nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒01‒08
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Capital controls, macroprudential measures and monetary policy interactions in an emerging economy By Valerio Nispi Landi
  2. The Credit Channel Transmission of Monetary Policy in Tunisia By Mna, Ali; Younsi, Moheddine
  3. Inflation Targeting as a Shock Absorber By M. Fratzscher; C. Grosse Steffen; M. Rieth
  4. Macroprudential Policy, Central Banks and Financial Stability: Evidence from China By Jan Klingelhöfer; Rongrong Sun
  5. The Impact of Forward Guidance on Inflation Expectations: Evidence from the ECB By Marc de la Barrera; Juraj Falath; Dorian Henricotc; Jean-Alexandre Vaglio
  6. Liquidity provision as a monetary policy tool: The ECB's non-standard measures after the financial crisis By Quint, Dominic; Tristani, Oreste
  7. Appropriate monetary policy and forecast disagreement at the FOMC By Schultefrankenfeld, Guido
  8. Dominant Currency Paradigm: A New Model for Small Open Economies By Camila Casas; Federico Diez; Gita Gopinath; Pierre-Olivier Gourinchas
  9. Optimal monetary policy and fiscal interactions in a non-Ricardian economy By Massimiliano Rigon; Francesco Zanetti
  10. Which Model to Forecast the Target Rate? By Maarten van Oordt
  11. Global Trade and the Dollar By Emine Boz; Gita Gopinath; Mikkel Plagborg-Møller
  12. Essays in empirical finance and monetary policy By van Holle, Frederiek
  13. Communication of monetary policy in unconventional times By Coenen, Günter; Ehrmann, Michael; Gaballo, Gaetano; Hoffmann, Peter; Nakov, Anton; Nardelli, Stefano; Persson, Eric; Strasser, Georg H.
  14. A Tale of Four Tails: Inflation, the Policy Rate, Longer-Term Rates, and Stock Prices By Anene, Dominic; D'Amico, Stefania
  15. Monetary Policy Stretched to the Limit: How Could Governments Support the European Central Bank? By van Riet, Ad
  16. Money Markets and Exchange Rates in Pre-Industrial Europe By Nogues-Marco, Pilar
  17. The Effect of Interest Rates on Economic Growth By Drobyshevsky Sergey; Bozhechkova Alexandra; Trunin Pavel; Sinelnikova-Muryleva Elena
  18. The Optimal Inflation Target and the Natural Rate of Interest By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  19. Financial Spillovers and Macroprudential Policies By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  20. The macroeconomic effects of asset purchases revisited By Henning Hesse; Boris Hofmann; James Weber
  21. Unconventional Policies and Exchange Rate Dynamics By Gustavo Adler; Ruy Lama; Juan Pablo Medina
  22. International financial flows and the risk-taking channel By Pietro Cova; Filippo Natoli
  23. How far does monetary policy reach? Evidence from factor-augmented vector autoregressions for Poland By Mariusz Kapuściński
  24. Monetary Policy Puzzle and wealth targeting consumers By Elliot Aurissergues
  25. Monetary Policy Transmission and Trade-offs in the United States: Old and New By Boris Hofmann; Gert Peersman
  26. Exit Strategies, Capital Flight and Speculative Attacks: Europe's Version of the Trilemma By Andreas Steiner; Sven Steinkamp; Frank Westermann
  27. The Macroeconomic Determinants of the Pass-Through from the Market Interest Rate to the Bank Lending Rate in Mozambique By Machava, Agostinho
  28. Quantitative easing and bank risk taking: evidence from lending By John Kandrac; Bernd Schlusche
  29. Global Liquidity Transmission to Emerging Market Economies, and Their Policy Responses By Woon Gyu Choi; Taesu Kang; Geun-Young Kim; Byongju Lee
  30. China Monetary Policy Transmission in China: Dual Shocks with Dual Bond Markets By Makram El-Shagi; Lunan Jiang
  31. Stigma and the Discount Window By Mark A. Carlson; Jonathan D. Rose
  32. Inflation dynamics during the financial crisis in Europe: Cross-sectional identification of long-run inflation expectations By Dany-Knedlik, Geraldine; Holtemöller, Oliver
  33. Dirty Money Coming Home: Capital Flows into and out of Tax Havens By Lukas Menkhoff; Jakob Miethe
  34. Pairwise trading in the money market during the European sovereign debt crisis By Edoardo Rainone
  35. Loanable funds vs money creation in banking: A benchmark result By Faure, Salomon A.; Gersbach, Hans
  36. Public investment and monetary policy stance in the euro area By Lorenzo Burlon; Alberto Locarno; Alessandro Notarpietro; Massimiliano Pisani
  37. Money Demand in China: A Meta-Study By Makram El-Shagi; Yizhuang Zheng
  38. Oil price shocks, monetary policy and current account imbalances within a currency union By Baas, Timo; Belke, Ansgar

  1. By: Valerio Nispi Landi (Bank of Italy)
    Abstract: Are capital controls and macroprudential measures desirable in an emerging economy? How do these instruments interact with monetary policy? I address these questions in a DSGE model for an emerging economy whose banks are indebted in foreign currency. The model is augmented with financial frictions. The main results are as follows. First, capital controls and macroprudential policies are able to mitigate the adverse effects of an increase in the foreign interest rate. Second the desirability of these measures is shock dependent. Third, capital controls and monetary policy are complementary in addressing the trade-off between inflation and financial fluctuations.
