nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒12‒03
thirty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Policy Rules for Capital Controls By Gurnain Kaur Pasricha
  2. Signaling in monetary policy near the zero lower bound By Sergio Salas; Javier Núñez
  4. The Exchange Rate as an Instrument of Monetary Policy By Heipertz, Jonas; Mihov, Ilian; Santacreu, Ana Maria
  5. Monitoring Money for Price Stability By Hevia, Constantino; Nicolini, Juan Pablo
  6. How should the European Central Bank ‘normalise’ its monetary policy? By Grégory Claeys; Maria Demertzis
  7. Unconventional monetary Policy and Long Yields During QE1: Learning from the Shorts By McInish, Thomas; Neely, Christopher J.; Planchon, Jade
  8. Liquidity provision as a monetary policy tool: the ECB’s non-standard measures after the financial crisis By Quint, Dominic; Tristani, Oreste
  9. Credit supply responses to reserve requirement: loan-level evidence from macroprudential policy By João Barata R B Barroso; Rodrigo Barbone Gonzalez; Bernardus F Nazar Van Doornik
  10. FX Intervention in the New Keynesian Model By Zineddine Alla; Raphael A Espinoza; Atish R. Ghosh
  11. Global Trade and the Dollar By Emine Boz; Gita Gopinath; Mikkel Plagborg-Møller
  12. The Nonlinear Interaction Between Monetary Policy and Financial Stress By Martín Saldías
  13. Is Monetary Policy Too Complex for the Public? Evidence from the UK By Adriel Jost
  14. Banking Panics and Liquidity in a Monetary Economy By Tarishi Matsuoka; Makoto Watanabe
  15. Do Central Bank Actions Reduce Interest Rate Volatility? By Jaqueline Terra Moura Marins; José Valentim Machado Vicente
  16. Credit Supply Responses to Reserve Requirement: loan-level evidence from macroprudential policy By João Barata R. B. Barroso; Rodrigo Barbone Gonzalez; Bernardus F. Nazar Van Doornik
  17. The Neo-Fisher Effect in the United States and Japan By Martín Uribe
  18. US Monetary Policy and the Euro Area By Max Hanisch
  19. The Bank of England as lender of last resort: New historical evidence from daily transactional data By Anson, Mike; Bhola, David; Kang, Miao; Thomas, Ryland
  20. ECB Policies Involving Government Bond Purchases: Impact and Channels By Arvind Krishnamurthy; Stefan Nagel; Annette Vissing-Jorgensen
  21. Allan Meltzer’s Model of the Transmission Mechanism and Its Implications for Today By Peter N. Ireland
  22. Did the Exchange Rate Floor Prevent Deflation in the Czech Republic? By Francesca G Caselli
  23. ECB Policies Involving Government Bond Purchases: Impacts and Channels By Krishnamurthy, Arvind; Nagel, Stefan; Vissing-Jorgensen, Annette
  24. Financial Crises and Lending of Last Resort in Open Economies By Luigi Bocola; Guido Lorenzoni
  25. The (Unintended?) Consequences of the Largest Liquidity Injection Ever By Crosignani, Matteo; Faria-e-Castro, Miguel; Fonseca, Luis
  26. An Examination of the Neutrality of US Money Supply on the Nigerian Economy By Nwanne, Nkem
  27. The equilibrium real policy rate through the lens of standard growth models By Sichel, Daniel E.; Wang, J. Christina
  28. An assessment of the inflation targeting experience By Theologos Dergiades; Costas Milas; Theodore Panagiotidis
  29. The Center and the Periphery: Two Hundred Years of International Borrowing Cycles By Graciela L. Kaminsky
  30. The use of cash by households in the euro area By Esselink, Henk; Hernández, Lola
  31. FOMC communication and interest rate sensitivity to news By Tang, Jenny
  32. Quantitative Easing and Long-Term Yields in Small Open Economies By Antonio Diez de los Rios; Maral Shamloo
  33. Industrial structure and preferences for a common currency: the case of the EURO referendum in Sweden By Ahlfeldt, Gabriel M.; Maennig, Wolfgang; Osterheider, Tobias
  34. Monetary Policy, Inequality and Political Instability By Pablo Duarte; Gunther Schnabl
  35. Innovation, Productivity, and Monetary Policy By Albert Queralto; Patrick Donnelly Moran
  36. Settling the Inflation Targeting Debate: Lights from a Meta-Regression Analysis By Hippolyte W. Balima; Eric G. Kilama; Rene Tapsoba

  1. By: Gurnain Kaur Pasricha
    Abstract: This paper attempts to borrow the tradition of estimating policy reaction functions in monetary policy literature and apply it to capital controls policy literature. Using a novel weekly dataset on capital controls policy actions in 21 emerging economies over the period 1 January 2001 to 31 December 2015, I examine the competitiveness and macroprudential motivations for capital control policies. I introduce a new proxy for competitiveness motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. The analysis shows that past emerging-market policy systematically responds to both competitiveness and macroprudential motivations. The choice of instruments is also systematic: policy-makers respond to competitiveness concerns by using both instruments - inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. I also find evidence that that policy is acyclical to foreign debt but is countercyclical to domestic bank credit to the private non-financial sector. The adoption of explicit financial stability mandates by central banks or the creation of inter-agency financial stability councils increased the weight of macroprudential factors in the use of capital controls policies. Countries with higher exchange rate pass-through to export prices are more responsive to competitiveness concerns.
