nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒01‒22
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Rules Versus Discretion: Assessing the Debate Over the Conduct of Monetary Policy By John B. Taylor
  2. The Uncovered Interest Parity Puzzle, Exchange Rate Forecasting, and Taylor Rules By Charles Engel; Dohyeon Lee; Chang Liu; Chenxin Liu; Steve Pak Yeung Wu
  3. Unconventional monetary policy and the portfolio choice of international mutual funds By Cenedese, Gino; Elard, Ilaf
  4. Quantitative Easing and the “New Normal” in Monetary Policy By Michael T. Kiley
  5. Monetary policy transmission in an open economy:new data and evidence from the United Kingdom By Cesa-Bianchi, Ambrogio; Thwaites, Gregory; Vicondoa, Alejandro
  6. Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks By Fernando Alvarez; Francesco Lippi
  7. Are Negative Nominal Interest Rates Expansionary? By Gauti B. Eggertsson; Ragnar E. Juelsrud; Ella Getz Wold
  8. Ambiguity, monetary policy and trend inflation By Masolo, Riccardo M.; Monti, Francesca
  9. Making Discretion in Monetary Policy More Rule-Like By Frederic S. Mishkin
  10. Risk and Monetary Policy in a New Keynesian Model By Mikhail Golosov; David Evans; anmol bhandari
  11. Monetary policy and prudential supervision: From functional separation to a holistic approach? By Goldmann, Matthias
  12. Credit Risk, Excess Reserves and Monetary Policy: The Deposits Channel By Bratsiotis, George
  13. Short-Run and Long-Run Effects of Milton Friedman's Presidential Address By Robert E. Hall; Thomas J. Sargent
  14. Step away from the zero lower bound: Small open economies in a world of secular stagnation By Corsetti, Giancarlo; Mavroeidi, Eleonora; Thwaites, Gregory; Wolf, Martin
  15. Pegging the Interest Rate on Bank Reserves By Diba Behzad; Olivier Loisel
  16. Unconventional Monetary Policy in a Small Open Economy By Margaux MacDonald; Michał Ksawery Popiel
  17. International Credit Supply Shocks By Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Rebucci, Alessandro
  18. The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis By Mumtaz, Haroon; Theodoridis, Konstantinos
  19. On the empirical (ir)relevance of the zero lower bound constraint By Davide Debortoli; Jordi Galí; Luca Gambetti
  20. When is foreign exchange intervention effective? Evidence from 33 countries By Fratzscher, Marcel; Gloede, Oliver; Menkhoff, Lukas; Sarno, Lucio; Stoerh, Tobias
  21. Funding quantitative easing to target inflation By Reis, Ricardo
  22. The transmission of monetary policy shocks By Miranda-Agrippino, Silvia; Ricco, Giovanni
  23. Money circulation and debt circulation: A restatement of quantity theory of money By Xing, Xiaoyun; Xiong, Wanting; Chen, Liujun; Chen, Jiawei; Wang, Yougui; Stanley, H. Eugene
  24. How Do Central Bank Projections and Forward Guidance Influence Private-Sector Forecasts? By Monica Jain; Christopher S. Sutherland
  25. Faster Payments: Market Structure and Policy Considerations By Hayashi, Fumiko; Rosenbaum, Aaron; Stewart, Kylie; Manuszak, Mark D.; Baughman, Garth; Stavins, Joanna
  26. An Equilibrium Model of the Market for Bitcoin Mining By Julien Prat; Walter Benjamin
  27. Coexistence of several currencies in presence of increasing returns to adoption By Alex Lamarche-Perrin; Andr\'e Orl\'ean; Pablo Jensen
  28. Does Monetary Policy Influence Banks' Perception of Risks? By Simona Malovana; Dominika Kolcunova; Vaclav Broz
  29. The Dynamic Relationship Among the Money Market Mutual Funds, the Commercial Paper Market and the Repo Market By Haghani Rizi, Majid; Kishor, N. Kundan

  1. By: John B. Taylor
    Abstract: This paper reviews the state of the debate over rules versus discretion in monetary policy, focusing on the role of economic research in this debate. It shows that proposals for policy rules are largely based on empirical research using economic models. The models demonstrate the advantages of a systematic approach to monetary policy, though proposed rules have changed and generally improved over time. Rules derived from research help central bankers formulate monetary policy as they operate in domestic financial markets and the global monetary system. However, the line of demarcation between rules and discretion is difficult to establish in practice which makes contrasting the two approaches difficult. History shows that research on policy rules has had an impact on the practice of central banking. Economic research also shows that while central bank independence is crucial for good monetary policy making, it has not been enough to prevent swings away from rules-based policy, implying that policy-makers might consider enhanced reporting about how rules are used in monetary policy. The paper also shows that during the past year there has been an increased focus on policy rules in implementing monetary policy in the United States.
