Venter; Andrea Vedolin; Matteo Leombroni
  22. Measuring inflation expectations uncertainty using high-frequency data By Joshua C C Chan; Yong Song
  23. Exit Strategies, Capital Flight and Speculative Attacks: Europe's Version of the Trilemma By Steiner; Steinkamp; Westermann
  24. Flow specific capital controls for emerging markets By Chris Garbers; Guangling Liu
  25. Overnight Reverse Repurchase (ON RRP) Operations and Uncertainty in the Repo Market By Zeynep Senyuz; Manjola Tase
  26. Real and Financial Shocks, Exchange Rate Regimes and the Probability of a Currency Crisis By Nakatani, Ryota
  27. Exchange rate expectations since the financial crisis: Performance evaluation and the role of monetary policy and safe haven By Beckmann, Joscha; Czudaj, Robert
  28. The Increased Role of the Federal Home Loan Bank System in Funding Markets, Part 3 : Implications for Financial Stability By Stefan Gissler; Borghan N. Narajabad
  29. The Day of the Week Effect in the Crypto Currency Market By Guglielmo Maria Caporale; Alex Plastun
  30. The Increased Role of the Federal Home Loan Bank System in Funding Markets, Part 2 : Recent Trends and Potential Drivers By Stefan Gissler; Borghan N. Narajabad
  31. Money and Credit: Lessons of the Irish bank strike of 1970 By Malte Krüger
  32. The Currency Union Effect: A PPML Re-assessment with High-Dimensional Fixed Effects By Mario Larch; Joschka Wanner; Yoto V. Yotov; Thomas Zylkin
  33. Equilibrium Real Interest Rates and Secular Stagnation: An Empirical Analysis for Euro-Area Member Countries By Ansgar Belke; Jens Klose
  34. The Increased Role of the Federal Home Loan Bank System in Funding Markets, Part 1 : Background By Stefan Gissler; Borghan N. Narajabad

  1. By: Benjamin Schwanebeck (University of Kassel)
    Abstract: The cross-country interbank market in the euro area was a crucial transmission channel of financial stress. By using a two-country DSGE model of a financially heterogeneous monetary union where banks in one country lend funds to their foreign counterparts, I examine its role as shock amplifier and the implications for unconventional policy interventions Using the international interbank market to pool and insure against shocks is not neutral, the resulting spillovers rather act as shock multipliers on union output. Country-specific unconventional policies of direct lending to firms seem to be the most effective interventions in terms of union and relative output stabilization. The higher the size of the interbank market, the more effective are these policies in terms of union stabilization. The effectiveness of interventions in the interbank market seems to be very sensitive to the type of shock and the interbank market size. Hence, the central bank should rather shy away from this policy as it is only useful under specific circumstances.
    Keywords: financial intermediation; financial frictions; interbank market; monetary union; unconventional policy;
    JEL: E32 E44 E58
    Date: 2017
  2. By: Katja Gattin Turkalj (The Croatian National Bank, Croatia); Igor Ljubaj
    Abstract: Central bank transparency implies clarity and openness in the implementation of monetary policy and comprehensive communication with the professional and general public. Transparency includes various aspects, primarily the transparency of monetary policy instruments as well as procedural transparency and transparency of implementation. It is closely connected to central bank independence, which implies the highest level of accountability. In addition, transparency is significantly determined by the monetary policy framework and, particularly, by the exchange rate arrangement. Literature measuring central bank transparency is relatively scarce, and established measures are biased in favour of inflation targeting regimes, which in the literature are considered the most transparent. Therefore, essential monetary framework characteristics can, by itself, make individual central banks more or less transparent. If various monetary policy frameworks and exchange rate arrangements are considered, the CNB's transparency is around the average of peer countries, while regarding financial stability, it is significantly above the average. The Croatian National Bank increased its transparency from 2010 to 2017, in line with the general trends.