    Keywords: financial markets, monetary policy, small open economy
    JEL: E44 E52 E58 F41
    Date: 2107–12
  2. By: Mna, Ali; Younsi, Moheddine
    Abstract: The purpose of this paper is to evaluate the importance of the credit channel in the monetary policy transmission mechanism in Tunisia. Using a VAR approach, we attempt to empirically examine the responses of the main aggregates of the Tunisian economy to monetary policy shocks over the period 1965-2015. Our empirical results showed that credit has a significant effect on investment and inflation. Indeed, the cointegration relationship, coupled with the weak exogeneity test, shows that credit is an endogenous variable and therefore the long-term equation found is a credit equation. The crucial role of credit channel is argued by the goal of price stability expected by any monetary policy. The analysis of monetary shocks shows the importance of exchange rate policy and the local currency devaluation on the financing mode. It is observed that Tunisian economy is dominated by external conditions. This dominance is confirmed by extensive using of external debts and trade agreements with the dominant countries. Ultimately, our findings suggest that policymakers should act on the level of economic activity and inflation, on two terms. The first is in short-run, by acting on the interest rate and the second is in long-run, by controlling the exchange rate.
    Keywords: Credit channel, monetary policy transmission, VAR approach, impulse analysis, monetary shocks
    JEL: E43 E51 E52
    Date: 2017–12–28
  3. By: M. Fratzscher; C. Grosse Steffen; M. Rieth
    Abstract: We study the characteristics of inflation targeting as a shock absorber in response to large shocks in the form of natural disasters for a sample of 76 countries over the period 1970-2015. We find that inflation targeting improves macroeconomic performance following such shocks as it lowers inflation, raises output growth, and reduces inflation and growth variability compared to alternative monetary regimes. This performance is mostly due to a stronger response of monetary policy and fiscal policy under inflation targeting. Finally, we show that only hard but not soft targeting reaps the fruits: deeds, not words, matter for successful monetary stabilization.
    Keywords: Monetary policy, Central banks, Monetary regimes, Dynamic effects.
    JEL: E42 E52 E58
    Date: 2017
  4. By: Jan Klingelhöfer; Rongrong Sun (Center for Financial Development and Stability at Henan University, Kaifeng, Henan)
    Abstract: We study the Chinese experience and provide evidence that central banks can play an active role in safeguarding financial stability. The narrative approach is used to disentangle macropudential policy actions from monetary actions. We show that reserve requirements, window guidance, supervisory pressure and housing-market policies can be used for macroprudential purposes. Our VAR stimates suggest that well-targeted macroprudential policy has immediate and persistent impact on credit, but no statistically significant impact on output. Macroprudential policy can be used to retain financial stability without triggering an economic slowdown, or as a complement to monetary policy to offset the buildup of financial vulnerabilities arising from monetary easing. The multi-instrument framework enables central banks to achieve both macroeconomic and financial stability.
    Keywords: macroprudential policy, monetary policy, credit, financial stability, China
    JEL: E52 E58 E44
    Date: 2017–12
  5. By: Marc de la Barrera; Juraj Falath; Dorian Henricotc; Jean-Alexandre Vaglio
    Abstract: This paper empirically investigates the impact of forward guidance announcements on inflation expectations in the Eurozone. We identify forward guidance shocks as changes in the 2-year nominal ECB yield on specific announcement days to measure changes in daily inflation swaps of different maturities. In the process, we also separately identify the effect of quantitative easing and interest rate change announcement shocks. We find that forward guidance was successful in reviving inflation expectations across maturities. Analyzing the transmission channels of forward guidance, we find evidence that both a reanchoring channel and a portfolio effect might have been at play.