    JEL: E52 E58 F33
    Date: 2017–12
  2. By: Charles Engel; Dohyeon Lee; Chang Liu; Chenxin Liu; Steve Pak Yeung Wu
    Abstract: Recent research has found that the Taylor-rule fundamentals have power to forecast changes in U.S. dollar exchange rates out of sample. Our work casts some doubt on that claim. However, we find strong evidence of a related in-sample anomaly. When we include U.S. inflation in the well-known uncovered interest parity regression of the change in the exchange rate on the interest-rate differential, we find that the inflation variable is highly significant and the interest-rate differential is not. Specifically, high U.S. inflation in one month forecasts dollar appreciation in the subsequent month. We introduce a model in which a Taylor rule determines monetary policy, but in which not only monetary shocks but also liquidity shocks drive nominal interest rates. This model can potentially account for the empirical findings.
    JEL: F3 F31 F41
    Date: 2017–11
  3. By: Cenedese, Gino (Bank of England); Elard, Ilaf (Shanghai University of International Business and Economics)
    Abstract: Unconventional monetary policy (UMP) by the US Federal Reserve, Bank of England, Bank of Japan, and European Central Bank affects the geographical portfolio choice of international mutual fund managers. UMP prompts managers of mutual funds to rebalance their portfolios away from the country conducting UMP, and increase their geographical allocation to other developed markets; there is little evidence of rebalancing towards emerging markets. The international spillover effects from UMP announcement surprises are of small economic magnitude, in contrast to the effects of actual UMP operations in the form of large-scale asset purchases (LSAPs). The results imply that while not contributing to QE-induced capital flows to emerging markets, mutual fund managers play a role in the transmission of unconventional monetary policy, in particular LSAPs, across developed markets.
    Keywords: Unconventional monetary policy; portfolio rebalancing; international spillovers; asset allocation; mutual funds
    JEL: F30 G11 G15 G23
    Date: 2018–01–18
  4. By: Michael T. Kiley
    Abstract: Interest rates may remain low and fall to their effective lower bound (ELB) often. As a result, quantitative easing (QE), in which central banks expand their balance sheet to lower long-term interest rates, may complement policy approaches focused on adjustments in short-term interest rates. Simulation results using a large-scale model (FRB/US) suggest that QE does not improve economic performance if the steady-state interest rate is high, confirming that such policies were not advantageous from 1960 to 2007. However, QE can offset a significant portion of the adverse effects of the ELB when the equilibrium real interest rate is low. These improvements in economic performance exceed those associated with moderate increases in the inflation target. Active QE is primarily required when nominal interest rates are near the ELB, pointing to benefits within the model from QE as a secondary tool while relying on short-term interest rates as the primary tool.
    Keywords: Interest rates ; Macroeconomic models ; Monetary policy
    JEL: E52 E47 E37
    Date: 2018–01–17
  5. By: Cesa-Bianchi, Ambrogio; Thwaites, Gregory; Vicondoa, Alejandro
    Abstract: This paper constructs a new series of monetary policy surprises for the United Kingdom and estimates their effects on macroeconomic and financial variables, employing a high-frequency identification procedure. First, using local projections methods, we find that monetary policy has persistent effects on real interest rates and breakeven inflation. Second, employing our series of surprises as an instrument in a SVAR, we show that monetary policy affects economic activity, prices, the exchange rate, exports, and imports. Finally, we implement a test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks computed by Cloyne and Huertgen (2014), and find no evidence that either set of shocks contains any ‘endogenous’ response to macroeconomic variables.
    Keywords: Monetary policy transmission; external instrument; high-frequency identification; structural VAR; local projections.
