nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒01‒15
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. 'Credit Risk, Excess Reserves and Monetary Policy: The Deposits' By George J. Bratsiotis
  2. Monetary policy rule and its performance under inflation targeting: the evidence of Thailand By Taguchi, Hiroyuki; Wanasilp, Mesa
  3. Effectiveness of monetary policy in stabilising food inflation: Evidence from advanced and emerging economies. By Bhattacharya, Rudrani
  4. The Evolution of U.S. Monetary Policy By Hetzel, Robert L.
  5. The effect of news shocks and monetary policy By Gambetti, Luca; Korobilis, Dimitris; Tsoukalas, John D.; Zanetti, Francesco
  6. Mars or Mercury? The Geopolitics of International Currency Choice By Barry Eichengreen; Arnaud J. Mehl; Livia Chitu
  7. Unsurprising shocks: information, Premia, and the Monetary Transmission By Miranda-Agrippino, Silvia
  8. Unconventional monetary olicy: interest rates and low inflation. A review of literature and methods By COMUNALE Mariarosaria; STRIAUKAS Jonas
  9. The Corridor's Width as a Monetary Policy Tool By Guillaume Khayat
  10. Corporate Overseas Debt Issuance in the Context of Global Liquidity Transmission By Huang, Anni; Kishor, N. Kundan
  11. Monetary policy through production networks: evidence from the stock market By Ozdagli, Ali K.; Weber, Michael
  12. State-dependent risk taking and the transmission of monetary policy shocks By Fève, Patrick; Garcia, Pablo; Sahuc, Jean-Guillaume
  13. The Rise of Dollar Credit in Emerging Market Economies and US Monetary Policy By Huang, Anni; Kishor, N. Kundan
  14. Allan Meltzer: How He Underestimated His Own Contribution to the Modern Concept of a Central Bank By Hetzel, Robert L.
  15. An overlapping generations model for monetary policy analysis By Samuel Huber; Jaehong Kim
  16. Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support By Julien Pinter
  17. Unconventional Monetary Policy and Bank Lending Relationships By C. Cahn; A. Duquerroy; W. Mullins
  18. Working Paper– WP/16/09- Qualitative Guidance and Predictability of Monetary Policy in South Africa By Alain Kabundi; Ntuthuko Tsokodibane
  19. Optimal trend inflation By Adam, Klaus; Weber, Henning
  20. International Inflation Spillovers Through Input Linkages By Philip Sauré; Andrei Levchenko; Raphael Auer
  21. Fixed on flexible rethink exchange rate regimes after the Great Recession By Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J.
  22. Bofinger and Ries versus Borio and Disyatat: macroeconomics after endogenous money. A brief note By Sergio Cesaratto
  23. The making of a national currency. Spatial transaction costs and money market integration in Spain (1825-1874) By Aslanidis, Nektarios; Herranz-Loncán, Alfonso; Nogues-Marco, Pilar
  24. Asymmetric effects of monetary policy in regional housing markets By Knut Are Aastveit; Author-Name: André K. Anundsen
  25. The endogeneity of money and the securitizing system. Beyond shadow banking By Caverzasi, Eugenio; Botta, Alberto; Capelli, Clara
  26. Mortgage Defaults, Expectation-Driven House Prices and Monetary Policy By BEKIROS, Stelios D.; NILAVONGSE, Rachatar; UDDIN, Gazi S.
  27. An Historical Perspective on the Quest for Financial Stability and the Monetary Policy Regime By Michael D. Bordo
  28. Inequality and Imbalances : a Monetary Union Agent-Based Model By Alberto Cardaci; Francesco Saraceno
  29. How to deflate rigorously Economic Variables? By KHELIFI, Atef
  30. Working Paper – WP/16/07- Decomposing inflation using micro-price data- Sticky-price inflation By Franz Ruch; Neil Rankin; Stan du Plessis

  1. By: George J. Bratsiotis
    Abstract: This paper examines the role of the precautionary demand for liquidity and the interest on reserves as two potential determinants of the deposits channel that can help explain the role of monetary policy, particularly at the near zero-bound. At high levels of precautionary liquidity hoarding the optimal policy response of a Taylor rule is shown to indicate a zero weight on inflation. This is a determinate outcome, despite the violation of the Taylor Principle, because of the effect that the demand for liquidity has on the deposit rate which determines the intertemporal choices of households. Similarly, through its effect on the deposits channel the interest on reserves can act as the main monetary policy tool that can provide determinacy and replace the Taylor rule. This result holds at the zero-bound and it is independent of precautionary demand for liquidity, or fiscal theory of the price level properties.