    JEL: E31 E52 E65
    Date: 2017–12
  6. 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.
    Keywords: ECB,euro area,financial crisis,financial frictions,interbank market,non-standard monetary policy
    JEL: E44 E58
    Date: 2017
  7. By: Schultefrankenfeld, Guido
    Abstract: I assess how dissenting views on appropriate monetary policy result in disagreement about the macroeconomic outlook of Federal Open Market Committee members. FOMC members that voted for a higher Fed Funds Rate than the majority of voters also forecast higher inflation rates, while they forecast lower unemployment rates relative to the consensus view on the future economy. Voters that tighten their stance revise inflation forecasts to the upside and unemployment forecasts to the downside. Members that switched their voting status between forecasting rounds, i.e., switched from voting with the majority to being a dissenting minority voter, or switched vice versa, are significantly more hesitant in revising their macroeconomic forecasts.
    Keywords: Federal Reserve System,Federal Open Market Committee,Federal Funds Rate,Dissent,Forecast Disagreement
    JEL: C12 E52
    Date: 2017
  8. By: Camila Casas; Federico Diez; Gita Gopinath; Pierre-Olivier Gourinchas
    Abstract: Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.
  9. By: Massimiliano Rigon (Bank of Italy); Francesco Zanetti (University of Oxford)
    Abstract: This paper studies optimal discretionary monetary policy and its interaction with fiscal policy in a New Keynesian model with finitely-lived consumers and government debt. Optimal discretionary monetary policy involves debt stabilization to reduce consumption dispersion across cohorts of consumers. The welfare relevance of debt stabilization is proportional to the debt-to-output ratio and inversely related to the households probability of survival that affects the household’s propensity to consume out financial wealth. Debt stabilization bias implies that discretionary optimal policy is suboptimal compared with the inflation targeting rule that fully stabilizes the output gap and the inflation rate while leaving debt to freely fluctuate in response to demand shocks.
    Keywords: optimal monetary policy, fiscal and monetary policy interaction
    JEL: E53 E63
    Date: 2017–12
  10. By: Maarten van Oordt
    Abstract: Specifications of the Federal Reserve target rate that have more realistic features mitigate in-sample over-fitting and are favored in the data. Imposing a positivity constraint and discrete increments significantly increases the accuracy of model out-of-sample forecasts for the level and volatility of the Federal Reserve target rates. In addition, imposing the constraints produces different estimates of the response coefficients. In particular, a new and simple specification, where the target rate is the maximum between zero and the prediction of an ordered-choice Probit model, is more accurate and has higher response coefficients to information about inflation and unemployment.
    Keywords: Financial markets, Interest rates
    JEL: E43
    Date: 2017
  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 percent U.S. dollar appreciation against all other currencies in the world predicts a 0.6–0.8 percent 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 percent 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.
    Date: 2017–11–13
  12. By: van Holle, Frederiek (Tilburg University, School of Economics and Management)
    Abstract: This dissertation consists of three essays. In the first paper, “Stock-Bond Correlations, Macroeconomic Regimes and Monetary Policy”, we link the evolution of stock-bond correlations for an international sample to both local and global regimes in inflation, the output gap and monetary policy. We find that negative stock-bond correlations only occur during regimes of low to medium inflation, combined with an accommodating monetary policy. This observation is highly relevant in the current environment of potential policy normalization by central banks. Normalizing policy could push stock-bond correlations back into positive territory resulting in a higher volatility of balanced investment portfolios. The second paper, “The Dynamic Risk Profile of Currency Carry Strategies”, contributes to a better understanding of the time-varying risk exposure of the currency carry strategy applied on the G10 currencies. Risk factor migration over time is captured using Bayesian model averaging techniques. The third paper, “Monetary Policy Transmission and the Impact on Financial Assets, the Real Economy and Inflation”, studies the different dimensions of conventional and unconventional monetary policy. The recent unfolding of unconventional policy measures like QE and forward guidance and the presence of the so-called zero lower-bound on nominal interest rates further complicate the transmission. I show that asymmetrical policy transmission challenges the current focus on policy normalization after a decade of ultra-loose monetary policy.
    Date: 2017
  13. By: Coenen, Günter; Ehrmann, Michael; Gaballo, Gaetano; Hoffmann, Peter; Nakov, Anton; Nardelli, Stefano; Persson, Eric; Strasser, Georg H.
