nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒11‒26
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Structural Factor Analysis of Interest Rate Pass Through In Four Large Euro Area Economies By Anindya Banerjee; Victor Bystrov; Paul Mizen
  2. Communicating Uncertainty in Monetary Policy By Sharon Kozicki; Jill Vardy
  3. What Rule for the Federal Reserve? Forecast Targeting By Lars E.O. Svensson
  4. The international bank lending channel of unconventional monetary policy By Gräb, Johannes; Żochowski, Dawid
  5. Monetary Policy Divergence, Net Capital Flows, and Exchange Rates: Accounting for Endogenous Policy Responses By Davis, Scott; Zlate, Andrei
  6. Eurozone bond market dynamics, ECB monetary policy and financial stress By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  7. On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound By Christopher Waller; Paola Boel
  8. Central Bank Information and the effects of Monetary shocks By Paul Hubert
  9. The Gold Pool (1961-1968) and the Fall of the Bretton Woods System. Lessons for Central Bank Cooperation. By Michael Bordo; Eric Monnet; Alain Naef
  10. Optimal monetary policy with international trade in intermediate inputs By Liutang Gong; Chan Wang; Heng-fu Zou
  11. Exchange rates and monetary policy uncertainty By Mueller, Philippe; Tahbaz-Salehi, Alireza; Vedolin, Andrea
  12. Populism and central bank independence By Goodhart, Charles; Lastra, Rosa
  13. Inflation Expectations and Monetary Policy Surprises By Snezana Eminidou; Marios Zachariadis; Elena Andreou
  14. Comparative Analysis of Afghanistan and Pakistan Central Banks Monetary Policy By Tahiri, Noor Rahman
  15. Monetary Rule, Central Bank Loss and Household’s Welfare: an Empirical Investigation By Benchimol, Jonathan; Fourçans, André
  16. Myths and Observations on Unconventional Monetary Policy -- Takeaways from Post-Bubble Japan -- By Yuto Iwasaki; Nao Sudo
  17. Monetary Policy Under Uncertainty: Practice Versus Theory By Rhys R. Mendes; Stephen Murchison; Carolyn A. Wilkins
  18. A Central Bank’s optimal balance sheet size? By Goodhart, Charles
  19. The Bank of England as Lender of Last Resort: New historical evidence from daily transactional data By Mike Anson; David Bholat Author-Name-First: David; Miao Kang; Ryland Thomas
  20. Banks Cannot Either Multiply or Increase the Amount of Money or Create Deposits Without Backing of Matching Reserve; Only Central Bank Creates Money By NABA KUMAR ADAK
  21. The Macroeconomic Impact of Money Market Freezes By Marie Hoerova; Harald Uhlig; Fiorella De Fiore
  22. The Demand for Divisia Money: Theory and Evidence By Michael T. Belongia; Peter N. Ireland
  23. Global Trade and the Dollar By Mikkel Plagborg-Moller; Gita Gopinath; Emine Boz
  24. Friedman’s Presidential Address in the Evolution of Macroeconomic Thought By N. Gregory Mankiw; Ricardo Reis
  25. Inflation expectations and nonlinearities in the Phillips curve By Doser, Alexander; Nunes, Ricardo; Rao, Nikhil; Sheremirov, Viacheslav
  26. The transmission of monetary policy shocks By Silvia Miranda-Agrippino; Giovanni Ricco
  27. Understanding the Time Variation in Exchange Rate Pass-Through to Import Prices By Rose Cunningham; Christian Friedrich; Kristina Hess; Min Jae Kim
  28. International banking and transmission of the 1931 financial crisis By Accominotti, Olivier
  29. Determinants and Macroeconomic Impact of Parallel Market For Foreign Exchange in Sudan By Ebaidalla Mahjoub Ebaidalla
  30. Inflation and hyperinflation in Venezuela (1970s-2016): A post-Keynesian interpretation By Kulesza, Marta
  31. From Wicksell to Le Bourva to Modern Monetary Theory: A Wicksell connection By Ehnts, Dirk; Barbaroux, Nicolas
  32. Capitalising on the euro. Options for strengthening the EMU By Jeroen Hessel; Niels Gilbert; Jasper de Jong

  1. By: Anindya Banerjee (University of Canterbury); Victor Bystrov; Paul Mizen
    Abstract: In this paper we examine the influence of unconventional monetary policy at the ECB on mortgage and business lending rates offered by banks in the major euro area countries (Germany, France, Italy and Spain). Since there are many different policy measures that have been undertaken, we utilise a dynamic factor model based on the Bernanke Boivin and Eliasz (2005) approach, which allows examination of impulse responses to a policy rate conditioned by structurally identified latent factors. The distinct feature of this paper is that it explores the effects of all three phases of monetary policy to emphasize the transmission channels - through short-term rates, long-term yields and and perceived risk - ultimately directed towards bank lending rates. Further analysis of unconventional monetary policy is provided through rolling window impulse responses and variance decompositions of the identified financial factors on lending rates to demonstrate the changing influence of different policy measures on lending rates.