    Keywords: transparency, central bank, monetary policy, CNB
    JEL: E52 E58 E61
    Date: 2017–10
  3. By: Hills, Robert (Bank of England); Ho, Kelvin (Hong Kong Monetary Authority); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England); Wong, Eric (Hong Kong Monetary Authority); Wu, Gabriel (Hong Kong Monetary Authority)
    Abstract: This paper explores the cross-border transmission of monetary policy by comparing and contrasting the results for two major international financial centres: Hong Kong and the United Kingdom. We examine the effect of monetary policy in the US, euro area and Japan, on UK and Hong Kong-resident banks’ domestic lending behaviour, using individual bank-level data. Focusing on financial interconnections and other balance sheet characteristics as a transmission mechanism, we find that both of these factors play an important role in the transmission of foreign monetary policy. We are able to establish evidence for both a bank funding and bank portfolio channel of monetary policy, for both Hong Kong and the United Kingdom. There are important differences between the two countries; in particular, the currency denomination of lending appears to play a major role only in the United Kingdom, which probably reflects Hong Kong’s linked exchange rate system by which the HK dollar is pegged with the US dollar. These results contrast to the largely inconclusive results from previous studies, whose aggregate nature may have masked offsetting individual bank effects.
    Keywords: International financial linkages; monetary policy transmission; bank lending
    JEL: E52 F42 G21
    Date: 2017–10–16
  4. By: Marine Charlotte André; Meixing Dai
    Abstract: This paper studies how the government should design a linear inflation contract to deal with the time-inconsistency problem arising from incentives for the central bank to exploit the inflation-output tradeoff with an overambitious output-gap objective when private expectations are based on adaptive learning. An intertemporal tradeoff due to learning leads the central bank to accommodate less the effect of inflation expectations and cost-push shocks on inflation. An optimal linear inflation contract is able to achieve many of the benefits, i.e., reducing inflation bias and stabilization bias, resulting from central bank conservatism and inflation targeting rules. The government can impose either a long-term or a short-term contract. The first is equivalent to appointing a hawkish central banker. The second implies that inflation penalty rate should be adjusted for inflation expectations in each period, and could be positive or negative, i.e., the central banker should shift between hawkish and dovish stances depending on inflation expectations and the speed of learning.
    Keywords: adaptive learning, inflation bias, stabilization bias, inflation contract, monetary policy delegation, central bank conservatism, optimal monetary policy.
    JEL: C62 D83 D84 E52 E58
    Date: 2017
  5. By: Luis E. Arango (Banco de la República de Colombia); Javier Pantoja; Carlos Velásquez
    Abstract: We carry out a reading analysis that consists of two elements. First, we observe the coherence between monetary policy actions and press releases. In this case, we found that inflation and growth are significant themes in the adoption of the policy measures between September 2004 and March 2016. Moreover, when inflation and economic growth are both raising the monetary actions becomes tighter. Nevertheless, economic activity has always coefficients greater than those of inflation. In second place, the monetary authority goes beyond explanations in the press releases: there are some traces of forward guidance in a number of communications with different degrees of commitment. We also assess whether Colombia’s Central Bank uses its communications as a complementary monetary policy tool and estimate the effectiveness of this strategy. To do so, we use a machine learning technique to unveil the semantic structure of the central bank´s communications. This technique allows us to extract some semantic factors that are used in a structural VAR to identify and measure the impact of these communications on inflation expectations. Our results indicate that Colombia’s Central Bank uses communications as a monetary policy tool and that this strategy influences market inflation expectations. Classification JEL: C4, E4, E5
    Keywords: text mining, content analysis, latent semantic analysis, central bank’s communications
    Date: 2017–10
  6. By: Lucas F. Husted; John H. Rogers; Bo Sun
    Abstract: We construct new measures of uncertainty about Federal Reserve policy actions and their consequences - monetary policy uncertainty (MPU) indexes. We show that, under a variety of VAR identification schemes, positive shocks to uncertainty about monetary policy robustly raise credit spreads and reduce output. The effects are of comparable magnitude to those of conventional monetary policy shocks. We evaluate the usefulness of our MPU indexes, and examine the influence of Fed communication. Our analysis suggests that policy rate normalization that is accompanied by reduced uncertainty can help neutralize the contractionary effects of the rate increases themselves.
