nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒11‒05
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Aggregate and Country-Specific Effectiveness of ECB Policy: Evidence from an External Instruments (VAR) Approach By Lucas Hafemann; Peter Tillmann
  2. International Financial Market Integration, Asset Compositions, and the Falling Exchange Rate Pass-Through By Almira Enders; Zeno Enders; Mathias Hoffmann
  3. Financial imbalances, crisis probability and monetary policy in Norway By Ragna Alstadheim; Ørjan Robstad; Nikka Husom Vonen
  4. Financial Firm Production of Inside Monetary and Credit Card Services: An Aggregation Theoretic Approach By Barnett, William; Su, Liting
  5. Monetary policy in times of debt By Mario Pietrunti; Federico M. Signoretti
  6. Monetary Policy in the Small Open Economy with Market Segmentation By Shim, Jae-Hun
  7. How Should Central Banks Respond to Non-neutral Inflation Expectations By Shah, Imran H.; Corrick, Ian; Saboor, Abdul
  8. Pulling up the Tarnished Anchor: The End of Silver as a Global Unit of Account By Ricardo T. Fernholz; Kris James Mitchener; Marc Weidenmier
  9. The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound By Athanasios Orphanides
  10. The interaction between monetary and macroprudential policy: Should central banks "lean against the wind" to foster macro-financial stability? By Krug, Sebastian
  11. Heterogeneous consumers, segmented asset markets, and the real effects of monetary policy By Enders, Zeno
  12. Redistributive Tax Policy at the Zero Bound By Lancastre, Manuel
  13. Central Bank Policy Rates: Are they Cointegrated? By Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana
  14. The Impact of Monetary Strategies on Inflation Persistence By Evžen Kocenda; Balázs Varga
  15. Trade Policy and Structural Reforms at the Zero Lower Bound: Lessons Learned and Suggestions for Europe By Alessandro Barattieri; Matteo Cacciatore; Francesco Costamagna
  16. "Whatever it takes" to Resolve the European Sovereign Debt Crisis? Bond Pricing Regime Switches and Monetary Policy Effects By António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
  17. Uncertainty and Monetary Policy in Good and Bad Times By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  18. Quantitative Easing in the Euro Area - An Event Study Approach By Florian Urbschat; Sebastian Watzka
  19. The Euro Area's Common Pool Problem Revisited: Has the Single Supervisory Mechanism Ameliorated Forbearance and Evergreening By Sven Steinkamp; Aaron Tornell; Frank Westermann
  20. A Calibration of the Shadow Rate to the Euro Area Using Genetic Algorithms By Eric McCoy; Ulrich Clemens
  21. Monetary Momentum By Andreas Neuhierl; Michael Weber
  22. How Does the Policy Rate Respond to Output and Prices in Thailand? By Jiranyakul, Komain
  23. Rethinking the Power of Forward Guidance: Lessons from Japan By Mark Gertler
  24. Safety, Liquidity, and the Natural Rate of Interest By Marc Giannoni; Domenico Giannone; Andrea Tambalotti; Marco Del Negro
  25. When does information on forecast variance improve the performance of a combined forecast? By Conrad, Christian
  26. House Prices and Macroprudential Policy in an Estimated DSGE Model of New Zealand By Michael Funke; Robert Kirkby; Petar Mihaylovski
  27. Remittance Inflows and State-Dependent Monetary Policy Transmission in Developing Countries By Machasio, Immaculate; Tillmann, Peter
  28. The response of monetary policy shocks on Islamic bank deposits: evidence from Malaysia based on ARDL approach By Nazib, Nur Afiyah; Masih, Mansur
  29. Monetary policy transmission with two exchange rates and a single currency : The Chinese experience By Qing, He; Korhonen, Iikka; Zongxin, Qian

  1. By: Lucas Hafemann; Peter Tillmann
    Abstract: This paper studies the transmission of ECB monetary policy, both at the aggregate euro area and the country level. We estimate a VAR model for the euro area in which monetary policy shocks are identified using an external instrument that reflects policy surprises. For that purpose we use the change in German bunds at meeting days of the Governing Council. The identified monetary policy shock is then put into country-specific local projections in order to derive country-specific impulse responses. We find that (i) the transmission is very heterogeneous, both across channels and across countries, (ii) policy is transmitted through spreads, yields and the exchange rate, but less through banks and the stock market, and (iii) the strength of the transmission depends on structural characteristics of member countries, among them are current account balanced, debt to GDP levels, and the strength of banking systems.