    Keywords: monetary policy, dynamic factor models, interest rates, pass through
    JEL: C32 C53 E43 E4
    Date: 2017–11–01
  2. By: Sharon Kozicki; Jill Vardy
    Abstract: While central banks cannot provide complete foresight with respect to their future policy actions, it is in the interests of both central banks and market participants that central banks be transparent about their reaction functions and how they may evolve in response to economic developments, shocks, and risks to their outlooks. This paper outlines the various ways in which the Bank of Canada seeks to explain its economic outlook and monetary policy decisions, with an emphasis on how different sources of uncertainty factor into monetary policy communications. To help markets and others understand its reaction function, the central bank must explain what uncertainties are weighing on policy and how (or if) these uncertainties are being considered in policy formulation. Discussion of uncertainty becomes particularly important when a large shock has hit the economy or when a central bank’s view or its policy stance is changing. Market views and the views of the central bank will not always be aligned. The aim of monetary policy communications should not be alignment but understanding—helping markets comprehend the central bank’s policy objectives and providing a coherent rationale for policy decisions. In doing so, the bank must be transparent about the uncertainties influencing the outlook, their possible impacts and how these uncertainties will be factored into policy decisions. This paper outlines some recent and upcoming initiatives to achieve those objectives and improve Bank of Canada communications.
    Keywords: Credibility, Monetary Policy, Uncertainty and monetary policy
    JEL: E E5 E52 E58 E61
    Date: 2017
  3. By: Lars E.O. Svensson
    Abstract: How would the policy rule of forecast targeting work for the Federal Reserve? To what extent is the Federal Reserve already practicing forecast targeting? Forecast targeting means selecting a policy rate and policy-rate path so that the forecasts of inflation and employment “look good,” in the sense of best fulfilling the dual mandate of price stability and maximum employment, that is, best stabilize inflation around the inflation target and employment around its maximum level. It also means publishing the policy-rate path and the forecasts of inflation and employment forecasts and, importantly, explaining and justifying them. This justification may involve demonstrations that other policy-rate paths would lead to worse mandate fulfillment. Publication and justification will contribute to making the policy-rate path and the forecasts credible with the financial market and other economic agents and thereby more effectively implement the Federal Reserve's policy. With such information made public, external observers can review Federal Reserve policy, both in real time and after the outcomes for inflation and employment have been observed, and the Federal Reserve can be held accountable for fulfilling its mandate. In contrast to simple policy rules that rely on very partial information in a rigid way, such as Taylor-type rules, forecast targeting allows all relevant information to be taken into account and has the flexibility and robustness to adapt to new circumstances. Forecast targeting can also handle issues of time consistency and determinacy. The Federal Reserve is arguably to a considerable extent already practicing forecast targeting.
    JEL: E52 E58
    Date: 2017–11
  4. By: Gräb, Johannes; Żochowski, Dawid
    Abstract: We use a confidential euro area bank-level data set of close to 250 banks to assess outward and inward spillovers of unconventional monetary policies on bank lending. We find that euro area banks increase lending to the rest of the world in response to non-standard ECB monetary policy accommodation. We also find strong evidence that euro area banks increase lending to the domestic non-financial private sector in response to accommodative unconventional monetary policy measures in the US. Inward and outward spillovers are substantially stronger for euro area banks which are liquidity constrained and which rely more on internal capital markets. This suggests that bank-specific supply effects, stemming from banks’ increased ability to lend following a central bank balance sheet expansion, are a major driver of monetary policy spillovers, providing strong support to the existence of an international bank lending channel that prevails at the effective lower bound. JEL Classification: E44, E52, G01
    Keywords: cross-border spillovers, international bank lending channel, monetary policy, quantitative easing
    Date: 2017–11
  5. By: Davis, Scott (Federal Reserve Bank of Dallas); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: This paper measures the effect of monetary tightening in key advanced economies on net capital flows and exchange rates around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous responses of domestic monetary policy depends on each economy’s capital account openness and exchange rate regime. We develop a method to plot counter-factual impulse responses for net capital outflows under the assumption that domestic interest rates are held constant despite foreign monetary tightening. Our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as ¼ for floaters and ½ for peggers with open capital accounts.