    Keywords: capital controls, macroprudential policy, competitiveness motivations, capital flows, emerging markets, policy rules
    JEL: F3 F4 F5 G0 G1
    Date: 2017–11
  2. By: Sergio Salas; Javier Núñez
    Abstract: What are the consequences of asymmetry of information about the future state of the economy between a benevolent Central Bank (CB) and private agents near the zero lower bound? How is the conduct of monetary policy modified under such a scenario? We propose a game theoretical signaling model, where the CB has better information than private agents about a future shock hitting the economy. The policy rate itself is the signal that conveys information to private agents in addition to its traditional role in the monetary transmission mechanism. We find that only multiple "pooling equilibria" arise in this environment, where a CB privately forecasting a contraction will most likely follow a less expansionary policy compared to a complete information context, in order to avoid making matters worse by revealing bad times ahead. On the other hand, a CB privately forecasting no contraction is most likely to distort its complete information policy rate, the consequences of which are welfare detrimental. However, this is necessary because deviating from the pooling policy rate would be perceived by private agents as an attempt to mislead them into believing that a contraction is not expected, which would be even more harmful for society.
    Keywords: Monetary Policy, Signaling, Zero lower bound
    JEL: E58 C72
    Date: 2017–11
  3. By: Burak Eroglu (Istanbul Bilgi University); Secil Yildirim-Karaman (Altinbas University)
    Abstract: This paper investigates the impact of the policy decisions by the Central Bank of the Republic of Turkey (CBRT) and Federal Reserve (FED) on the financial markets in Turkey between 2010 and 2016, the period in which CBRT adopted new policy objectives. We investigate the impact of monetary policy shocks on the term structure of interest rates, exchange rates and credit default swap (CDS) rates using VAR framework. For identification, we rely on the assumption that monetary policy shocks are heteroscedastic. Our results show that expansionary monetary policy shocks by the CBRT made the yield curve steeper, caused TL to depreciate and CDS rates to decrease. As for FED decisions, expansionary decisions decreased the bond yields and CDS rates and caused TL to appreciate. The paper contributes to the literature by investigating the response of the term structure of interest rates and other asset prices for the period in which CBRT prioritized financial stability and did not make guidance for the future stance of monetary policy and by testing whether bond yields with various maturities responded to monetary policy shocks differently. Our results imply that not following a long term inflation target and lack of communication weakened the control of the CBRT over the long term interest rates.
    Keywords: Monetary policy; Term structure of interest rates; Asset prices; Heteroscedasticity based identification
    JEL: E40 E43 E44 E52 E58
    Date: 2017–11
  4. By: Heipertz, Jonas (Paris School of Economics); Mihov, Ilian (INSEAD); Santacreu, Ana Maria (Federal Reserve Bank of St. Louis)
    Abstract: Monetary policy research in small open economies has typically focused on “corner solutions”: either the currency rate is fixed by the central bank, or it is left to be determined by market forces. We build an open-economy model with external habits to study the properties of a new class of monetary policy rules in which the monetary authority uses the exchange rate as the instrument. Different from a Taylor rule, the monetary authority announces the rate of expected currency appreciation by taking into account inflation and output fluctuations. We find that the exchange rate rule outperforms a standard Taylor rule in terms of welfare, regardless of the policy parameter values. The differences are driven by: (i) the behavior of the nominal exchange rate and interest rates under each rule, and (ii) deviations from UIP due to a time-varying risk premium.
    Date: 2017–10–01
  5. By: Hevia, Constantino (Universidad Torcuato Di Tella); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: In this paper, we use a simple model of money demand to characterize the behavior of monetary aggregates in the United States from 1960 to 2016. We argue that the demand for the currency component of the monetary base has been remarkably stable during this period. We use the model to make projections of the nominal quantity of cash in circulation under alternative future paths for the federal funds rate. Our calculations suggest that if the federal funds rate is lifted up as suggested by the survey of economic projections made by the members of the Federal Open Market Committee (FOMC), the fall in total currency demanded in the next two years ranges between 50 and 200 billion. Our discussion suggests that specific measures by the Federal Reserve to absorb that cash could be worth considering to make the future path of the price level consistent with the price stability mandate.