    JEL: E31 E32 E43 E44 E52 E58
    Date: 2016–08–02
  6. By: Fernando Alvarez (University of Chicago); Francesco Lippi (University of Sassari and EIEF)
    Abstract: We analyze a sticky price model where firms choose a price plan, namely a set of two prices. Changing the plan entails a “menu cost”, but either price in the plan can be charged at any point in time. We analytically solve for the optimal policy and for the output response to a monetary shock. The setup rationalizes the coexistence of many price changes, most of which are temporary, with a modest flexibility of the aggregate price level. We present evidence consistent with the model implications using CPI data for Argentina across a wide range of inflation rates.
    Date: 2018
  7. By: Gauti B. Eggertsson; Ragnar E. Juelsrud; Ella Getz Wold
    Abstract: Following the crisis of 2008 several central banks engaged in a radical new policy experiment by setting negative policy rates. Using aggregate and bank-level data, we document a collapse in pass-through to deposit and lending rates once the policy rate turns negative. Motivated by these empirical facts, we construct a macro-model with a banking sector that links together policy rates, deposit rates and lending rates. Once the policy rates turns negative the usual transmission mechanism of monetary policy breaks down. Moreover, because a negative interest rate on reserves reduces bank profits, the total effect on aggregate output can be contractionary.
    JEL: E3 E30 E31 E32 E4 E41 E42 E43 E5 E50 E52 E58 E65
    Date: 2017–11
  8. By: Masolo, Riccardo M.; Monti, Francesca
    Abstract: Allowing for ambiguity, or Knightian uncertainty, about the behavior of the policymaker helps explain the evolution of trend inflation in the US in a simple new-Keynesian model, without resorting to exogenous changes in the inflation target. Using Blue Chip survey data to gauge the degree of private sector confidence, our model helps reconcile the difference between target inflation and the inflation trend measured in the data. We also show how, in the presence of ambiguity, it is optimal for policymakers to lean against the private sectors pessimistic expectations.
    Keywords: Ambiguity aversion; monetary policy; trend inflation
    JEL: D84 E31 E43 E52 E58
    Date: 2017–02–06
  9. By: Frederic S. Mishkin
    Abstract: This paper argues that the rules versus discretion debate has been miscast because a central bank does not have to choose only between adopting a policy rule versus pure discretion, both of which have serious shortcomings. Rather it can choose a constrained discretionary regime that has rule-like attributes. Monetary policy discretion can be made more rule-like, by 1) adopting a nominal anchor such as an inflation target, and 2) communication of a monetary policy reaction process, especially through data-based forward guidance, in which the monetary policy authorities describe how the future policy path will change as economic circumstances change.
    JEL: E5 E52 E58
    Date: 2017–12
  10. By: Mikhail Golosov (Princeton University); David Evans (University of Oregon); anmol bhandari (university of minnesota)
    Abstract: Asset pricing data indicates that shocks to the nominal interest rates are primarily reflected in changes in risk premium. In this paper we build a New Keynesian model in which the behavior of interest rates and risk premium is consistent with this observation. We show that monetary shocks affect the real and nominal variables through the novel channel -- when nominal price adjustment is costly, firms need to balance needs to maximize current period profit and minimize future cost of price adjustments. Increase in risk, which follows a decrease in interest rates, increases firm's weight of future costs in inflationary environments, and leads to an increase in inflation, nominal and real marginal costs and output. Effectiveness of monetary policy varies with the state of the economy and generally is low in low inflationary environments. We also show that a number of well-known predictions of New Keynesian models reverses when interest rate shocks affect risk premium.
    Date: 2017
  11. By: Goldmann, Matthias
    Abstract: When prudential supervision was put in the hands of the European Central Bank (ECB), it was the political understanding that the ECB should follow a policy of meticulous separation between monetary policy and financial supervision. However, the financial crisis showed that monetary policy and prudential supervision deeply affect each other and that an overly strict separation might generate systemic risk. As a consequence, the prevalent model of "functional separation" - central banking and financial supervision in separate entities - has been questioned and calls for a more holistic approach increased. This policy letter states that from a legal perspective, such a holistic approach would be in conformity with the current legal framework of the Economic and Monetary Union. Although the realization of a holistic approach might intensify the doubts of democratic legitimation under the framework of the ESCB, the independence of the ECB should not be given up. As viable alternatives to protect monetary policy against the time inconsistency problem that would render central bank independence moot do not seem to be available and given the great importance of the independence of the European institutions for the European integration, the democratic control over the ECB should be strengthened instead of stripping the ECB of its independence.