    Abstract: Monetary policy communication is particularly important during unconventional times, because high uncertainty about the economy, the introduction of new policy tools and possible limits to the central bank's toolkit could hamper the predictability of policy actions. We study how monetary policy communication should and has worked under such circumstances. Our main results relate to announcements of asset purchase programmes and the use of forward guidance. We show that announcements of asset purchase programmes have lowered market uncertainty, particularly when accompanied by a contextual release of implementation details such as the envisaged size of the programme. We also show that forward guidance reduces uncertainty more effectively when it is state-contingent or when it provides guidance about a long horizon than when it is open-ended or covers only a short horizon, and that the credibility of forward guidance is strengthened if the central bank also has embarked on an asset purchase programme.
    Keywords: Central Bank Communication,Unconventional Monetary Policy,Asset Purchase Programme,Forward Guidance
    JEL: E43 E52 E58
    Date: 2017
  14. By: Anene, Dominic (Northwestern University); D'Amico, Stefania (Federal Reserve Bank of Chicago)
    Abstract: We analyze empirical links between the perceived tail-risk of inflation, the policy rate, longer-term interest rates, and equity prices in the U.S. Their simultaneous changes enable us to distinguish between a systematic and "exogenous" response to monetary-policy news. And, those tail risks' co-movements are accounted for in quantifying the magnitude and persistence of their responses to key shocks. We find that: (i) in the medium-term, all four tail risks respond significantly and contemporaneously to domestic and foreign monetary-policy announcements, except for the equity tail risk to foreign policy; (ii) all four tail risks rarely change in response to other U.S. macroeconomic news; (iii) the directional pattern of their simultaneous reactions to policy announcements is often consistent with the systematic response to new information about the economic outlook rather than with the response to an exogenous shock; (iv) the few notable instances of the latter response are always in reaction to Fed announcements; and, (v) our impulse responses demonstrate that odds of extreme inflation outcomes and extreme policy-rate outcomes are tightly linked, and that both determine tail outcomes for longer-term interest rates but not for stock prices.
    Keywords: Downside risk; derivatives; inflation; monetary policy
    JEL: C32 E52 E58 G12 G14
    Date: 2017–12–19
  15. By: van Riet, Ad
    Abstract: New-style central banking in many advanced economies, involving the use of unconventional monetary policy instruments and forward guidance at the effective lower bound for interest rates, has raised questions about the appropriate role of fiscal policy – also in the euro area, where a fiscal counterpart to the European Central Bank (ECB) and the Eurosystem is missing. This paper considers three areas where euro area governments could act as the ‘joint sovereign’ behind the euro and support the ECB in its task of maintaining price stability, staying within the boundaries of the Maastricht Treaty. First, member countries could coordinate a growth-friendly aggregate economic policy mix that is supportive of the single monetary policy, with the help of a central fiscal capacity subject to common decision-making. Second, they could introduce a safe sovereign asset for the eurozone without assuming common liability in order to anchor financial integration and facilitate monetary policy implementation. Third, the significant benefits for the Eurosystem from a lower burden on monetary policy and a reduced exposure to sovereign risk could make it acceptable for euro area governments to indemnify it against potential large losses on its much expanded balance sheet. The fundamental solution, however, lies in advancing with fiscal integration to address the ‘institutional loneliness’ of the Eurosystem with full respect for its independent status.
    Keywords: Maastricht Treaty; new-style central banking; supportive fiscal policies; capital loss insurance; safe sovereign asset
    JEL: E5 E63 H63
    Date: 2017–10
  16. By: Nogues-Marco, Pilar
    Abstract: This chapter focuses on money markets and exchange rates in preindustrial Europe. The foreign exchange market was mostly based on bills of exchange, the instrument used to transfer money and provide credit between distant centers in pre-industrial Europe. In this chapter, first I explain bill of exchange operations, money market integration, usury regulations and circumventions to hide the market interest rate as well as the evolution of bills of exchange in history, focusing mainly on the most relevant features generalized during the first half of the 17th century: endorsement and the joint liability rule, which facilitated the full expansion of the foreign exchange market beyond personal networks. Then, I describe the European geography of money in the mid-18th century, characterized by a very high degree of multilateralism with the triangle of Amsterdam, London and Paris as the backbone of the European settlement system. Finally, I measure the cost of capital and relate it to liquidity. I show evidence of interest rates in the 18th century for Amsterdam, London, Paris and Cadiz. While Amsterdam, London and Paris presented low and similar interest rates, Cadiz had higher interest rates, mostly being double the cost of capital. These results seem to show a high inverse correlation between liquidity and interest rates, suggesting that the share in international trade of European centers might have been a powerful driver of international monetary leadership. While more empirical evidence and further research is needed, this approach opens the scope of the analysis beyond the national institutional explanation.