    Keywords: Inflation; Money demand; Currency in circulation
    JEL: E31 E41 E51
    Date: 2017–11–14
  6. By: Grégory Claeys; Maria Demertzis
    Abstract: This policy contribution was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of 20 November 2017 between ECON and the President of the ECB. Copyright remains with the European Parliament at all times As the global financial crisis unfolded, the European Central Bank (ECB) and other central banks greatly extended their monetary policy toolboxes and adjusted their operational frameworks. These unconventional monetary policies have left central banks with large balance sheets. As growth picks up in the euro area, there are discussions about how to normalise monetary policy, but it is unclear if normalisation means returning to monetary policy as it was prior to the crisis, or whether there is a ‘new normal’ that would justify different monetary policies. The debate on the optimal size of the central bank’s balance sheet has not yet been settled. We discuss the benefits and drawbacks of central banks having permanently large balance sheets. It might be difficult to reduce them quickly without negatively affecting financial markets. In order to avoid market volatility, this process needs to be done gradually and preferably passively, by holding to maturity assets purchased during the crisis. The interest rate – the central banks’ main conventional tool – might stay at a much lower level than historical standards and closer to the zero-lower bound because of a fall in the neutral rate, implying that in the future monetary policy would have to rely more on balance sheet policies and less on interest rate cuts to provide accommodation during recessions. The combination of these two issues implies that the normalisation of monetary policy will be very slow and entail a long period with a large balance sheet. In the meantime, the ECB will not be able to go back to its pre-crisis operational framework. In terms of the sequencing of the normalisation process, the experience of the US Federal Reserve, which was one of the first central banks to use unconventional tools during the crisis, could provide useful pointers to the ECB. Following the Fed’s example would involve tapering (ie gradually reducing asset purchases), then increasing key policy rates slowly before reducing passively the size of the balance sheet. The Fed’s experience shows that the normalisation process needs to be communicated early in order to reduce uncertainty for market participants and avoid any disruption of financial markets. So far, the ECB has been quite successful in smoothly scaling back its asset purchases, but it has not yet provided a clear vision of what its monetary policy or operational framework will look like at the end of the normalisation process.
    Date: 2017–11
  7. By: McInish, Thomas (University of Memphis); Neely, Christopher J. (Federal Reserve Bank of St. Louis); Planchon, Jade (Rhodes College, Memphis, TN)
    Abstract: In November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies, which would include asset purchases and forward guidance, to reduce long-term interest rates. We investigate the behavior of shorts, considered sophisticated investors, before and after FOMC announcements not fully anticipated in spot bond markets. Short interest in Treasury and agency securities declined prior to expansionary anouncements, indicating shorts anticipated these surprises, and declined further after these announcements. The failure of shorts to reinstitute their positions after the last purchase announcement confirms that the Fed convinced sophisticated investors that interest rates would remain low.
    Date: 2017–10–27
  8. By: Quint, Dominic; Tristani, Oreste
    Abstract: We study the macroeconomic consequences of the money market tensions associated with the financial crisis in the euro area. In a structural VAR, we identify a liquidity shock rooted in the interbank market and use its impulse response functions to calibrate key parameters of a Smets and Wouters (2003) closed-economy model augmented with a banking sector à la Gertler and Kiyotaki (2010). We highlight two main results. First, an identified liquidity shock causes a sizable and persistent fall in investment. The shock can account for one third of the observed, large fall in euro area aggregate investment in 2008–09. Second, the liquidity injected in the market by the ECB played an important role in attenuating the macroeconomic impact of the shock. According to our counterfactual simulations based on the structural model, in the absence of ECB liquidity injections interbank spreads would have been at least 200 basis points higher and their adverse impact on investment would have been more than twice as severe. JEL Classification: E44, E58
    Keywords: ECB, euro area, financial crisis, financial frictions, interbank market, non-standard monetary policy
    Date: 2017–11
  9. By: João Barata R B Barroso; Rodrigo Barbone Gonzalez; Bernardus F Nazar Van Doornik
    Abstract: This paper estimates the impact of reserve requirements (RR) on credit supply in Brazil, exploring a large loan-level dataset. We use a difference-in-difference strategy, first in a long panel, then in a cross-section. In the first case, we estimate the average effect on credit supply of several changes in RR from 2008 to 2015 using a macroprudential policy index. In the second, we use the bank-specific regulatory change to estimate credit supply responses from (1) a countercyclical easing policy implemented to alleviate a credit crunch in the aftermath of the 2008 global crisis; and (2) from its related tightening. We find evidence of a lending channel where more liquid banks mitigate RR policy. Exploring the two phases of countercyclical policy, we find that the easing impacted the lending channel on average two times more than the tightening. Foreign and small banks mitigate these effects. Finally, banks are prone to lend less to riskier firms.