    Keywords: Monetary policy uncertainty ; VAR identification ; FOMC communication
    JEL: E40 E50
    Date: 2017–10
  7. By: Bacchetta, Philippe
    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.
    Date: 2017–10
  8. By: Luca Gambetti (Universitat Autònoma de Barcelona); Dimitris Korobilis (University of Essex); John D. Tsoukalas (University of Glasgow); Francesco Zanetti (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 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.
    JEL: E20 E32 E43 E52
    Date: 2017–09
  9. By: Athanasios Geromichalos (University of California – Davis); Lucas Herrenbrueck (Simon Fraser University)
    Abstract: We propose a new model of liquidity in the macroeconomy. It is simple and tractable, yet takes the foundations of liquidity seriously, and can thus be precise about the implementation, effects, and optimality of monetary policy. The model shines light on some open issues in macroeconomics: the effect of asset purchases, the tension between two channels through which the price of liquidity affects the economy (Friedman’s real balance effect vs Mundell’s and Tobin’s asset substitution effect), the liquidity trap, and the importance of using the right interest rate for empirical analysis.
    Keywords: monetary theory, monetary policy, financial frictions, liquidity trap
    JEL: E31 E43 E44 E52
    Date: 2017–10
  10. By: J. Liu; C.J.M. Kool
    Abstract: In this paper, we use panel cointegration estimation to analyze the determinants of heterogeneous monetary dynamics in ten euro area member countries over the period 1999-2013. In particular, we investigate the role of real house prices, real equity prices and cross border bank credit. For the period up till 2008 we find a significantly positive income effect, a significantly negative interest rate effect, a significantly negative effect of net foreign credit and a significantly positive housing price effect. Inclusion of the financial crisis shows evidence of a structural break in money demand and some sign reversals, most significantly so for the interest rate effect. Finally, we find evidence of a divide in the long-term money demand relation between the Northern and Southern parts of the euro area, potentially complicating monetary policy.
    Date: 2017–09
  11. By: Andreas Schrimpf (Bank for International Settlements); Semyon Malamud (Ecole Polytechnique Federale de Lausanne)
    Abstract: We introduce intermediation frictions into the classical monetary model with fully flexible prices. Trade in financial assets happens through intermediaries who bargain over a full set of state-contingent claims with their customers. Monetary policy is redistributive and affects intermediaries' ability to extract rents; this opens up a new channel for transmission of monetary shocks into rates in the wider economy, which may be labelled the markup channel of monetary policy. Passthrough efficiency depends crucially on the anticipated sensitivity of future monetary policy to future stock market returns (the ``Central Bank Put"). The strength of this put determines the room for maneuver of monetary policy: when it is strong, monetary policy is destabilizing and may lead to market tantrums where deteriorating risk premia, illiquidity and markups mutually reinforce each other; when the put is too strong, passthrough becomes fully inefficient and a surprise easing even begets a rise in real rates.
    Date: 2017
  12. By: Monica Hernandez (Department of Economics, New School for Social Research)
    Abstract: This research examines the change in the pattern of foreign indebtedness of countries in Central America in the 2010s and its relation to the second phase of global liquidity generated with the implementation of rounds of quantitative easing (QE) policies by developed countries after the 2008 economic crisis, as well as its implications. Drawing on an analysis of the Central American countries’ sectoral balances, their historic dependence on bank lending, and on their contemporary sources of funding, we find that the international bond market has become an important source of debt for these economies in the last decade but that, in contrast to the case of some big emerging economies around the world, the role of non-financial corporations’ foreign bond issuance is not so relevant in the case of Central America. By classifying these countries’ international debt securities by residence and nationality of issuer, we also identify another difference with big emerging economies and conclude that the financial fragility of some of these countries has been exacerbated more by the general government’s foreign bonds issuance than by the financial and non-financial corporations’ ones.