    Keywords: monetary policy,financial stability,financial supervision
    Date: 2018
  12. By: Bratsiotis, George
    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.
    Keywords: Deposits channel,zero-bound monetary policy,excess reserves,credit risk,welfare,required reserve ratio,interest on reserves,balance sheet channel,DSGE models
    Date: 2017
  13. By: Robert E. Hall; Thomas J. Sargent
    Abstract: The immediate effect of Friedman's 1968 AEA presidential address on the economics profession was the introduction of an adaptive term in the Phillips curve that shifted the curve, as Friedman proposed, based on expected inflation. Initial formulations suggested that the shift was less than point-for-point, but later thinking, based on the emerging idea of rational expectations, together with the experience of the 1970s, came to agree with Friedman that the shift was by the full amount. The profession also recognized that Friedman's point was deeper---real outcomes are invariant to the monetary policy rule, not just to the trend in inflation. The presidential address made an important contribution to the conduct of monetary policy around the world. It ushered in low and stable inflation rates in all advanced countries, and in many less advanced ones.
    JEL: E31 E52 E61
    Date: 2017–12
  14. By: Corsetti, Giancarlo; Mavroeidi, Eleonora; Thwaites, Gregory; Wolf, Martin
    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: Monetary policy; zero lower bound; deflation; depreciation; beggar-thy-neighbour; capital controls
    JEL: E62 F41
    Date: 2017–05–31
  15. By: Diba Behzad (Department of Economics; Georgetown University); Olivier Loisel (CREST; ENSAE)
    Abstract: We develop a model of monetary policy with a small departure from the basic New Keynesian (NK) model. In this model, the central bank can set the interest rate on bank reserves and the nominal stock of bank reserves independently, because these reserves reduce the costs of banking (i.e., have a convenience yield). The model delivers local-equilibrium determinacy under a permanent interest-rate peg. Consequently, it does not share the puzzling and paradoxical implications of the basic NK model under a temporary peg (e.g., in the context of a liquidity trap). More specifically, it offers a resolution of the \forward guidance puzzle," a related puzzle about scal multipliers, and the \paradox of exibility," even for an arbitrarily small departure from the basic NK model (i.e., arbitrarily small banking costs and convenience yield of reserves).
  16. By: Margaux MacDonald; Michał Ksawery Popiel
    Abstract: This paper investigates the effects of unconventional monetary policy in a small open economy. Using recently proposed shadow interest rates to capture unconventional monetary policy at the zero lower bound (ZLB) we estimate a Bayesian structural vector autoregressive model for Canada - a useful case where foreign shocks can be proxied by U.S. variables alone. We find that, during the ZLB period, Canadian unconventional monetary policy increased output (measured by industrial production) by 0.013 percent per month on average while US unconventional monetary policy raised Canadian output by 0.127 percent per month on average. Our results demonstrate the effectiveness of domestic unconventional monetary policy and the strong positive spillover effects that foreign unconventional monetary policies can have in a small open economy.
    Date: 2017–12–01
  17. By: Cesa-Bianchi, Ambrogio; Ferrero, Andrea; Rebucci, Alessandro
    Abstract: House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.
    Keywords: Capital Flows; Credit Supply Shock; Cross-border claims; Exchange Rates; House Prices; International Financial Intermediation.; leverage
    JEL: C32 E44 F44
    Date: 2017–12
  18. By: Mumtaz, Haroon (Queen Mary University); Theodoridis, Konstantinos (Cardiff Business School)
    Abstract: This paper identi?es shocks to the Federal Reserve?s in?ation target as VAR innovations that make the largest contribution to future movements in long-horizon in?ation expectations. The effectiveness of this scheme is documented via Monte-Carlo experiments. The estimated impulse responses indicate that a positive shock to the target is associated with a large increase in in?ation and long-term interest rates in the US and the industrialised world. Target shocks are estimated to be a vital factor behind the increase in in?ation during the pre-1980 period and are an important driver of the decline in long-term interest rates over the last two decades. transmission.
