nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒11‒12
43 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Disagreement and monetary policy By Falck, Elisabeth; Hoffmann, Mathias; Hürtgen, Patrick
  2. Heterogeneous Consumers, Segmented Asset Markets, and the Real Effects of Monetary Policy By Zeno Enders
  3. The Great Deception: the ‘science’ of monetary policy and the Great Moderation revisited By Gilberto Tadeu Lima; Mark Setterfield; Jaylson Jair da Silveira
  4. (Un)expected monetary policy shocks and term premia By Kliem, Martin; Meyer-Gohde, Alexander
  5. Bargaining power and outside options in the interbank lending market By Abbassi, Puriya; Bräuning, Falk; Schulze, Niels
  6. (Why) Do Central Banks Care About Their Profits? By Igor Goncharov; Vasso Ioannidou; Martin C. Schmalz
  7. Financial and real shocks and the effectiveness of monetary and macroprudential policies in Latin American countries By Javier Garcia-Cicco; Markus Kirchner; Julio Carrillo; Diego Rodríguez; Fernando Perez; Rocío Gondo; Carlos Montoro; Roberto Chang
  8. The Impact of Japanese Monetary Policy Crisis Management on the Japanese Banking Sector By Juliane Gerstenberger; Gunther Schnabl
  9. Trade union inflation expectations and the second-round effect in South Africa: Toda-Yamamoto causality approach By Leshoro, Temitope L A
  10. Dissecting long-term Bund yields in the run-up to the ECB's Public Sector Purchase Programme By Lemke, Wolfgang; Werner, Thomas
  11. The Tradeoffs in Leaning Against the Wind By Gourio, Francois; Kashyap, Anil K.; Sim, Jae W.
  12. Policy Evaluation by the Synthetic Control Approach: The Case of the Swiss Franc By Nicole Aregger; Jessica Leutert
  13. The Failure of ECB Monetary Policy from a Mises-Hayek Perspective By Gunther Schnabl
  14. Assessing the effective stance of monetary policy: A factor-based approach By Christiaan Pattipeilohy; Christina Bräuning; Jan Willem van den End; Renske Maas
  15. Unconventional Monetary Policy under Appreciation Pressure - The Role of Financial Frictions By Nicole Aregger; Jessica Leutert
  16. Monetary Policy Crisis Management as a Threat to Economic Order By Andreas Freytag; Gunther Schnabl
  17. Testing the Fisher Hypothesis in the G-7 Countries Using I(d) Techniques By Guglielmo Maria Caporale; Luis A. Gil-Alana
  18. U. S. monetary policy and emerging market credit cycles By Brauning, Falk; Ivashina, Victoria
  19. Monetary policy and stock valuation: Structural VAR identification and size effects By Kontonikas, A; Zekaite, Z
  20. The K-Y Protocol: The First Protocol for the Regulation of Crypto Currencies (E.g.-Bitcoin) By Hegadekatti, Kartik; S G, Yatish
  21. The Dire Effects of the Lack of Monetary and Fiscal Coordination By Bianchi, Francesco; Melosi, Leonardo
  22. Interest Rates Under Falling Stars By Michael D. Bauer; Glenn D. Rudebusch
  23. The Intersection of U.S. Money Market Mutual Fund Reforms, Bank Liquidity Requirements, and the Federal Home Loan Bank System By Anadu, Ken; Baklanova, Viktoria
  24. Monetary Policy and Corporate Bond Returns By Kontonikas, A; Maio, P; Zekaite, Z
  25. Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts By Kunze, Frederik
  26. Flow specific capital controls for emerging markets By Chris Garbers; Guangling Liu
  27. Banking Systems in an Economy Dominated by Cryptocurrencies By Hegadekatti, Kartik; S G, Yatish
  28. On collateral: implications for financial stability and monetary policy By Corradin, Stefano; Heider, Florian; Hoerova, Marie
  29. Evaluating South African Fiscal and Monetary Policy Using a Wavelet-Based Model By Patrick Matthew Crowley; David Hudgins
  30. The inflation-growth relationship in SSA inflation targeting countries By Mavikela, Nomahlubi; Mhaka, Simba; Phiri, Andrew
  31. Early Warning Systems for Currency Crises with Real-Time Data By Tjeerd M. Boonman; Jan P. A. M. Jacobs; Gerard H. Kuper; Alberto Romero
  32. The Day of the Week Effect in the Crypto Currency Market By Guglielmo Maria Caporale; Alex Plastun
  34. Real exchange rate misalignments in the euro area By Fidora, Michael; Giordano, Claire; Schmitz, Martin
  35. Capital Flows and Financial Stability in Emerging Economies By Christopher F. Baum; Madhavi Pundit; Arief Ramayandi
  36. Equilibrium Exchange Rates and Misalignments: The Case of Homogenous Emerging Market Economies By Christian K. Tipoy; Marthinus C. Breitenbach; Mulatu F. Zerihun
  37. Money Creation and Destruction By Salomon Faure; Hans Gersbach
  38. Inflation Dynamics in Uganda: A Quantile Regression Approach By Francis Leni Anguyo; Rangan Gupta; Kevin Kotze
  39. Can the Central Bank Alleviate Fiscal Burdens? By Ricardo Reis
  40. The time is right for a European Monetary Fund By André Sapir; Dirk Schoenmaker
  41. A New Dataset of Macroprudential Policy Governance Structures By Ricardo Correa; Rochelle M. Edge; J. Nellie Liang
  42. GDP Growth, Private Debt and Monetary Policy By Gianluca Cafiso
  43. Examining Taxation of Fiat Money and Bitcoins Vis-A-Vis Regulated Cryptocurrencies By Hegadekatti, Kartik; S G, Yatish

  1. By: Falck, Elisabeth; Hoffmann, Mathias; Hürtgen, Patrick
    Abstract: Time-variation in disagreement about inflation expectations is a stylized fact in surveys, but little is known on how disagreement interacts with the efficacy of monetary policy. This paper fills this gap in providing theoretical predictions of monetary policy shocks for different levels of disagreement and testing these empirically. When disagreement is high, a dispersed information New Keynesian model predicts that a contractionary monetary policy shock leads to a short-run rise in inflation and inflation expectations, whereas both decline when disagreement is low. Estimating a smooth-transition model on U.S. data shows significantly different responses in inflation and inflation expectations consistent with theory.