    JEL: E52 E32 E44
    Date: 2017–07
  2. By: Almira Enders; Zeno Enders; Mathias Hoffmann
    Abstract: This paper provides an explanation for the observed decline of the exchange rate pass-through into import prices by modeling the effects of financial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices. Contrary to previous literature, we take the interdependence of this decision with the optimal portfolio choice of internationally traded financial assets explicitly into account. In particular, price setters move towards more local-currency pricing and portfolios include more foreign debt assets following increased financial integration. Both predictions are in line with novel empirical evidence.
    Keywords: exchange rate pass-through, financial integration, portfolio home bias, international price setting
    JEL: F41 F36 F31
    Date: 2017
  3. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Ørjan Robstad (Norges Bank (Central Bank of Norway)); Nikka Husom Vonen (The Ministry of Labour and Social Affairs)
    Abstract: We assess the strength of the impact of a monetary policy shock on financial crisis probability in Norway. Policy effects go via the interest rate impact on credit, house prices and banks’ wholesale funding. We find that the impact of a monetary policy shock on crisis probability is about 10 times larger than what previous studies suggest. The large impact is mostly due to a fall in property prices and banks’ wholesale funding in response to a contractionary monetary policy shock. In contrast, and in line with existing literature, there is a more limited contribution to reduced crisis probability from the impact of monetary policy on credit.
    Keywords: Monetary Policy, Financial Imbalances, Financial Crisis, Structural VAR
    JEL: E32 E37 E44 E52
    Date: 2017–10–26
  4. By: Barnett, William; Su, Liting
    Abstract: A monetary-production model of financial firms is employed to investigate supply-side monetary aggregation, augmented to include credit card transaction services. Financial firms are conceived to produce monetary and credit card transaction services as outputs through financial intermediation. While credit cards provide transactions services, credit cards have never been included into measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on microeconomic aggregation theory, not accounting. Barnett, Chauvet, Leiva-Leon, and Su (2016) have derived and applied the relevant aggregation theory applicable to measuring the demand for the joint services of money and credit cards. But because of the existence of required reserves and differences in taxation on the demand and supply side, there is a regulatory wedge between the demand and supply of monetary services. We derive theory needed to measure the supply of the joint services of credit cards and money, to estimate the output supply function, and to compute value added. The resulting model can be used to investigate the transmission mechanism of monetary policy. Earlier results on the monetary policy transmission mechanism based on the correlation between simple sum inside money and final targets are not likely to approximate or even be relevant to results that can be acquired by empirical implementation of this model or its extensions. Our financial-firm value-added measure and its supply function are fundamentally different from prior measures of inside money, shadow banking output, or money supply functions. The data needed for empirical implementation of our theory are available online from the Center for Financial Stability (CFS) in New York City. We show that the now discredited conventional accounting-based measures of privately produced inside money can be replaced by our measures, based on microeconomic aggregation theory, to provide the information originally contemplated in the literature on monetary theory for over a century.
    Keywords: Inside money, aggregation theory, index number theory, financial firm production
    JEL: C5 C58 D2 D22 E4 E41 G2 G21
    Date: 2017–10–18
  5. By: Mario Pietrunti (Bank of Italy); Federico M. Signoretti (Bank of Italy)
    Abstract: We model an economy with long-term mortgages and show that some characteristics of mortgage contracts – such as the type of interest rate (adjustable versus fixed) and the loan-to-value ratio – matter for the transmission of monetary policy impulses, both conventional and unconventional. A conventional monetary policy shock has a stronger impact on output and inflation with adjustable-rate mortgages, also reflecting the higher sensitivity of installments to changes in the short-term rate. When households borrow at a fixed rate, unconventional monetary policy can stimulate the economy mainly through a redistribution of income from savers to borrowers, who have a higher marginal propensity to consume. The impact of monetary policy – both conventional and unconventional – is stronger when the level of households' mortgage debt is high relative to housing wealth.
