nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒02‒26
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Households’ Inflation Perceptions and Expectations: Survey Evidence from New Zealand By Bernd Hayo; Florian Neumeier
  2. Global factors and trend inflation By Güneş Kamber; Benjamin Wong
  3. Asymmetric inflation expectations, downward rigidity of wages,and asymmetric business cycles By Baqaee, David Rezza
  4. The dynamic impact of monetary policy on regional housing prices in the US: Evidence based on factor-augmented vector autoregressions By Manfred M. Fischer; Florian Huber; Michael Pfarrhofer; Petra Staufer-Steinnocher
  5. US Monetary Policy and International Bond Markets By Simon Gilchrist; Vivian Z. Yue; Egon Zakrajsek
  6. Time-Inconsistent Discounting and the Friedman Rule: The Role of Non-Unitary Discounting By Takeo Hori; Koichi Futagami
  7. Financial spillovers of international monetary policy: Six hypotheses on the Latin American case, 2010-2016 By Eijffinger, Sylvester C W; Malagon, Jonathan
  8. Estimating unobservable inflation expectations in the New Keynesian Phillips Curve By Francesca Rondina
  9. Targeted Price Controls on Supermarket Products By Diego Aparicio; Alberto Cavallo
  10. Monetary policy operating procedures, lending frictions, and employment By Florian, David; Limnios, Chris; Walsh, Carl
  11. Oil Price Cycles, Fiscal Dominance and Counter-cyclical Monetary Policy in Iran By Jalali Naini, Ahmad Reza; Naderian, Mohammad Amin
  12. Monetary Policy and Financial Conditions: A Cross-Country Study By Adrian, Tobias; Duarte, Fernando; Grinberg, Federico; Mancini-Griffoli, Tommaso
  13. The effect of unconventional monetary policy on inflation expectations: evidence from firms in the United Kingdom By Boneva, Lena; Cloyne, James; Weale, Martin; Wieladek, Tomasz
  14. Oil price pass-through into core inflation By Cristina Conflitti; Riccardo Cristadoro
  15. Asset Prices under Alternative Exchange Rate Regimes By Nicole Aregger
  16. The global financial cycle, bank capital flows and monetary policy. Evidence from Norway By Ragna Alstadheim; Christine Blandhol
  17. Inferring the Shadow Rate from Real Activity By Benjamin Garcia; Arsenios Skaperdas
  18. Risk-Taking Channel of Monetary Policy By Adrian, Tobias; Estrella, Arturo; Shin, Hyun Song
  19. Equilibrium Real Interest Rates, Secular Stagnation, and the Financial Cycle: Empirical Evidence for Euro-Area Member Countries By Belke, Ansgar; Klose, Jens
  20. Financial Heterogeneity and the Investment Channel of Monetary Policy By Pablo Ottonello; Thomas Winberry
  21. Seven Fallacies Concerning Milton Friedman's "The Role of Monetary Policy" By Edward Nelson
  22. Temporary Price Changes, Inflation Regimes and the Propagation of Monetary Shocks By Alvarez, Fernando; Lippi, Francesco
  23. Nonlinear state and shock dependence of exchange rate pass through on prices By Hernán Rincón-Castro; Norberto Rodríguez-Niño
  24. Monetary Policy and Asset Valuation By Bianchi, Francesco; Lettau, Martin; Ludvigson, Sydney
  25. Heterogeneity, Convergence and Imbalances in the Euro Area By Stephane Auray; Aurelien Eyquem
  26. Sweden's Trilemma Trade-offs By Cortuk, Orcan
  27. Financial Vulnerability and Monetary Policy By Adrian, Tobias; Duarte, Fernando
  28. What does the heterogeneity of the inflation expectations of Italian firms tell us? By Laura Bartiloro; Marco Bottone; Alfonso Rosolia
  29. Can Trend Inflation Solve the Delayed Overshooting Puzzle? By Cooke, Dudley; Kara, Engin
  30. Oil Price Shocks, Monetary Policy and Current Account Imbalances within a Currency Union By Baas, Timo; Belke, Ansgar H.