    Keywords: disagreement,dispersed information,disanchoring of inflation expectations,monetary policy transmission,state-dependent effects of monetary policy,local projections
    JEL: C52 D83 E31 E32 E52
    Date: 2017
  2. By: Zeno Enders
    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. The model predicts a short-term inflation-output trade-off, a liquidity effect, countercyclical markups, and procyclical wages after monetary shocks. Among other correlations of financial variables, it also reproduces the empirical, negative relationship between changes in the money supply and markups.
    Keywords: segmented asset markets, monetary policy, countercyclical markups, liquidity effect, heterogenous money holdings
    JEL: E31 E32 E51
    Date: 2017
  3. By: Gilberto Tadeu Lima (Department of Economics, University of Sao Paulo); Mark Setterfield (Department of Economics, New School for Social Research); Jaylson Jair da Silveira (Department of Economics and International Relations, Federal University of Santa Catarina)
    Abstract: Conventional wisdom suggests that the Great Moderation was caused by either good policy, good luck (favourable shocks), more efficient private sector behaviour (such as better inventory management), or more effective financial innovations. We show that it may, instead, have originated from the complementarity of an erroneous reading of the economy by central bankers and evolutionarily time-varying heterogeneity in inflation expectations formation within the private sector. One general finding of our analysis is that seemingly inadequate stabilization policies may, in fact, work. We comment on the broader ramifications for stabilization policy of this finding.
    Keywords: Great Moderation, monetary policy, inflation targeting, macroeconomic stability, heterogeneous inflation expectations, satisficing evolutionary dynamics
    JEL: B52 E12 E31 E32 E52 E58
    Date: 2017–10
  4. By: Kliem, Martin; Meyer-Gohde, Alexander
    Abstract: We analyze an estimated stochastic general equilibrium model that replicates key macroeconomic and financial stylized facts during the Great Moderation of 1983-2007. Our model predicts a sizeable and volatile nominal term premium - comparable to recent reduced-form empirical estimates - with real risk two times more important than inflation risk. The model enables us to address salient questions about the effects of monetary policy on the term structure of interest rates. We find that monetary policy can have sizeable and differing effects on nominal and real risk premia, rationalizing many opposing findings in the empirical literature.
    Keywords: DSGE model,Bayesian estimation,Term structure,Monetary policy
    JEL: E13 E31 E43 E44 E52
    Date: 2017
  5. By: Abbassi, Puriya; Bräuning, Falk; Schulze, Niels
    Abstract: We study the role of bargaining power and outside options for the pricing of over-the-counter interbank loans using a bilateral Nash bargaining model and test the model predictions with detailed transaction-level data from the euro-area interbank market. We find that lender banks with greater bargaining power over their borrowers charge higher interest rates, while the lack of alternative investment opportunities for lenders reduces bilateral interest rates. Moreover, we find that lenders that are not eligible to earn interest on excess reserves (IOER) lend funds below the IOER rate to borrowers with access to the IOER facility, which in turn put these funds in their reserve accounts to earn the spread. Our findings highlight that this persistent arbitrage opportunity is not a result of the mere lack of alternative outside options of some lenders, but it crucially depends on their limited bilateral bargaining power, leading to a persistent segmentation of prices in the euro interbank market. We examine the implications of these findings for the transmission of euro-area monetary policy.
    Keywords: bargaining power,over-the-counter market,monetary policy,money market segmentation
    JEL: E4 E58 G21
    Date: 2017
  6. By: Igor Goncharov; Vasso Ioannidou; Martin C. Schmalz
    Abstract: We document that central banks are significantly more likely to report slightly positive profits than slightly negative profits. The discontinuity in the profit distribution is (i) more pronounced amid greater political or public pressure, the public’s receptiveness to more extreme political views, and agency frictions arising from governor career concerns, but absent when no such factors are present, and (ii) correlated with more lenient monetary policy inputs and greater inflation. These findings indicate that profitability concerns, while absent from standard theoretical models of central banking, are both present and effective in practice, and inform a theoretical debate about monetary stability and the effectiveness and riskiness of non-traditional central banking.