    Keywords: long-term mortgages, monetary policy, income channel
    JEL: E52 E58 G21
    Date: 2017–10
  6. By: Shim, Jae-Hun
    Date: 2016–09
  7. By: Shah, Imran H.; Corrick, Ian; Saboor, Abdul
    Abstract: This paper investigates the net real inflation effect on output in ten countries, comprising both advanced and developing countries. An indicator is introduced to compute the net effect of inflation on output (NIEO) based on the difference between two concepts of core inflation, where both are computed using the decomposition of VARresiduals. We find that for all countries, when inflation is increasing the NIEOis significantly positive and is negative during periods of decreasing inflation. Typically, countries which follow anti-inflationary policies if the NIEOis of small magnitude suffer relatively minimal damage in output, whereas if the same policies are undertaken when the NIEOis large the damaging effects on output could be much greater. This suggests that the NIEOcould be a useful indicator of the likely effects of policy, especially countries which have frequent episodes of high infaation, and in those countries which have had quite successful inflation-targeting policy, i.e. the timing of monetary policy actions could be optimized to take account of this real effect of inflation.
    Date: 2016–10–03
  8. By: Ricardo T. Fernholz; Kris James Mitchener; Marc Weidenmier
    Abstract: We use the demise of silver-based standards in the 19th century to explore price dynamics when a commodity-based money ceases to function as a global unit of account. We develop a general equilibrium model of the global economy with gold and silver money. Calibration of the model shows that silver ceased functioning as a global price anchor in the mid-1890s - the price of silver is positively correlated with agricultural commodities through the mid-1890s, but not thereafter. In contrast to Fisher (1911) and Friedman (1990), both of whom predict greater price stability under bimetallism, our model suggests that a global bimetallic system, in which the gold price of silver uctuates, has higher price volatility than a global monometallic system. We confirm this result using agricultural commodity price data for 1870-1913.
    Keywords: bimetallism, classical gold standard, silver, unit of account, fixed exchange rates
    JEL: E42 F33 N10 N20
    Date: 2017
  9. By: Athanasios Orphanides
    Abstract: This paper explores the reasons for the suboptimal fiscal-monetary policy mix in the euro area in the aftermath of the global financial crisis and ways in which the status quo can be improved. A comparison of fiscal and monetary policies and of economic outcomes in the euro area and the United States suggests that both fiscal and monetary policy in the euro area have been overly tight. Fiscal policy has been hampered by the institutional framework which constrains individual states and lacks instruments to secure an appropriate aggregate stance. ECB monetary policy has been hampered by the distributional effects of balance sheet policies which needed to be adopted at the zero lower bound, and by discretionary decisions taken before the crisis such as the reliance on credit rating agencies for determining collateral eligibility for monetary operations. The compromising of the “safe asset” status of euro area sovereign debt during the crisis complicated fiscal and monetary policy. Changes in the discretionary decisions governing the implementation of monetary policy in the euro area can potentially reduce the distributional effects of policy and improve the fiscal-policy mix and longerterm prospects for the euro area.
    JEL: E52 E58 E61 E62 G01
    Date: 2017–07
  10. By: Krug, Sebastian
    Abstract: The extensive harm caused by the financial crisis raises the question of whether policymakers could have done more to prevent the build-up of financial imbalances. This paper aims to contribute to the field of regulatory impact assessment by taking up the revived debate on whether central banks should "lean against the wind" or not. Currently, there is no consensus on whether monetary policy is, in general, able to support the resilience of the financial system or if this task should better be left to the macroprudential approach of financial regulation. The author aims to shed light on this issue by analyzing distinct policy regimes within an agent-based computational macromodel with endogenous money. He finds that policies make use of their comparative advantage leading to superior outcomes concerning their respective intended objectives. In particular, he shows that "leaning against the wind" should only serve as first line of defense in the absence of a prudential regulatory regime and that price stability does not necessarily mean financial stability. Moreover, macroprudential regulation as unburdened policy instrument is able to dampen the build-up of financial imbalances by restricting credit to the unsustainable high-leveraged part of the real economy. In contrast, leaning against the wind seems to have no positive impact on financial stability which strengthens proponents of Tinbergen's principle arguing that both policies are designed for their specific purpose and that they should be used accordingly.
