nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒12‒18
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The behavior of the money multiplier during and after the subprime crisis: Implications for the transmission mechanism of monetary policy By Cukierman, Alex
  2. Communicating Monetary Policy Rules By Andrew Foerster; Troy Davig
  3. ON RRP and Stability of the Tri-party Market By Borghan Narajabad
  4. Potential Impact of Financial Innovation on Financial Services and Monetary Policy By Marek Dabrowski
  5. The Fragility of Emerging Currencies Since the 2000s: a Minskyan Analysis By Raquel Ramos
  6. The Effect of News Shocks and Monetary Policy By Francesco Zanetti; Luca Gambetti; Dimitiris Korobilis; John D. Tsoukalas
  7. The Interplay Between Financial Conditions and Monetary Policy Shocks By Trevor Serrao; Luca Benzoni; Marco Bassetto
  8. Monetary Constitutionalism: Some Recent Developments By Van Den Hauwe, Ludwig
  9. The optimal inflation target and the natural rate of interest By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  10. Quantitative Easing in Joseph's Egypt with Keynesian Producers By Jeffrey Campbell
  12. Milton Friedman and the case for flexible exchange rates and monetary rules By Harris Dellas; George S. Tavlas
  13. The portfolio of euro area fund investors and ECB monetary policy announcements By Bubeck, Johannes; Habib, Maurizio Michael; Manganelli, Simone
  14. Should Monetary Authorities Prick Asset Price Bubbles? Evidence from a New Keynesian Model with an Agent-Based Financial Market By Alexey Vasilenko
  15. Modelling euro banknote quality in circulation By Deinhammer, Harald; Ladi, Anna
  16. Macroprudential policy and foreign interest rate shocks: A comparison of different instruments and regulatory regimes By Chris Garbers; Guangling Liu
  17. International Evidence on Long Run Money Demand By Warren E. Weber; Robert Lucas; Juan Pablo Nicolini; Luca Benati
  18. Choice of market in the monetary economy By Ryoji Hiraguchi; Keiichiro Kobayashi
  19. An endogenous regime-switching model of ordered choice with an application to federal funds rate target. By Andrei A. Sirchenko
  20. Modeling Inflation in the WAEMU's Zone By Oulatta, Moon
  21. Learning, optimal monetary delegation and stock prices dynamics. By Marine Charlotte André; Meixing Dai
  22. Testing the interest parity condition with Irving Fisher's example of Indian rupee and sterling bonds in the London financial market (1869 - 1906) By Nils Herger
  24. Why are Banks Exposed to Monetary Policy? By Sebastian Di Tella; Pablo Kurlat
  25. Bitcoin Reveals Exchange Rate Manipulation and Detects Capital Controls By Gina Christelle Pieters
  26. Forward Guidance with Bayesian Learning and Estimation By Edward Herbst; David Lopez-Salido; Christopher Gust
  27. Competing Currencies in the Laboratory By Janet Hua Jiang; Cathy Zhang
  28. Optimal Long-Run Inflation and the Informal Economy By Claudio Cesaroni
  29. Quantitative Easing and Sovereign Yield Spreads: Euro-Area Time-Varying Evidence By António Afonso; João Tovar Jalles
  30. Mortgages and Heterogeneity in the Transmission of Monetary Policy By Arlene Wong; Aaron Kirkman; Alejandro Justiniano
  31. On the Optimal Majority Rule By Compte, Olivier; Jehiel, Philippe
  32. U.S. Monetary-Fiscal Regime Changes in the Presence of Endogenous Feedback in Policy Rules By Yoosoon Chang; Boreum Kwak
  33. Some Physics Notions on Monetary Standard By Tiago Fernandes
  34. Communism, Value Neutrality and Monetary Neutrality By Luo, Yinghao
  35. Bitcoin Awareness and Usage in Canada By Christopher S. Henry; Kim P. Huynh; Gradon Nicholls

  1. By: Cukierman, Alex
    Abstract: This short paper documents a dramatic decrease in the US conventional money multiplier since the downfall of Lehman's brothers and attributes it to the large scale quantitative easing operations of the Fed in conjunction with sluggish growth of banking credit. This, now almost ten years' old phenomenon, implies that shortage of reserves did not constitute a binding constraint on the expansion of banking credit since the start of the crisis. Since the Fed is unlikely to swiftly reduce its bloated balance sheet the banking system will continue to possess substantial excess reserves implying that they will not constitute a constraint on credit expansion for quite a while. Hence the conventional money multiplier is likely to be of little use as a predictor of the transmission of monetary base expansions to banking credit and the money supply in the foreseeable future.