    Keywords: SVAR, DSGE model, in?ation target. International
    JEL: C5 E1 E5 E6
  19. By: Davide Debortoli; Jordi Galí; Luca Gambetti
    Abstract: We estimate a time-varying structural VAR that describes the dynamic responses of a number of U.S. macro variables to different identified shocks. We find no significant changes in the estimated responses over the period when the federal funds rate attained the zero lower bound (ZLB). This result is consistent with the hypothesis of "perfect substitutability" between conventional and unconventional monetary policies. Montecarlo simulations based on artificial time series generated from a standard New Keynesian model point to the validity of our empirical approach to detect the changes in equilibrium dynamics associated with ZLB episodes.
    Keywords: Regime changes, liquidity trap, unconventional monetary policies, time-varying structural vector-autoregressive models.
    JEL: E44 E52
    Date: 2018–01
  20. By: Fratzscher, Marcel; Gloede, Oliver; Menkhoff, Lukas; Sarno, Lucio; Stoerh, Tobias
    Abstract: This paper examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and an effective policy tool, with a success rate in excess of 80 percent under some criteria. The policy works well in terms of smoothing the path of exchange rates, and in stabilizing the exchange rate in countries with narrow band regimes. Moving the level of the exchange rate in flexible regimes requires that some conditions are met, including the use of large volumes and that intervention is made public and supported via communication.
    Keywords: Foreign exchange intervention; exchange rate regimes; effectiveness measures; communication.
    JEL: E58 F31 F33
    Date: 2017–12
  21. By: Reis, Ricardo
    Abstract: The study of quantitative easing (QE) policies has so far focussed on which assets the central bank should buy, and on how it can pursue its targets for real and financial stability. This paper emphasizes instead the funding of QE by central bank liabilities, with an eye on achieving the inflation target. Looking backwards, it shows evidence that post-QE1, the U.S. banking sector became saturated with reserves, so the central bank can control the size of the balance sheet independently of its interest-rate policy. Using options data for U.S. inflation, it shows that while QE1 had an e↵ect on expected inflation, further rounds of QE did not. Looking forward, it estimates the feasibility of keeping the liabilities of the central bank at a high level in terms of a solvency upper bound. Finally, it argues that the central bank’s interest-rate policy is not out of ammunition when it comes to targeting inflation, since there are radical proposals on the composition of its liabilities, their maturity and the way to remunerate them that could be employed.
    JEL: J1
    Date: 2016–09
  22. By: Miranda-Agrippino, Silvia; Ricco, Giovanni
    Abstract: Despite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identification that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections. We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely misspecified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles.
    Keywords: Monetary Policy; Local Projections; VARs; Expectations; Information Rigidity; Survey Forecasts; External Önancial markets; International transfers; Optimal currency area
    JEL: C32 E52 G14
    Date: 2017–02–28
  23. By: Xing, Xiaoyun; Xiong, Wanting; Chen, Liujun; Chen, Jiawei; Wang, Yougui; Stanley, H. Eugene
    Abstract: Both money and debt are products of credit creation of banks. Money is always circulating among traders by facilitating commodity transactions. In contrast, debt is created by borrowing and annihilated by repayment as it is matured. However, when this creation- annihilation process is mediated by banks which are constrained by a credit capacity, there exists continuous transfer of debt among debtors, which can be defined as debt circulation. This paper presents a multi-agent model in which income determination, credit creation, and credit transaction are integrated. A hypothetical economy composed of a banking system and multiple traders is proposed, in which the traders are allowed to borrow money from the bank once their expenditure cannot be financed by their own funds. In order to demonstrate the circulations of money and debt from the micro view, the authors track the transfer processes of them and collect their holding times respectively. When the traders could afford their expenditures, only money circulation can be observed. However, as they are forced to borrow, the money circulation is accelerated and debt circulation emerges. Both distributions of holding times of money and debt are found to take exponential form due to the random nature of exchanges. The velocity of money circulation is determined by the expending behavior of traders, while the velocity of debt circulation is associated with the repayment behavior of debtors. Consequently, the aggregate income can be decomposed into two parts: one comes from money circulation and the other from debt circulation.
    Keywords: money circulation,debt circulation,holding time distribution,quantity theory of money
    JEL: E51 E27 G21
    Date: 2018
  24. By: Monica Jain; Christopher S. Sutherland
    Abstract: We construct a 23-country panel data set to consider the effect of central bank projections and forward guidance on private-sector forecast disagreement. We find that central bank projections and forward guidance matter mainly for private-sector forecast disagreement surrounding upcoming policy rate decisions and matter less for private-sector macroeconomic forecasts. Further, neither central banks’ provision of policy rate path projections nor their choice of policy rate assumption used in their macroeconomic projections appear to matter much for private-sector forecast disagreement.