    Keywords: central banks, profitability, non-traditional central banking, monetary stability
    JEL: E58
    Date: 2017
  7. By: Javier Garcia-Cicco; Markus Kirchner; Julio Carrillo; Diego Rodríguez; Fernando Perez; Rocío Gondo; Carlos Montoro; Roberto Chang
    Abstract: This work compares the impact of monetary and macroprudential policies on financial and real sectors in four Latin American countries: Chile, Colombia, Mexico and Peru, and explores the commonalities and differences in the reaction to shocks to both the financial and real sector. In order to do that, we estimate a New Keynesian small open economy model with frictions in the domestic financial intermediation sector and a commodity sector for each country. Results suggest that financial shocks are important drivers of output and investment fluctuations in the short run for most countries, but in the long run their contribution is small. Furthermore, we evaluate the ability of macroprudential policies to limit the impact on credit growth and its effect on real variables. In a scenario of tighter financial conditions, monetary policy becomes expansionary due to both lower inflation (given the exchange rate appreciation) and weaker output growth, and macroprudential policies further contribute to restoring credit and output growth. However, in the case of a negative commodity price shock, macroprudential policies are less effective but useful as a complement for the tightening of monetary policy. Higher inflation (due to the exchange rate depreciation) and higher policy rates lead to a contraction in output growth, but macroprudential policies could alleviate this by improving credit conditions.
    Keywords: central banking, monetary policy, macroprudential policy, financial frictions
    JEL: E52 F41 F47
    Date: 2017–10
  8. By: Juliane Gerstenberger; Gunther Schnabl
    Abstract: The paper analyses the impact of Japanese monetary policy crisis management on the Japanese banking sector since the 1998 Japanese financial crisis. It shows how low-cost liquidity provision as a means to stabilize banks has created a growing gap between deposits above lending and has compressed interest margins as the traditional source of bank’s income. Efficiency scores are compiled to estimate the impact of monetary policy crisis management on the efficiency of banks. The estimation results provide evidence that the Japanese monetary policy crisis management has contributed to declining efficiency in the banking sector despite or because of growing concentration.
    Keywords: Japan, monetary policy, crisis management, banking sector, city banks, regional banks, shinkin banks, concentration
    JEL: E52 E58 F42 E63
    Date: 2017
  9. By: Leshoro, Temitope L A
    Abstract: Inflation expectation is believed to be critical in the formation of prices and wages; hence the South African Reserve Bank (SARB) reacts to any first-round effect of inflation by tightening the monetary policy in order to avoid the second-round effect. But how important are the inflation expectations of the trade unions in leading the inflation rate? Using quarterly data and Toda-Yamamoto causality technique, this study investigates whether inflation rate is led by inflation expectations and/or vice versa, using three different measures of inflation expectations of trade union representatives. The study also investigates the importance of the exchange rate in leading or lagging inflation rate. The inflation expectations of trade union representatives were chosen because of the way in which this sector, through the trade union federation COSATU (Congress of South African Trade Unions), has antagonised the inflation-targeting framework adopted by SARB. The results obtained showed that inflation and the exchange rate have bi-directional causality, while uni-directional causality exists from inflation rate to inflation expectations. The study therefore concluded that a possible second-round effect of inflation cannot be experienced from the changes in inflation expectations of the trade unions, while providing possible policy recommendations. While many studies have observed inflation expectations in different ways, to our knowledge, no study has been conducted with regard to the cause and effect of inflation expectations of trade unions, in particular, on inflation rate using Toda-Yamamoto causality technique for South Africa.
    Keywords: Exchange rate, Inflation, Inflation expectations, Toda-Yamamoto causality, Trade union
    Date: 2017–10
  10. By: Lemke, Wolfgang; Werner, Thomas
    Abstract: Starting in summer 2014, markets began to build up expectations that the European Central Bank (ECB) would embark on large-scale sovereign bond purchases. The ECB’s Public Sector Purchase Programme (PSPP) was eventually announced on 22 January 2015 and purchases started in March. Both during the run-up phase to the PSPP announcement day and for the day itself, German government bond yields declined significantly. Using an affine term structure model, we evidence that the yield declines are almost fully attributable to a decline in the term premium as opposed to the expectations component. This speaks in favour of the conjecture that the PSPP transmits to long-term yields mainly via a portfolio re-balancing channel rather than a (policy rate) signalling channel. The results prove robust against changing the number of factors in the model, the estimation sample and the estimation approach. JEL Classification: E43, E52
    Keywords: large-scale asset purchases, term premia, term structure of interest rates
    Date: 2017–10
  11. By: Gourio, Francois (Federal Reserve Bank of Chicago); Kashyap, Anil K. (University of Chicago); Sim, Jae W. (Board of Governors)
    Abstract: Credit booms sometimes lead to financial crises which are accompanied with severe and persistent economic slumps. Does this imply that monetary policy should “lean against the wind” and counteract excess credit growth, even at the cost of higher output and inflation volatility? We study this issue quantitatively in a standard small New Keynesian dynamic stochastic general equilibrium model which includes a risk of financial crisis that depends on “excess credit”. We compare monetary policy rules that respond to the output gap with rules that respond to excess credit. We find that leaning against the wind may be attractive, depending on several factors, including (1) the severity of financial crises; (2) the sensitivity of crisis probability to excess credit; (3) the volatility of excess credit; (4) the level of risk aversion.