    Keywords: reserve requirement, credit supply, capital ratio, liquidity ratio, macroprudential policy
    JEL: E51 E52 E58 G21 G28
    Date: 2017–11
  10. By: Zineddine Alla; Raphael A Espinoza; Atish R. Ghosh
    Abstract: We develop an open economy New Keynesian Model with foreign exchange intervention in the presence of a financial accelerator mechanism. We obtain closed-form solutions for the optimal interest rate policy and FX intervention under discretionary policy, in the face of shocks to risk appetite in international capital markets. The solution shows that FX intervention can help reduce the volatility of the economy and mitigate the welfare losses associated with such shocks. We also show that, when the financial accelerator is strong, the risk of multiple equilibria (self-fulfilling currency and inflation movements) is high. We determine the conditions under which indeterminacy can occur and highlight how the use of FX intervention reinforces the central bank’s credibility and limits the risk of multiple equilibria.
    Keywords: Foreign exchange;Central banks and their policies;Central bank reserves; Speculative attack; Portfolio balance model; Equilibrium determinacy; Capital flows; Capital controls; Open Economy New Keynesian Model, Central bank reserves, Speculative attack, Portfolio balance model, Equilibrium determinacy, Capital flows, Capital controls, Open Economy New Keynesian Model, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–09–29
  11. By: Emine Boz; Gita Gopinath; Mikkel Plagborg-Møller
    Abstract: We document that the U.S. dollar exchange rate drives global trade prices and volumes. Using a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs, we establish the following facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. U.S. monetary policy induced dollar fluctuations have high pass-through into bilateral import prices. 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates. 3) The strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation. A 1% U.S. dollar appreciation against all other currencies in the world predicts a 0.6--0.8% decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. 4) Using a novel Bayesian semiparametric hierarchical panel data model, we estimate that the importing country's share of imports invoiced in dollars explains 15% of the variance of dollar pass-through/elasticity across country pairs. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms.
    JEL: E5 F1 F3 F4
    Date: 2017–11
  12. By: Martín Saldías
    Abstract: This paper analyzes the nonlinear relationship between monetary policy and financial stress and its effects on the transmission of shocks to output. Results from a Bayesian Threshold Vector Autoregression (TVAR) model show that the effects of monetary policy shocks on output growth are stronger during normal times than during times of financial stress. Monetary policy shocks are effective to ease stressed financial conditions, but have limited ability to fully contain the buildup of vulnerabilities. These results have important policy implications for central banks’ countercyclical policies under different financial conditions and for “lean against the wind” policies to address financial vulnerabilities.
    Date: 2017–08–04
  13. By: Adriel Jost
    Abstract: Central banks have increased their engagement in the information and education of the broad public. But what can be said about the nonprofessional’s knowledge of monetary policy and central banking? Based on the Bank of England’s Inflation Attitudes Survey, I construct a score to capture the central banking knowledge of the respondents. I show that the average British person displays limited knowledge of central banking. At the same time, the data reveal that satisfaction with the Bank of England’s policies increases with a better understanding of monetary policy.
    Keywords: Economic literacy, Monetary policy, Bank of England
    JEL: D83 E52 E58 I21
    Date: 2017
  14. By: Tarishi Matsuoka; Makoto Watanabe
    Abstract: This paper studies banks’ liquidity provision in the Lagos and Wright model of monetary exchanges. With aggregate uncertainty we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors’ need of consumption smoothing. The banking panics can be eliminated by the zero-interest policy for the perfect risk sharing, but the first best can be achieved only at the Friedman rule. In our monetary equilibrium, the probability of banking panics is endogenous and increases with inflation, as is consistent with empirical evidence. The model derives a rich array of non-trivial effects of inflation on the equilibrium deposit and the bank’s portfolio.
    Keywords: money search, monetary equilibrium, banking panic, liquidity
    JEL: E40
    Date: 2017
  15. By: Jaqueline Terra Moura Marins; José Valentim Machado Vicente
    Abstract: This paper investigates how Central Bank of Brazil (CBB) actions influence market uncertainty. We consider two kinds of actions: the monetary policy decision about the interest rate target and the pure communication event of minutes release one week later. Unlike related papers, we measure market uncertainty by the implied volatility extracted from interest rate options. Implied volatility is more suitable than physical volatility to assess economic effects since it encompasses market beliefs adjusted by risk. We use an event study approach to evaluate the impact of CBB actions. The results show that both decisions about the target rate and communication event reduce interest rate volatility.