    Date: 2018
  2. By: Taguchi, Hiroyuki; Wanasilp, Mesa
    Abstract: This article reviews the Thailand monetary policy rule and its performance under the adoption of inflation targeting regime since 2000. The study estimates the policy reaction function to see if the inflation targeting has been linked with an inflation-responsive monetary policy rule, and investigates whether the monetary policy rule would actually have its transmission effect on inflation, through tracing the impulse responses of inflation rate to monetary policy shocks in vector autoregressive (VAR) and structural VAR models. The study contributes to the literature by updating the assessment of the Thailand monetary policy through covering the period after 2015, when the Bank of Thailand has upgraded its inflation targeting framework by transforming it from range target to point target to provide a clearer policy signal to the public. The main findings are as follows. The estimation outcomes of the policy reaction function show that the Thailand monetary policy rule under the inflation targeting is characterized as an inflation- and exchange-rate- responsive rule with forward-looking manner, which is countercyclical against inflation in the long run, but is accompanied with slow adjustment toward a target policy rate. The results from the impulse response analyses imply that the Thailand monetary policy under the inflation targeting has only a marginal transmission effect on inflation probably due to the slow adjustment of policy rate.
    Keywords: Monetary policy rule, Inflation targeting, The Bank of Thailand, Policy reaction function, and Vector autoregressive model
    JEL: E52 E58 O53
    Date: 2017–12
  3. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy)
    Abstract: In the backdrop of several episodes of high and volatile food inflationin emerging economies, a wealth of literature emphasises on broad range of monetary and exchange rate policies to stabilise food inflation by moderating demand pressure. While the theoretical literature mainly focus on welfare-maximising monetary policy, there exists hardly any empirical consensus on effectiveness of monetary policy to stabilise food inflation. Very recently, a limited strand of empirical literature has attempted to shed light in this arena. The present study attempts to contribute in this literature by analysing effectiveness of monetary policy shock to stabilise food inflation in a panel of developed and emerging economies. We find that an unexpected monetary tightening has a positive and significant effect on food inflation in both advanced and emerging economies. Our findings suggest that in the backdrop of inflationary pressure stemming from the food sector, a monetary tightening may turn out to be destabilising for the food as well as overall inflation in the economy.
    Keywords: Food inflation ; Monetary policy ; Emerging economies ; Panel Vector Auto-Regression
    JEL: E31 E52 E58 C51
    Date: 2017–10
  4. By: Hetzel, Robert L. (Federal Reserve Bank of Richmond)
    Abstract: Since the establishment of the Federal Reserve System in 1913, policymakers have always pursued the goal of economic stability. At the same time, their understanding of the world and of the role of monetary policy has changed dramatically. This evolution of views provides a laboratory for understanding what kinds of monetary policy stabilize the economy and what kinds destabilize it.
    Keywords: federal reserve; monetary policy
    JEL: E52 E58
    Date: 2018–01–03
  5. By: Gambetti, Luca; Korobilis, Dimitris; Tsoukalas, John D.; Zanetti, Francesco
    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 significantly, and durable spending rises significantly 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: 2017–09–01
  6. By: Barry Eichengreen; Arnaud J. Mehl; Livia Chitu
    Abstract: We assess the role of economic and security considerations in the currency composition of international reserves. We contrast the “Mercury hypothesis” that currency choice is governed by pecuniary factors familiar to the literature, such as economic size and credibility of major reserve currency issuers, against the “Mars hypothesis” that this depends on geopolitical factors. Using data on foreign reserves of 19 countries before World War I, for which the currency composition of reserves is known and security alliances proliferated, our results lend support to both hypotheses. We find that military alliances boost the share of a currency in the partner’s foreign reserve holdings by 30 percentage points. These findings speak to current discussions about the implications of possible U.S. disengagement from global geopolitical affairs. In a hypothetical scenario where the U.S. withdraws from the world, our estimates suggest that long-term U.S. interest rates could rise by as much as 80 basis points, assuming that the composition of global reserves changes but their level does not.