    Keywords: banking credit and reserves.; monetary base; Money multiplier since the crisis and in the future; Quantitative easing
    JEL: E4 E5
    Date: 2017–12
  2. By: Andrew Foerster (Federal Reserve Bank of Kansas City); Troy Davig (Federal Reserve Bank of Kansas City)
    Abstract: Sixty-two countries around the world use some form of inflation targeting as their monetary policy framework, though none of these countries express explicit policy rules. In contrast, models of monetary policy typically assume policy is set through a rule such as a Taylor rule or optimal monetary policy formulation. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. The approach requires central banks to specify an inflation target, tolerance bands, and economic projections. When inflation moves outside the band, the central bank must also specify a time frame over which inflation will return to within the band. We show how communication about time horizons and tolerance bands can uniquely pin down a policy rule, and highlight how different types of communication can be used to convey different policy rules.
    Date: 2017
  3. By: Borghan Narajabad (Federal Reserve Board)
    Abstract: The Federal Reserve uses the overnight reverse repo (ON RRP) as a monetary policy tool to provide a floor for overnight money market rates. The connection between the ON RRP and tri-party repo market provides an effective tool for interest rate control. But diverting funds away from the tri-party market to the ON RRP could hinder broker-dealers’ funding and cause a problem for the liquidity of various securities markets. The potential negative systemic effect of using the ON RRP could be amplified due to a multiplier effect of cash circulation through the reinvestment of cash collateral by securities lenders in repo. This paper provides a simple competitive search model to shed light on the interaction among the ON RRP eligible and ineligible cash lenders in the tri-party repo market. We use the model to study how the ON RRP rate and capacity affect broker-dealers’ funding. The calibrated model is used to study the tradeoff between the effectiveness of the ON RRP as a monetary policy tool and the potential instability that it can pose.
    Date: 2017
  4. By: Marek Dabrowski
    Abstract: The recent wave of financial innovation, particularly innovation related to the application of information and communication technologies, poses a serious challenge to the financial industry’s business model in both its banking and non-banking components. It has already revolutionised financial services and, most likely, will continue to do so in the future. If not responded to adequately and timely by regulators, it may create new risks to financial stability, as occurred before the global financial crisis of 2007-2009. However, financial innovation will not seriously affect the process of monetary policymaking and is unlikely to undermine the ability of central banks to perform their price stability mission. The recent wave of financial innovation, particularly innovation related to the application of information and communication technologies, poses a serious challenge to the financial industry’s business model in both its banking and non-banking components. It has already revolutionised financial services and, most likely, will continue to do so in the future. If not responded to adequately and timely by regulators, it may create new risks to financial stability, as occurred before the global financial crisis of 2007-2009. However, financial innovation will not seriously affect the process of monetary policymaking and is unlikely to undermine the ability of central banks to perform their price stability mission.
    Keywords: monetary policy, financial innovation, electronic money
    JEL: E41 E44 E51 E52 E58 G21
    Date: 2017–07
  5. By: Raquel Ramos (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The currencies of a few emerging market economies (EME) have being following a specific dynamic since the early 2000s: they are strongly connected to financial markets internationally , appreciating in moments of tranquility and presenting sharp depreciations in peaks of uncertainty. What is the mechanism behind this specific dynamic that contradicts mainstream exchange-rate theories? To answer this question, this article applies the Minskyan framework to the context of money managers and their portfolio allocation decisions. The approach allows the analysis of these currencies through money managers' decisions, putting forward that these might float according to their balance-sheet constraints-reasons not related to the currencies themselves, but to money managers' assets, liabilities, and currency mismatch. The result is a dynamic characterized by deviation-amplifying system, the opposite of the equilibrium-seeking mechanism needed for clearing markets, and high frequency of depreciations associated to the global extent of these institutions' balance-sheet.
