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

  1. Monetary Policy Uncertainty and the Response of the Yield Curve to Policy Shocks By Peter Tillmann
  2. International Spillovers of (Un)Conventional Monetary Policy: The Effect of the ECB and US Fed on Non-Euro EU Countries By Jan Hajek; Roman Horvath
  3. How does monetary policy influence bank lending? Evidence from the market for banks' wholesale funding By Max Breitenlechner; Johann Scharler
  4. Will macroprudential policy counteract monetary policy’s effects on financial stability? By Itai Agur; Maria Demertzis
  5. Optimal Monetary and Fiscal Policy with Migration in a Currency Union By Pedro, Gomis-Porqueras; Cathy, Zhang
  6. Money and Monetary Stability in Europe, 1300-1914 By Karaman, Kivanc; Pamuk, Sevket; Yildirim, Secil
  7. Current account dynamics and the real exchange rate: disentangling the evidence By Matthieu Bussiere; Aikaterini Karadimitropoulou; Miguel A. Leon-Ledesma
  8. A Macroeconomic Model with Financial Panics By Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
  9. Misallocation Costs of Digging Deeper into the Central Bank Toolkit By David Zeke; Robert Kurtzman
  10. Do The Countries’ Monetary Policies Have Spatial Impact? By Arikan, Cengiz; Yalcin, Yeliz
  11. A Microfounded Model of Money Demand Under Uncertainty, and some Empirical Evidence By Ingrid Groessl; Artur Tarassow
  12. Quantitative Easing without Rational Expectations By Dmitriy Sergeyev; Luigi Iovino
  13. Versatile Forward Guidance: Escaping or Switching? By Gersbach, Hans; Liu, Yulin; Tischhauser, Martin
  14. Dynamics and Factors of Inflation Convergence in the European Union By Vaclav Broz; Evzen Kocenda
  15. Moral Hazard Misconceptions: the Case of the Greenspan Put By Gideon Bornstein; Guido Lorenzoni
  16. The theory of unconventional monetary policy By Farmer, Roger E.A; Zabczyk, Pawel
  17. Inflation Targeting and Financial Stability: does the quality of institutions matter? By Dimas Mateus Fazio; Thiago Christiano Silva; Benjamin Miranda Tabak; Daniel Oliveira Cajueiro
  18. Shrouding and the Foreign Exchange Trades of Global Custody Banks By Carol Osler; Tanseli Savaser
  19. The Effects of Quantitative Easing: Taking a Cue from Treasury Auctions By Yuriy Gorodnichenko; Walker Ray
  20. Making room for the needy: the credit-reallocation effects of the ECB’s corporate QE By Óscar Arce; Ricardo Gimeno; Sergio Mayordomo
  21. Inflation Dynamics in Turkey : A Historical Accounting By A. Hakan Kara; Fethi Ogunc; Cagri Sarikaya
  22. Currency unions and heterogeneous trade effects: the case of the latin monetary union By Jacopo Timini

  1. By: Peter Tillmann (Philipps-University Marburg)
    Abstract: This paper studies the non-linear response of the term structure of interest rates to monetary policy shocks. We show that uncertainty about monetary policy changes the way the term structure responds to monetary policy. A policy tightening leads to a significantly smaller increase in long-term bond yields if policy uncertainty is high at the time of the shock. We also look at the decomposition of bond yields into expectations about policy and the term premium. The weaker response of yields is driven by the fall in term premia, which fall even more if uncertainty about policy is high. These findings are robust to the measurement of monetary policy uncertainty and the definition of the monetary policy shock. We argue that short-term uncertainty about monetary policy tends to make yields of longer maturities relatively more attractive. As a consequence, investors demand lower term premia. This intuition is supported by the fact that long-term monetary policy uncertainty leads to opposite effects with term premia increasing even more after a policy shock.
    Keywords: Monetary policy uncertainty, term structure, term premium, unconventional monetary policy, local projections
    JEL: E43 E58 G12
    Date: 2017
  2. By: Jan Hajek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: We estimate a global vector autoregression model to examine the effects of euro area and US monetary policy stances, together with the effect of euro area consumer prices, on economic activity and prices in non-euro EU countries using monthly data from 2001-2016. Along with some standard macroeconomic variables, our model contains measures of the shadow monetary policy rate to address the zero lower bound and the implementation of unconventional monetary policy by the European Central Bank and US Federal Reserve. We find that these monetary shocks have the expected qualitative effects but their magnitude differs across countries, with Southeastern EU economies being less affected than their peers in Central Europe. Euro area monetary shocks have greater effects than those that emanate from the US. We also find certain evidence that the effects of unconventional monetary policy measures are weaker than those of conventional measures. The spillovers of euro area price shocks to non-euro EU countries are limited, suggesting that the law of one price materializes slowly.