    JEL: F0 F33 F51 N0 N1
    Date: 2017–12
  7. By: Miranda-Agrippino, Silvia
    Abstract: This article studies the information content of monetary surprises, i.e. the reactions of financial markets to monetary policy announcements. We find that monetary surprises are predictable by past information, and can incorporate anticipatory effects. Surprises are decomposed into monetary policy shocks, forecast updates, and time-varying risk premia, all of which can change following the announcements. Hence, their use as identification devices is not warranted, and can have strong qualitative and quantitative implications for the estimated responses of variables to the shocks. We develop new measures for monetary policy shocks, independent of central banks’ forecasts and unpredictable by past information.
    Keywords: Monetary Surprises; Identification with External Instruments; Monetary Policy; Expectations; Information Asymmetries; Event Study; Proxy SVAR.
    JEL: E44 E52 G14
    Date: 2017–08–08
  8. By: COMUNALE Mariarosaria (Bank of Lithuania); STRIAUKAS Jonas (CORE, Université catholique de Louvain)
    Abstract: n this paper, we review a range of approaches used to capture monetary policy in a period of Zero Lower Bound (ZLB). We concentrate here on methods closely linked to interest rates, which include: spreads, synthetic indices from principal component analys
    Keywords: unconventional monetary policy; zero lower bound; shadow rates; natural interest rate; inflation
    JEL: E43 E52 E58 F42
    Date: 2017–09–13
  9. By: Guillaume Khayat (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique - ECM - Ecole Centrale de Marseille)
    Abstract: Credit institutions borrow liquidity from the central bank’s lending facility and deposit (excess) reserves at its deposit facility. The central bank directly controls the corridor: the non-market interest rates of its lending and deposit facilities. Modifying the corridor changes the conditions on the interbank market and allows the central bank to set the short-term interest rate in the economy. This paper assesses the use of the corridor’s width as an additional tool for monetary policy. Results indicate that a symmetric widening of the corridor boosts output and welfare while addressing the central bank’s concerns over higher risk-taking in the economy.
    Keywords: monetary policy,interbank market,heterogeneous interbank frictions,the corridor,excess reserves,financial intermediation
    Date: 2017–10
  10. By: Huang, Anni; Kishor, N. Kundan
    Abstract: Given the rising importance of non-financial corporate overseas debt issuance in the overall international capital flow activities, this paper tries to understand the determinants of corporate overseas bond issuance in 32 countries during the sample period 1993-2015. The results suggest that the compression in risk premium in advanced economies has encouraged the corporates in emerging markets to borrow more from international bond markets. This effect is more prevalent in countries where policy makers impose tighter international capital control, so that corporates outside financial regulation serve as surrogate financial intermediaries at the border. Besides, corporates hold short-term assets in domestic currency as collateral for outstanding overseas debt, in expecting domestic currency appreciation, a behavior often phased as price arbitrage or carry trade position. Our results suggest a potential systematic shift in international financial risk transmission through corporate fixed-income markets and a possible external shock transmission channeled through the monetary policy spillover effect.
    Keywords: Corporate Overseas Debt, Global Liquidity, Carry Trade Hypothesis, Monetary Policy Spillover
    JEL: E44 F31 F32 F34 F36 G15
    Date: 2017–10–03
  11. By: Ozdagli, Ali K. (Federal Reserve Bank of Boston); Weber, Michael (University of Chicago)
    Abstract: Monetary policy shocks have a large impact on stock prices during narrow time windows centered around press releases by the FOMC. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct effect and a network effect. We attribute 50 to 85 percent of the overall impact to network effects. The decomposition is a robust feature of the data, and we confirm large network effects in realized cash-flow fundamentals. A simple model with intermediate inputs allows a structural interpretation of our empirical strategy. Our findings indicate that production networks might be an important mechanism for transmitting monetary policy to the real economy.
