nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒02‒12
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. US Inflation 1980 - 2016. A Good Old Quantity Theory Approach By Olivo, Victor
  2. Fiscal Shocks and Helicopter Money in Open Economy By Giorgio Di Giorgio; Guido Traficante
  3. The Relation Between Monetary and Macroprudential Policy By Jong Ku Kang
  4. Who Are the First Users of a Newly-Emerging International Currency? A Demand-Side Study of Chinese Renminbi Internationalization By Hyoung-kyu Chey; Geun-Young Kim; Dong Hyun Lee
  5. Spillovers from U.S. Unconventional Monetary Policy and Its Normalization to Emerging Markets: A Capital Flow Perspective By Sangwon Suh; Byung-Soo Koo
  6. Monetary policy spillovers, global commodity prices and cooperation By Andrew Filardo; Jacopo Lombardi; Carlos Montoro
  7. Endogeneity of Inflation Target By Soyoung Kim; Geunhyung Yim
  8. Some Unpleasant Euro Arithmetic By Guillaume Gaulier; Vincent Vicard
  9. Portugal and the Euro By António Mendonça
  10. Can the interaction between a single long-term attractor and heterogeneous trading explain the exchange rate conundrum? By Giulio Cifarelli; Giovanna Paladino
  11. Redefining Liquidity for Monetary Policy By Kim, Kyunghun; Lee, Il Houng; Shim, Won
  12. Asymmetry of the Interest Rate Pass-through in Zambia By Chileshe, Patrick Mumbi; Akanbi, Olusegun Ayodele
  13. Monetary Policy Normalization in the Euro Area By Daniel Privitera; Malte Rieth
  14. Gender and Age Group Differences in Employment Responses to Monetary Policy Shocks (in Korean) By Sungyup Chung
  15. Monetary policy and inequality under household heterogeneity and incomplete markets By Villarreal, Francisco G.
  16. Divergent EME Responses to Global and Domestic Monetary Policy Shocks By Woon Gyu Choi; Byongju Lee; Taesu Kang; Geun-Young Kim
  17. US Interest Rate Policy Spillover and International Capital Flow: Evidence from Korea By Jieun Lee; Jung-Min Kim; Jong Kook Shin
  18. Structural analysis with mixed-frequency data: A MIDAS-SVAR model of US capital flows By Emanuele Bacchiocchi; Andrea Bastianin; Alessandro Missale; Eduardo Rossi
  19. State-dependent Forward Guidance and the Problem of Inconsistent Announcements By Julian A. Parra-Polania
  20. Which Monetary Shocks Matter in Small Open Economies? Evidence from SVARs By Jongrim Ha; Inhwan So
  21. Monetary policy and speculative stock markets By Boehl, Gregor
  22. Monetary System of Georgia in XI-XII centuries and its Effect on Economic Activity By Abuselidze, George
  23. Monetary policy operating procedures, lending frictions, and employment By David Florian Hoyle; Chris Limnios; Carl E. Walsh

  1. By: Olivo, Victor
    Abstract: This paper presents and discusses the econometric estimation of several models of inflation that follow the New Keynesian (NK) approach, and compares the results with those obtained with a model based on the quantity theory. The period of estimation is from the first quarter of 1980 until the fourth quarter of 2016. The main finding of the paper is that modeling inflation following a quantity theory approach produces a better overall explanation of the dynamics of the US inflation for the period under analysis than the ubiquitous New Keynesian models. Additionally, the quantity theory approach beats the New Keynesian models in offering a more coherent narrative of the relative deceleration that inflation has exhibited since the financial crisis (the so-called inflation puzzle).
    Keywords: Central banks,inflation, monetary policy, Phillips curve, money supply, velocity of money, interest rates
    JEL: E31 E52
    Date: 2018–01–22
  2. By: Giorgio Di Giorgio (LUISS Guido Carli and CASMEF); Guido Traficante (European University of Rome and CASMEF)
    Abstract: We study the effects of expansionary fiscal shocks in a two-country DSGE model with perpetual youth. We consider two alternative financing regimes, monetary financing and debt financing, and find that a money-financed fiscal stimulus is more expansionary on output and infl ation. We investigate how the transmission mechanism is related to the open-economy dimension and how structural parameters affect macroeconomic dynamics.
    Keywords: Exchange Rate, Fiscal Shocks, Helicopter Drop.