    Keywords: financial stability,monetary economics,macroprudential policy,financial regulation,central banking,agent-based macroeconomics
    JEL: E44 E50 G01 G28 C63
    Date: 2017
  11. By: Enders, Zeno
    Abstract: This paper proposes a novel mechanism by which changes in the distribution of money holdings have real effects. Specifically, I develop a flexible-price model of segmented asset markets that generates real aggregate effects of monetary policy through the dependence of optimal markups on the heterogeneity of money holdings. Because varieties of consumption bundles are purchased sequentially, newly injected money disseminates slowly throughout the economy via second-round effects.
    JEL: E31
    Date: 2017
  12. By: Lancastre, Manuel
    Abstract: Emulating consumer price inflation with an increasing path of consumption taxes when the nominal interest rate binds and monetary policy becomes ineffective, as proposed by Correia et al. [1] in the Standard New Keynesian model, may not neutralize a liquidity trap of very long duration. Instead this paper presents a wealth redistributive tax policy, in an OLG model with credit constraints, able to prevent or counteract a liquidity trap caused by a credit shock. The tax prescription is opposite to the one proposed by Correia et al.[1]
    Keywords: Zero Bound; Fiscal policy; Credit constraints; Sticky prices; Heterogeneous agents; Redistribution
    JEL: E21 E24 E31 E40 E43 E52 E62
    Date: 2017–08–31
  13. By: Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana
    Abstract: This paper analyses the stochastic properties of and the bilateral linkages between the central bank policy rates of the US, the Eurozone, Australia, Canada, Japan and the UK using fractional integration and cointegration techniques respectively. The univariate analysis suggests a high degree of persistence in all cases: the fractional integration parameter d is estimated to be above 1, ranging from 1.26 (US) to 1.48 (UK), with the single exception of Japan, for which the unit root null cannot be rejected. Concerning the bivariate results, Australian interest rates are found to be cointegrated with the Eurozone and UK ones, Canadian rates with the UK and US ones, and Japanese rates with the UK ones. The increasingdegree of integration of international financial markets and the coordinated monetary policy responses following the global financial crisis might both account for such linkages.
    Keywords: interest rates, long memory, fractional integration and cointegration
    JEL: C22 C32 E47
    Date: 2017
  14. By: Evžen Kocenda; Balázs Varga
    Abstract: We analyze the impact of price stability-oriented monetary strategies (inflation targeting—IT—and constraining exchange rate arrangements) on inflation persistence using a time-varying coefficients framework in a panel of 68 countries (1993–2013). We show that explicit IT has a stronger effect on taming inflation persistence than implicit IT and is effective even during and after the financial crisis. We also show that once a country hits the ZLB its inflation persistence mildly decreases and that there exists a mild pull to return to inflation persistence mean once a central bank moves away from its inflation target. The link between inflation persistence and constraining exchange rate regimes is less pronounced than that of IT and regimes with the U.S. dollar as a reserve currency are less effective than those using the Euro (Deutsche mark). On other hand, the U.S. persistence transers disproportionately lower effect on other countries’ persistence than the IP of Germany.
    Keywords: inflation persistence, inflation targeting, exchange rate regime, flexible least squares
    JEL: C22 C32 E31 E52 F31
    Date: 2017
  15. By: Alessandro Barattieri; Matteo Cacciatore; Francesco Costamagna
    Abstract: Calls for market reforms to help improve economic performance have become a mantra in European policy discussions. In the recent years, fears of a new wave of protectionism reopened the debate on the macroeconomic effects of raising tariff and non-tariff barriers. In this policy paper, we evaluate the consequences of such policy options for economies in a liquidity trap - i.e. at times of major slack and binding constraints on monetary policy easing (such as when the zero lower bound on nominal interest rates is binding). First, we analyse the consequences of protectionism through the lens of a benchmark business cycle model. We show that raising trade barriers has contractionary effects both domestically and abroad. Such detrimental effects are larger in a liquidity trap. We conclude that Europe should not engage in protectionism, even in response to an increase in the level of tariffs imposed by a major trading partner (such as the U.S.). We then review recent trends in product and labor market regulation across the European Union members. Using results from the academic literature, we argue that market reforms in Europe are unlikely to induce significant deflationary effects, suggesting that the inability of monetary policy to deliver interest rate cuts might not be a relevant obstacle to reform. While coordinated structural reforms across the EU members would maximise short- and long-term gains, legal considerations of the implementation of reforms across countries pose challenges to the harmonisation process.