    JEL: E5 F3 F4
    Date: 2017–10–01
  6. By: Christophe Blot (OFCE, Sciences Po Paris, France); Jérôme Creel (OFCE, Sciences Po Paris, France); Paul Hubert (OFCE, Sciences Po Paris, France); Fabien Labondance (OFCE, Sciences Po Paris, France)
    Abstract: We investigate the role of both ECB’s asset purchases and market sentiment in the Eurozone sovereign debt crisiscontext. We explain the evolution of long-term interest rates in the Eurozone and in some Member States since the ECB started to purchase various securities for monetary policy purposes. We control for four categories offundamentals: macroeconomic, international, financial and expectations. We show that unconventional monetary policies and country-specific market sentiment have significant negative and positive effects respectively. Our results suggest that ECB’s unconventional policies have been effective in mitigating the disruption in the channels of transmission across the different Eurozone countries
    Keywords: Asset purchase programmes, ECB, sovereign yields, unconventional monetary policies, CISS
    JEL: E52 E58
    Date: 2017–09
  7. By: Christopher Waller (Federal Reserve Bank of St. Lousi); Paola Boel (Sveriges Riksbank)
    Abstract: We construct a monetary economy in which agents face aggregate demand shocks and heterogeneous idiosyncratic preference shocks. We show that, in this environment, not all agents are satiated at the zero lower bound even when the Friedman rule is the best interest rate policy the central bank can implement. Therefore, there is scope for central bank policies of liquidity provision even at the zero lower bound. This is because such policies temporarily relax the liquidity constraint of impatient agents without harming the patient ones, thus improving welfare. Due to a pricing externality, this may also have beneficial general equilibrium effects for the patient agents even if they are unconstrained in their holdings of real balances.
    Date: 2017
  8. By: Paul Hubert (OFCE Sciences Po)
    Abstract: Does the effect of monetary policy depend on the macroeconomic information released by the central bank? Because differences between central bank’s and private agents’ information sets affect private agents’interpretation of policy decisions, this paper aims to investigate whether the publication of macroeconomic information by the central bank modifies private responses to monetary policy. We assess the non-linear effects of monetary shocks conditional on the Bank of England’s macroeconomic projections on UK private inflation expectations. We find that inflation projections modify the impact of monetary shocks. When contractionary monetary shocks are interacted with positive (negative) projections, the negative effect of policy on inflation expectations is amplified (reduced). This suggests that providing guidance about central bank future expected inflation helps private agents’ information processing, and therefore changes their response to policy decisions..
    Keywords: Monetary policy, information processing, signal extraction, market-based inflation expectations, central bank projections, real-time forecasts.
    JEL: E62 E58
    Date: 2017–09
  9. By: Michael Bordo; Eric Monnet; Alain Naef
    Abstract: The Gold Pool (1961-1968) was one of the most ambitious cases of central bank cooperation in history. Major central banks pooled interventions – sharing profits and losses – to stabilize the dollar price of gold. Why did it collapse? From at least 1964, the fate of the Pool was in fact tied to sterling, the first line of defense for the dollar. Sterling’s unsuccessful devaluation in November 1967 spurred speculation and massive losses for the Pool. Contagion occurred because US policies were inflationary and insufficiently credible as well. The demise of the Pool provides a striking example of contagion between reserve currencies.
    JEL: E42 F31 F33 N14
    Date: 2017–11
  10. By: Liutang Gong (Guanghua School of Management and LMEQF, Peking University); Chan Wang (Guanghua School of Management and LMEQF, Peking University); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics; Institute for Advanced Study, Wuhan University; Institute for Advanced Study, Shenzhen University)
    Abstract: This paper examines optimal monetary policy in a two-country New Keynesian model with international trade in intermediate inputs. We derive the loss function of a cooperative monetary policymaker and ï¬ nd that the optimal monetary policy must target intermediategoods price inflation rates, ï¬ nal-goods price inflation rates, ï¬ nalgoods output gaps, and relative-price gaps. We use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three Taylor-type monetary policy rules. A main ï¬ nding is that the degree of price stickiness at the stage of intermediate-goods production is a key factor to determine which policy rule should be followed. Speciï¬ cally, when the degree of price stickiness at the stage of intermediate-goods production is high, the policymaker should follow intermediate-goods PPI-based Taylor rule, whereas CPI-based Taylor rule should be followed when the degree of price stickiness at the stage of intermediate-goods production is intermediate or low.