    JEL: E32 E52 F41 F42
    Date: 2018–01
  3. By: Jong Ku Kang (Economic Research Institute, The Bank of Korea)
    Abstract: This paper analyzes the interaction between monetary and macroprudential policies with different levels of cooperation among policy authorities: non-cooperation, full cooperation, and leader-follower relation. In non-cooperation, each policy authority's optimal response is to tighten its policy measures when the inflation gap, the output gap and the credit gap expand, and when other authorities' policy measures are loosened. This indicates that the two policies are substitutes for each other. The condition for the response functions to converge to a Nash equilibrium and the speed of convergence depend on the authorities' preferences and the economic structure. If the financial supervisory authority (FSA) puts greater importance on the output gap, the probability of non-convergence increases and the speed of convergence declines even when the condition of convergence is satisfied. When the policy authorities fully cooperate with each other, they can establish an optimal combination of policy responses to each of the three gaps.
    Keywords: Monetary policy, Central banking, Financial regulation
    JEL: E52 E58 G28
    Date: 2016–06–24
  4. By: Hyoung-kyu Chey (National Graduate Institute for Policy Studies (GRIPS)); Geun-Young Kim (Research Department, The Bank of Korea); Dong Hyun Lee (Economic Research Institute, The Bank of Korea)
    Abstract: Who are the first users of a newly-internationalizing currency? This issue, crucial to understanding the dynamics of the emergence of a new international monetary order, remains long underexplored in the existing literature, which tends to adopt a supply-side approach analyzing mainly the international currency issuers. Our study addresses this important question, with a focus on the case of the Chinese renminbi, by employing a demand-side approach examining the international currency users through generalized ordered logistic regression analysis. Our primary argument is that a state hosting a major global financial center—a condition largely independent of influence from countries issuing international currencies—is likely to be more interested in enhancing its use of the renminbi, implying thereby that global financial institutions and the related inter-state rivalries among international currency users may play crucial roles in the shaping of a new international monetary order. We in addition find significant impacts on a state's interest in renminbi use resulting from its institutional economic cooperation with China through a preferential trade agreement or a bilateral investment treaty, but that a country's mere trade and investment integration with China does not meaningfully affect its government's support for renminbi use.
    Keywords: Currency internationalization, International currency, Renminbi internationalization, Yuan internationalization
    JEL: F33 F50
    Date: 2016–12–23
  5. By: Sangwon Suh (School of Economics, Chung-Ang University); Byung-Soo Koo (Daegu-Gyeongbuk Branch, Bank of Korea)
    Abstract: Policy makers employed unconventional monetary policy (UMP) tools to respond to the recent global financial crisis in the U.S. and other advanced economies, and the UMP is about to be normalized. In this paper, we try to quantitiatively assess the effects of the UMP and its normalization on capital flows to emerging market economies. We find that the UMP significantly affected capital flows on average. The effects of the normalization are closely related with the effects of the UMP. Importantly, the larger the capital inflows due to the UMP, the larger the capital outflows due to the normalization. Moreover, policy makers need to be careful of a potential risk of unexpected capital outflows (exceeding the expected ones) during an uncertain period whose size tends to be proportional to the size of the previous capital inflows.
    Keywords: Capital flows, Unconventional monetary policy, Emerging markets, Cross-border borrowings
    JEL: F37 F42 G15 G18
    Date: 2016–03–23
  6. By: Andrew Filardo; Jacopo Lombardi; Carlos Montoro
    Abstract: How do monetary policy spillovers complicate the trade-offs faced by central banks face when responding to commodity prices? This question takes on particular relevance when monetary authorities find it difficult to accurately diagnose the drivers of commodity prices. If monetary authorities misdiagnose commodity price swings as being driven primarily by external supply shocks when they are in fact driven by global demand shocks, this conventional wisdom - to look through the first-round effects of commodity price fluctuations - may no longer be sound policy advice. To analyse this question, we use the multi-country DSGE model of Nakov and Pescatori (2010) which breaks the global economy down into commodity-exporting and non-commodity-exporting economies. In an otherwise conventional DSGE setup, commodity prices are modelled as endogenously changing with global supply and demand developments, including global monetary policy conditions. This framework allows us to explore the implications of domestic monetary policy decisions when there is a risk of misdiagnosing the drivers of commodity prices. The main findings are: i) monetary authorities deliver better economic performance when they are able to accurately identify the source of the shocks, ie global supply and demand shocks driving commodity prices; ii) when they find it difficult to identify the supply and demand shocks, monetary authorities can limit the deterioration in economic performance by targeting core inflation; and iii) the conventional wisdom approach of responding to global commodity price swings (as external supply shocks when they are truly global demand shocks) results in an excessive procyclicality of global inflation, output and commodity prices. In light of recent empirical studies documenting a significant role of global demand in driving commodity prices, we conclude that the systematic misdiagnoses inherent in the conventional wisdom applied at the country level have contributed to destabilising procyclicality at the global level. These findings support calls for greater attention to global factors in domestic monetary policymaking and highlight potential gains from greater monetary policy cooperation focused on accurate diagnoses of domestic and global sources of shocks.