    Keywords: Money market, Bills of exchange, Monetary geography, Usury regulations, Cost of capital, Exchange rates, Interest rates, Specie-point mechanism
    JEL: E42 F31 G15 N23
    Date: 2017
  17. By: Drobyshevsky Sergey (Gaidar Institute for Economic Policy); Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Trunin Pavel (Gaidar Institute for Economic Policy); Sinelnikova-Muryleva Elena (Gaidar Institute for Economic Policy)
    Abstract: This paper explores the mechanisms, direction and extent to which interest rates can affect economic growth. The authors analyze theoretical concepts and international economic practices in high-interest-rate environments to justify that high nominal and real interest rates may not dampen economic growth if there are mechanisms such as low inflation expectations, economy’s attractiveness to foreign investors, the technological transfer effect, the accumulation of domestic savings. By using a structural vector autoregression (VAR) to evaluate econometrically the effectiveness of the interest rate channel of Bank of Russia’s monetary policy transmission mechanism, the paper provides evidence to suggest that interest rate policy is partially efficient after the global financial crisis.
    Keywords: monetary policy, inflation, inflation expectations, nominal interest rate, real interest rate, economic growth, interest rate channel, SVAR model
    JEL: E20 E31 E52 E58 G15
    Date: 2017
  18. 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: macroeconomia, economia internacional
    JEL: E31 E52 E58
    Date: 2017–12
  19. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: We investigate whether and to what extent macroprudential policies affect the financial link between the center economies (CEs, i.e., the U.S., Japan, and the Euro area), and the peripheral economies (PHs). We first estimate the correlation of the policy interest rates between the CEs and the PHs and use that as a measure of financial sensitivity. We then estimate the determinants of the estimated measure of financial sensitivity as a function of country-specific macroeconomic conditions and policies. The potential determinant of our focus is the extensity of macroprudential policies. From the estimation exercise, we find that a more extensive implementation of macroprudential policies would lead PHs to (re)gain monetary independence from the CEs when the CEs implement expansionary monetary policy; when PHs run current account deficit; when they hold lower levels of international reserves (IR); when their financial markets are relatively closed; when they are experiencing an increase in net portfolio flows; and when they are experiencing credit expansion.
    JEL: F4 F41 F42
    Date: 2017–12
  20. By: Henning Hesse; Boris Hofmann; James Weber
    Abstract: This paper revisits the macroeconomic effects of the large-scale asset purchase programmes launched by the Federal Reserve and the Bank of England from 2008. Using a Bayesian VAR, we investigate the macroeconomic impact of shocks to asset purchase announcements and assess changes in their effectiveness based on subsample analysis. The results suggest that the early asset purchase programmes had significant positive macroeconomic effects, while those of the subsequent ones were weaker and in part not significantly different from zero. The reduced effectiveness seems to reflect in part better anticipation of asset purchase programmes over time, since we find significant positive macroeconomic effects when we consider shocks to survey expectations of the Federal Reserve's last asset purchase programme. Finally, in all estimations we find a significant and persistent positive impact of asset purchase shocks on stock prices.
    Keywords: unconventional monetary policy, asset purchases, monetary transmission
    JEL: E50 E51 E52
    Date: 2017–12
  21. By: Gustavo Adler; Ruy Lama; Juan Pablo Medina
    Abstract: We study exchange rate dynamics under cooperative and self-oriented policies in a two-country DSGE model with unconventional monetary and exchange rate policies. The cooperative solution features a large exchange rate adjustment that cushions the impact of negative shocks and a moderate use of unconventional policy instruments. Self-oriented policies (Nash equilibrium), however, entail limited exchange rate movements and an aggressive use of unconventional policies in both countries. Our results highlight the role of international policy cooperation in allowing the exchange rate to play the traditional role of shock absorber.
    Keywords: Foreign exchange intervention;Quantitative Easing, International Policy Coordination, International Policy, Monetary Policy (Targets, Instruments, and Effects), Open Economy Macroeconomics, International Policy Coordination and Transmission, International Business Cycles
    Date: 2017–11–13
  22. By: Pietro Cova (Bank of Italy); Filippo Natoli (Bank of Italy)
    Abstract: During the 1990s, the increased propensity to save in emerging market economies triggered massive inflows towards safe assets in the United States; a few years later, rising dollar funding by global banks was concurrent to increasing inflows to private-label US securities. While it is well documented that foreign financial flows have eased financing conditions in the US through the compression of long-term yields, in this paper we also find significant effects on the credit spread and the VIX, suggesting a relevant risk appetite channel. Moreover, flows into the US corporate bond market, partly linked to the previous saving glut in emerging economies, also directly affected bank leverage, household indebtedness and the housing market. This evidence provides a new perspective on the global banking glut, complementary to the role of banks in the risk-taking channel of monetary policy.