    Keywords: Central bank research, Inflation targets, Monetary Policy, Monetary policy communications, Transmission of monetary policy
    JEL: D83 E37 E52 E58
    Date: 2018
  25. By: Hayashi, Fumiko (Federal Reserve Bank of Kansas City); Rosenbaum, Aaron; Stewart, Kylie; Manuszak, Mark D.; Baughman, Garth (Federal Reserve Bank of Kansas City); Stavins, Joanna (Federal Reserve Bank of Kansas City)
    Abstract: This paper reports on a research effort by Federal Reserve staff to examine market structure implications in the still‐emerging faster payments market. The analysis and conclusions in this paper are those of the authors and do not indicate official positions of the Board of Governors or Federal Reserve System. Although this paper offers several considerations regarding the U.S. faster payments market, it does not make specific policy recommendations or provide a view on the potential roles, including service provider or other roles, that the Federal Reserve may play in this market.2 Given the nascent state of the faster payments market, many of the matters discussed in this paper are not yet settled. The paper is intended to provide background and a framework for future dialogue and research in this area.
    Keywords: Payments; Market structure; Dominant-operator environment; Multi-operator environment
    JEL: G21
    Date: 2017–11–01
  26. By: Julien Prat (CREST; CNRS; Université Paris- Saclay; CESifo; IZA); Walter Benjamin (CREST; Université Paris-Saclay)
    Abstract: We propose a model which uses the Bitcoin/US dollar exchange rate to predict the computing power of the Bitcoin network. We show that free entry places an upper-bound on mining revenues and we devise a structural framework to measure its value. Calibrating the model’s parameters allows us to accurately forecast the evolution of the network computing power over time. We establish the accuracy of the model through out-of-sample tests and investigation of the entry rule.
    Keywords: Bitcoin; Blockchain; Miners; Industry Dynamics
  27. By: Alex Lamarche-Perrin (Phys-ENS); Andr\'e Orl\'ean (PSE); Pablo Jensen (Phys-ENS)
    Abstract: We present a simplistic model of the competition between different currencies. Each individual is free to choose the currency that minimizes his transaction costs, which arise whenever his exchanging relations have chosen a different currency. We show that competition between currencies does not necessarily converge to the emergence of a single currency. For large systems, we prove that two distinct communities using different currencies in the initial state will remain forever in this fractionalized state.
    Date: 2018–01
  28. By: Simona Malovana; Dominika Kolcunova; Vaclav Broz
    Abstract: This paper studies the extent to which monetary policy may affect banks' perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we analyze the effect of different monetary policy indicators on banks' risk weights for credit risk. We present robust evidence of the existence of the risk-taking channel in the Czech Republic. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. Finally, we obtain comparable results by extending the analysis to cover all the Visegrad Four countries. The presented findings have important implications for the prudential authority, which should be aware of the possible side-effects of monetary policy on how banks measure risk.
    Keywords: Banks, financial stability, internal ratings-based approach, risk-taking channel
    JEL: E52 E58 G21 G28
    Date: 2017–12
  29. By: Haghani Rizi, Majid; Kishor, N. Kundan
    Abstract: In this paper, we investigate the short-run and the long-run relationship among the financial assets of the money market funds, the commercial paper, and the repurchase agreement markets by undertaking a cointegration analysis of quarterly data over the 1985-2017 period. The evidence suggests that there exists a common long-term cointegrating trend among these three components of the shadow banking system. Any disequilibrium in this long-run relationship among these variables is corrected by movement in the financial assets of the money market funds. The Beveridge-Nelson decomposition from the estimated cointegrating relationship shows that the cyclical component in the money market funds is large and captures the huge swings in these markets during the financial crisis. Our results confirm the narrative evidence presented in Krishnamurthy et al. (2014), who argue that the short-term debt market investment opportunities in the form of the commercial paper and the repo market played a crucial role in the expansion of the balance sheet of the money market funds.
    Keywords: Shadow banking, Money Market Fund, Commercial Paper, Repurchase Agreement, TrendCycle Decomposition, Cointegration
    JEL: E44 G01 G10 G21 G32
    Date: 2017–12–23

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