  31. Effectiveness of unconventional monetary policies in a low interest rate environment By Andrew Filardo; Jouchi Nakajima
  32. Extreme events and optimal monetary policy By Jinill, Kim; Ruge-Murcia, Francisco

  1. By: Bernd Hayo (University of Marburg); Florian Neumeier (Ifo Institute–Leibniz Institute for Economic Research at the University of Munich)
    Abstract: In this paper, we study how inflation is viewed by the general population of New Zealand. Based on unique representative survey data collected in 2016 and using descriptive statistics and multivariate regressions, we explore various aspects of how laypersons perceive inflation and form inflation expectations. We focus on how an individual’s economic situation, information search and interest in inflation, economic knowledge, and attitudes and values are related to inflation perception and expectation, as well as the individual’s reaction to them. We interpret our findings as a clear indication that laypersons’ knowledge about inflation is much better described by the imperfect information view prevailing in social psychology than by the rational actor view typically assumed in economics.
    Keywords: Inflation perception, inflation expectation, New Zealand, monetary policy, household survey
    JEL: E52 E58 Z1
    Date: 2018
  2. By: Güneş Kamber; Benjamin Wong
    Abstract: We develop a model to empirically study the influence of global factors in driving trend inflation and the inflation gap.We apply our model to five established inflation targeters and a group of heterogeneous Asian economies. Our results suggest that while global factors can have a sizeable influence on the inflation gap, they play only a marginal role in driving trend inflation. Much of the influence of global factors in the inflation gap may be reflecting commodity price shocks. We also find global factors have a greater influence on inflation, and especially trend inflation, for the group of Asian economies relative to the established inflation targeters. A possible interpretation is that inflation targeting may have reduced the influence of global factors on inflation, and especially so on trend inflation.
    Keywords: trend inflation, foreign shocks, Beveridge-Nelson decomposition
    JEL: C32 E31 F41
    Date: 2018–01
  3. By: Baqaee, David Rezza
    Abstract: Household expectations of the inflation rate are much more sensitive to inflation than to disinflation. To the extent that workers have bargaining power in wage determination, this asymmetry in their beliefs can make wages respond quickly to inflationary forces but sluggishly to deflationary ones. I microfound asymmetric household expectations using ambiguity-aversion: households, who do not know the quality of their information, overweight inflationary news since it reduces their purchasing power, and underweight deflationary news since it increases their purchasing power. I embed asymmetric beliefs into a general equilibrium model and show that, in such a model, monetary policy has asymmetric effects on employment, output, and wage inflation in ways consistent with the data. Although wages are downwardly rigid in this environment, monetary policy need not have a bias towards using inflation to grease the wheels of the labor market.
    JEL: E27
    Date: 2016–12–23
  4. By: Manfred M. Fischer; Florian Huber; Michael Pfarrhofer; Petra Staufer-Steinnocher
    Abstract: In this study interest centers on regional differences in the response of housing prices to monetary policy shocks in the US. We address this issue by analyzing monthly home price data for metropolitan regions using a factor-augmented vector autoregression (FAVAR) model. Bayesian model estimation is based on Gibbs sampling with Normal-Gamma shrinkage priors for the autoregressive coefficients and factor loadings, while monetary policy shocks are identified using high-frequency surprises around policy announcements as external instruments. The empirical results indicate that monetary policy actions typically have sizeable and significant positive effects on regional housing prices, revealing differences in magnitude and duration. The largest effects are observed in regions located in states on both the East and West Coasts, notably California, Arizona and Florida.
    Date: 2018–02
  5. By: Simon Gilchrist; Vivian Z. Yue; Egon Zakrajsek
    Abstract: This paper uses high-frequency data to analyze the effects of US monetary policy--during the conventional and unconventional policy regimes--on foreign government bonds markets in advanced and emerging market economies. The results indicate that an expansionary US monetary policy steepens the foreign yield curve--denominated in local currency--during a conventional US monetary policy regime and flattens the foreign yield curve during an unconventional policy regime. The passthrough of unconventional US monetary policy to foreign bond yields is, on balance, comparable to that of conventional policy. In addition a conventional US monetary easing leads to a significant narrowing of the credit spreads on dollar-denominated sovereign bonds that are issued by countries with a speculative-grade sovereign credit rating. However, during the unconventional policy regime, yields on speculative-grade sovereign debt denominated in dollars move one-to-one with yields on comparable-maturity US Treasury securities.
    Keywords: Conventional and unconventional US monetary policy ; Financial spillovers ; Sovereign yields and credit spreads
    JEL: E4 E5 F3
    Date: 2018–02–15
  6. By: Takeo Hori (Department of Industrial Engineering and Economics, School of Engineering, Tokyo Institute of Technology); Koichi Futagami (Graduate School of Economics, Osaka University)
    Abstract: We examine the optimality of the Friedman rule by considering recent developments in behavioral economics. We construct a simple macroeconomic model where agents discount consumption and leisure at different rates. We also consider a standard exponential discounting model and a hyperbolic discounting model, assuming that the same discounting applies to both consumption and leisure. Money is introduced via a cash-in-advance constraint. Although the three models are observationally equivalent, they provide different policy implications. The Friedman rule is optimal in the latter two models, whereas it is not optimal in the first model when agents discount consumption at a higher rate than leisure.