    Keywords: saving glut, banking glut, capital flows, banking leverage, risk-taking channel
    JEL: F32 F33 F34
    Date: 2017–12
  23. By: Mariusz Kapuściński
    Abstract: This study applies factor-augmented vector autoregressions to identify the effects of monetary policy shocks in a small, open, emerging market economy. It uses data on 132 variables for Poland, ‘compressing’ them to either structural (having an economic interpretation) or economically uninterpretable factors, also known as diffusion indices. The tightening of monetary policy is found to have broad, contractionary effects. Among other things, production, building permits, retail trade, employment, job offers, prices, wages, loans and stock prices decrease, unemployment and non-performing loans increase. However, a rise in the interest rate does not appear to be associated with an appreciation of the exchange rate. But this result is not robust among studies using vector autoregressions, which calls for a different strategy to identify the causal effect. As one of extensions, the effects of changes in global and foreign factors are investigated. Domestic prices are found to respond to global prices of commodities and foreign prices. Domestic production and interest rates – to their foreign counterparts.
    Keywords: factor analysis, vector autoregressions, factor-augmented vector autoregressions, high-frequency identification, monetary transmission mechanism
    JEL: C38 C32 E43 E52
    Date: 2017
  24. By: Elliot Aurissergues (PSE - Paris School of Economics)
    Abstract: In this paper, I document that the three equation new keynesian model predicts a strong overreaction of real wages to monetary policy shocks, whereas the response is close to zero in datas. This puzzle may be solved by sticky wages but I show that this overreaction is created by the intertemporal choice of households, on which the recent forward guidance literature have cast doubts. Then, I build a simple new keynesian model with bounded rationality. At each period, households do not form a consistent plan for their lifetime but choose between leisure, consumption and future wealth. It transposes joy of giving model to the business cycles analysis. I show that this simple model generates more realistic response to monetary policy shocks than the three equation new keynesian model. The model also highlights the importance of perceived future wealth and asset supply. Their response to changes in real inetrest rates deeply affects consumption and leisure decision. This point could be useful for more complicated model like Heterogenous agents or Behavioral new keynesian model. JEL Classification: D83,D84
    Keywords: Forward guidance,nonseparable preferences,bounded ratio- nality,euler equation,monetary policy shocks
    Date: 2017–10–27
  25. By: Boris Hofmann; Gert Peersman
    Abstract: This study shows that, in the United States, the effects of monetary policy on credit and housing markets have become considerably stronger relative to the impact on GDP since the mid-1980s, while the effects on inflation have become weaker. Macroeconomic stabilization through monetary policy may therefore have become associated with greater fluctuations in credit and housing markets, whereas stabilizing credit and house prices may have become less costly in terms of macroeconomic volatility. These changes in the aggregate impact of monetary policy can be explained by several important changes in the monetary transmission mechanism and in the composition of macroeconomic and credit aggregates. In particular, the stronger impact of monetary policy on credit is driven by a much higher responsiveness of mortgage credit and a larger share of mortgages in total credit since the 1980s.
    Keywords: monetary policy trade-offs, monetary transmission mechanism, inflation, credit, house prices
    JEL: E52
    Date: 2017
  26. By: Andreas Steiner; Sven Steinkamp; Frank Westermann
    Abstract: In the winter 2011/12 a wave of internal capital flight prompted the ECB to abandon its exit strategy and to announce an unprecedented monetary expansion. We analyze this episode in several dimensions: (i) by providing an event-study analysis covering key variables from national central banks’ balance sheets, (ii) by rationalizing their patterns in a portfolio balance model of the exchange rate, augmented by institutional characteristics of the TARGET2 system, and (iii) by proposing a theory-based index of exchange market pressure within the euro area. We argue that the euro area entails an inherent policy trilemma that makes it prone to speculative attacks.
    Keywords: currency union, exchange market pressure, policy trilemma, speculative attack, TARGET2
    JEL: E42 F36 F41
    Date: 2017
  27. By: Machava, Agostinho (Department of Economics, Umeå University)
    Abstract: This paper employs a linear regression with interaction terms, impulse response functions, and analysis of multiplier effects to identify the macroeconomic determinants of the market-to-bank interest rate pass-through in Mozambique. This paper also looks at how these macroeconomic fundamentals affect the interest rate pass-through mechanism. The study finds incomplete market-to-bank interest rate pass-through and shows that it takes approximately five months for the money market rate to be fully transmitted to the bank lending rate. There is evidence indicating the existence of asymmetry in the interest rate transmission mechanism, and the empirical findings also highlight that GDP growth and inflation are the most important macroeconomic variables influencing the degree of the interest rate pass-through in both the short and long run.