    Keywords: Credit risk; financial crisis; monetary policy
    JEL: E52 E58 G28
    Date: 2017–08–01
  12. By: Nicole Aregger; Jessica Leutert
    Abstract: In this paper, we analyse the effect of unconventional monetary policies on the EUR/CHF exchange rate. We apply the synthetic control approach to four events defining a change in the Swiss National Bank's monetary policy during the 2009 to 2011 period before the introduction of the exchange rate floor. We provide evidence that in some periods the EUR/CHF exchange rate shares common factors not only with other exchange rates, but in particular with other safe assets. It is thus possible to construct a counterfactual exchange rate by assigning weights to other exchange rates or safe assets. The synthetic control approach finds major effects for the March 2009 and August 2011 announcements. The methodology seems less appropriate to evaluate the spring 2010 foreign exchange interventions.
    Date: 2017–11
  13. By: Gunther Schnabl
    Abstract: The paper analyses the common European monetary policy based on a Mises-Hayek overinvestment framework, which is combined with the theory of optimum currency areas. It shows how since the turn of the millennium a too expansionary monetary policy contributed to unsustainable overinvestment booms in the periphery of the European Monetary Union, and more recently in Germany, dependent on the national fiscal policy stances. It is argued that the ECB´s ultra-loose monetary policy as a crisis therapy puts a drag on long-term growth by conserving distorted economic structures. To preserve political stability a timely exit from the ultra-expansionary monetary policy is postulated.
    Keywords: Hayek, Mises, European Monetary Union, European Central Bank, monetary overinvestment theory, optimum currency areas, fiscal policy, asymmetric shocks, secular stagnation
    JEL: E52 E58 F42 E63
    Date: 2017
  14. By: Christiaan Pattipeilohy; Christina Bräuning; Jan Willem van den End; Renske Maas
    Abstract: We present an empirical approach to derive the implicit stance of monetary policy. The indicator can be interpreted as an implied short-term interest rate that is not restricted by the effective lower bound. Factor analysis is used to extract an expectations and term premium component from fitted yield curve data. Based on this, an implied short-term interest rate is constructed, which reflects how much the short-term rate should have fallen to achieve observed drop in long-term yields, assuming it could not have been caused by a fall in the term premium. Following Lombardi and Zhu (2014), we study how the implied rate performs as instrument for monetary policy analysis. Regression analyses suggests that the implied rate provides a good gauge for the identification of non-standard monetary policy shocks, and has responded significantly to financial stress as opposed to the output and inflation gap.
    Keywords: interest rates; determination; term structure and effects; monetary policy
    JEL: E43 E52
    Date: 2017–11
  15. By: Nicole Aregger; Jessica Leutert
    Abstract: We build a two-country model with imperfect financial intermediation. Banks face limits to arbitrage which lead to positive excess returns in the investment markets and a risk premium in the international credit market. Gross capital flows affect the exchange rate since banks are balance sheet constrained and can only absorb additional fl ows on the international credit market if the exchange rate adjusts. Similarly, unconventional monetary policies such as foreign exchange interventions and credit easing infl uence asset prices in financial markets where banks are credit constrained. Within this framework, we study three external sources of appreciation pressure: Financial frictions in the foreign investment market, financial frictions in the international credit market and capital infl ow shocks. In the two latter cases, foreign exchange interventions can reverse the resulting exchange rate movements and misallocations of capital. Furthermore, under certain conditions, foreign exchange interventions and credit easing are substitutes since asset purchases in one market reduce the excess returns in both.
    Date: 2017–11
  16. By: Andreas Freytag; Gunther Schnabl
    Abstract: The paper analyses the effects of the monetary policy crisis management of the European Central Bank on the economic order of Germany. It is argued that in post-war Europe the German social market economy as designed by Eucken (1952) and Müller-Armack (1966) has been a core element of growth, welfare, social cohesion and political stability in Germany and Europe as a whole. It is shown that the monetary policy rescue measures of the European Central Bank have undermined the constitutive principles of the German social market economy, what has considerably contributed to the erosion of (productivity) growth and welfare in Germany and Europe. As the outcome is crumbling social cohesion and growing political instability, a timely exit from ultra-expansionary monetary policy is postulated.
    Keywords: economic order, social market economy, Soziale Marktwirtschaft, Germany, Walter Eucken, Alfred Müller-Armack, monetary policy, crisis management
    JEL: B20 B25
    Date: 2017
  17. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: This paper revisits the Fisher hypothesis by estimating fractional integration and cointegration models that are more general than the standard ones based on the classical I(0)/I(1) dichotomy. Two sets of results are obtained under the alternative assumptions of white noise and Bloomfield (1973) autocorrelated errors respectively. The univariate analysis suggests than the differencing parameter is higher than 1 for most series in the former case, whilst the unit root null cannot be rejected for the majority of them in the latter case. The multivariate results imply that there exists a positive relationship, linking nominal interest rates to inflation; however, there is no evidence of the full adjustment of the former to the latter required by the Fisher hypothesis.