    JEL: F10 F40 E20 L60
    Date: 2017–07
  16. By: António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
    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. 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.
    Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy
    JEL: E43 E44 F30 G01 G12
    Date: 2017
  17. By: Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
    Abstract: We investigate the role played by systematic monetary policy in tackling the real effects of uncertainty shocks in U.S. recessions and expansions. We model key indicators of the business cycle with a nonlinear VAR that allows for different dynamics in busts and booms. Uncertainty shocks are identified by focusing on historical events that are associated to jumps in financial volatility. Uncertainty shocks hitting in recessions are found to trigger a more abrupt drop and a faster recovery in real activity than in expansions. Counterfactual simulations suggest that the effectiveness of systematic monetary policy in stabilizing real activity 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, Generalized Impulse Response Functions, systematic monetary policy
    JEL: C32 E32
    Date: 2017
  18. By: Florian Urbschat; Sebastian Watzka
    Abstract: We examine the effects of the Asset Purchase Programme (APP) gradually introduced by the European Central Bank from September 2014 onwards. Studying the short-term reaction of financial markets after APP press releases, we analyse the development of bond yields and spreads around these releases. More precisely, we try to estimate different asset price channels by quantifying the cumulative decrease of spreads and by running event regressions for several Euro Area countries. Focusing on the signalling channel, measured by the OIS rate, and the portfolio rebalancing channel, proxied by the conditional bond-OIS spread, we find that the effects in yield and spread reduction were most pronounced for the initial announcement on the Public Sector Purchase Programme (PSPP) but declined afterwards for additional announcements. Possible explanations for this are the declining degree to which the ECB surprised markets and the increasingly burdensome institutional set-up of the APP. While yield reductions were larger for periphery countries’ than for core countries’ bonds, our evidence suggests that this stronger reduction is mostly due to a decreasing risk component of southern bonds. In fact, once controlling for this implicit credit risk reduction we find rather mild effects from portfolio rebalancing for all countries.
    Keywords: large scale asset purchase, yield curve, quantitative easing, APP, event study
    JEL: E43 E44 E52 E58 G14
    Date: 2017
  19. By: Sven Steinkamp; Aaron Tornell; Frank Westermann
    Abstract: The Single Supervisory Mechanism was introduced to eliminate the common-pool problem and limit uncontrolled lending by national central banks (NCBs). We analyze its effectiveness. Second, we model how, by forbearing and providing refinancing credit, NCBs avoid domestic resolution costs and, instead, share potential losses within the Euro Area. This results in “evergreening” of bad loans. Third, we construct a new evergreening index based on a large worldwide survey administered by the ifo institute. Regressions show evergreening is significantly greater in the Euro Area and where banks are in distress. Finally, greater evergreening accompanies higher growth of NCB-credit and Target2-liabilities.
    Keywords: single supervisory mechanism, evergreening, nonperforming loans, common-pool problem
    JEL: F33 F55 E58
    Date: 2017
  20. By: Eric McCoy; Ulrich Clemens
    Abstract: In the face of the lower bound on interest rates, central banks have relied on unconventional policy tools such as large-scale asset purchases and forward guidance to try to affect long-term interest rates and provide monetary stimulus to the economy. Assessing the impact of these measures and summarising the overall stance of monetary policy in this new environment has proven to be a challenge for academics and central banks. As a result, researchers have worked on modifying current term structure models and have adapted them to the current situation of close to zero or even negative interest rates. The paper begins by providing a non-technical overview of Leo Krippner's two-factor shadow rate model (K-ANSM2), explaining the underlying mechanics of the model through an illustrative example. Thereafter, the paper presents the results obtained from calibrating Krippner's KANSM2 shadow rate model to the euro area using genetic algorithms and discusses the pros and the cons of using genetic algorithms as an alternative to the optimisation method currently used (Nelder-Mead optimisation routine). Finally, the paper ends by analysing the strengths and weaknesses of using the shadow short rate as a tool to illustrate the stance and the dynamics of monetary policy.