    Keywords: International spillovers, monetary policy, global VAR, shadow rate
    JEL: E52 E58
    Date: 2017–09
  3. By: Max Breitenlechner; Johann Scharler
    Abstract: We study the transmission of monetary policy shocks to loan volumes using a structural VAR. To disentangle different transmission channels, we use aggregated data from the market for large certificates of deposits and apply a sign restrictions approach. We find that although the standard bank lending channel as well as the recently formulated risk-pricing channel (Disyatat, 2011; Kishan and Opiela, 2012) contribute to the transmission of policy shocks, the effects associated with the risk-pricing channel are quantitatively stronger. Our results also show that policy shocks give rise to non-negligible effects on loan demand.
    Keywords: bank lending channel, risk-pricing channel, external finance premium, structural vector autoregression, sign restrictions
    JEL: C32 E44 E52
    Date: 2018–01
  4. By: Itai Agur; Maria Demertzis
    Abstract: How does monetary policy impact upon macroprudential regulation? This paper models monetary policy’s transmission to bank risk taking, and its interaction with a regulator’s optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator’s entire trade-off. The authors show that the regulator allows interest rate changes to partly “pass through” to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation
    Date: 2018–01
  5. By: Pedro, Gomis-Porqueras; Cathy, Zhang
    Abstract: We develop an open economy model of a currency union with frictional goods markets and costly migration to study optimal monetary and fiscal policy for the union. Households finance consump- tion with a common currency and can migrate across regions given regional differences in goods market characteristics and microstructure. Equilibrium is generically inefficient due to regional spillovers from migration. While monetary policy alone cannot correct this distortion, fiscal policy can help by taxing or subsidizing at the regional level. When households of only one region can migrate, optimal policy entails a deviation from the Friedman rule and a production subsidy (tax) if there is underinvestment (overinvestment) in migration. Optimal policy when households from both region can migrate is the Friedman rule and zero taxes in both regions.
    Keywords: currency unions, costly migration, search frictions, optimal monetary and fiscal policy
    JEL: D8 E4
    Date: 2018–01–07
  6. By: Karaman, Kivanc; Pamuk, Sevket; Yildirim, Secil
    Abstract: This paper investigates the determinants of monetary stability in Europe from the late medieval era until World War I. Through this period, the nominal anchor for monetary policy was the silver/gold equivalent of the monetary unit. States, however, frequently abandoned this anchor, some depreciating their monetary units against silver/gold less than 10 times and others more than 10,000 times between 1500 and 1914. To document patterns of monetary stability and put alternative theories of stability to test, we compile a new data set of silver/gold equivalents of monetary units for all major European states. We find strong support for political and fiscal theories arguing that states with weak executive constraints and intermediate levels of fiscal capacity had less stable monetary units. In contrast, the empirical support for monetary theories emphasizing the mechanics of the monetary system is weak. These findings support the primacy of political and fiscal factors over mechanical factors for monetary stability.
    Keywords: depreciation; fiat standard; fiscal capacity; gold standard; money; price stability; silver standard
    JEL: E31 E42 E52 N13 N43 O23 O43
    Date: 2018–01
  7. By: Matthieu Bussiere (Banque de France); Aikaterini Karadimitropoulou (Bank of Greece and University of East Anglia); Miguel A. Leon-Ledesma (University of Kent)
    Abstract: We study the main shocks driving current account fluctuations for the G6 economies. Our theoretical framework features a standard two-goods inter-temporal model, which is specifically designed to uncover the role of permanent and temporary output shocks and the relation between the real exchange rate and the current account. We build a SVAR model including the world real interest rate, net output, the real exchange rate, and the current account and identify four structural shocks. Our results suggest four main conclusions: i) there is substantial support for the two-good intertemporal model with time-varying interest rate, since both external supply and preference shocks account for an important proportion of current account fluctuations; ii) temporary domestic shocks account for a large proportion of current account fluctuations, but the excess response of the current account is less pronounced than in previous studies; iii) our results alleviate the previous puzzle in the literature that a shock that explains little about net output changes can explain a large proportion of current account changes; iv) the nature of the shock matters to shape the relationship between the current account and the real exchange rate, which explains why is it difficult to understand the role of the real exchange rate for current account fluctuations.