    Keywords: Fisher effect, fractional integration, long memory, G7 countries
    JEL: C22 C32 E43
    Date: 2017
  18. By: Brauning, Falk (Federal Reserve Bank of Boston); Ivashina, Victoria (Harvard Business School)
    Abstract: Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated primarily in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers face a 32-percentage-point greater increase in the volume of loans issued by foreign banks than borrowers from developed markets face, with a similarly large effect upon reversal of the U.S. monetary policy stance. This result is robust across different geographical regions and industries, and holds for non-U.S. lenders, including those with little direct exposure to the U.S. economy. Local EME lenders do not offset the foreign bank capital flows; thus, U.S. monetary policy affects credit conditions for EME firms. We show that the spillover is stronger in higher-yielding and more financially open markets, and for firms with a higher reliance on foreign bank credit.
    Keywords: global business cycle; monetary policy; emerging markets; reaching for yield
    JEL: E44 E52 F34 F44 G21
    Date: 2017–08–29
  19. By: Kontonikas, A; Zekaite, Z
    Abstract: his paper examines the relationship between the US monetary policy and stock valuation using a structural VAR framework that allows for the simultaneous interaction between the federal funds rate and stock market developments based on the assumption of long-run monetary neutrality. The results confirm a strong, negative and significant monetary policy tightening effect on real stock prices. Furthermore, we provide evidence consistent with a delayed response of small stocks to monetary policy shocks relative to large stocks.
    Date: 2017–11–02
  20. By: Hegadekatti, Kartik; S G, Yatish
    Abstract: Crypto currencies like Bitcoin are gaining prominence as a medium of exchange. They have several benefits like very low transaction cost, fungibility etc. But Crypto currencies are also identified with their use in crimes, illegal activities and speculation. Part of the reason for their prominence as well as notoriety is the fact that they have no Sovereign Backing whatsoever and also because they are decentralized. To make Crypto currencies acceptable by the people and also curb their misuse, the authors have proposed a protocol containing a set of standards and procedures. By using this procedure, any nation can create its own Sovereign Backed crypto currency called NationCoin. A commission will be established which will hold a certain quantum of money loaned by the Government. This loaned money will provide the Sovereign backing to the Crypto Currency. A Controlled Block Chain Protocol is used. The Genesis Block of several NationCoins is then provided to the banks in the country to use them for interbank settlements. These Interbank transactions will lead to the mining (generation) of additional NationCoins by the commission which will hold it without releasing it to the public. Once there are sufficient numbers of NationCoins so as to be equal to the loaned amount unit-for-unit, it shall be released to the public for use.
    Keywords: bitcoin, blockchain, cryptocurrency
    JEL: E51 E52 E58 F33 G18 O38
    Date: 2016–02–23
  21. By: Bianchi, Francesco (Duke University); Melosi, Leonardo (Federal Reserve Bank of Chicago)
    Abstract: What happens if the government’s willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.
    Keywords: Monetary and fiscal policies; coordination; emergency budget; Markov-switching models; liquidity traps
    JEL: D83 E31 E5 E62 E63
    Date: 2017–07–06
  22. By: Michael D. Bauer; Glenn D. Rudebusch
    Abstract: Theory predicts that the equilibrium real interest rate, r*t, and the perceived trend in inflation, ð*t, are key determinants of the term structure of interest rates. However, term structure analyses generally assume that these endpoints are constant. Instead, we show that allowing for time variation in both r*t and ð*t is crucial for understanding the empirical dynamics of U.S. Treasury yields and risk pricing. Our evidence reveals that accounting for fluctuations in both r*t and ð*t substantially increases the accuracy of long-range interest rate forecasts, helps predict excess bond returns, improves estimates of the term premium in long-term interest rates, and captures a substantial share of interest rate variability at low frequencies.
    Keywords: yield curve, macro-finance, inflation trend, equilibrium real interest rate, shifting endpoints, bond risk premia
    JEL: E43 E44 E47
    Date: 2017
  23. By: Anadu, Ken (Federal Reserve Bank of Boston); Baklanova, Viktoria (Office of Financial Research)
    Abstract: The most recent changes to money market fund regulations have had a strong impact on the money fund industry. In the months leading up to the compliance date of the core provisions of the amended regulations, assets in prime money market funds declined significantly, while those in government funds increased contemporaneously. This reallocation from prime to government funds has contributed to the latter's increased demand for debt issued by the U.S. government and government-sponsored enterprises. The Federal Home Loan Bank (FHLBank) System played a key role in meeting this heightened demand for U.S. government-related assets with increased issuance of short-term debt. The FHLBank System uses the funding obtained from money market funds to provide general liquidity to its members, including the largest U.S. banks. Large U.S. banks' increased borrowings from the FHLBank System are motivated, in large part, by other post-crisis regulations, specifically the liquidity coverage ratio (LCR). The intersection of money market mutual fund reforms and the LCR have contributed to the FHLBanks' increased reliance on short-term funding to finance relatively longer-term assets, primarily collateralized loans to its largest members. This funding model could be vulnerable to "runs" and impact financial markets and financial institutions in ways that are difficult to predict. While a funding run seems unlikely, it is often the violation of commonly held conventions that tend to pose financial stability risks. Indeed, runs on leveraged financial intermediaries engaged in maturity transformation have produced systemic risks issues in the past and are worthy of investigation and continuous monitoring.