    JEL: E43 E44 E52 E58
    Date: 2017–07
  21. By: Andreas Neuhierl; Michael Weber
    Abstract: We document a large return drift around monetary policy announcements by the Federal Open Market Committee. Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy move and continues to increase to more than 4.5% 15 days after the meeting. The return drift is a market-wide phenomenon, holds for all industries, and many international equity markets. In the cross section of stocks, size, value, profitability, and investment do not exhibit differential return drifts. Momentum is an exception, because past losers plummet around contractionary monetary policy surprises. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4.
    Keywords: return drift, policy speeches, expected returns, macro news
    JEL: E31 E43 E44 E52 E58 G12
    Date: 2017
  22. By: Jiranyakul, Komain
    Abstract: This paper attempts to examine how the policy rate as a monetary policy stance reacts to output and price level in Thailand during 2005Q1 and 2016Q2. An empirical relationship that characterizes the way the Bank of Thailand adjusts its policy rate to output growth and inflation is identified. Johansen ointegration technique and VAR methodology are used in the analysis. The results from the cointegration analysis show that there exists a long-run relationship of the policy rate with real GDP and prices. This long-run equation differs from the empirical Taylor-type rule. However, the result from short-run dynamics captures the short-run interest rate equation. The partial adjustment coefficient in the estimated interest rate equation is negative and highly significant, which indicates that any deviation of the policy rate from its equilibrium value is corrected by monetary policy actions. Furthermore, there is long-run causality running from inflation and economic growth to a change in policy rate. In the short run, economic growth negatively causes a change in the policy rate while inflation positively causes a change in the policy rate. Also, impulse response analysis from an unrestricted VAR model indicates that both output growth and inflation shocks cause fluctuation in the policy rate.
    Keywords: Policy rate, output, prices, error correction mechanism, impulse responses
    JEL: C32 E52
    Date: 2017–10
  23. By: Mark Gertler (Henry and Lucy Moses Professor of Economics, New York University and National Bureau of Economic Research (E-mail:
    Abstract: In the spring of 2013 the Bank of Japan introduced a state-of- the-art monetary policy which included among other things inflation targeting and aggressive use of forward guidance. In contrast to the predictions of conventional macroeconomic theory, these policies have had only very limited success in reflating the economy. I argue that the disconnect between the Japanese experience and existing theory can be traced to the forward guidance puzzle (FGP). As recent literature suggests, the essence of the FGP is that existing models predict implausibly strong effects of expected future interest rate changes on the economy, with the strength of the effect increasing with the expected horizon of the interest rate change. Accordingly, in this lecture I sketch a model meant to capture the challenge of reflation in Japan. As in recent literature I attempt to mute the power of forward guidance by stepping outside of rational expectations. In particular, I introduce a hybrid adaptive/rational expectations belief mechanism. Most relevant to the Japanese experience is that individuals have adaptive expectations about trend inflation, which is consistent with the evidence. As Kuroda (2016) emphasizes, for an economy without a history of inflation being anchored by a target, individuals need direct evidence that the central bank is capable of moving inflation to target.
    Keywords: Forward guidance, Inflation targeting, Hybrid adaptive/rational expectations
    JEL: E31 E52 D84
    Date: 2017–10
  24. By: Marc Giannoni (Federal Reserve Bank of New York); Domenico Giannone (Federal Reserve Bank of New York); Andrea Tambalotti (Federal Reserve Bank of New York); Marco Del Negro (Federal Reserve Bank of New York)
    Abstract: Why are interest rates so low in the Unites States? We nd that they are low mostly because the premium for safety and liquidity has increased since the late 1990s. We reach this conclusion using two complementary perspectives: a exible time series model of trends in nominal rates, Treasury and corporate yields, in ation, and long term expectations, and a medium-scale DSGE model. We discuss the implications of this nding for the natural rate of interest.