    Keywords: Current account; real exchange rate; two-good intertemporal model; SVAR
    JEL: F32 F41
    Date: 2017–12
  8. By: Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
    Abstract: This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of the banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity and the effects of policies in containing crises.
    JEL: E0 E44
    Date: 2017–12
  9. By: David Zeke (University of Southern California); Robert Kurtzman (Federal Reserve Board of Governors)
    Abstract: This paper examines the potential misallocation of resources induced by Central Bank large-scale asset purchases, particularly the purchase of corporate bonds of nonfinancial firms, through their heterogeneous effect on firms' cost of capital. First, we analytically demonstrate the mechanism in a static model with heterogeneous agents. We then evaluate the misallocation of resources induced by corporate bond buys and the associated output losses in a calibrated DSGE model of which Gertler Karadi (2013) is a special case.
    Date: 2017
  10. By: Arikan, Cengiz; Yalcin, Yeliz
    Abstract: Nowadays, not land border but economic cooperation and borders determine the neighborhood and closeness by globalization. No doubt, any economic event happens in any country affects other partners more and less according to economic relationship in globalization process. The desire of measuring of this interaction make occur spatial econometrics. Initially, in spatial models take into account land borders. Subsequently, studies about spatial econometric models allow economic interactions and relationships. After the global economic crises in 2008 Central Banks have started to vary monetary policy tool to ensure economic and financial stability. It is estimated that which tool will be implemented by following the policies of the central banks in which they are closely related. The spatial effect of monetary policy can be not only geographical but also economic or social. Different spatial models have set up to examine whether any spatial effect on monetary policy. Unlike other studies in this study not only geographic weight matrix but also economic weight matrix have been used in the spatial models. Different weight matrix models results have been compared and construed. Our preliminary findings reveal that there is a spatial effect on monetary policy between OECD, EU and G-20 countries. And also, economic weight matrix effect is more than geographic weight matrix.
    Keywords: Monetary Policy, Spatial Model, Spatial Impact, Econometrics
    JEL: C01 C51 E52
    Date: 2017–12–21
  11. By: Ingrid Groessl (Universität Hamburg (University of Hamburg)); Artur Tarassow (Universität Hamburg (University of Hamburg))
    Abstract: In this article we derive a microfounded model of money demand under uncertainty built on intertemporally optimizing risk-averse households. Deriving a complete solution of the optimization problem taking the intertemporal budget constraint into account where linearization procedures in our paper take a risky steady state as benchmark. The solution leads to ambiguous effects w.r.t. to the impact of capital market risk as well as ination risk, which is due to the interplay of substitution and opposing income effects. The econometric results reveal that U.S. households increase their demand for money in response to positive changes in ination risk and capital market risk, respectively, with both effects lasting permanently.
    Keywords: Money Demand, Uncertainty, Inflation Risk, Capital Market Risk, Monetary Policy, Cointegration
    JEL: C22 E41 E51 E58 G11
    Date: 2018–01
  12. By: Dmitriy Sergeyev (Bocconi University); Luigi Iovino (Bocconi University)
    Abstract: We study the effects of risky assets purchases financed by issuance of riskless debt by the government (quantitative easing) in a model with nominal frictions but without rational expectations. We use the concept of reflective equilibrium that converges to the rational expectations equilibrium in the limit. This equilibrium notion rationalizes the idea that it is difficult to change expectations about economic outcomes even if it is easy to shift expectations about the policy. Without additional assumptions about non-pecuniary demand for safe assets or segmentation of assets markets, we find that in the reflective equilibrium quantitative easing policy increases the price of risky assets and stimulates output, while it is neutral in the rational expectations equilibrium.
    Date: 2017
  13. By: Gersbach, Hans; Liu, Yulin; Tischhauser, Martin
    Abstract: We examine how forward guidance should be designed when an economy faces negative natural real interest-rate shocks and subsequent supply shocks. Besides a standard approach for forward guidance, we introduce two flexible designs: escaping and switching. With escaping forward guidance, the central banker commits to low interest rates in the presence of negative natural real interest-rate shocks, contingent on a self-chosen inflation rate threshold. With switching forward guidance, the central banker can switch from interest-rate forecasts to inflation forecasts any time in order to stabilize supply shocks. We show that for small and large natural real interest-rate shocks, escaping forward guidance is preferable to any of the other approaches, while switching forward guidance is optimal for intermediate natural real interest-rate shocks. Furthermore, with the polynomial chaos expansion method, we show that our findings are globally robust to parameter uncertainty. In addition, using Sobol' Indices, we identify the structural parameters with the greatest effect on the results.