    Keywords: Vertical production and trade, Optimal monetary policy, Inflation targeting, Welfare
    JEL: E5 F3 F4
    Date: 2016–07
  11. By: Mueller, Philippe; Tahbaz-Salehi, Alireza; Vedolin, Andrea
    Abstract: We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.
    JEL: F3 G3
    Date: 2017–06–01
  12. By: Goodhart, Charles; Lastra, Rosa
    Abstract: The consensus that surrounded the granting of central bank independence in the pursuit of a price stability oriented monetary policy has been challenged in the aftermath of the global financial crisis, in the light of the rise of populism on the one hand and the expanded mandates of central banks on the other hand. After considering the economic case for independence and the three Ds (distributional, directional and duration effects), the paper examines three different dimensions in the debate of how the rise in populism - or simply general discontent with the status quo - affects central bank independence. Finally, the paper examines how to interpret the legality of central bank mandates, and whether or not central banks have exceeded their powers. This analysis leads us in turn to consider accountability and, in particular, the judicial review of central bank actions and decisions. It is important to have in place adequate mechanisms to ‘guard the guardians’ of monetary and financial stability.
    Keywords: central bank independence; populism; mandates; accountability; legitimacy; Judicial Review
    JEL: F3 G3
    Date: 2017–09–26
  13. By: Snezana Eminidou (University of Cyprus); Marios Zachariadis (University of Cyprus); Elena Andreou (University of Cyprus)
    Abstract: We use monthly data across fifteen euro-area economies for the period 1985:1-2015:3 to obtain monetary policy changes that can be regarded as surprises for different types of consumers. A novel feature of our empirical approach is the estimation of monetary policy surprises based on changes in monetary policy that were unanticipated according to the consumers stated beliefs about the economy. We go on to investigate how these monetary policy surprises affect consumers' inflation expectations. We find that such monetary policy surprises can have the opposite impact on inflation expectations to those obtained under the assumption that consumers are well informed about a set of macroeconomic variables describing the state of the economy. More specifically, when we relax the assumption of well informed consumers by focusing instead on their stated beliefs about the economy, unanticipated increases in the interest rate raise inflation expectations. This is consistent with imperfect information theoretical settings where unanticipated increases in interest rates are interpreted as positive news about the state of the economy by consumers that know policymakers have relatively more information. This impact changes sign since the Crisis.
    Date: 2017
  14. By: Tahiri, Noor Rahman
    Abstract: This paper provides a broad overview of monetary policy cooperation of Afghanistan and Pakistan central banks through the differences framework of policy analysis. The framework proves useful for interpreting past policy decisions and mistakes of Policy during the 2005 but when closely examined within the context of the information available and policymaker perceptions in real time of those country , this change is indirect than usually appears at first glance with reviewing analysis in this research we also find the real GDP, Inflation, GDP per capita, PPP, GDP per capita, current dollars, GDP per capita, constant dollars, GDP, current U.S. dollars, External debt and Economic growth measure through the world banks internet measuring of Afghanistan and Pakistan compression .
    Keywords: Host Country Growth, GDP, Policy
    JEL: C54 D12 E52
    Date: 2017–11–01
  15. By: Benchimol, Jonathan (Bank of Israel); Fourçans, André (ESSEC Business School)
    Abstract: Which monetary policy rule best fits the historical data? Which rule is most effective to reach the central bank’s objectives? Is minimizing a central bank loss equivalent to maximizing households’ welfare? Are NGDP growth or level targeting good options, and if so, when? Do they perform better than Taylor-type rules? In order to answer these questions, we use Bayesian estimations to evaluate the Smets and Wouters (2007) model under nine monetary policy rules with US data ranging from 1955 to 2017 and over three different sub-periods (among them the zero lower bound period where a shadow rate is introduced). We find that when considering the minimization of the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules. If the behavior of the Fed is expressed in terms of households-welfare, the implications are not necessarily the same.