    Keywords: commodity prices, monetary policy, spillovers, global economy
    JEL: E52 E61
    Date: 2018–01
  7. By: Soyoung Kim (Department of Economics, Seoul National University); Geunhyung Yim (Economic Research Institute, The Bank of Korea)
    Abstract: Under inflation targeting, central banks set an inflation target in advance and then try to make an actual inflation hit the target. However, central banks may have an incentive to adjust the target to actual inflation rates such as past inflation rates, to make the actual inflation rate close to the target. This paper examines this issue of "endogeneity of inflation target" by using various empirical methods with the sample of 19 inflation targeting countries. Empirical results show that an inflation rate has significantly positive effect on the inflation target of the next period. Empirical results further suggest that this endogeneity of the inflation target is found more strongly in central banks with low credibility or weak performance than in central banks with high credibility or strong performance.
    Keywords: Inflation targeting, Inflation rate, Inflation target, Endogeneity
    JEL: E31 E58
    Date: 2016–12–19
  8. By: Guillaume Gaulier; Vincent Vicard
    Abstract: Current estimates of misalignments in real effective exchange rates show that euro area imbalances are still large: Germany exhibits a 20 percentage point undervaluation compared to the rest of the euro area (EA). Within a monetary union, rebalancing requires price adjustments through differentials in inflation rates. The rebalancing process therefore involves a 2 percentage point higher inflation in Germany than in the rest of the EA over a decade, or a 1 pp over two decades. It also requires above 2% inflation in surplus countries to meet the 2% ECB inflation target. At the current pace, rebalancing is a 20 year process and requires sustained very low inflation rates in the rest of the euro area.
    Keywords: Current account imbalances;Euro area;Exchange rates misalignments
    JEL: E31 F32
    Date: 2018–01
  9. By: António Mendonça
    Abstract: This paper is divided in two parts. In the first part, we present some data of the Portuguese economy aiming to capture some of its main long trends and the way it reacts to the introduction of the single currency in Europe. Since Portugal follow a similar path with Spain in what concerns the European economic integration process, we developed a comparative analysis between the two Iberian countries trying to capture some dynamics that can aid to understand the different ways how the two economies reacted to the introduction of the euro and, in this phase of the economic integration in Europe, how they suffered the 2007-2008 international crisis and reacted to its effects. To evaluate and compare the two countries paths we use some fundamental macroeconomic indicators as, output and employment, investment, external accounts, budget balances and government debts. The comparison with Europe's average economic performance is also present, trying to understand which country follow a more “European path”. In the second part, we concentrate on the euro system crisis trying to give some contributes to the ongoing discussion about the role and effectiveness of the euro as an internal adjustment variable. Not only in terms of the pre-creation of the better conditions for the European economy to respond to cyclical and structural crisis processes, but also in terms of dealing with the developments of the real crisis process that explode in Europe in 2007-2008 and gave origin to what was called the “sovereign debt crisis” that deeply harmed the most week economies, like Portugal but also like Spain. In particular, we discuss the issue of the effectiveness versus the exhaustion of monetary policy followed by the ECB in response to the Eurozone effects of the global economic and financial crisis.
    Keywords: Portugal, Spain, Euro, Financial Crisis, Unconventional Monetary Policy.