    Keywords: Mozambique; cointegration; interaction terms; asymmetry; interest rate pass-through; money market rate; bank lending rate
    JEL: E43 E44 G21
    Date: 2017–12–18
  28. By: John Kandrac; Bernd Schlusche
    Abstract: We empirically assess the effect of reserve accumulation as a result of quantitative easing (QE) on bank-level lending and risk taking activity. To overcome the endogeneity of bank-level reserve holdings to banks' other portfolio decisions, we employ instruments made available by a regulatory change that strongly influenced the distribution of reserves in the banking system. Consistent with theories of the portfolio substitution channel in which the transmission of QE depends in part on reserve creation itself, we document that reserves created in two distinct QE programs led to higher total loan growth and an increase in the share of riskier loans, such as commercial real estate, construction, C&I, and consumer loans, within banks' loan portfolios.
    Keywords: Monetary policy ; QE ; bank lending ; reserve balances
    JEL: G21 E52 E58 G28
    Date: 2017–10–12
  29. By: Woon Gyu Choi; Taesu Kang; Geun-Young Kim; Byongju Lee
    Abstract: This paper distills and identifies global liquidity (GL) momenta from the macro-financial data of advanced economies through a factor model with sign restrictions as policy-driven, market-driven, and risk averseness factors. Using a panel factor-augmented VAR, we investigate responses of emerging market economies (EMEs) to GL shocks. A policy-driven liquidity increase boosts growth in EMEs, elevating stock prices and currency values, while a risk averseness rise has an opposite effect. A market-driven GL expansion boosts stock markets and lowers funding costs, promoting competitiveness and current account. Inflation targeting EMEs fare better than EMEs under alternative regimes with respect to macrofinancial volatility.
    Keywords: Global liquidity;Inflation targeting;Panel Factor-Augmented VAR, International Policy Coordination and Transmission
    Date: 2017–10–30
  30. By: Makram El-Shagi; Lunan Jiang (Center for Financial Development and Stability at Henan University, Kaifeng, Henan)
    Abstract: Although China's monetary and financial system differs drastically from its Western counterpart, empirical studies covering this vast economy (the largest by some accounts) have often been simple reestimations or recalibrations of models that have originally been designed to describe US or European monetary policy. In this paper, we aim to provide an assessment of Chinese monetary policy and in particular monetary policy transmission through the bond market into the real economy, which takes into account the peculiarities of the Chinese market. Namely, our model includes both China's modern attempts at a market based policy shock as well as the "authority" based monetary policy that is a relic of the original banking system; it considers the special nature of the Chinese treasury bond market which is separated in two independent markets with very limited direct arbitrage opportunities between almost identical assets, and finally it incorporates the role of real estate, which played an essential role in China during the last decade.
    Keywords: monetary policy, yield curve, market segmentation
    JEL: E52 E43
    Date: 2017–12
  31. By: Mark A. Carlson; Jonathan D. Rose
    Abstract: One of the primary roles of central banks like the Federal Reserve is to provide liquidity to the financial system, particularly during periods of stress. The discount window is a critical tool for providing that liquidity. In this note, we discuss several topics related to stigma in depth and describe how concerns about stigma have influenced changes in Federal Reserve discount window policies.
    Date: 2017–12–19
  32. By: Dany-Knedlik, Geraldine; Holtemöller, Oliver
    Abstract: We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the crosssectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.
    Keywords: inflation dynamics,inflation expectations,trend inflation,nonlinear state space model,panel UCSV model,Euro area
    JEL: C32 E5 E31
    Date: 2017
  33. By: Lukas Menkhoff; Jakob Miethe
    Abstract: We use newly released bilateral locational banking statistics of the Bank for International Settlements to show the full circle of international tax evasion via tax havens. Surprisingly, white-washed money from tax havens is also withdrawn from banks in non-havens if an information treaty is signed between both countries. There are time lags and other economically plausible structures in these reactions. Interestingly, the effect of additional information-uponrequest treaties seems to fade out over time. By contrast, new treaties based on automatic information exchange again show bite; this puzzling evidence is best explained by dirty money changing its packaging.