    JEL: E32 E52 E58
    Date: 2017–10–01
  16. By: Yuto Iwasaki (Bank of Japan); Nao Sudo (Bank of Japan)
    Abstract: Reservations are sometimes raised regarding the effectiveness of unconventional monetary policy (UMP) due to the concerns about influences of impaired financial systems and low policy rates. To see if this is the case, we combine the local projection method of Jorda (2005) with shadow rates to estimate macroeconomic effects of monetary policy shocks during the implementation period of UMP, and test if effects of these shocks with the same magnitude differ across periods or states of the economy, using Japan's data from the 1980s to 2016. We find that monetary policy shocks during the implementation period of the UMP had statistically significant expansionary effects on the economy. We also find that an unexpected 100 basis point cut in shadow rates during the UMP yielded larger expansionary effects on key economic variables than it did during the conventional monetary policy (CMP), because of the following three reasons: (i) A cut in the shadow rates resulted in a larger reduction in the real interest rate, and affected a wider range of borrowing rates during the UMP; (ii) The effectiveness of monetary policy shocks was dampened when the financial system was significantly impaired, particularly during the CMP; (iii) Other things being equal, the effectiveness has been so far little affected by the level of policy rate. Our results show that UMP has been effective, but that the nature of monetary transmission is subject to change depending on financial conditions or other economic circumstances, and therefore monetary policy needs to be carefully implemented. Note also that our study only explores the effects of a one-unit shock to the monetary policy rule, and does not address the entire effects of monetary easing that are affected by the size of shocks as well.
    Keywords: Conventional and unconventional monetary policy; Shadow rates
    JEL: F39 G15 G18
    Date: 2017–11–09
  17. By: Rhys R. Mendes; Stephen Murchison; Carolyn A. Wilkins
    Abstract: For central banks, conducting policy in an environment of uncertainty is a daily fact of life. This uncertainty can take many forms, ranging from incomplete knowledge of the correct economic model and data to future economic and geopolitical events whose precise magnitudes and effects cannot be known with certainty. The objective of this paper is to summarize and compare the main results that have emerged in the literature on optimal monetary policy under uncertainty with actual central bank behaviour. To this end, three examples are studied in which uncertainty played a significant role in the Bank of Canada’s policy decision, to see how closely they align with the predictions from the literature. Three principles emerge from this analysis. First, some circumstances—such as when the policy rate is at risk of being constrained by the effective lower bound—should lead the central bank to be more pre-emptive in moving interest rates, whereas others can rationalize more of a wait-and-see approach. In the latter case, the key challenge is finding the right balance between waiting for additional information and not falling behind the curve. Second, the starting-point level of inflation can matter for how accommodative or restrictive policy is relative to the same situation without uncertainty, if there are thresholds in the central bank’s preferences associated with specific ranges for the target variable, such as the risk of inflation falling outside of the inflation control range. Third, policy decisions should be disciplined, where possible, by formal modelling and simulation exercises in order to support robustness and consistency in decision making over time. The paper concludes with a set of suggested areas for future research.
    Keywords: Monetary Policy, Uncertainty and monetary policy
    JEL: E52 E58 E61 E65
    Date: 2017
  18. By: Goodhart, Charles
    Abstract: Unlike other facets of monetary policy renormalisation, there has been little discussion yet of what principles should determine the optimum size of a Central Bank's balance sheet, the end-point to which on-going portfolio reductions should approach. In this note I start by addressing the arguments of those who would leave this balance sheet very large, much as now; and then continue with the counter-arguments, also stressing the nature of the relationships between monetary and fiscal policies, and between the Central Bank and the Treasury's Debt Management Office.
    Keywords: Central Bank balance sheet; monetary policy renormalisation; debt management; interest rate risk; auction risk
    JEL: F3 G3
    Date: 2017–09
  19. By: Mike Anson; David Bholat Author-Name-First: David; Miao Kang; Ryland Thomas (Bank of England)
    Abstract: We use daily transactional ledger data from the Bank of EnglandÕs Archive to test whether and to what extent the Bank of England during the mid-nineteenth century adhered to Walter BagehotÕs rule that a central bank in a financial crisis should lend cash freely at a high interest rate in exchange for ÔgoodÕ securities. The archival data we use provides granular, loan-level insight on the price and quantity of credit, and information on its distribution to particular counterparties. We find that the BankÕs behaviour during this period broadly conforms to BagehotÕs rule, though with variation across the crises of 1847, 1857 and 1866. Using a new, higher frequency series on the BankÕs balance sheet, we find that the Bank did lend freely, with the number of discounts and advances increasing during crises. These loans were typically granted at a rate above pre-crisis levels and, in 1857 and 1866, typically at a spread above Bank Rate, though we also find some instances in the daily discount ledgers where individual loans were made below Bank rate in 1847. Another set of customer ledgers shows that the securities the Bank purchased were debts owed by a geographically and industrially diverse set of debtors. And using new data on the BankÕs income and dividends, we find the Bank and its shareholders profited from lender of last resort operations. We conclude our paper by relating our findings to contemporary debates including those regarding the provision of emergency liquidity to shadow banks.