    Keywords: Federal Home Loan Banks; liquidity coverage ratio; Money Market Mutual Funds; short-term funding markets; systemic risk
    JEL: E50 G23 G28
    Date: 2017–10–31
  24. By: Kontonikas, A; Maio, P; Zekaite, Z
    Abstract: We investigate the impact of monetary policy shocks (the surprise change in the Fed Funds rate (FFR)) on excess corporate bonds returns. We obtain a significant negative response of bond returns to FFR shocks. This effect is especially strong in the period before the 2007- 09 financial crisis and for bonds with longer maturity and lower rating. We show that the largest portion of this response is related to higher expected excess bond returns, especially term premia news. Therefore, the discount-rate channel represents an important mechanism through which monetary policy affects corporate bonds. However, the financial crisis has attenuated this effect.
    Keywords: Corporate Bond Market, Variance Decomposition, Monetary Policy
    Date: 2017–10
  25. By: Kunze, Frederik
    Abstract: This paper evaluates aggregated survey forecasts with forecast horizons of 3, 12, and 24 months for the exchange rates of the Chinese yuan, the Hong Kong dollar, the Japanese yen, and the Singapore dollar vis-à-vis the US dollar using common forecast accuracy measures. Additionally, the rationality of the exchange rate predictions are assessed utilizing tests for unbiasedness and efficiency. All investigated forecasts are irrational in the sense that the predictions are biased. However, these results are inconsistent with an alternative measure of rationality based on methods of applied time series analysis. Investigating the order of integration of the time series and using cointegration analysis, empirical evidence supports the conclusion that the majority of forecasts are rational. Regarding forerunning properties of the predictions, the results are less convincing, with shorter term forecasts for the tightly managed USD/CNY FX regime being one exception. As one important evaluation result, it can be concluded, that the currency regime matters for the quality of exchange rate forecasts.
    Keywords: exchange rates,survey forecasts,forecast evaluation,forecast acccuracy,forecast rationality,cointegration,impulse response analysis
    JEL: F31 F37 G17 O24
    Date: 2017
  26. By: Chris Garbers; Guangling Liu
    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, DSGE, real business cycle, Financial intermediation
    JEL: E21 E32 E43 E44 E51 E52
    Date: 2017–10
  27. By: Hegadekatti, Kartik; S G, Yatish
    Abstract: In this paper, we analyse the workings of commercial banks in a scenario where crypto-currencies are the mainstream bills of exchange. We start by explaining the concept of cryptocurrencies (also referred to as cryptocoins in this paper). Then we discuss the concept of Regulated and Sovereign Backed Cryptocurrencies (RSBCs). Later on, we envisage a scenario where cryptocoins are the main media of exchange. The banking aspects of Paper money, Bitcoins and RSBCs are then deliberated. We analyse the interplays between Banking and various currency formats. Finally, the paper concludes as to which currency is best suited to be the mainstream bill of exchange.
    Keywords: Banking, Cryptocurrencies, Bitcoin, Blockchain
    JEL: E51 E52 E58 F33 G18 G21 O38
    Date: 2016–10–22
  28. By: Corradin, Stefano; Heider, Florian; Hoerova, Marie
    Abstract: This paper examines the role of collateral in the financial system, with special emphasis on the implications for financial stability and the conduct of monetary policy. First, we review what drives the demand and supply for both real and financial collateral assets. Then we examine financial stability issues and the case for regulating the use of collateral. We discuss the role and design of market infrastructures such as central clearing counterparties (CCPs). Finally, we examine the interaction of standard and non-standard monetary policy and the functioning of private collateralised markets. We show that the use of collateral is neither a sufficient nor a necessary condition for financial stability. To ensure the stability of collateralised markets a mix of micro- and macro-prudential regulation, as well as a sufficient supply of safe public assets that can be used as collateral, are needed. JEL Classification: E59, E44, G18
    Keywords: central-clearing counterparties, central bank policies, haircuts, margins, repo
    Date: 2017–11
  29. By: Patrick Matthew Crowley (College of Business, Texas A&M University); David Hudgins (College of Business, Texas A&M University)
    Abstract: This paper models South African fiscal and monetary policy in an open economy context, using a wavelet-based optimal control model. We then use the model to simulate fiscal and monetary strategies under different levels of policy restrictions. This research applies the Maximal Overlap Discrete Wavelet Transform (MODWT) to post-apartheid South African quarterly GDP data and other pertinent macro data, and then uses these decomposed variables to build a large state-space linear-quadratic tracking model. Using a political targeting design for the frequency range weights, we then simulate jointly optimal fiscal and monetary policy where: (1) both fiscal and monetary policy are dually emphasized, (2) fiscal policy is unrestricted while monetary policy largely restricted, and (3) only monetary policy is relatively active, while fiscal spending is heavily restricted. This paper adds to recent research by incorporating an external sector by using the South African real effective exchange rate as a driver of output.