    Keywords: Exchange rates,emerging market economies,Minsky
    Date: 2017–10–19
  6. By: Francesco Zanetti; Luca Gambetti; Dimitiris Korobilis; John D. Tsoukalas
    Abstract: Abstract A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline signi ficantly, and durable spending rises signi ficantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over inflation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, Business cycles, VAR models, DSGE models
    JEL: E20 E32 E43 E52
    Date: 2017–09–27
  7. By: Trevor Serrao (Federal Reserve Bank of Chicago); Luca Benzoni (Federal Reserve Bank of Chicago); Marco Bassetto (Federal Reserve Bank of Chicago)
    Abstract: We study the interplay between monetary policy and financial conditions shocks. Such shocks have a significant and similar impact on the real economy, though with different degrees of persistence. The systematic fed funds rate response to a financial shock contributes to bringing the economy back towards trend, but a zero lower bound on policy rates can prevent this from happening, with a significant cost in terms of output and investment. In a retrospective analysis of the U.S. economy over the past 20 years, we decompose the realization of economic variables into the contributions of financial, monetary policy, and other shocks.
    Date: 2017
  8. By: Van Den Hauwe, Ludwig
    Abstract: The volume edited by Leland Yeager more than 50 years ago and published in 1962 under the title In Search of a Monetary Constitution has turned out to be remarkably prescient since the Great Inflation was then about to begin. One might expect that in the wake of the Global Financial Crisis and Great Recession interest in monetary-constitutional matters would be revived and this has indeed been the case. In this paper an attempt is made to assess whether and to what extent scientific progress has been made in defining the nature and characteristics of a monetary constitution for the post-Crisis world. To that end some recent contributions to the literature are reviewed critically.
    Keywords: Monetary Systems, Monetary Constitution, Monetary Constitutionalism
    JEL: A10 B53 E02 E5 E50 E6 E66
    Date: 2017–11–02
  9. By: Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
    Abstract: We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.
    Keywords: inflation target, effective lower bound.
    JEL: E31 E52 E58
    Date: 2017–12
  10. By: Jeffrey Campbell (Federal Reserve Bank of Chicago)
    Abstract: This paper considers monetary and fiscal policy when tangible assets can be created and stored after shocks that increase desired savings, like Joseph's biblical prophecy of seven fat years followed by seven lean years. The model's flexible-price allocation mimics Joseph's saving to smooth consumption. With nominal rigidities, monetary policy that eliminates liquidity traps leaves the economy vulnerable to confidence recessions with low consumption and investment. Josephean Quantitative Easing, a fiscal policy that purchases either obligations collateralized by reproducible tangible assets or the assets themselves, eliminates both liquidity traps and confidence recessions by putting a floor under future consumption. This requires no commitment to a time-inconsistent plan. In a small open economy, the monetary authority can implement Josephean Quantitative Easing with a sterilized currency-market intervention that accumulates foreign reserves. This can improve outcomes even if it leaves nominal exchange rates unchanged.
    Date: 2017
  11. By: Farm, Ante (Swedish Institute for Social Research, Stockholm University)
    Abstract: This is an introduction to money and the workings of the financial system. The creation of money is discussed in detail in Chapter 1. Chapter 2 explains how international payments can add to money creation but also generate a new type of money, usually called Eurodollars. Basic securities are defined and characterized in Chapter 3, namely bills, bonds and shares, but basic derivatives, like futures, swaps, and options, are also discussed. Chapter 4 deals with pricing by banks when extending loans, but also with price formation in markets for securities. Chapter 5 surveys possible threats to the financial system and discusses three different approaches to the problem of stabilizing it, namely crisis management, regulation, and structural reforms.