    Keywords: Tax evasion, international capital flows, international information exchange treaties, bank deposits
    JEL: H26
    Date: 2017
  34. By: Edoardo Rainone (Bank of Italy)
    Abstract: This paper studies over-the-counter (OTC) trading in the unsecured interbank market for euro funds. The goal of our analysis is to identify the determinants of the probability of trading, the bilateral rate and the quantity exchanged during the European sovereign debt crisis. We show how the specific features of this market bring to a non-standard estimation framework. A dyadic econometric model with shadow rates is proposed to control for possibly endogenous matching with the counterparty. A unique dataset containing banks characteristics and bilateral trades is built and used to study the evolution of trading patterns. The estimates bring mild evidence towards the existence of shadow rates. Active monitoring decreased market access to low equity and illiquid borrowers, while dispersion in rates and quantities is mainly driven by banks' nationality, especially during the peak of the crisis.
    Keywords: interbank networks, payment systems, sample selection models, two-step estimation, over-the-counter market, money, dyadic model, financial crisis
    JEL: E50 E40 C30 G01 G10 D40
    Date: 2017–12
  35. By: Faure, Salomon A.; Gersbach, Hans
    Abstract: We establish a benchmark result for the relationship between the loanablefunds and the money-creation approach to banking. In particular, we show that both processes yield the same allocations when there is no uncertainty and thus no bank default. In such cases, using the much simpler loanablefunds approach as a shortcut does not imply any loss of generality.
    Keywords: money creation,bank deposits,capital regulation,monetary policy,loanable funds
    JEL: D50 E4 E5 G21
    Date: 2017
  36. By: Lorenzo Burlon; Alberto Locarno (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic impact of a programme for public infrastructure spending in the euro area (EA) under alternative assumptions about funding sources and the monetary policy stance. The quantitative assessment is made by simulating a dynamic general equilibrium model of a monetary union with region-specific fiscal policy. The main results are the following. First, EA-wide stimuli are more effective than unilateral (region-specific) stimuli. Second, under EA-wide stimulus, the fiscal multiplier is close to 2 if the forward guidance (FG) on the short-term policy rate holds. Third, if the monetary authority keeps down both the policy rates (with FG) and the long-term interest rates (with quantitative easing), the fiscal multiplier exceeds 3 at peak and investment spending is self-financing. Fourth, the financing method is relevant: debt financing, particularly under an accommodative monetary policy stance and if the sovereign spreads do not increase, is more growth-friendly than tax financing in the short-term (but not in the long-term). Fifth, the effectiveness of the fiscal stimulus is larger if government spending is directed towards productive goods and its implementation occurs efficiently and without delays.
    Keywords: public investment, fiscal policy, monetary policy, euro area
    JEL: E52 E62 F41 F42
    Date: 2017–12
  37. By: Makram El-Shagi; Yizhuang Zheng (Center for Financial Development and Stability at Henan University, Kaifeng, Henan)
    Abstract: In this paper we reexamine the literature on money demand in China published both in English and Chinese language. Over the past 30 years - starting with the paper by Chow (1987) there has been a regular stream of papers assessing the Chinese money demand function. The literature is mostly focusing on income elasticity, stability, and - which is special for China - the adequate choice and quality of data. In particular regarding stability of money demand, we find a substantial publication bias towards rejecting stability. When controlling for publication bias, and focusing on longer time periods, our paper strongly suggests stable long run money demand in China.
    Keywords: inflation, exchange rate, forecast performance, terror- ism, market forecast, expert forecast
    JEL: C53 E37 F37 F51
    Date: 2017–12
  38. By: Baas, Timo; Belke, Ansgar
    Abstract: For more than two decades now, current-account imbalances are a crucial issue in the international policy debate as they threaten the stability of the world economy. More recently, the government debt crisis of the European Union shows that internal current account imbalances inside a currency union may also add to these risks. Oil price fluctuations and a contracting monetary policy that reacts on oil prices, previously discussed to affect the current account may also be a threat to the currency union by changing internal imbalances. Therefore, in this paper, we analyze the impact of oil price shocks on current account imbalances within a currency union. Differences in institutions, especially labor market institutions and trade result in an asymmetric reaction to an otherwise symmetric shock. In this context, we show that oil price shocks can have a long-lasting impact on internal balances, as the exchange rate adjustment mechanism is not available. The common monetary policy authority, however, can reduce such effects by specifying an optimum monetary policy target. Nevertheless, we also show that there is no single best solution. CPI, core CPI or an asymmetric CPI target all come at a cost either regarding an increase in unemployment or increasing imbalances.
    Keywords: Current account deficit,Oil price shocks,DSGE models,Search and matching labor market,Monetary policy
    JEL: E32 F32 Q43
    Date: 2017

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