    Keywords: Monetary policy coordination, quantitative easing, developing countries
    JEL: N1 E58 E61
    Date: 2017–10
  13. By: Ali Ozdagli; Michael Weber
    Abstract: Monetary policy shocks have a large impact on aggregate stock market returns in narrow event windows around press releases by the Federal Open Market Committee. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct (demand) effect and an indirect (network) effect. We attribute 50%-85% of the overall effect to indirect effects. The decomposition is robust to different sample periods, event windows, and types of announcements. Direct effects are larger for industries selling most of the industry output to end-consumers compared to other industries. We find similar evidence of large indirect effects using ex-post realized cash-flow fundamentals. A simple model with intermediate inputs guides our empirical methodology. Our findings indicate that production networks might be an important propagation mechanism of monetary policy to the real economy.
    Keywords: input-output linkages, spillover effects, asset prices, high frequency identification
    JEL: E12 E31 E44 E52 G12 G14
    Date: 2017
  14. By: Vogel, Lukas; Hohberger, Stefan; Priftis, Romanos
    Abstract: This paper analyses the macroeconomic effects of the ECB’s quantitative easing using an open-economy DSGE model estimated with Bayesian techniques. Shock decompositions for real GDP growth and CPI inflation suggest positive contributions of up to 0.4 and 0.5 pp in the standard linearized version of model. Using piecewise linear solution techniques to allow for an occasionally binding zero-bound constraint raises the positive impact on growth and inflation to 0.8 and 0.7 pp.
    JEL: E52
    Date: 2017
  15. By: Farley Grubb (Department of Economics, University of Delaware)
    Abstract: Beginning in 1712, North Carolina's assembly emitted its own paper money and maintained some of its paper money in public circulation for the rest of the colonial period. This paper money has been reviled as an archetype of what was bad about the paper monies issued by American colonial legislatures. Yet little systematic analysis of North Carolina's paper money has been undertaken. We correct that here. We reconstruct North Carolina's paper money regime from original sources—providing yearly quantitative data on printings, net new emissions, redemptions and removals, amounts remaining in circulation, denominational structure, as well as the paper money's current market value in pounds sterling. We identify different paper money regimes based on how the assembly structured and executed its paper money laws. We model and estimate how the market value of this money was determined. We compare the quantity theory of money with an asset-pricing model that treats the money as zero-coupon bonds to see which explains the observed market value of the paper money better. The asset-pricing model wins by a mile. Finally, we explore counterfactual redemption architectures to show how redemption affected monetary performance in periods of value collapse.
    Keywords: asset money, bills of credit, redemption, transaction premium, zero-coupon bonds
    JEL: E42 E51 G12 N11 N21
    Date: 2017
  16. By: Ruediger Bachmann; Sebastian Rüth
    Abstract: What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? In a structural VAR, GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
    Keywords: loan-to-value ratios, monetary policy, residential investment, structural VAR, Cholesky identification, Taylor rules
    JEL: E30 E32 E44 E52
    Date: 2017
  17. By: Almut Balleer; Nikolay Hristov; Dominik Menno
    Abstract: This paper investigates how financial market imperfections and the frequency of price adjustment interact. Based on new firm-level evidence for Germany, we document that financially constrained firms adjust prices more often than their unconstrained counterparts, both upwards and downwards. We show that these empirical patterns are consistent with a partial equilibrium menu-cost model with a working capital constraint. We then use the model to show how the presence of financial frictions changes profits and the price distribution of firms compared to a model without financial frictions. Our results suggest that tighter financial constraints are associated with lower nominal rigidities, higher prices and lower output. Moreover, in response to aggregate shocks, aggregate price rigidity moves substantially, the response of inflation is dampened, while output reacts more in the presence of financial frictions. This means that financial frictions make the aggregate supply curve flatter for all calibrations considered in our model. We show that this differs fundamentally from models in which the extensive margin of price adjustment is absent (Rotemberg, 1982) or constant (Calvo, 1983). Hence, the interaction of financial frictions and the frequency of price adjustment potentially induces important consequences for the effectiveness of monetary policy.