    JEL: E50 E52
    Date: 2018–02
  10. By: Giulio Cifarelli (Dipartimento di Scienze per l'Economia e l'Impresa); Giovanna Paladino
    Abstract: Over the last 15 years, exchange rate movements have been smoother and slower than expected, given the entity of the sharp shifts in the fundamental variables brought about by the international financial crisis. Since the beginning of the ’90s researchers have explored different approaches in order to understand high frequency exchange rate dynamics. Among them the model that assumes heterogeneous trading strategies, where ‘fundamentalists’ coexist with ‘chartists’ in nonlinear transitional specifications, plays an increasingly relevant if puzzling role. We study the US dollar, the British pound and the Japanese yen vs the euro over the period 2002 to 2016 using weekly data. The most important contribution of this paper is that we find empirical evidence that both types of agent react to the same transition variable, viz. the absolute distance of the actual exchange rate to its relative PPP value. The spot foreign currency demand of fundamentalists is driven by the size of the misalignment both directly and through a transition function, which models the adoption of fundamental strategies by newcomers. The number of chartists also varies according to the absolute distance of the exchange rate change from its fundamental value. Evidence supports the existence of stabilizing and destabilizing behaviour not only by chartists but also by fundamentalists.
    Date: 2017
  11. By: Kim, Kyunghun (Korea Institute for International Economic Policy); Lee, Il Houng (Bank of Korea); Shim, Won (Bank of Korea)
    Abstract: This paper proposes a monetary aggregate “Liquidity” that could serve as a useful indicator for gauging the appropriateness of monetary policy. If liquidity rises above a certain threshold, it is signaling that monetary policy is losing traction due to structural and other impediments even when the inflation gap remains open. This indicator supplements the financial cycle approach but adds value by providing a benchmark that is derived from the national account, and not based on its own trend. Over the last two decades, each time this measure rose above the threshold range, it was followed by a decline in GDP growth. The latter was greater when accompanied by a high physical asset value to GDP, e.g., an elevated property market.
    Keywords: Liquidity; Monetary policy; Inflation targeting; Financial stability
    JEL: E31 E32 E52 G01
    Date: 2018–01–19
  12. By: Chileshe, Patrick Mumbi; Akanbi, Olusegun Ayodele
    Abstract: This study undertook to investigate interest rate pass-through in Zambia with a focus on unravelling evidence on the asymmetric response of retail and bond yield rates to monetary policy controlled rates. The study utilise a non-linear ARDL model to investigate the relationship between policy-controlled rates and retail rates as well as bond yield rates. Based on the single-equation error correction model and the associated dynamic multipliers, the study is able to model asymmetries in both the long-run relationship and the pattern of dynamic adjustment simultaneously and in a coherent manner. In addition, the study present results from a symmetrical ARDL model. Results from the study support evidence to the existence of asymmetry in the response of retail and bond yield rates to changes in policy-controlled interest rates (interbank and 3-month rate). Specifically, there is a negative asymmetry in the response of deposit rates to changes in the interbank and 3-month rates while there is a positive asymmetry with regard to lending and bond yield rates.
    Keywords: Asymmetry; Symmetry; Interest rate Pass-through; ARDL; Non-linear ARDL; Zambia
    JEL: E00 E43 E51 E52
    Date: 2016–10
  13. By: Daniel Privitera; Malte Rieth
    Abstract: The ECB announced in October 2018 that it would begin to cut back the amount of monthly asset purchases starting January 2018 while extending the duration of the purchases until at least September 2018. At it latest Governor’s Council meeting in January 2019 it decided to remain on this track despite a sharp appreciation of the euro in the meanwhile. These steps were just two on a longer and potentially slippery path back towards standard monetary policy. Market turbulences like the so-called “Taper Tantrum”, which followed the Fed’s 2013 announcement that it was considering to cut back its asset purchasing program, have made central banks wary of the risks of premature or overly explicit announcements of monetary policy normalization. This article provides a short review of quantitative easing (QE) in the euro area since 2015 and of the debate about the right timing for terminating QE.
    Date: 2018
  14. By: Sungyup Chung (Macroeconomics Team, Economic Research Institute, The Bank of Korea)
    Abstract: Most previous empirical studies on the effects of monetary policy on employment fail to take care of the "price puzzle," concluding that the estimated response of inflation is positive to the contractionary monetary policy shock. This paper aims to resolve this problem by using a factor augmented vector autoregressive (FAVAR) model suggested by Bernanke et al. (2005). Additionally, a small-open economy structure is imposed on the FAVAR model to separately identify the domestic and foreign interest rate shocks. The results suggest that a raise in the key rate by the Bank of Korea decreases the employment-to-population ratio (EPR) of young male workers while other worker groups do not respond in a similar fashion. This implies that a labor demand channel of monetary policy works only in the young male workers market. This finding is also in concord with the fact that young workers confront a relatively high unemployment rate compared to other population groups since a larger reserve labor force means a bigger sensitivity to a change in labor demand change.