    Keywords: Bank of England, lender of last resort, financial crises, financial history, central banking
    JEL: E58 G01 G18 G20 H12 N2 N4 N8
    Date: 2017–11
    Abstract: This paper presents a critical analysis of whether banks can multiply their available existing deposits of money, that is their liability, and or whether banks can create new money and thereby increase money supply. Economists held different views. Some argue that individual bank cannot multiply credit. Some view individual bank can multiply credit if the borrowers purchase with the borrowed money and, then, the sellers deposit successively the same money in the same bank, the money can be multiplied to the extent of credit divided by reserve ratio times. Some others argue that banks don?t need deposit at all; it can create money when it gives loan and deposit it in the borrower?s account. They are of the view that ?The money supply is created as ?fairy dust? produced by the banks individually, ?out of thin air?. (Werner 2014, P1). From the critical review of these theories, some important issues come to the surface. First, Money cannot be multiplied, second, money cannot be created out of thin air, third, what is increased is only the IOUs from the banks to their customers and from the customers to their banks, fourth, as banks are bound to keep certain percent of their reserve (deposit) in the custody of the central bank, in every successive deposit the quantity of money reduces and after the final deposit and lending all money will be placed at the custody of the central bank. No money will be there in the economy to repay the loan and its interest. Repeated depositing and lending of same money, thus, reduces the money available for economic activities.
    Keywords: Credit creation, money multiplier, financial intermediary, reserve ratio, central bank reserve, deposit, IOU, creation and destruction of money
    Date: 2017–10
  21. By: Marie Hoerova (European Central Bank); Harald Uhlig (University of Chicago); Fiorella De Fiore (European Central Bank)
    Abstract: We build a general equilibrium model featuring unsecured and secured interbank markets, and collateralized central bank funding. The model accounts for some key facts about the European money markets since 2008: i) the decline in the ratio of interbank liabilities in total bank assets since the onset of the global financial crisis; ii) the reduced ability of banks to access the unsecured market during the sovereign crisis, and their shift to secured market funding; iii) the increased reliance on central bank funding, particularly for banks in countries with a vulnerable sovereign. Using the calibrated model, we find that a decline in the share of unsecured to secured interbank market transactions, as observed during the crisis, generates a sizeable macroeconomic impact.
    Date: 2017
  22. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: A money-in-the-utility function model is extended to capture the distinct roles of noninterest-earning currency and interest-earning deposits in providing liquidity services to households. It implies the existence of a stable money demand relationship that links a Divisia monetary aggregate to spending or income as a scale variable and the associated Divisia user-cost dual as an opportunity cost measure. Cointegrating money demand equations of this form appear in quarterly United States data spanning the period from 1967:1 through 2017:2, especially for the Divisia M2 aggregate. The identification of a stable money demand function over a period that includes the financial innovations of the 1980s and continues through the recent financial crisis and Great Recession suggests that a properly measured aggregate quantity of money can play a role in the conduct of monetary policy. That role can be of greater prominence when traditional interest rate policies are constrained by the zero lower bound.
    Keywords: Divisia monetary aggregates, money demand, money-in-the-utility function
    JEL: C43 E41
    Date: 2017–11–01
  23. By: Mikkel Plagborg-Moller (Harvard University); Gita Gopinath (Harvard); Emine Boz (International Monetary Fund)
    Abstract: We document the outsize role played by the U.S. dollar in driving international trade prices and flows. Our analysis is the first to examine the consequences of the dollar's prominence as an invoicing currency using a globally representative panel data set. We establish three facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. 2) The cross-sectional heterogeneity in pass-through/elasticity across country pairs is related to the share of imports invoiced in dollars. 3) Bilateral terms of trade are essentially uncorrelated with bilateral exchange rates. Our results derive from fixed effects panel regressions as well as a Bayesian semiparametric hierarchical panel data model. Unlike standard panel regressions, the Bayesian approach allows us to quantify the cross-sectional heterogeneity of exchange rate pass-through/elasticities and the relation of this heterogeneity to dollar invoicing. Our results imply that the majority of international trade is best characterized by a dominant currency paradigm, as opposed to the traditional producer or local currency pricing paradigms.