    Keywords: input-output linkages; spillover effects; asset prices; high frequency identification
    JEL: E12 E31 E44 E52 G12 G14
    Date: 2017–10–01
  12. By: Fève, Patrick; Garcia, Pablo; Sahuc, Jean-Guillaume
    Abstract: Is risk taking an important channel by which monetary policy shocks affect economic activity? On the basis of a nonlinear structural VAR including a new measure of risk sensitivity by economic agents, we show that the role of the risk-taking channel depends on the state of the economy. While it is irrelevant during recession or normal times, it acts as an amplifier by boosting output during expansion. It means that, as long as monetary policy does not actively "lean against the wind", it may exacerbate boom-bust patterns.
    Keywords: Risk-taking channel; Monetary policy; Boom-bust cycle
    JEL: C32 E52
    Date: 2017–12
  13. By: Huang, Anni; Kishor, N. Kundan
    Abstract: This paper examines the hypothesis that the boom in dollar credit in the emerging market economies is associated with excessively low interest rate in the US. For this purpose, we use a multivariate correlated unobserved component model that allows for correlation between shocks to dollar credit, interest rates and dollar index both in the short-run and in the long-run. In addition, it also provides us a quantitative estimate of the permanent and transitory movements in dollar credit in emerging markets, US interest rate and the dollar index. The results from this model do suggest that a temporary decline in interest rate and dollar index below their long-run levels are associated with an increase in dollar credit with a very high degree of negative correlation. The estimate of the cyclical component of the dollar credit in emerging market from our model captures the recent boom and bust in this market and compares favorably to a univariate trend-cycle decomposition benchmark.
    Keywords: Dollar Credit, Emerging Market Economies, Monetary Policy Spillover, Trend-Cycle Decomposition, State-Space Model, Kalman Filter
    JEL: E32 E51 E58 F32 F34 F36 G15
    Date: 2017–05–01
  14. By: Hetzel, Robert L. (Federal Reserve Bank of Richmond)
    Abstract: In his great work A History of the Federal Reserve System, vol. 1, Allan Meltzer contended that monetary policymakers in the Depression simply ignored the quantity theoretic prescriptions that would have prevented contractionary monetary policy. Practically, he was arguing that the Fed should have accepted the responsibilities for economic stabilization now taken for granted with the modern concept of a central bank. In reality, decades of monetarist criticism had to pass before the Fed accepted both responsibility for the behavior of the price level and economic stabilization. In effect, Meltzer’s contention about the self-evident truth of quantity theory ideas ignored the monumental task that lay ahead for the monetarists.
    Keywords: federal reserve system; central bank; monetary policy
    JEL: E5 N2
    Date: 2018–01–09
  15. By: Samuel Huber; Jaehong Kim
    Abstract: We integrate an overlapping generations model into a new monetarist framework and show that the Friedman rule is not optimal. This is because inflation makes saving for retirement less attractive, such that young agents optimally choose to increase their consumption at the expense of lower savings. On the other hand, old agents consume less due to the inflation tax. We show that for low inflation rates, the former effect dominates the latter, such that the Friedman rule is not optimal. However, this effect disappears for higher inflation rates such that the optimal rate is at an intermediate level.
    Keywords: Overlapping generations, monetary theory, Friedman rule
    JEL: D90 E31 E41 E50
    Date: 2017–12
  16. By: Julien Pinter (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UvA - University of Amsterdam [Amsterdam])
    Abstract: This paper re-examines whether weak central bank finances affect inflation by scrutinizing the key rationale for such a relationship: that the absence of Treasury support makes central bank finances relevant for price stability. Specifically, I ask whether central banks which are not likely to enjoy fiscal support when needed experience higher inflation as their inflation as their financial situation deteriorates. I find this to be true among a large sample of 82 countries between 1998 and 2008. De facto potential fiscal support appears relevant, while de jure fiscal support, which I survey analyzing 82 central bank laws, does not appear to matter. No link is found in a general context. The results bring forward an explanation for the conflicting results of the previous empirical studies, which neglected this key component.