    Keywords: Money; interest; securities; payments system; financial system
    JEL: E40 E50
    Date: 2017–12–08
  12. By: Harris Dellas (University of Bern and Bank of Greece); George S. Tavlas (Bank of Greece and University of Leicester)
    Abstract: Managed currency without definite, stable, legislative rules is one of the most dangerous forms of "planning." A free enterprise economy can function only within a legal framework of rules; and no part of that framework is more important than the rules which define the monetary system. In the past those rules have been empty and inadequate; but there is no tolerable solution to be found in resort to the wisdom of "authorities." No liberal can contemplate with equanimity the prospect of an economy in which every investment and business venture is largely a speculation in the future actions of the Federal Reserve Board. [Henry Simons (1935, p. 558)]
    Keywords: exchange rate systems; monetary rules; Taylor Rule.
    JEL: F02 F33 E52
    Date: 2017–10
  13. By: Bubeck, Johannes; Habib, Maurizio Michael; Manganelli, Simone
    Abstract: This paper studies the impact of major ECB monetary policy announcements on the portfolio allocation of euro area fund investors, using daily data between 2012 and mid-2016, a period that includes a variety of unconventional measures. We distinguish between active portfolio reallocation, driven by redemptions or injections of investors, and passive portfolio rebalancing, triggered by valuation effects related to changes in asset prices and exchange rates. We find that, for this class of fund investors, policy announcements work mainly through valuation effects (the signalling channel), rather than via active reallocation (the portfolio rebalancing channel). Notably, since the autumn of 2014, monetary policy shocks triggered large asset price and exchange rate effects and prompted a passive shift of euro area investors into riskier assets, in particular European and Emerging Market equity funds and out of bond funds. JEL Classification: G11, G15
    Keywords: asset allocation, euro area, European Central Bank, investment funds, monetary policy
    Date: 2017–12
  14. By: Alexey Vasilenko (National Research University Higher School of Economics)
    Abstract: We develop the approach based on the synthesis of New Keynesian macroeconomics and agent-based models, and build a model, allowing for the incorporation of behavioral and speculative factors in ?nancial markets in a New Keynesian model with a ?nancial accelerator, `a la Bernanke et al. (1999). Using our model, we study the optimal strategy of central banks in pricking asset price bubbles for the maximization of social welfare and preserving ?nancial stability. Our results show that pricking asset price bubbles can be a policy that enhances social welfare, and reduces the volatility of output and in?ation; especially, in the cases when asset price bubbles are caused by credit expansion, or when the central bank conducts effective information policy, for example, effective verbal interventions. We also argue that pricking asset price bubbles with the lack of the effectiveness of information policy, only by raising the interest rate, leads to negative consequences to social welfare and ?nancial stability
    Keywords: optimal monetary policy; asset price bubble; New Keynesian macroeconomics; agent-based ?nancial market
    JEL: E44 E52 E58 G01 G02
    Date: 2017
  15. By: Deinhammer, Harald; Ladi, Anna
    Abstract: The quality of banknotes in the cash cycles of countries in the Eurosystem varies, despite all of these countries using identical euro banknotes. While it is known that this is dependent on national characteristics, such as public use and the involvement of the central bank in cash processing operations, the influence of all relevant parameters has not yet been established. This paper presents two computer-based models for the simulation of banknote cash cycles. The first model simulates a cash cycle using a theoretical approach based on key figures and models banknote fitness as a one-dimensional profile of fitness levels. The model identifies: (i) the frequency with which banknotes are returned to the central bank; (ii) the fitness threshold used in automated note processing at the central bank; and (iii) the note lifetime as the main drivers of banknote quality in circulation as well as central bank cash cycle costs. Production variations in new banknotes, the fitness threshold applied by commercial cash handlers and the accuracy of the fitness sensors used in the sorting process have been found to have a lower but non-trivial impact. The second model simulates banknotes in circulation as single entities and is oriented towards modelling country-specific cash cycles using available single-note data. The model is constructed using data collected by monitoring banknotes in circulation over the duration of a “circulation trial” carried out in three euro area countries. We compare the predicted quality results of the second data-based model against actual cash cycle data collected outside the circulation trial, discuss the reasons for the deviations found and conclude with considerations for an optimal theoretical national cash cycle. JEL Classification: C46, C63, E42, E58
    Keywords: banknote circulation, banknote lifetime, banknote quality, banknotes, circulation modelling
    Date: 2017–12
  16. By: Chris Garbers (Department of Economics, University of Stellenbosch); Guangling Liu (Department of Economics, University of Stellenbosch)
    Abstract: This paper presents a generic small open economy real business cycle model with banking and foreign borrowing. We incorporate capital requirements, reserve requirements, and loan-to-value (LTV) regulation into this framework, and subject the model to a positive foreign interest rate shock that raises the country risk premium and reduces the supply of foreign funds. The results show that these macroprudential instruments can attenuate the impact of such a shock, and that this attenuation property increases with the strictness of the regulatory regime. Capital requirements and LTV regulation deliver the largest attenuation benefits and are shown to be close substitutes. That being said, capital requirements are shown to be more effective at leaning against the financial cycle whereas LTV regulation is more effective at stimulating the financial cycle. The analysis indicates that capital and reserve requirements can interact such that reserve requirements are most effective when used to supplement existing capital requirement or LTV measures. We find that financial and macroeconomic stability objectives are aligned following a positive foreign interest rate shock such that a macroprudential response to such shocks can be to the benefit of both objectives. Lastly, our results show that capital requirements and LTV regulation exhibit decreasing returns to scale.