    Date: 2017
  24. By: N. Gregory Mankiw (Department of Economics Harvard University); Ricardo Reis (Centre for Macroeconomics (CFM); Economics Department London School of Economics (LSE))
    Abstract: This essay discusses the role of Milton Friedman's presidential address to the American Economic Association, which was given half a century ago and helped set the stage for modern macroeconomics. We discuss where macroeconomics was before this address, what insights Friedman offered, where researchers and central bankers stand today on these issues, and (most speculatively) where we may be heading in the future.
    Date: 2017–11
  25. By: Doser, Alexander (Federal Reserve Bank of Boston); Nunes, Ricardo (University of Surrey); Rao, Nikhil (Federal Reserve Bank of Boston); Sheremirov, Viacheslav (Federal Reserve Bank of Boston)
    Abstract: This paper shows that a simple form of nonlinearity in the Phillips curve can explain why, following the Great Recession, inflation did not decrease as much as predicted by linear Phillips curves, a phenomenon known as the missing disinflation. We estimate a piecewise-linear specification and document that the data favor a model with two regions, with the response of inflation to an increase in unemployment slower in the region where unemployment is already high. Nonlinearities remain important, even when we account for other factors proposed in the literature, such as consumer expectations of inflation or financial frictions. However, studying a range of specifications with different measures of inflation and economic activity, we conclude that, in most cases, consumer expectations are more robust than nonlinearities. We find that the role of consumer expectations was especially important in the 1970s and ’80s, during a turbulent rise in inflation followed by the Volcker disinflation; the nonlinearities make disinflation more problematic and require the inflation expectations process to be more forward-looking during this period, thereby putting a larger weight on survey expectations. We conclude that a nonlinear Phillips curve with forward-looking survey expectations can be a useful tool to understand inflation dynamics during episodes of rapid disinflation and persistent inflation.
    Keywords: inflation expectations; Phillips curve; Volcker disinflation
    JEL: D84 E24 E31 E32
    Date: 2017–10–01
  26. By: Silvia Miranda-Agrippino; Giovanni Ricco (University of Warwick, OFCE-SciencesPo Paris)
    Abstract: Despite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identification that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections. We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely misspecified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles.
    Keywords: Monetary policy, local projections, VARs, expectations, information rigidity, survey forecasts, external instruments
    JEL: C11 C14 E52 G14
    Date: 2017–05
  27. By: Rose Cunningham; Christian Friedrich; Kristina Hess; Min Jae Kim
    Abstract: In this paper, we analyze the presence of time variation in the pass-through from the nominal effective exchange rate to import prices for 24 advanced economies over the period 1995–2015. In line with earlier studies in the literature, we find substantial heterogeneity in the level of exchange rate pass-through across countries. But, in addition, we show that the dynamics of exchange rate pass-through also differ across countries. Potential explanations for this observation could be of a country-specific nature or could relate to differences in the composition or transmission of global shocks across countries. We then investigate the role of global demand shocks as potential determinants of exchange rate pass-through dynamics in seven advanced economies. We conduct this analysis by running a set of instrumental variable regressions to quantify the contemporaneous exchange rate pass-through that arises from different shocks. Out of the global demand shocks that we examine, we find that oil demand shocks, in particular, are associated with a relatively higher exchange rate pass-through to import prices, while US fiscal policy shocks appear to have the lowest impact.
    Keywords: Exchange rates, Inflation and prices, International topics, Transmission of monetary policy
    JEL: F31 F41 E31
    Date: 2017
  28. By: Accominotti, Olivier
    Abstract: In May-July 1931, a series of financial panics shook Central Europe before spreading to the rest of the world. This paper explores how the 1931 Central European crisis propagated to the London and New York financial centers; it also examines the role of cross-border banking linkages in international crisis transmission. Using archival bank-level data, I document US and British banks' asset-side exposure to the crisis region. The Continental crisis disturbed few US banks but endangered several British financial institutions and triggered severe stress in the London money market. Central European credits were mostly held by large and diversified commercial banks in the United States and by small and geographically specialized financial institutions in Britain. Differences in the market structure of the trade finance industry explain why the 1931 Central European crisis infected London banks but not New York banks.