    Date: 2017
  25. By: Conrad, Christian
    Abstract: We show that the consensus forecast can be biased if some forecasters minimize an asymmetric loss function and the DGP features conditional heteroscedasticity. The time-varying bias depends on the variance of the process. As a consequence, the information from the ex-ante variation of forecasts can be used to improve the predictive accuracy of the combined forecast. Forecast survey data from the Euro area and the U.S. confirm the implications of the theoretical model.
    JEL: C51 C53
    Date: 2017
  26. By: Michael Funke; Robert Kirkby; Petar Mihaylovski
    Abstract: We analyse the effects of macroprudential and monetary policies and their interactions using an estimated dynamic stochastic general equilibrium (DSGE) model tailored to New Zealand. We find that the main historical drivers of house prices are shocks specific to the housing sector. While our estimates show that monetary policy has large spillover effects on house prices, it does not appear to have been a major driver of house prices in New Zealand. We consider macroprudential policies, including the loan-to-value restrictions that have been implemented in New Zealand. We find that loan-to-value restrictions reduce house prices with negligible effects on consumer prices, suggesting that they can be used without derailing monetary policy. We estimate that the loan-to-value restrictions imposed in New Zealand in 2013 reduced house prices by 3.8 per cent and that greater forward guidance on their duration would have made them more effective.
    Keywords: macroprudential policies, housing, DSGE, Bayesian estimation, New Zealand
    JEL: E32 E44 E52 E58
    Date: 2017
  27. By: Machasio, Immaculate; Tillmann, Peter
    Abstract: Remittance inflows from overseas workers are an important source of foreign funding for developing and emerging economies. This paper estimates nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under different remittance inflows regimes. We show that for Kenya, Mexico, Colombia and the Philippines monetary policy has a smaller effect under strong inflows of remittances.
    JEL: E52
    Date: 2017
  28. By: Nazib, Nur Afiyah; Masih, Mansur
    Abstract: As much as it is important in a conventional system, monetary policy also plays a critical role in governing the Islamic economic system. However, in a dual banking system, things may have to be designed and devised differently to cater to the needs of both. Thus, assessing the impact of monetary policy shocks on the Islamic banking system is the key to understanding the addition of the industry towards financial stability and the extent of quality of the industry. The purpose of this paper is to initially revisit the issue of monetary policy shocks on the Islamic banking system, in the case of Malaysia. Our paper extends the previous study by using the most recent monthly data available which is from the year 2010 to the year 2016. Additionally, we incorporate the use of a robust time series technique, ARDL, and paired our analysis with an analysis of variance decomposition to strengthen our findings. Based on the results, we find evidence that despite being in the industry for almost half a century, the monetary policy shocks still have an influence on the Islamic banking deposit in Malaysia. Additionally, the Islamic banking deposits are also highly influenced by the level of inflation which comes out to be the most exogenous variable amongst all. An important implication from our analysis is that it is very critical for the central bank to help maintain the resiliency of the system by designing an appropriate monetary policy that could cater to both system and start devising legitimate risk management procedures that is applicable to these Islamic institutions.
    Keywords: Islamic bank deposits, monetary policy, ARDL, Malaysia
    JEL: C22 C58 E52
    Date: 2017–06–05
  29. By: Qing, He; Korhonen, Iikka; Zongxin, Qian
    Abstract: In emerging market economies, transmission of monetary policy through the foreign exchange market is complicated by the coexistence of financial restrictions and arbitrages. Using China as an example, we show that the coexistence of exchange rate interventions, capital controls and an on-shore-offshore exchange rate differential makes the long run equilibrium in the currency market nonlinear. Disturbances to this nonlinear long run equilibrium could offset the impact of monetary policy actions on domestic price stability. Omitting such nonlinearity leads to biased inference on the effectiveness of monetary policy.
    JEL: E52 F31 F40
    Date: 2017–10–21

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