    Keywords: Macroprudential policy, Open economy macroeconomics, Financial stability, Business cycle, Welfare, DSGE
    JEL: E32 E44 E58 F41 G28
    Date: 2017
  17. By: Warren E. Weber (University of South Carolina); Robert Lucas (University of Chicago); Juan Pablo Nicolini (Minneapolis Fed); Luca Benati (University of Bern)
    Abstract: We explore the long-run demand for M1 based on a data set that has comprised 32 countries since 1851. In many cases, cointegration tests identify a long-run equilibrium relationship between either velocity and the short rate or M1, GDP, and the short rate. Evidence is especially strong for the United States and the United Kingdom over the entire period since World War I and for moderate and high-inflation countries. With the exception of high-inflation countries–for which a “log-log” specification is preferred–the data often prefer the specification in the levels of velocity and the short rate originally estimated by Selden (1956) and Latané (1960). This is especially clear for the United States and other low-inflation countries.
    Date: 2017
  18. By: Ryoji Hiraguchi; Keiichiro Kobayashi
    Abstract: We investigate a monetary model with two kinds of decentralized markets and where each agent stochastically chooses the market in which to participate. In one market, the pricing mechanism is competitive, whereas in the other, the terms of trade are determined by Nash bargaining. We show the sub-optimality of the Friedman rule, which is already demonstrated by existing models, where the setting of search externality in the competitive market is not completely satisfactory. We show this result in the more plausible setting when the competitive market does not have a search externality.
    Date: 2017–11
  19. By: Andrei A. Sirchenko
    Abstract: This paper introduces a class of ordered probit models with endogenous switching among N latent regimes and possibly endogenous explanatory variables. The paper contributes to and bridges two strands of microeconometric literature. First, it extends endogenous switching regressions to models of ordered choice with N unknown regimes. Second, it generalizes the existing zero-inflated ordered probit models to make them suitable for ordinal data that take on negative, zero and positive values and characterized by abundant and heterogeneous zero observations. From a macroeconomic perspective, it is the first attempt to implement regime switching and accommodate endogenous regressors in discrete-choice monetary policy rules. Recurring oscillating regime switches in the three regimes evolving endogenously in response to the state of economy are detected during a relatively stable policy period such as the Greenspan era. The Monte Carlo experiments and an application to the federal funds rate target demonstrate that ignoring endogeneity and regime-switching environment can lead to seriously distorted statistical inference. In the simulations, the new models perform well in small samples. In the application, they not only have better in-sample fit for the Greenspan era than the existing models but also forecast better out of sample for the entire Bernanke era, correctly predicting 91 percent of policy decisions.
    JEL: C34 C35 C36 E52
    Date: 2017–11–19
  20. By: Oulatta, Moon
    Abstract: This paper introduces a simple AS-AD model to examine the determinants of inflation for the members of the West African Economic and Monetary Union (WAEMU). On the supply side, we found France's inflation, rainfall, and real crude oil inflation to be the most important drivers of domestic inflation. On the demand side, we found the output gap to be a significant determinant of domestic inflation. Given the estimated size of the effect of the output gap on inflation, we can conclude that the short-run aggregate supply curve may be relatively flat; bolstering the Keynesian view that monetary policy could be extremely effective in stabilizing output in the short-run.