    Date: 2017
  30. By: Mavikela, Nomahlubi; Mhaka, Simba; Phiri, Andrew
    Abstract: This paper investigates the relationship between inflation and economic growth for South Africa and Ghana using quarterly empirical data collected from 2001 to 2016 applied to the quantile regression method. For our full sample estimates we find that inflation is positively related with growth in Ghana at high inflation levels whilst inflation in South Africa exerts its least adverse effects at high inflation levels. However, when particularly focusing on the post-crisis period, we find inflation exerts negative effects at all levels of inflation for both countries with inflation having its least adverse effects at high levels for Ghana and at moderate levels for South Arica. Based on these findings bear important implications for inflation targeting frameworks adopted by Central Banks in both countries.
    Keywords: Inflation, Economic Growth, quantile regression, Inflation targeting; South Africa, Ghana, Sub-Saharan Africa (SSA).
    JEL: C32 C51 E31 E52 O40
    Date: 2018–10–23
  31. By: Tjeerd M. Boonman; Jan P. A. M. Jacobs; Gerard H. Kuper; Alberto Romero
    Abstract: This paper investigates the performance of early warning systems for currency crises in real-time, using forecasts of indicators that are available at the moment predictions are to be made. We focus on eight Latin American and Central and Eastern European countries, distinguishing an estimation period 1990{2009 and a prediction period 2010{2014. We apply two varieties of early warning systems: the signal approach and the logit model. For bothmethods we nd that using early estimates in the predictions worsens the ability of early warning systems to signal crises compared to the most recently available information.
    JEL: F31 E47 G01 C23 E58
    Date: 2017–10–30
  32. 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
  33. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Liting Su (Department of Economics, The University of Kansas;)
    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 financialfirm 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: Credit Cards, Money, Credit, Aggregation, Monetary Aggregation, Index Number Theory, Divisia Index, Risk, Euler Equations, Asset Pricing
    JEL: C43 C53 C58 E01 E3 E40 E41 E51 E52 E58 G17
    Date: 2017–10
  34. By: Fidora, Michael; Giordano, Claire; Schmitz, Martin
    Abstract: Building upon a Behavioural Equilibrium Exchange Rate (BEER) model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses whether both the size and the persistence of real effective exchange rate misalignments from the levels implied by economic fundamentals are affected by the adoption of a single currency. While real misalignments are found to be smaller in the euro area than in its main trading partners, they are also more persistent, although the reactivity of real exchange rates to past misalignments increased, and therefore the persistence decreased, after the global financial crisis. In the absence of the nominal adjustment channel, an improvement in the quality of regulation and institutions is found to reduce the persistence of real exchange rate misalignments, plausibly by removing real rigidities. JEL Classification: E24, E30, F00
    Keywords: equilibrium exchange rate, monetary union, real effective exchange rate, regulation
    Date: 2017–11
  35. By: Christopher F. Baum (Boston College; DIW Berlin); Madhavi Pundit (Asian Development Bank); Arief Ramayandi (Asian Development Bank)
    Abstract: There is mixed evidence for the impact of international capital flows on financial sector's stability. This paper investigates the relationship between components of gross capital flows and various financial stability indicators for 16 emerging and newly industrialized economies. Departing from panel data methods, for each financial stability proxy, we employ systems of seemingly unrelated regression estimators to allow variation in the estimated relationship across countries, while permitting crossequation restrictions to be imposed within a country. The findings suggest that, after controlling for macroeconomic factors, there are significant effects of different gross capital flow measures on the financial stability proxies. However, the effects are not homogeneous across our sample economies and across flows. Country-specific financial and macroeconomic characteristics help to explain some of these differences.
    Keywords: emerging economies, financial stability, international capital flows
    JEL: E44 F41
    Date: 2017–10–30
  36. By: Christian K. Tipoy; Marthinus C. Breitenbach; Mulatu F. Zerihun
    Abstract: We compute the exchange rate misalignment for a set of emerging economies between 1980 and 2013 using the behavioural equilibrium exchange rate definition. The real equilibrium exchange rate is constructed using a parsimonious model and estimators that are robust to cross-sectional independence and small sample size bias. We find that these countries tend to intervene to avoid real appreciation of their currencies following a rise in relative productivity, casting doubt on the Balassa-Samuelson effect. East-Asian countries have maintained their currencies at an artificially low level in order to remain competitive and boost economic growth these past years.
    Keywords: equilibrium exchange rate, panel cointegration, autoregressive distributed lag
    JEL: F31 C23
    Date: 2017–10
  37. By: Salomon Faure; Hans Gersbach
    Abstract: We study money creation and destruction in today’s monetary architecture within a general equilibrium setting. Two types of money are created and destructed: bank deposits, when banks grant loans to firms or to other banks, and central bank money, when the central bank grants loans to private banks. We show that symmetric equilibria yield the first-best allocation when prices are exible, regardless of the monetary policy or capital regulation. When prices are rigid, we identify the circumstances in which money creation is excessive or breaks down and how an adequate combination of monetary policy and capital regulation may restore efficiency.