    Keywords: frequency of price adjustment, financial frictions, menu cost model
    JEL: E31 E44
    Date: 2017
  18. By: Gerlach, Stefan
    Abstract: This paper studies long-run demand functions for Swiss M1 and M3, using annual data spanning the period 1907-2016. While the demand functions display plausible price and income elasticities, tests for structural breaks at unknown points in time detect instability in 1929 for real M1 and 1943 for real M3. This instability appears to arise from the way in which the opportunity cost is modelled. While using a single interest rate may be appropriate for M1, for M3 it would likely be helpful to take into consideration both the own return and the return on non-monetary assets.
    Keywords: cointegration; money demand; opportunity cost; Switzerland
    JEL: E4 E5 N1
    Date: 2017–10
  19. By: Corsetti, Giancarlo; Dedola, Luca; Jarocinski, Marek; Mackowiak, Bartosz Adam; Schmidt, Sebastian
    Abstract: The euro area recently experienced a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix.
    Keywords: eurobond; Government bonds; Joint Analysis of Fiscal and Monetary Policy; Lower Bound on Nominal Interest Rates; Self-Fulfilling Sovereign Default
    JEL: E31 E62 E63
    Date: 2017–10
  20. By: Gregory Sutton; Dubravko Mihaljek; Agnė Subelytė
    Abstract: This paper estimates the response of house prices to changes in short- and long-term interest rates in 47 advanced and emerging market economies. We use data that statistical authorities selected as their best house price series, covering almost half a century of quarterly observations for the United States and over 1,000 annual observations for the rest of the sample. We find a surprisingly important role for short-term interest rates as a driver of house prices, especially outside the United States. Our interpretation is that this reflects the importance of the bank lending channel of monetary policy in house price fluctuations, especially in countries where securitisation of home mortgages is less prevalent. In addition, we document substantial inertia in house prices and find that changes in interest rates and other determinants affect house prices gradually rather than on impact. This suggests that modest cuts in policy rates are not likely to rapidly fuel house price increases. Finally, we find that US interest rates seem to affect house prices outside the United States.
    Keywords: interest rates, house prices, monetary policy, bank lending channel, random walk, house price bubble, United States, advanced economies, emerging market economies
    JEL: E39 E43 E58 G12 R31 R32
    Date: 2017–10
  21. By: Paul Whelan (Copenhagen Business School); Gyuri Venter (Copenhagen Business School); Andrea Vedolin (London School of Economics); Matteo Leombroni (Stanford)
    Abstract: We decompose ECB monetary policy surprises into target and communication shocks and document a number of novel findings. First, consistent with the idea that concurrent implementation of monetary policy is largely anticipated, we find that target shocks only have a limited effect on yields. However, we show that communication shocks have a large and economically significant impact on sovereign yields, displaying a hump-shaped pattern across maturity. Second, we document that around the European debt crisis communication had the effect of driving a wedge between yields on core versus peripheral countries. We study two explanations for this finding, revelation of the ECB’s private information and credit risk, and argue that neither channel can explain the effect on yield spreads. Motivated by this, we consider an alternative explanation in which central bank communication affects the aggregate demand due to the presence of reaching-for-yield investors. We show that a resulting risk premium channel helps to rationalize our findings.
    Date: 2017
  22. By: Joshua C C Chan; Yong Song
    Abstract: Inflation expectations play a key role in determining future economic outcomes. The associated uncertainty provides a direct gauge of how well-anchored the inflation expectations are. We construct a model-based measure of inflation expectations uncertainty by augmenting a standard unobserved components model of inflation with information from noisy and possibly biased measures of inflation expectations obtained from financial markets. This new model-based measure of inflation expectations uncertainty is more accurately estimated and can provide valuable information for policymakers. Using US data, we find significant changes in inflation expectations uncertainty during the Great Recession.