    Keywords: central banks; forward guidance; global robustness; polynomial chaos expansion; Sobol' Indices; transparency; zero lower bound
    JEL: E31 E49 E52 E58
    Date: 2018–01
  14. By: Vaclav Broz (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; CESifo, Munich; IOS, Regensburg)
    Abstract: We provide comprehensive evidence of the widespread occurrence of inflation convergence between all countries of the European Union from 1999 to 2016. We also show that convergence was more inclusive in the years after the global financial crisis—including the European sovereign debt crisis and the period of zero lower bound—and that price-stabilityoriented monetary strategies might have in fact facilitated this convergence. Our results are robust with respect to the use of three inflation benchmarks (the cross-sectional average, the inflation target of the European Central Bank, and the Maastricht criterion), structural breaks, and a core inflation measure. Our main findings imply that further enlargement of the euro area is feasible from the perspective of the convergence of inflation rates between the countries of the European Union.
    Keywords: inflation convergence, European Union, global financial crisis, zero lower bound, monetary strategy
    JEL: C32 E31 E58 G01 K33
    Date: 2017–11
  15. By: Gideon Bornstein; Guido Lorenzoni
    Abstract: Policy discussions on financial market regulation tend to assume that whenever a corrective policy is used ex post to ameliorate the effects of a crisis, there are negative side effects in terms of moral hazard ex ante. This paper shows that this is not a general theoretical prediction, focusing on the case of monetary policy interventions ex post. In particular, we show that if the central bank does not intervene by monetary easing following a crisis, this creates an aggregate demand externality that makes borrowing ex ante inefficient. If instead the central bank follows the optimal discretionary policy and intervenes to stabilize asset prices and real activity, we show examples in which the aggregate demand externality disappears, reducing the need for ex ante intervention.
    JEL: E52 E61 G38
    Date: 2017–11
  16. By: Farmer, Roger E.A; Zabczyk, Pawel
    Abstract: This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing.
    JEL: J1
    Date: 2016–03–25
  17. By: Dimas Mateus Fazio; Thiago Christiano Silva; Benjamin Miranda Tabak; Daniel Oliveira Cajueiro
    Abstract: Inflation targeting (IT) has recently been seen as one of the main causes of the authorities' unresponsiveness to the build up of financial imbalances during the recent financial crisis. We take data from banks from 66 countries for the period of 1998-2014 and compare how institutional quality as perceived by the national population impacts financial stability in countries that adopted IT with those that did not. We find that, while banks from IT countries with high quality of institutions do not have their stability significantly enhanced by this policy (the ``paradox of credibility''), countries with average levels of quality of institutions seem to benefit from it. In addition, in the estimations, IT and financial stability are negatively associated in countries with low levels of institutional quality, which is consistent with the fact that governments must have at least some trust of their population in order to conduct effective economic policies. This inverted U-shaped relationship between IT and financial stability as function of the institutional quality reflects the two opposing views in the literature regarding this topic
    Date: 2018–01
  18. By: Carol Osler (Brandeis University); Tanseli Savaser (Vassar College)
    Abstract: Custodial forex trades generally have far higher bid-ask spreads than regular OTC trades. We develop a model of custodial liquidity provision and test it using trade records from a global custody bank. Custodial dealers set high markups and “shroud” them by exploiting their clients’ limited access to information. Market opacity becomes endogenous as custodial dealers benchmark prices to the day’s high or low (as relevant) rather than the currency’s true value. A predicted kink in the relation between client price and the interbank price is evident in scatterplots and confirmed by regressions. Custodial dealers also shroud by delaying trades.
    Date: 2018–01
  19. By: Yuriy Gorodnichenko; Walker Ray
    Abstract: To understand the effects of large-scale asset purchase programs recently implemented by central banks, we study how markets absorb large demand shocks for risk-free debt. Using high-frequency identification, we exploit the structure of the primary market for U.S. Treasuries to isolate demand shocks. These shocks are sizable, leading to large movements in Treasury yields and impacting corporate borrowing rates. Informed by a calibrated “preferred habitat” model of the term structure, we test for “local” demand effects and find evidence consistent with theoretical predictions. Crucially, this local effect is strongest when the risk-bearing capacity of arbitrageurs is low. Our estimates are consistent with the view that quantitative easing worked mainly via market segmentation, with a potentially limited role for other channels.