    Keywords: money creation, bank deposits, capital regulation, zero lower bound, monetary policy, price rigidities
    JEL: D50 E40 E50 G21
    Date: 2017
  38. By: Francis Leni Anguyo (School of Economics, University of Cape Town); Rangan Gupta (Department of Economics, University of Pretoria); Kevin Kotze (School of Economics, University of Cape Town)
    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 current 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 current 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
    Date: 2017
  39. By: Ricardo Reis
    Abstract: Central banks affect the resources available to fiscal authorities through the impact of their policies on the public debt, as well as through their income, their mix of assets, their liabilities, and their own solvency. This paper inspects the ability of the central bank to alleviate the fiscal burden by inuencing different terms in the government resource constraint. It discusses five channels: (i) how inflation can (and cannot) lower the real burden of the public debt, (ii) how seignorage is generated and subject to what constraints, (iii) whether central bank liabilities should count as public debt, (iv) how central bank assets create income risk, and whether or not this threatens its solvency, and (v) how the central bank balance sheet can be used for fiscal redistributions. Overall, it concludes that the scope for the central bank to lower the fiscal burden is limited.
    Keywords: monetary policy, reserves, interest rates, quantitative easing
    JEL: E58 E63 E52
    Date: 2017
  40. By: André Sapir; Dirk Schoenmaker
    Abstract: The issue The creation of the European Stability Mechanism (ESM) and the banking union were instrumental in stemming the euro-area sovereign crisis. However, both remain incomplete. While the ESM reduces the risk of sovereign debt crises, it still lacks an instrument to deal in an orderly way with insolvency crises. This makes the no-bailout clause of the Maastricht Treaty toothless. Two of the banking union’s pillars – common European supervision by the European Central Bank and common European resolution by the Single Resolution Fund – are up and running. But the third, common European deposit insurance, is still missing. Furthermore, the governance of the ESM is wanting. Decisions to provide financial assistance are taken by unanimity, preventing swift crisis response when it is needed. Policy challenge The re-election of Chancellor Merkel and the election of President Macron create a new momentum for strengthening the euro area’s crisis framework. There is agreement to turn the ESM into a European Monetary Fund (EMF). We propose to design this EMF as part of a broader risk-sharing and market-discipline agenda. Risk sharing would come from the increased capacity of the EMF to intervene early in a sovereign or banking crisis and to act as a fiscal backstop to a complete banking union that includes European deposit insurance. Market discipline of sovereigns would come from the reduced exposure of banks to their home sovereigns and from a newly-established debt restructuring mechanism. The proposed transformation of the ESM into an EMF should be viewed as part of a wider institutional reform of the fiscal dimension of the euro area.
    Date: 2017–10
  41. By: Ricardo Correa; Rochelle M. Edge; J. Nellie Liang
    Abstract: Governance structures are a critical part of a framework for implementing macroprudential policy, alongside methodologies for measuring and monitoring systemic risk, and analyses to understand the impact of policies that may be used to mitigate risk. As part of various research projects to study macroprudential policy frameworks, we have compiled a new dataset of governance structures in 58 countries. This note documents the construction of our dataset, including the decisions that we made concerning the countries and governance-structure facts to record in our dataset, and it discusses the approach that we followed for collecting this information.
    Date: 2017–11–07
  42. By: Gianluca Cafiso
    Abstract: Economic research has considered Private Debt a determinant of GDP growth for years. By keeping this perspective, the objective of this work is to understand how much of the GDP response to a monetary shock is due to the variation of private debt. This is the marginal contribution of private debt, which we relate to an increase of the aggregate demand. We study the USA, the UK and Germany in the period 1980q1-2015q4. Our approach is based on the comparison of one baseline structural VAR with one counterfactual for each country. The analysis is developed using the two main constituents of private debt: households and corporations debt.
    Keywords: private debt, GDP, monetary policy, structural VAR
    JEL: O11 O16 O51 O52 E44
    Date: 2017
  43. By: Hegadekatti, Kartik; S G, Yatish
    Abstract: In this paper, we examine the Taxation aspects of Fiat money and Bitcoins vis-a-vis Regulated Cryptocurrencies. We start off by briefly explaining the concept of cryptocurrencies (also referred to as cryptocoins in this paper). We then discuss the concept of Regulated and Sovereign Backed Cryptocurrencies (RSBCs). Then we envisage a scenario where cryptocoins are the main medium of exchange. The taxation aspects of Paper money, Bitcoins and RSBCs are then deliberated with the pros and cons of taxation for each currency format. The currency that can support an Automated Tax Regime is also debated. Finally, the paper concludes by arranging in ascending order, the currencies which are easily amenable to and compliant with taxation policies and laws.
    Keywords: Taxation, Bitcoins, K-Y Protocol, NationCoins, RSBC
    JEL: E42 E52 H21 H24 H26
    Date: 2016–10–02

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