    Keywords: Central bank financial strength,Central bank capital,Central bank balance sheet,Inflation,Fiscal space,Central bank law
    Date: 2017–10
  17. By: C. Cahn; A. Duquerroy; W. Mullins
    Abstract: How to support private lending to firms in recessions is a major open question. This paper uses an unexpected change in the collateral framework of the European Central Bank that reduced the cost of funding loans to a subset of firms in France in 2012, to examine how bank adjust their corporate lending portfolio in a downturn. It provides causal evidence that targeted unconventional monetary policy can be an effective lever to increase private credit and reduce contagion of financial distress. The effect is strongly driven by firms with only a single bank relationship, especially less risky borrowers with information intensive banking relationships.
    Keywords: Unconventional Monetary Policy, Relationship Banking, SME finance, Bank Lending, Small Business, Collateral.
    JEL: D24 O11 O47
    Date: 2017
  18. By: Alain Kabundi; Ntuthuko Tsokodibane
    Abstract: This paper investigates the impact of rising cycle talk on the predictability of the likely future path of the policy rate in South Africa. Throughout 2014 the South African Reserve Bank (SARB) explicitly communicated that monetary policy was on a rising cycle until normalisation is reached. Given that the "rising cycle" talk occurred early in 2014, we compare the forecasts in 2013 to those in 2014. We use two sources of expectations, the survey of economic experts obtained from Thomson Reuters and the Forward Rate Agreements (FRAs) which represent the expectations of the financial market participants. The results based on descriptive analysis and a nonparametric change points model confirm the influence of the "rising cycle" talk in shaping expectations of both economic experts and financial market participants on the future path of the reaction function of the SARB. Besides the surprise effects of January 2014, agents clearly predicted subsequent rate hikes based on the guidance received from the SARB. Previous rising interest rate cycles do not portray the same degree of predictability by analysts.
    Date: 2016–08–17
  19. By: Adam, Klaus; Weber, Henning
    Abstract: We present a sticky-price model incorporating heterogeneous Firms and systematic firm-level productivity trends. Aggregating the model in closed form, we show that it delivers radically different predictions for the optimal inflation rate than canonical sticky price models featuring homogenous Firms: (1) the optimal steady-state inflation rate generically differs from zero and, (2) inflation optimally responds to productivity disturbances. Using micro data from the US Census Bureau to estimate the inflation-relevant productivity trends at the firm level, we find that the optimal US inflation rate is positive. It was slightly above 2 percent in the year 1986, but continuously declined thereafter, reaching about 1 percent in the year 2013.
    Keywords: optimal inflation rate,sticky prices,firm heterogeneity
    JEL: E52 E31 E32
    Date: 2017
  20. By: Philip Sauré (Swiss National Bank); Andrei Levchenko (University of Michigan); Raphael Auer (Bank for International Settlements)
    Abstract: We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry- level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of in- ternational input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disinflation and high inflation.
    Date: 2017
  21. By: Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J.
    Abstract: We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities’ ability to rescue the economy from stagnation.