    Keywords: Inflation, Two Stage Least Squares, Monetary policy, BCEAO
    JEL: C36 E31 E52
    Date: 2016–11–20
  21. By: Marine Charlotte André; Meixing Dai
    Abstract: This paper studies how learning affects the interactions between monetary policy and stock prices. Learning modifes the intertemporal trade-off of the central bank by giving to the latter the possibility to manipulate private expectations. The result of this manipulation is not socially optimal since it reduces excessively the stabilization bias. To remedy this, the government should appoint a central banker that is less conservative than the society. The turnover rate in the stock market is the key factor that determines the interactions between monetary policy (hence delegation) and stock prices. A positive turnover rate means that the presence of stocks in the households' portfolios distorts the optimal consumption path. This type of distortion compensates somehow these induced by learning. The central bank should be more conservative to avoid the effect of distortions on social welfare induced by learning than in the absence of stocks.
    Keywords: adaptive learning, stabilization bias, inflation penalty, optimal monetary delegation, central bank conservatism, stock prices.
    JEL: C62 D83 D84 E52 E58
    Date: 2017
  22. By: Nils Herger (Study Center Gerzensee)
    Abstract: This paper assesses the uncovered interest parity (UIP) condition by means of Indian government bonds during the 1869 to 1906 period. As emphasised by Irving Fisher, interest and exchange rates between Britain and India from that period concur closely with the theoretical assumptions of UIP since (i.) India issued bonds in different currencies (rupees and sterling) (ii.) these bonds were simultaneously traded in the London financial market, and (iii.) subject to negligible regulation and default risks. As long as the Indian currency system was stable, a close correlation arises indeed between sterling-to-rupee interest rate differences and exchange rate changes.
    Date: 2017–12
  23. By: Jamel Saadaoui (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique, BETA - Bureau d'Economie Théorique et Appliquée - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: From the onset of the euro crisis to the Brexit vote, we have witnessed impressive reductions of current account imbalances in peripheral countries of the euro area. These reductions can be the result of either a compression of internal demand or an improvement in external competitiveness. In this paper, we compute exchange rate misalignments within the euro area to assess whether peripheral countries have managed to improve their external competitiveness. After controlling for the reduction of business cycle synchronization within the EMU, we find that peripheral countries have managed to reduce their exchange rate misalignments thanks to internal devaluations. To some extent, these favourable evolutions reflect improvements in external competitiveness. Nevertheless, these gains could only be temporary if peripheral countries do not improve their non-price competitiveness, their trade structures and their international specializations in the long run.
    Keywords: Internal Devaluation,Equilibrium Exchange Rate,External Competitiveness
    Date: 2017–11–11
  24. By: Sebastian Di Tella; Pablo Kurlat
    Abstract: We propose a model of banks’ exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks' optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity-mismatched balance sheet, and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks’ maturity mismatch.
    JEL: E41 E43 E44 E51
    Date: 2017–11
  25. By: Gina Christelle Pieters
    Abstract: Many countries manipulate the value of their currency or use some form of capital control, yet the data usually used to detect these manipulations are low frequency, expensive, lagged, and potentially mismeasured. I demonstrate that the price data of the internationally traded cryptocurrency Bitcoin can approximate unocial exchange rates which, in turn, can be used to detect both the existence and the magnitude of the distortion caused by capital controls and exchange rate manipulations. However, I document that bitcoin exchange rates contain problematic bitcoin-market-speci c elements and must be adjusted before being used for this purpose. As bitcoin exchange rates exist at a daily frequency, they reveal transitory interventions that would otherwise go undetected. This result also serves as veri cation that Bitcoin is used to circumvent capital controls and manipulated exchange rates.