    Date: 2017–11
  16. By: João Barata R. B. Barroso; Rodrigo Barbone Gonzalez; Bernardus F. Nazar Van Doornik
    Abstract: This paper estimates the impact of reserve requirements (RR) on credit supply in Brazil, exploring a large dataset with several policy shocks. We use a difference-in-difference strategy; first in a long panel, then in a cross-section exploring the effects of changes in RR on credit. In the first case, we average several RR changes from 2008 to 2015 using a macroprudential policy index. In the second, we use the bank-specific regulatory change to estimate credit supply responses from (1) a countercyclical easing policy implemented to alleviate a credit crunch in the aftermath of the 2008 global crisis; and (2) from its related tightening. We find evidence of a lending channel where more liquid banks mitigate RR policy. Exploring the two phases of countercyclical policy, we find that the easing impacted the lending channel on average two times more than the tightening. Foreign and small banks mitigate theses effects
    Date: 2017–11
  17. By: Martín Uribe
    Abstract: I investigate the effects of an increase in the nominal interest rate on inflation and output in the United States and Japan during the postwar period. I postulate a structural autoregressive model that allows for transitory and permanent nominal and real shocks. I find that nominal interest-rate increases that are expected to be temporary, lead, in accordance with conventional wisdom, to a temporary increase in real rates that is contractionary and deflationary. By contrast, nominal interest-rate increases that are perceived to be permanent cause a temporary decline in real rates with inflation adjusting faster than the nominal interest rate to a higher permanent level. Estimated impulse responses show that inflation reaches its long-run level within a year. Importantly, because real rates are low during the transition, the economy does not suffer an output loss. This result is relevant for the design of monetary policy in economies plagued by chronic below-target inflation, for it is consistent with the prediction that a credible announcement of a gradual return of nominal rates to normal levels can bring about a swift convergence of inflation to its target level without negative consequences for aggregate activity.
    JEL: E52 E58
    Date: 2017–10
  18. By: Max Hanisch
    Abstract: This study investigates the international spillover effects of contractionary US monetary policy and its transmission channels on members of the euro area (EA) before and after the implementation of the euro. I find the multilateral spillover effects on individual EA economies' real activity and inflation to be asymmetric, i.e. the responses are mainly expansionary but not exclusively so. While the effects are diverse and rather large before 1999, responses become more homogeneous and smaller in size after the implementation of the euro. However, country-specific asymmetries remain. Trade and interest rates but also credit, stock and housing markets are identified as important transmission channels.
    Keywords: Structural dynamic factor model, sign restrictions, monetary policy, US, Euro area, spillover effects
    JEL: C32 E52 E58
    Date: 2017
  19. By: Anson, Mike; Bhola, David; Kang, Miao; Thomas, Ryland
    Abstract: We use daily transactional ledger data from the Bank of England's Archive to test whether and to what extent the Bank of England during the mid-nineteenth century adhered to Walter Bagehot's rule that a central bank in a financial crisis should lend cash freely at a high interest rate in exchange for "good" 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 Bank's behaviour during this period broadly conforms to Bagehot's rule, though with variation across the crises of 1847, 1857 and 1866. Using a new, higher frequency series on the Bank's 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 Bank's 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
  20. By: Arvind Krishnamurthy; Stefan Nagel; Annette Vissing-Jorgensen
    Abstract: We evaluate the effects of three ECB policies (the Securities Markets Programme, the Outright Monetary Transactions, and the Long-Term Refinancing Operations) on government bond yields. We use a novel Kalman-filter augmented event-study approach and yields on euro-denominated sovereign bonds, dollar-denominated sovereign bonds, corporate bonds, and corporate CDS rates to understand the channels through which policies reduced sovereign bond yields. On average across Italy, Spain and Portugal, considering both the Securities Markets Programme and the Outright Monetary Transactions, yields fall considerably. Decomposing this fall, default risk accounts for 37% of the reduction in yields, reduced redenomination risk for 13%, and reduced market segmentation effects for 50%. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers.
    JEL: E4 G01 G18
    Date: 2017–11
  21. By: Peter N. Ireland (Boston College)
    Abstract: Allan Meltzer developed his model of the monetary transmission mechanism in research conducted with Karl Brunner. The Brunner-Meltzer model implies that the Federal Reserve would benefit from drawing brighter lines between monetary and fiscal policy actions, eschewing credit market intervention and focusing, instead, on using its control over the monetary base to stabilize the aggregate price level. The model downplays the importance of the zero lower interest rate bound and suggests a greater role for monetary aggregates in the Fed’s policymaking strategy. Finally, it highlights the benefits that accrue when policy is conducted according to a rule rather than discretion.