    Keywords: Trend inflation, inflation expectations, stochastic volatility
    JEL: C11 C32 E31
    Date: 2017–10
  23. By: Steiner (University of Groningen); Steinkamp (Osnabrück University); Westermann (Osnabrück University)
    Abstract: In the winter 2011/12 a wave of internal capital flight prompted the ECB to abandon its exit strategy and to announce an unprecedented monetary expansion. We analyze this episode in several dimensions: (i) by providing an event-study analysis covering key variables from national central banks' balance sheets, (ii) by rationalizing their patterns in a portfolio balance model of the exchange rate, augmented by institutional characteristics of the TARGET2 system, and (iii) by proposing a theory-based index of exchange market pressure within the euro area. We argue that the euro area entails an inherent policy trilemma that makes it prone to speculative attacks.
    Keywords: Currency Union; Exchange Market Pressure; Policy Trilemma; Speculative Attack; TARGET2.
    JEL: E42 F36 F41
    Date: 2017–10–23
  24. By: Chris Garbers (Department of Economics, University of Stellenbosch); Guangling Liu (Department of Economics, University of Stellenbosch)
    Abstract: This paper investigates the impact of capital controls on business cycle fluctuations and welfare. To perform this analysis, we deploy an asymmetric two country model that is subject to negative foreign interest rate shocks. The results show that both an inflow and outflow capital control are able to attenuate capital flow dynamics, but each control bears different implications for macroeconomic outcomes. Whilst the outflow capital control is associated with shock attenuation benefits, the inflow capital control is shown to amplify the impact of shocks. Easier capital control regimes enhance the attenuation and amplification properties associated with each capital control, whilst strict regimes do the opposite. Lastly, the analysis shows that the welfare effects of capital controls are agent dependent, and that society prefers the outflow capital control to the inflow capital control. Taken together, these results are indicative of the comparative desirability of capital controls imposed on the financial sector (outflows) as compared to the real sector (inflows).
    Keywords: Capital controls, Welfare, Wealth, Real business cycle, Financial intermediation, DSGE
    JEL: E21 E32 E43 E44 E51 E52
    Date: 2017
  25. By: Zeynep Senyuz; Manjola Tase
    Abstract: In this note, we analyze the effects of the ON RRP operations on daily repo rate uncertainty--based on revisions to the repo rate forecast--and intraday repo rate volatility.
    Date: 2017–10–19
  26. By: Nakatani, Ryota
    Abstract: We analyze the relationships among shocks, exchange rate regimes, and capital controls in relation to the probabilities of currency crises. Based on the theoretical model by Nakatani (2016, 2017a), we use panel data on 34 developing countries and apply a probit estimation. We find that both productivity shocks and country risk premium shocks trigger currency crises, whereas productivity shocks are important for severe currency crises. We also find that the effects of these shocks on the probability of a crisis are larger for floating exchange rate regimes and that capital controls mitigate the effects of productivity shocks in pegged regimes.
    Keywords: Currency Crisis; Productivity Shock; Risk Premium Shock; Exchange Rate Regimes; Capital Control; Probit Model
    JEL: E5 F3 F41 G01
    Date: 2017–10–24
  27. By: Beckmann, Joscha; Czudaj, Robert
    Abstract: We analyze and evaluate novel data on exchange rate expectations after the collapse of Lehman Brothers for more than 60 economies over different horizons. We find that monetary policy effects on expectations are time-varying and identify substantial international spillovers over the recent period. Our results also show that markets have been surprised by monetary policy effects on the exchange rates and point to an unexpected safe haven status of the US dollar after 2009.
    JEL: F31 G15
    Date: 2017
  28. By: Stefan Gissler; Borghan N. Narajabad
    Abstract: This note is the third part in a three part series. Part 1 provides some historical background and discusses key institutional characteristics of the Federal Home Loan Banks (FHLB) System. Part 2 highlights some of the recent trends in the FHLB system and potential drivers of those trends. This note discusses the implication of these developments for financial stability.