    Keywords: External shock; Great Recession; Exchange rate; Zero lower bound; Exchange rate peg; Currency union; Fiscal Multiplier; Benign coincidence
    JEL: E31 F41 F42
    Date: 2017–07–28
  22. By: Sergio Cesaratto
    Abstract: A paper by Peter Bofinger and Mathias Ries (2017a/b) strays from the recent rethinking in monetary analysis to criticise Summers’ “saving glut” explanation of the prevalence of low real interest rates. A similar critical perspective is held by Borio and Disyatat (e.g. 2011a/b, 2015), who are criticised, however, by Bofinger and Reis for their Wicksellian background. In this note, we compare and assess these two different views. Both Bofinger and Reis (B&R) and Borio and Disyatat (B&D) reject traditional “loanable fund theory” in favour of an endogenous money view of credit, but while B&R regard conventional marginalist (real) theory as inconsistent with the endogenous money view, B&D, following Wicksell, regard it as consistent. We sympathize with B&R’s criticism of conventional theory, especially their Keynesian view of the interest rate as a purely monetary phenomenon. Interestingly, B&R refer to the problems of marginalist capital theory as undermining the natural interest rate concept
    Keywords: Bofinger, Borio, Dysiatat, monetary theory, capital theory, Wicksell, natural interest rate
    JEL: B12 E11 E13 E4 E5
    Date: 2017–11
  23. By: Aslanidis, Nektarios; Herranz-Loncán, Alfonso; Nogues-Marco, Pilar
    Abstract: This article analyses the integration of the Spanish money market in the 19th century. We use a Band-TAR model of prices in Madrid of bills of exchange on 9 Spanish cities to measure convergence and efficiency in the market between 1825 and 1875. While price gaps between cities were significantly reduced during the period, no progress took place in efficiency. We suggest that increasing convergence was associated to the reduction in transaction costs, which started before the railways through improvements in roads and postal services. By contrast, increases in efficiency were prevented by a very restrictive regulation of arbitrage.
    Keywords: Bills of Exchange; Financial Development; Legal Systems; Money Market Convergence; Money Market Efficiency; Money Market Integration; Real Bills Doctrine; Spanish National Currency; Specie-Point Mechanism; transaction costs
    JEL: E02 E42 F02 F15 F31 F36 K00 L10 N13 N73 R40
    Date: 2017–11
  24. By: Knut Are Aastveit; Author-Name: André K. Anundsen
    Abstract: The responsiveness of house prices to monetary policy shocks depends both on the nature of the shock – expansionary versus contractionary – and on city-specific housing supply elasticities. We test and find supporting evidence for the hypothesis that expansionary monetary policy shocks have a larger impact on house prices when supply elasticities are low on 263 US metropolitan areas. We also test whether contractionary shocks are orthogonal to supply elasticities, as implied by downward rigidity of housing supply, and find supporting evidence. A final theoretical conjecture is that contractionary shocks should have a greater impact on house prices than expansionary shocks, as long as supply is not perfectly inelastic. For areas with high housing supply elasticity, our results are in line with this conjecture. However, for areas with an inelastic housing supply, we find that expansionary shocks have a greater impact on house prices than contractionary shocks. We provide evidence that this is related to a momentum effect that is more pronounced when house prices are increasing than when they are falling.
    Keywords: House prices, Heterogeneity, Monetary policy, Non-linearity, Supply elasticities
    Date: 2017–12
  25. By: Caverzasi, Eugenio; Botta, Alberto; Capelli, Clara
    Abstract: Financialization is not just a phenomenon regarding the exponential growth of the financial sector with respect to the real side of the economy. This paper aims shedding some light on the nature and the systemic impact of new elements in the financial realm and particularly on the so-called shadow banking through a macroeconomic perspective. Our analysis shows how financial evolutions have had an impact on the monetary system and on the whole economy at multiple levels. It involved the channel through which money enters the economic system, the rise of new financial institutions and activities, the implementation of monetary policies, and the relation between the real and the financial sector. What we are witnessing is not the rise of a shady version of something old whereas the surge of new forms of financial accumulation.
    Keywords: endogenous money; securitization; shadow banking; inequality; financial instability;
    JEL: E12 E42 E44 E51 G21
    Date: 2018–01–09
  26. By: BEKIROS, Stelios D.; NILAVONGSE, Rachatar; UDDIN, Gazi S.
    Abstract: We contribute to the literature on dynamic stochastic general equilibrium models with housing collaterals by including shocks to house price expectations. We incorporate endogenous mortgage defaults which are rarely included in DSGE models with housing collaterals. We show that our theoretical model of mortgage default is consistent with empirical evidence. We use this particular DSGE setup to study the effects of variations in house price expectations on macroeconomic dynamics and their implications for monetary policy. Extensive model simulations show that an increase in expected future house prices leads to a decline in mortgage default rates as well as in interest rates on loans, whereas it leads to an increase in house prices, household debt, bank leverage ratios and economic activity. As opposed to previous studies we find that inflation is low during a house price boom. Finally, we demonstrate that although monetary policy that reacts to household credit growth improves the stability of the real economy and enhances financial stability, yet it jeopardizes price stability.