    JEL: F30 F31 E42 G15
    Date: 2017–11–20
  26. By: Edward Herbst (Federal Reserve Board); David Lopez-Salido (Federal Reserve Board); Christopher Gust (Federal Reserve Board)
    Abstract: We estimate a New Keynesian model in which the private sector has incomplete information about a central bank’s reaction function and must infer it based on economic outcomes. A central bank’s reaction function can change across regimes and we document a systematic change in U.S. policymakers’ reaction function during the 2009-2016 period in which the federal funds rate was at the effective lower bound. This regime is characterized by being more responsive to economic slack and implies that policymakers sought to keep the policy rate at the ZLB longer than would the case by the pre-existing reaction function; hence, we call this the forward guidance regime. We use the model to assess the impact of forward guidance on the macroeconomy and to evaluate the role of imperfect information and learning in limiting its effectiveness.
    Date: 2017
  27. By: Janet Hua Jiang; Cathy Zhang
    Abstract: We investigate competition between two intrinsically worthless currencies as a result of decentralized interactions between human subjects. We design a laboratory experiment based on a simple two-country, two-currency search model to study factors that affect circulation patterns and equilibrium selection. Experimental results indicate foreign currency acceptance rates decrease with relative country size but are not significantly affected by the degree of integration. The laboratory economies tend to converge to a unified currency regime where both currencies circulate at home and abroad, even if other regimes are theoretical possibilities. Introducing government transaction policies biased towards domestic currency significantly reduces the acceptability of foreign currency. These findings suggest government policies can serve as a coordination device when multiple currencies are available.
    Keywords: Central bank research, Digital Currencies
    JEL: C92 D83 E40
    Date: 2017
  28. By: Claudio Cesaroni (Economic Analysis and Research, Sace S.p.A.)
    Abstract: This paper studies the optimal long-run rate of inflation in a two-sector model of the Lithuanian economy with informal production and price rigidity in the regular sector. The government issues no debt and is committed to follow a balanced budget rule. The informal sector is unregulated and untaxed and its existence limits the government’s ability to collect revenues through fiscal policy. Such environment provides therefore the basis for quantifying the possible existence of a public finance motive for inflation. The main results can be summarized as follows: First, there is a strong heterogeneity in the optimal inflation rate which depends on the tax rate that is endogenously adjusted to keep the budget balanced. Inflation can be as high as 6.77% when the capital tax rate is endogenous, but when labor income taxes are adjusted optimal policy calls for a rate of deflation such that the nominal interest rate hits the zero lower bound. Second, the optimal inflation rate is a non-decreasing function of the size of the informal economy and, in most cases, there is a positive relationship between the two. Finally, substantial deviations from zero inflation are observed even in presence of a plausible degree of price rigidity.
    Keywords: Optimal Inflation, Informal Economy, Endogenous Tax Changes
    JEL: E26 E52 H26
    Date: 2017–09–20
  29. By: António Afonso; João Tovar Jalles
    Abstract: We assess the determinants of sovereign bond yield spreads in the period 1999-2016, considering non-conventional monetary policy measures in the Euro area. We use a 2-step approach: i) confirm (by means of model selection methods) and estimate (by means of panel techniques) the determinants of sovereign bond yield spreads; ii) compute bivariate time-varying coefficient (TVC) models of each determinant on government bond spreads and analyse the temporal dynamics of resulting estimates. Our results show that the baseline determinants of sovereign bond yield spreads in the Euro area are the bid-ask spread, the VIX, fiscal developments and rating developments, REER, and economic growth. In recent years, additional relevant determinants became the QE measures implemented by the ECB in the aftermath of the economic and financial crisis. From the TVC analysis, the Covered Bond Purchase Programme contributed to reduce yield spreads in all Euro area countries in the analysis, particularly in the crisis period, 2011-2013. In addition, longer-term refinancing operations contributed to reduce yield spreads in most countries.