    Keywords: Employment, Monetary policy impact, FAVAR
    JEL: E24 E52 E58
    Date: 2016–04–07
  15. By: Villarreal, Francisco G.
    Abstract: Motivated by the evidence of the effects of monetary policy on the evolution of inequality, and the importance of insurance mechanisms to deal with idiosyncratic risks, the paper explores the relationship between household inequality and monetary policy in the context of a dynamic stochastic general equilibrium model. In contrast to the traditional approach where the demand-side of the economy is summarised by a single representative agent, the model considers heterogeneous households which face idiosyncratic shocks which they can not fully insure against. The model, which is calibrated using data from Mexico, is able to capture the main features that characterise both the business cycle dynamics, as well as the distribution of income and wealth across households. The results stemming from a series of counterfactual experiments indicate that the the presence of heterogeneity impinges upon the transmission of monetary policy, and that the design of monetary policy has important distributive effects.
    Keywords: Monetary Policy, Heterogeneous Agents, Redistribution
    JEL: D31 D53 E12 E52 O11
    Date: 2016–11
  16. By: Woon Gyu Choi (IMF Institute); Byongju Lee (Economic Research Institute, The Bank of Korea); Taesu Kang (Research Department, The Bank of Korea); Geun-Young Kim (Research Department, The Bank of Korea)
    Abstract: We assess the effect of tighter monetary policy in the U.S. and emerging market economies (EMEs) on EMEs using a panel factor-augmented VAR model. We find that a U.S. policy rate hike outstrips an equivalent domestic rate hike in its impacts on EMEs. In addition, EMEs show divergent policy responses and their macro-financial responses differ depending upon their economic fundamentals in the face of tighter U.S. policy. In particular, we find that high-inflation than low-inflation EMEs are more susceptible to the shock stemming from a U.S. federal funds rate hike.
    Keywords: Global liquidity, Monetary transmission, Divergent responses, Panel factor-augmented VAR
    JEL: F32 F42
    Date: 2016–11–15
  17. By: Jieun Lee (Economic Research Institute, The Bank of Korea); Jung-Min Kim (University of Seoul); Jong Kook Shin (Newcastle University Business School)
    Abstract: Using the novel high frequency capital flow dataset from the EPFR Global, this study empirically investigates the spillover effects of the US Fed's monetary policy on the international capital flow in South Korea. Around the Fed's monetary policy announcement (event) week, we find that equity investors appear to temporarily increase (decrease) their portfolio holdings in South Korea upon a more-than-expected contractionary (expansionary) interest rate policy, while bond investors do not change their portfolio holdings much. This result is robust to the exclusion of influential observations, alternative estimation methods as well as inclusion of an additional explanatory variable which explicitly controls for possible endogeneity. Additionally, we conduct the full sample regression analysis including event and non-event weeks after controlling for the pull and push factors that are likely to be associated with the international capital flow. Our empirical evidence shows that unexpected US policy shocks have a significant negative impact on certain types of international capital flow. Specifically, the unexpected US contractionary monetary policy appears to be associated with equity fund outflow from the US, passive and institutional investors and bond fund outflow from retail investors.