    JEL: E43 E44 E52
    Date: 2017–12
  20. By: Óscar Arce (Banco de España); Ricardo Gimeno (Banco de España); Sergio Mayordomo (Banco de España)
    Abstract: We analyse how the European Central Bank’s purchases of corporate bonds under its Corporate Sector Purchase Programme (CSPP) affected the financing of Spanish nonfinancial firms. Our results show that the announcement of the CSPP in March 2016 significantly raised firms’ propensity to issue CSPP-eligible bonds. The flipside was a drop in the demand for bank loans by these firms. This drop in the demand for credit by bondissuers, which are usually large corporations, unchained a positive and significant side effect on the flow of new loans extended to – typically smaller – firms that do not issue bonds. Specifically, we find that around 78% of the drop in loans previously given to bond issuers was redirected to other companies, which led them to raise investment. This reallocation of credit was amplified by the ECB’s Targeted Longer Term Refinancing Operations (TLTRO).
    Keywords: unconventional monetary policy, Corporate Sector Purchase Programme, quantitative easing, portfolio rebalancing
    JEL: E44 E52 E58 G2 G12 G15
    Date: 2017–12
  21. By: A. Hakan Kara; Fethi Ogunc; Cagri Sarikaya
    Abstract: [EN] This study investigates the key drivers of consumer inflation in Turkey during the inflation targeting period covering 2006-2016. We estimate a reduced-form time-varying parameter (TVP) Phillips curve for core inflation, defined as CPI excluding unprocessed food, alcoholic beverages and tobacco. TVP estimates suggest that there is a clear decline in import price pass-through in recent years whereas pass-through from exchange rates to domestic inflation is relatively stable. Using this setup, we compute the contribution of macro variables such as exchange rate, import prices, output gap and real unit wages to inflation. We document the changes in inflation dynamics over the past decade, particularly focusing on the two distinct episodes of inflation targeting in terms of monetary policy implementation and discuss implications for price stability. Overall, our results suggest that achieving price stability requires a holistic approach embedding both cyclical and structural policies. [TR] Bu calismada Turkiye’de uygulanmakta olan enflasyon hedeflemesi rejiminin 2006-2016 yillarini kapsayan donemi icin enflasyonun temel makro belirleyicileri incelenmektedir. Parametreleri zamana gore degisen bir Phillips egrisi tahmin edilerek elde edilen bulgular, ithalat fiyat geciskenliginin son yillarda azaldigina, doviz kuru geciskenliginin ise goreli olarak daha istikrarli seyrettigine isaret etmektedir. Bu yaklasim kullanilarak, doviz kuru, ithalat fiyatlari, cikti acigi ve reel birim ucret gibi makro degiskenlerin enflasyona katkisi hesaplanmaktadir. Calismada ayni zamanda enflasyon hedeflemesinin iki farkli alt donemi ele alinarak degisen enflasyon dinamikleri irdelenmekte ve politika cikarimlari yapilmaktadir. Bulgularimiz, fiyat istikrarina ulasmak icin konjonkturel ve yapisal politikalarin bir arada ele alindigi butuncul bir yaklasimin onemine isaret etmektedir.
    Date: 2017
  22. By: Jacopo Timini (Banco de España)
    Abstract: The Latin Monetary Union (LMU) agreement signed in December 1865 by France, Italy, Belgium and Switzerland standardised gold and silver coinage in member countries and allowed free circulation of national coins in the Union. In his seminal study, Flandreau (2000) found no evidence of an overall positive effect of the LMU on trade. In this paper, I estimate the effects of this currency agreement on trade. In my gravity model I explicitly take into account the changing conditions in the international environment that affected the LMU’s underlying economic foundations (i.e. the limits on silver coinage agreed upon in 1874) and its rules (i.e. the “liquidation clause” of 1885). I also test the existence of heterogeneous effects on bilateral trade within the LMU. In line with Flandreau, I find no significant LMU trade effects. However, I find support for the hypothesis that the LMU had significant trade effects for the period 1865-1874. These effects were nonetheless concentrated in trade flows between France and the rest of the LMU members, following a hub-and-spokes structure. Moreover, I find evidence for the existence of an 1874 “LMU-wide” structural break, which affected the course of trade flows within the Union.
    Keywords: international trade, currency unions, Latin Monetary Union, gravity model, bimetallism
    JEL: N73
    Date: 2017–11

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