    Keywords: sovereign bonds, fiscal policy, non-conventional monetary policy, time-varying coefficients, model selection, panel data
    JEL: C23 E52 E62 G10 H63
    Date: 2017–12
  30. By: Arlene Wong (Federal Reserve Bank of Minneapolis); Aaron Kirkman (Northwestern University); Alejandro Justiniano (Federal Reerve Chicago)
    Abstract: We study the transmission of monetary policy to consumption and the accumulation of mortgage debt. Using a comprehensive and representative borrower-loan level panel the analysis focuses on how decisions to obtain new mortgages or refinance existing ones following policy driven changes in interest rates vary with individual characteristics, particularly age. Furthermore, we document whether this heterogeneity varies by type of refinancing and so look separately at refinancing with and without an increase in mortgage balance. We then explore how these differences in accessing mortgages interact with decisions to tap into housing net worth through home equity loans and lines of credit. Finally, we extended the analysis to other forms of borrowing such as credit card debt and car loans. The latter in turn informs the pass-through to a crucial component of durable consumption.
    Date: 2017
  31. By: Compte, Olivier; Jehiel, Philippe
    Abstract: We develop a simple model that rationalizes why less stringent majority rules are preferable to unanimity in large committees. Proposals are randomly generated and the running proposal is adopted whenever it is approved by a sufficiently large share of voters. Unanimity induces excessive delays while too weak majority requirements induce the adoption of suboptimal proposals. The optimal majority rule balances these two inefficiencies: it requires the approval by a share equal to the probability (assumed to be constant across proposals) that a given member gets more than the average welfare associated with the running proposal. Various extensions are considered.
    Date: 2017–12
  32. By: Yoosoon Chang (Indiana University); Boreum Kwak (Martin Luther University Halle-Wittenberg and Halle Institute for Economic Research)
    Keywords: monetary and fiscal policy interactions, endogenous regime switching, adaptive LASSO, time-varying coefficient VAR, factor augmented VAR
    Date: 2017–10
  33. By: Tiago Fernandes
    Abstract: The economic concept of monetary standard of currencies is reviewed in a classical physics standpoint. Are analyzed the physical characteristics of the material elements used to represent value and how the energy matrix of an economy can play an important role in the sustained growth, through the adoption of a new monetary standard, based on the energy supply capacity.
    Date: 2017–11
  34. By: Luo, Yinghao
    Abstract: One of the most puzzling aspects about the functioning of the floating exchange rate regime of the 1980s has been that huge swings in exchange rate have had only muted effects on anything real. To understand this phenomenon, we study the relationship between communism and value neutrality and monetary neutrality. We find that the symmetry of communism is bound to lead to value neutrality. In the case of value neutrality, the economic man will certainly accept monetary neutrality. If money is neutral in the long run then even if purchasing power parity (PPP) is not valid in the short-run it will valid over the long run. However, without considering the time factor, communism is a kind of symmetry that is almost impossible to achieve. While considering the time factor, the symmetry of communism can be achieved in theory!
    Keywords: communism, symmetry, value neutrality, monetary neutrality, purchasing power parity
    JEL: A13 D24 D3 E5 F3
    Date: 2017–05–20
  35. By: Christopher S. Henry; Kim P. Huynh; Gradon Nicholls
    Abstract: There has been tremendous discussion of Bitcoin, digital currencies and FinTech. However, there is limited empirical evidence of Bitcoin’s adoption and usage. We propose a methodology to collect a nationally representative sample using the Bitcoin Omnibus Survey (BTCOS) to track the ubiquity and usage of Bitcoin in Canada. We find that about 64 percent of Canadians have heard of Bitcoin, but only 2.9 percent own it. We also find that awareness of Bitcoin is strongly associated with men and those with college or university education: additionally, Bitcoin awareness is more concentrated among unemployed individuals. On the other hand, Bitcoin ownership is associated with younger age groups and a high-school education. Furthermore, we construct a test of Bitcoin characteristics to gauge the level of knowledge held by respondents who were aware of Bitcoin, including actual owners. We find that knowledge is positively correlated with Bitcoin adoption. We attempt to reconcile the difference in awareness and ownership by decomposing the transactional and store-of-value motives for holding Bitcoin. Finally, we conclude with some suggestions to improve future surveys on digital currency, in particular, to achieve precise estimates from the hard-to-reach population of digital currency users.
    Keywords: Bank notes, Digital currencies, Econometric and statistical methods
    JEL: E4 C12
    Date: 2017

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