    Date: 2017–10–18
  29. By: Guglielmo Maria Caporale; Alex Plastun
    Abstract: This paper examines the day of the week effect in the crypto currency market using a variety of statistical techniques (average analysis, Student's t-test, ANOVA, the Kruskal- Wallis test, and regression analysis with dummy variables) as well as a trading simulation approach. Most crypto currencies (LiteCoin, Ripple, Dash) are found not to exhibit this anomaly. The only exception is BitCoin, for which returns on Mondays are significantly higher than those on the other days of the week. In this case the trading simulation analysis shows that there exist exploitable profit opportunities that can be interpreted as evidence against efficiency of the crypto currency market.
    Keywords: Efficient Market Hypothesis, day of the week effect, crypto currency, BitCoin, anomaly, trading strategy
    JEL: G12 C63
    Date: 2017
  30. By: Stefan Gissler; Borghan N. Narajabad
    Abstract: This note is the second part in a three part series. Part 1 provides some historical background and discusses key institutional characteristics of the Federal Home Loan Banks (FHLB) System. This note discusses recent trends in the FHLB system and potential drivers of those trends.
    Date: 2017–10–18
  31. By: Malte Krüger
    Abstract: In Ireland, there was a bank strike that led to a complete shut-down of the main part of the banking system from May to November 1970. The effects of this strike were surprisingly limited. This had led some observers to conclude that trade credit can easily substitute for bank deposits as a means of payment. In this paper, it is shown why it was possible to continue “business as usual” for an extended period of time. Subsequently, it is argued that such a situation would not have prevailed much longer. Due to rising risks for almost all transactors the use of trade credit would have declined and economic performance would have deteriorated progressively.
    Keywords: money, banking, payments, clearing&settlement, Ireland, trade credit
    JEL: E02 E59 E65 G21 N14
    Date: 2017
  32. By: Mario Larch; Joschka Wanner; Yoto V. Yotov; Thomas Zylkin
    Abstract: Recent work on the effects of currency unions (CUs) on trade stresses the importance of using many countries and years in order to obtain reliable estimates. However, for large samples, computational issues limit choice of estimator, leaving an important methodological gap. To address this gap, we unveil an iterative PPML estimator which flexibly accounts for multilateral resistance, pair-specific heterogeneity, and correlated errors across countries and time. When applied to a comprehensive sample with more than 200 countries trading over 65 years, these innovations flip the conclusions of an otherwise rigorously-specified linear model. Our estimates for both the overall CU effect and the Euro effect specifically are economically small and statistically insignificant. The effect of non-Euro CUs, however, is large and significant. Notably, linear and PPML estimates of the Euro effect increasingly diverge as the sample size grows.
    Keywords: currency unions, PPML, high-dimensional fixed effects
    JEL: C13 C21 F10 F15 F33
    Date: 2017
  33. By: Ansgar Belke; Jens Klose
    Abstract: Is secular stagnation—a period of persistently lower growth such as that seen following the financial crisis of 2008/09—a valid concern for euro-area countries? We tackle this question using the well-established Laubach-Williams model to estimate the unobservable equilibrium real interest rate and compare it to the actual real rate. In light of the considerable increase in heterogeneity among EU member countries since the beginning of the financial crisis, we apply our approach to twelve euro-area countries to provide country-level answers to the question of secular stagnation. The presence of secular stagnation in a number of euro-area countries has important implications for ECB decision-making (i.e., voting power in the Governing Council) and EU governance. Our results indicate that secular stagnation is not a significant threat to most euro-area countries, with one possible exception: Greece.
    Keywords: equilibrium real interest rate, secular stagnation, euro-area countries, heterogeneity
    JEL: E43 C32
    Date: 2017–12
  34. By: Stefan Gissler; Borghan N. Narajabad
    Abstract: The Federal Home Loan Bank (FHLB) system was founded in 1932 to support mortgage lending by thrifts and insurance companies. Over time, the system has grown into a provider of funding for a larger range of financial institutions, including commercial banks and insurance companies. Part 1 of this note provides an overview of the FHLB system. Part 2 highlights some of the recent developments in the FHLB system. And part 3 discusses the implications of these developments for financial stability.
    Date: 2017–10–18

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