    Keywords: Allan Meltzer, Karl Brunner, Monetarism, Monetary Transmission Mechanism
    JEL: B31 E52
    Date: 2017–11–15
  22. By: Francesca G Caselli
    Abstract: To fight deflationary pressures at the zero lower bound, in November 2013, the Czech National Bank (CNB) introduced a one-sided floor on the exchange rate, as an additional monetary policy instrument. This paper investigates the impact of the FX floor on inflation in the Czech Republic, by comparing actual inflation with counterfactuals in the absence of the exchange rate floor. Three different empirical strategies are implemented: an event study, difference-in-difference regressions and a synthetic control method. The empirical results provide evidence that the exchange rate floor was effective in fighting deflationary pressures and prevented inflation from going into negative territory. The magnitude of the effect ranges between 0.5 to 1.5 percentage points. The results are robust to different econometric specifications.
    Keywords: Foreign exchange;Czech Republic;Europe;Foreign exchange intervention;Central banks and their policies;exchange rate, synthetic control method
    Date: 2017–09–20
  23. By: Krishnamurthy, Arvind; Nagel, Stefan; Vissing-Jorgensen, Annette
    Abstract: We evaluate the effects of three ECB policies (the Securities Markets Programme, the Outright Monetary Transactions, and the Long-Term Refinancing Operations) on government bond yields. We use a novel Kalman-filter augmented event-study approach and yields on euro-denominated sovereign bonds, dollar-denominated sovereign bonds, corporate bonds, and corporate CDS rates to understand the channels through which policies reduced sovereign bond yields. On average across Italy, Spain and Portugal, considering both the Securities Markets Programme and the Outright Monetary Transactions, yields fall considerably. Decomposing this fall, default risk accounts for 37% of the reduction in yields, reduced redenomination risk for 13%, and reduced market segmentation effects for 50%. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers.
    Date: 2017–10
  24. By: Luigi Bocola; Guido Lorenzoni
    Abstract: We study financial panics in a small open economy with floating exchange rates. In our model, bank runs trigger a decline in domestic wealth and a currency depreciation. Runs are more likely when banks have dollar debt. Dollar debt emerges endogenously in response to the precautionary motive of domestic savers: dollar savings provide insurance against crises; so when crises are possible it becomes relatively more expensive for banks to borrow in local currency, which gives them an incentive to issue dollar debt. This feedback between aggregate risk and savers' behavior can generate multiple equilibria, with the bad equilibrium characterized by financial dollarization and the possibility of bank runs. A domestic lender of last resort can eliminate the bad equilibrium, but interventions need to be fiscally credible. Holding foreign currency reserves hedges the fiscal position of the government and enhances its credibility, thus improving financial stability.
    JEL: E44 F34 F41 G11 G15
    Date: 2017–11
  25. By: Crosignani, Matteo (Federal Reserve Board); Faria-e-Castro, Miguel (Federal Reserve Bank of St. Louis); Fonseca, Luis (London Business School)
    Abstract: We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank's three-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 10.6% of amounts outstanding. The steepening of peripheral sovereign yield curves after the policy announcement is consistent with the equilibrium effects of the collateral trade.
    Keywords: Lender of Last Resort; Unconventional Monetary Policy; Collateral; Sovereign Debt; Eurozone Crisis
    JEL: E58 G21 G28 H63
    Date: 2017–11–01
  26. By: Nwanne, Nkem
    Abstract: Literature on the classical dichotomy has focused on single economies with empirical evidence either substantiating or refuting the neutrality of money hypothesis. However this paper focuses on the neutrality of foreign money supply – in this case the US broad money supply – and its neutrality in both the long and short run on the real and nominal variables of the Nigerian economy. Based on data culled from the World Development Indicators (WDI) and time series methods such as the Augmented Dickey Fuller test, Johansen trace and maximum eigen value tests and the Vector Error Correction estimation; the US money supply was found to be non-neutral in both the long and short runs. US monetary policy was found to have profound impact on Nigerian interest rates followed by the consumer price index and the gross domestic product. This paper concludes that the US monetary policy must be a veritable factor considered in the design of monetary policy rules.