    Keywords: House price expectations, Inflation dynamics, Monetary policy, Mortgage defaults
    JEL: E32 E44 E52
    Date: 2017
  27. By: Michael D. Bordo
    Abstract: This paper surveys the co-evolution of monetary policy and financial stability for a number of countries across four exchange rate regimes from 1880 to the present. I present historical evidence on the incidence, costs and determinants of financial crises, combined with narratives on some famous financial crises. I then focus on some empirical historical evidence on the relationship between credit booms, asset price booms and serious financial crises. My exploration suggests that financial crises have many causes, including credit driven asset price booms, which have become more prevalent in recent decades, but that in general financial crises are very heterogeneous and hard to categorize. Two key historical examples stand out in the record of serious financial crises which were linked to credit driven asset price booms and busts: the 1920s and 30s and the Global Financial Crisis of 2007-2008. The question that arises is whether these two ‘perfect storms’ should be grounds for permanent changes in the monetary and financial environment.
    JEL: E3 E42 G01 N1 N2
    Date: 2017–12
  28. By: Alberto Cardaci (Universita Cattolica des Sacro Cuore, Via Lodovico Necchi, Milan, Italie); Francesco Saraceno (OFCE, Sciences Po Paris, France, LUISS-SEP, Rome, Italie)
    Abstract: Our paper investigates the impact of rising inequality in a two-country macroeconomic model with an agent-based household sector characterised by peer effects in consumption. In particular, the model highlights the role of inequality in determining diverging balance of payments dynamics within a currency union. Inequality may drive the two countries into different growth patterns: where peer effects in consumption interact with higher credit availability, rising income inequality leads to the emergence of a debt-led growth. Where social norms determine weaker emulation and credit availability is lower, an export-led regime arises. Eventually, a crisis emerges endogenously due to the sudden-stop of capital ows from the net lending country, triggered by the excessive risk associated to the dramatic amount of private debt accumulated by households in the borrowing country. Monte Carlo simulations for a wide range of calibrations confirm the robustness of our results.
    Keywords: Inequality, Current Account, Currency Union, Agent-based model
    JEL: C63 D31 E21 F32 F43
    Date: 2017–12–12
  29. By: KHELIFI, Atef
    Abstract: This brief technical note presents a judicious way to deflate rigorously economic variables by dissociating variations related to market fluctuations (or supply and demand) from monetary phenomenon driven by monetary policies.
    Keywords: inflation; deflate; monetary policy; Prices Indexes
    JEL: E01 E3 E31
    Date: 2018
  30. By: Franz Ruch; Neil Rankin; Stan du Plessis
    Abstract: Some prices are stickier than others. In South Africa (SA), consumer prices on average change every five months; with the most frequent prices changing every month and the least frequent changing every 15 months. Firms that change prices less frequently generally need to take account of the likely path of future inflation when setting these prices if they want to maximise profits. Therefore, prices that are sticky contain more forward-looking information and can be exploited to uncover inflation expectations and underlying, or core, inflation. Using micro-price data this paper decomposes goods inflation into a flexible and sticky-price inflation measure for South Africa at a product level from 2008 to 2015. Flexible-price inflation is more volatile, less persistent, and contributes the most to volatility in overall goods inflation. Sticky-price inflation is more persistent, less volatile and correlates well with future goods inflation. The advantage of sticky-price inflation is that it grounds the concept of underlying inflation into the theoretical framework currently used by central banks to make policy decisions and what is considered optimal policy, making it an ideal core inflation candidate for the central bank. We provide an initial analysis of the appeal of sticky-price inflation comparing it to a number of other core inflation measures including the common exclusion-based measure currently used as well as extend versions of trimmed means and persistence-weighted measures.
    Date: 2016–06–13

This nep-mon issue is ©2018 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.