    Keywords: international contagion; cross-border banking; trade finance; 1931 crisis
    JEL: N0 F3 G3
    Date: 2016–11–21
  29. By: Ebaidalla Mahjoub Ebaidalla (University of Khartoum)
    Abstract: This paper attempts to identify the factors that influencing the parallel exchange rate premium in Sudan during the period 1979–2014. In addition, the impact of parallel exchange rate premium on economic performance is examined; focusing on three key macroeconomic indicators namely, economic growth, inflation and exports. The empirical results show that parallel exchange rate premium is significantly affected by policy variables such as, real exchange rate, trade openness and money supply. The results also reveal that GDP growth, expected rate of devaluation, and foreign aid are the most significant factors affecting parallel exchange premium. Moreover, the results demonstrate that parallel premium has a detrimental impact on both economic growth and export performance. Expectedly, the results show a positive association between premium and inflation rate. These outcomes are still hold under robustness checks, indicating that parallel exchange rate premium has negative consequences on macroeconomic performance in Sudan. Accordingly, the paper concludes with some policy implications that aim to narrow the spread between the black and official exchange rate as an important way out to contain inflationary pressures, improve export competitiveness, and boost economic growth.
    Date: 2017–11–16
  30. By: Kulesza, Marta
    Abstract: This paper aims to explain the causes of rapidly increasing prices in Venezuela and establish whether the current episode can be considered to be of hyperinflationary nature from the post-Keynesian theoretical approach. The chosen approach highlights the role of distributive conflict, indexation mechanism, balance of payments constraint, devaluation expectations and gradual rejection of national currency in favour of foreign currency. We argue that the root cause of the precarious economic situation in Venezuela lies in the long term failure to implement structural changes, ensuring industrial diversification and lessening the dependency on oil exports. The symptoms of the Dutch disease are observed in the prolonged currency overvaluation during the high oil revenue periods. In the face of a growing external constraint, the authorities introduce severe foreign currency rationing. This in turn ignites inflation due to external bottlenecks since many sectors face supply constraints as they depend on imports of inputs of production. This leads to a regressive distribution of income, which contributes to the growing distributive conflict and fuels inflation further, as workers oppose to the lowering of real wages. Moreover, the currency rationing puts pressure on the black market for exchange as the devaluation expectations increase, leading to a parallel market devaluation-inflation spiral, which threatens to turn into hyperinflation. Nevertheless, we argue that hyperinflation, according to the proposed post-Keynesian framework (the flight to foreign currency), does not materialise despite skyrocketing prices because of the particular institutional setting - the exchange controls, which have been in place since 2003, prevent full currency substitution.
    Keywords: hyperinflation,foreign exchange,distributive conflict,expectations,Dutch disease,Venezuela
    JEL: E12 E31 O54
    Date: 2017
  31. By: Ehnts, Dirk; Barbaroux, Nicolas
    Abstract: In the aftermath of the Great Financial Crisis (GFC), and within the context of significant macroeconomic imbalances in the world economy, economists have shown renewed interest in the way central banks and financial systems work. The rise of Modern Monetary Theory (MMT) has relied on the examination of balance sheets, which has led to advancements in the understanding of the nuts and bolts of the financial system and the fundamental role of taxes, reserves, and deposits. While the school is associated with Post-Keynesian economics, we make the case that it could just as well be called Post-Wicksellian. The aim is not to argue for or against some label, but to make explicit the Wicksellian connection. In doing this, we bring forward old discussions and insights, which can be integrated into recent debates. MMT authors emphasize the importance of endogenous money and the examination of assets and liabilities in balance sheets. In our inquiry, we demonstrate that a horizontalist approach - adopted by MMT scholars - was already present in Wicksell (1898) and in the writings of French economist Jacques Le Bourva (1959, 1962). We examine the essential publications of the two authors and compare their views with the insights of MMT. By doing this, we hope to show continuity in monetary thought. MMT should not be seen as an intruder from the outside of monetary theory, but rather as a continuation and expansion of certain ideas that have long been part of the discipline. Identifying areas of disagreement between the three views should help bring clarity to the issues that are still disputed.
    Keywords: central banking,monetary policy,discretionary practices,Wicksell,Modern Monetary Theory,MMT
    JEL: E4 E51 E58
    Date: 2017
  32. By: Jeroen Hessel; Niels Gilbert; Jasper de Jong
    Abstract: Soon after the Second World War, Germany, France, Italy and Benelux countries Belgium, the Netherlands and Luxembourg sought closer collaboration. Their efforts sixty years ago culminated in the creation of what would become the EU. Over time, their partnership widened to encompass 28 Member States. Concentrating mainly on economic aspects, it brought them considerable economic benefits. The Netherlands turned out to be one of the major beneficiaries, given its large export sector and itsposition as Europe's gateway port.
    Date: 2017–07

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