    Keywords: Neutrality, US Money Supply, Interest Rate, Consumer Price Index, Gross Domestic Product
    JEL: E51
    Date: 2017–10–27
  27. By: Sichel, Daniel E. (Wellesley College); Wang, J. Christina (Federal Reserve Bank of Boston)
    Abstract: The long-run equilibrium real policy rate is a key concept in monetary economics and an important input into monetary policy decision-making. It has gained particular prominence lately as the Federal Reserve continues to normalize monetary policy. In this study, we assess the evolution, current level, and prospective values of this equilibrium rate within the framework of standard growth models. Our analysis considers as a baseline the single-sector Solow model, but it places more emphasis on the multi-sector neoclassical growth model, which better fits the data over the past three decades. We find that the long-run equilibrium policy rate has fallen between 0.3 and more than 1.6 percentage points from the 1973–2007 historical average, depending on the model and parameter values, mainly because of slower growth in total factor productivity (TFP) and the labor force. To the extent that the recent sluggish TFP growth persists, our estimates suggest a range of 0 percent to 1 percent for the equilibrium real rate in the current policy setting. But these estimates are subject to a substantial degree of uncertainty, as has been found in other studies. Policymakers thus need to interpret cautiously the guidance from policy rules that depend on the long-run equilibrium rate. This uncertainty also highlights the importance of the Federal Reserve’s standard practice of constantly monitoring a wide range of indicators of inflation and real activity to gauge as accurately as possible the economy’s reaction to policy.
    Keywords: natural rate of interest; productivity; growth models; monetary policy
    JEL: E43 E52 O33 O41
    Date: 2017–11–17
  28. By: Theologos Dergiades; Costas Milas; Theodore Panagiotidis
    Abstract: An effective inflation targeting (IT) regime assumes both a change in the stationarity properties of inflation and a lower variability. Within a framework that does not make a priori assumptions about the order of integration, we examine whether there is a change in the inflation persistence in forty-five, developed and developing, countries and in three groups of countries, the G7, the OECD, and OECD Europe. For the inflation targeters, we find that the endogenously identified break dates are not consistent with the formal adoption of the IT regime. We employ a test for the variability of inflation that tracks how frequently inflation variability is in control. Logit analysis reveals that inflation targeters do not experience a greater probability than non-inflation targeters of inflation persistence changing, and they are not more in control of their inflation variability. The quality of institutions emerges as being more significant for taming inflation
    Keywords: structural change, persistence change, inflation targeting
    JEL: C12 E4 E5
    Date: 2017–11–09
  29. By: Graciela L. Kaminsky
    Abstract: A common belief in both academic and policy circles is that capital flows to the emerging periphery are excessive and ending in crises. One of the most frequently mentioned culprits is the cycles of monetary easing and tightening in the financial centers. Also, many focus on the role of crises in the financial center, pointing to excess international borrowing predating crises in the financial center and global retrenchment in capital flows in its aftermath. I re-examine these views using a newly-constructed database on capital flows spanning 200 hundred years. Extending the study of capital flows to the first episode of financial globalization has two major advantages: During this episode, monetary policy in the financial center is constrained by the adherence to the Gold Standard, thus providing a benchmark for capital flow cycles in the absence of an active role of central banks in the financial centers. Second, panics in the financial center are rare disasters that need to be examined in a longer historical episode. I find that boom-bust capital flow cycles in the periphery are milder in the second episode of financial globalization when the financial center follows a cyclical monetary policy. Also, cyclical monetary policy in the financial center is far more pronounced in times of crises in the financial center, cutting short capital flow bonanzas in the periphery and injecting liquidity in the aftermath of the crisis.
    JEL: F30 F34
    Date: 2017–10
  30. By: Esselink, Henk; Hernández, Lola
    Abstract: Although euro banknotes and coins have been in circulation for fifteen years, not much is known about the actual use of cash by households. This paper presents an estimation of the number and value of cash transactions in all 19 euro area countries in 2016, based on survey results. It presents an extensive description of how euro area consumers pay at points of sale (POS). The aim of this study is to shed light on consumers’ payment behaviour and in particular to improve the understanding of consumers’ payment choices at POS, based on a large sample of countries. Therefore, it provides central banks and relevant payment system stakeholders with fundamental information for the development of their policies and strategic decisions that can contribute to improving the efficiency of the cash cycle and the payment system as a whole. Previous estimates of the value of cash usage by households in the euro area date from 2008. Since then some central banks have carried out their own research on cash usage. This paper is the first study to measure the transaction demand for cash in the euro area. The results show that in 2016 around 79% of all payments at POS were made with cash, 19% with cards and 2% with other payment instruments. In terms of value, the market share of main payment instruments was 54% for cash, 39% for cards and 7% for other instruments. However, results show substantial differences between euro area countries. JEL Classification: E41, E58, D12, D14
    Keywords: cash, consumer choice, money demand, payment behaviour, payment systems
    Date: 2017–11
  31. By: Tang, Jenny (Federal Reserve Bank of Boston)
    Abstract: In this paper, I examine whether communications by the Federal Open Market Committee (FOMC) play a role in determining the types of macroeconomic news that financial markets pay attention to. To do so, I construct novel measures of the intensity with which FOMC statements and meeting minutes discussed labor relative to other topics. I find that these labor topic intensity measures are related to the amount by which interest rates’ response to labor-related news exceeds their response to all other news. This relationship is especially strong for interest rates of longer maturities and is also present for short-term interest rate expectations over various horizons.