    Keywords: US monetary policy, Interest rate policy, Spillover, Capital flow, High frequency identification, Event study
    JEL: E44 E52 E58 F32
    Date: 2016–12–30
  18. By: Emanuele Bacchiocchi; Andrea Bastianin; Alessandro Missale; Eduardo Rossi
    Abstract: We develop a new VAR model for structural analysis with mixed-frequency data. The MIDAS-SVAR model allows to identify structural dynamic links exploiting the information contained in variables sampled at different frequencies. It also provides a general framework to test homogeneous frequency-based representations versus mixed-frequency data models. A set of Monte Carlo experiments suggests that the test performs well both in terms of size and power. The MIDAS-SVAR is then used to study how monetary policy and financial market volatility impact on the dynamics of gross capital inflows to the US. While no relation is found when using standard quarterly data, exploiting the variability present in the series within the quarter shows that the effect of an interest rate shock is greater the longer the time lag between the month of the shock and the end of the quarter
    Date: 2018–02
  19. By: Julian A. Parra-Polania (Banco de la República de Colombia)
    Abstract: Florez-Jimenez and Parra-Polania (2016) show that unconditional forward guidance (FG) performs poorly except in the most extreme zero lower-bound (ZLB) events and that for any ZLB situation it is better to resort to state-dependent (threshold-based) FG. The model of that paper is solved under the assumption that the threshold (to revert to the optimal discretionary policy) is announced in terms of an exogenous variable (the demand shock). The present paper shows that, taking full credibility as given, the solution does not change when the threshold is announced in terms of an endogenous variable (output or inflation). However, the paper also illustrates the fact that an endogenous-variable threshold gives rise to inconsistency: the action taken may not conform to the central bank announcement. Consistency imposes limits on the policy rate that can be set since reverting to the optimal discretionary rate can be incompatible with exceeding the threshold. Classification JEL: E52, E58, E37
    Keywords: forward guidance; zero-lower bound; central bank announcements; monetary policy; threshold
    Date: 2018–01
  20. By: Jongrim Ha (Development Economics Prospects Group (DECPG), World Bank); Inhwan So (Economics Research Institute, The Bank of Korea)
    Abstract: This paper investigates the nature of monetary policy transmission in the U.S. and selected small open economies by estimating SVAR models using the external instrument identification method. Differing from related studies on the U.S., which employ high-frequency futures data on Federal Funds rates, we exploit alternative sets of external instruments for the focal economies. We find that U.S. monetary policy plays an important role in monetary transmission in SOE interest rates, presumably hampering the effectiveness of domestic monetary policy. We also provide some evidence that foreign exchange rates in this process respond to monetary shocks as Dornbusch (1976)'s overshooting hypothesis.
    Keywords: Monetary policy transmission, External instrument identification, Structural VAR model
    JEL: E44 E52
    Date: 2017–01–19
  21. By: Boehl, Gregor
    Abstract: Financial market interactions can lead to large and persistent booms and recessions. Instability is an inherent threat to economies with speculative financial markets. A central bank's interest rate setting can amplify the expectation feedback in the financial market and this can lead to unstable dynamics and excess volatility. The paper suggests that policy institutions may be well-advised to handle tools like asset price targeting with care since such instruments might add a structural link between asset prices and macroeconomic aggregates. Neither stock prices nor indices are a good indicator to base decisions on.
    Keywords: monetary policy,asset pricing,nonlinearity,heterogeneous expectations,credit constraints
    JEL: E44 E52 C63
    Date: 2017
  22. By: Abuselidze, George
    Abstract: This works covers peculiarities of formation of Georgian monetary system in XI-XII centuries and their effect on the international financial and economic relations. In this works we have researched the matters of formation of monetary policy of feudal age and their effect on development of foreign trade, methods of money formation important for the present world, which correct choice may provide increase of production volume and economic activity. Currency policy, geopolitical and geostrategic localization proved the country to turn into one of the economically strong economic states with high standard of life, developed system of socioeconomic relations approached to the international standards and democratic institutions.
    Keywords: History of Economy; Economic Development; Monetary Policy; Monetary System; Economic Activity.
    JEL: E42 E52 N13 N15 O1
    Date: 2018–01–21
  23. By: David Florian Hoyle (Central Reserve Bank of Peru); Chris Limnios (Providence College); Carl E. Walsh (University of California, Santa Cruz)
    Abstract: This paper studies a channel system for implementing monetary policy when bank lending is subject to frictions. These frictions affect the spread between the interbank rate and the loan rate. We show how the width of the channel, the nature of random payment flows in the interbank market and the presence of frictions in the loan market affect the propagation of financial shocks that originate either in the interbank market or in the loan market. We study the transmission mechanism of two different financial shocks: 1) An increase in the volatility of the payment shock that banks face once the interbank market has closed and 2) An exogenous termination of loan contracts that directly affects the probability of continuation of credit relationships. Both financial shocks are propagated through the interaction of the marginal value of having excess reserves as collateral relative to other bank assets, the real marginal cost of labor for all active firms and the reservation productivity that selects the mass of producing firms. Our results suggest that financial shocks produce a reallocation of bank assets towards excess reserves as well as intensive and extensive margin effects over employment. The aggregation of those effects produce deep and prolonged recessions that are associated to fluctuations in the endogenous component of total factor productivity that appears as an additional input in the aggregate production function of the economy. We show that this wedge depends on aggregate credit conditions and on the mass of producing firms.
    Keywords: Monetary policy implementation, channel system, central bank, credit frictions
    JEL: E4 G21
    Date: 2018–02

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