    Keywords: Federal Reserve; FOMC; central bank communication; interest rates
    JEL: E43 E52 E58 G12
    Date: 2017–10–01
  32. By: Antonio Diez de los Rios; Maral Shamloo
    Abstract: We compare the effectiveness of Federal Reserve's asset purchase programs in lowering longterm yields with that of similar programs implemented by the Bank of England, the Swedish Riksbank, and the Swiss National Bank's reserve expansion program. We decompose government bond yields into (i) an expectations component, (ii) a global, and (iii) a country specific term premium to analyze two-day changes in 10-year yields around announcement dates. We find that, in contrast to the Federal Reserve's asset purchases, the programs implemented in these smaller economies have not been able to affect the global term premium and, furthermore, they have had limited, but significant, effect in lowering long-term yields.
    Keywords: Europe;Sweden;Switzerland;Central banks and their policies;United Kingdom;United States;Western Hemisphere;Unconventional monetary policy, event study, signaling, portfolio balance, asset purchases, Monetary Policy (Targets, Instruments, and Effects), Asset Pricing
    Date: 2017–09–29
  33. By: Ahlfeldt, Gabriel M.; Maennig, Wolfgang; Osterheider, Tobias
    Abstract: Attitudes for a common currency differ from nation to nation, or from region to region. We analyze regionally differing voting results of a referendum held in Sweden in lieu of joining the European Monetary Union. We put a special focus on the role of the industrial mix – being a potential factor influencing heterogeneous transmission – and find a significant, but subordinated, impact on voting behavior.
    Keywords: Currency Unions; EMU; industrial structure; referenda
    JEL: J1
    Date: 2016–05–06
  34. By: Pablo Duarte; Gunther Schnabl
    Abstract: Based on the concepts of justice by Hayek, Rawls and Buchanan we argue that the growing political dissatisfaction in industrialized countries is rooted in the asymmetric pattern in monetary policies since the 1980s for two reasons. First, the structurally declining interest rates and the unconventional monetary policy measures have granted privileges to specific groups. Second, the increasingly expansionary monetary policies have negative growth effects, which reduce the scope for compensation of the ones excluded from the privileges. The result is the fading acceptance of the economic order and growing political instability.
    Keywords: Hayek, Rawls, Buchanan, privileges, inequality, monetary policy, order of rules, difference principle, economic order
    JEL: D63 E02 E52
    Date: 2017
  35. By: Albert Queralto; Patrick Donnelly Moran
    Abstract: To what extent can monetary policy impact business innovation and productivity growth? We use a New Keynesian model with endogenous total factor productivity (TFP) to quantify the TFP losses due to the constraints on monetary policy imposed by the zero lower bound (ZLB) and the TFP benefits of tightening monetary policy more slowly than currently anticipated. In the model, monetary policy influences firms incentives to develop and implement innovations. We use evidence on the dynamic effects of R&D and monetary shocks to estimate key parameters and assess model performance. The model suggests significant TFP losses due to the ZLB.
    Keywords: Endogenous Technology ; Business Cycles ; Monetary Policy
    JEL: E32 F41 F44 G15
    Date: 2017–11–22
  36. By: Hippolyte W. Balima; Eric G. Kilama; Rene Tapsoba
    Abstract: Inflation targeting (IT) has gained much traction over the past two decades, becoming a framework of reference for the conduct of monetary policy. However, the debate about its very merits and macroeconomic consequences remains inconclusive. This paper digs deeper into the issue through a meta-regression analysis (MRA) of the existing literature, making it the first application of a MRA to the macroeconomic effects of IT adoption. Building on 8,059 estimated coefficients from a very broad sample of 113 studies, the paper finds that the empirical literature suffers from two types of publication bias. First, authors, editors and reviewers prefer results featuring beneficial effects of IT adoption on inflation volatility, real GDP growth and fiscal performances; second, they promote results with estimated coefficients that are significantly different from zero. However, after filtering out the publication biases, we still find meaningful (genuine) effects of IT in reducing inflation and real GDP growth volatility, but no significant genuine effects on inflation volatility and the level of real GDP growth. Interestingly, the results indicate that the impact of IT varies systematically across studies, depending on the sample structure and composition, the time coverage, the estimation techniques, country-specific factors, IT implementation parameters, and publication characteristics.
    Keywords: Central banks and their policies;Inflation targeting;Meta-regression analysis, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2017–09–29

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