    Keywords: Non-unitary discount rate, Hyperbolic discounting, Exponential discounting, Friedman rule, Optimal inflation
    JEL: E5
    Date: 2018–02
  7. By: Eijffinger, Sylvester C W; Malagon, Jonathan
    Abstract: This paper aims to determine if there is a differential incidence between conventional and unconventional monetary policy of developed economies in Latin American financial markets, evaluating six hypotheses that can be extracted from the economic literature. Financial spillovers are considered on two dimensions: financial asset prices (fixed income and equity markets) and interest rates (monetary policy rate and loans rates). The main finding is that both conventional and unconventional monetary policies in US and Eurozone have a significant and direct incidence on Latin American fixed income markets, although the effect of unconventional monetary policy is low. In contrast, only unconventional monetary policy has a significant effect on Latin American equity markets. On the other hand, regardless of the exchange rate pass-through of Latin American economies, the conventional monetary policy of the United States and Eurozone has a low but significant incidence on both monetary policy rates and lending interest rates in Latin America, while the unconventional monetary policies have no incidence. As anticipated, US conventional and unconventional monetary policy have a higher incidence on Latin American financial markets with respect to the monetary policy decisions in Eurozone and Japan. Finally, free trade agreements between developed economies and Latin American economies do not have a significant impact on the relationship between international monetary policy and Latin American financial markets.
    Keywords: central banking; financial asset prices; financial globalization; Financial spillovers; Latin America; monetary policy
    JEL: E40 E43 E50 E52 E58
    Date: 2018–02
  8. By: Francesca Rondina (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper uses an econometric model and Bayesian estimation to reverse engineer the path of inflation expectations implied by the New Keynesian Phillips Curve and the data. The estimated expectations roughly track the patterns of a number of common measures of expected inflation available from surveys or computed from financial data. In particular, they exhibit the strongest correlation with the inflation forecasts of the respondents in the University of Michigan Survey of Consumers. The estimated model also shows evidence of the anchoring of long run inflation expectations to a value that is in the range of the target inflation rate.
    Keywords: Phillips curve, expectations, survey data, Bayesian estimation.
    JEL: C1 E3 E5
    Date: 2018
  9. By: Diego Aparicio; Alberto Cavallo
    Abstract: We study the impact of targeted price controls for supermarket products in Argentina from 2007 to 2015. Using web-scraping, we collected daily prices for controlled and non-controlled goods and measured the differential effects on inflation, product availability, and price dispersion. We first show that, although price controls are imposed on goods with significant CPI weight, they have a temporary effect on aggregate inflation and no downward effect on other goods. Second, contrary to common beliefs, we find that controlled goods are consistently available for sale. Third, firms compensate for price controls by introducing new product varieties at higher prices. This behavior, which increases price dispersion within narrow categories, is consistent with a standard vertical differentiation model in the presence of price controls.
    JEL: D22 E31
    Date: 2018–02
  10. By: Florian, David (Banco Central de Reserva del Perú); Limnios, Chris (Providence College); Walsh, Carl (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
  11. By: Jalali Naini, Ahmad Reza; Naderian, Mohammad Amin
    Abstract: Impulse for business cycles in Iran are largely generated from oil price (terms of trade) shocks and propagated through fiscal policies. The classic mission of monetary policy is to conduct countercyclical policy, however, this is not a universal norm. Pro-cyclical fiscal and monetary policies during boom periods has been observed in a number of developing countries. Such policies tend to amplify the impact of positive oil price (terms of trade) shocks through aggregated demand expansion. The consequence has been strengthening of domestic inflationary pressures and appreciation of the real exchange rate. This paper attempts to examine if monetary policy in Iran is countercyclical and what is the impact of fiscal policy in this regard. It will be argued that the stance of fiscal policy and how government expenditures are financed can have a significant effect on how monetary policy is conducted. Our empirical observations regarding the experience of the Iranian economy indicates that, in a fiscally dominated structure, fiscal and monetary policies are generally expansionary, particularly during economic booms. This entails subsequent very large managed depreciation of the exchange rate, higher inflation rates, and an economic downturn. Under fiscal dominance monetary policy will be ineffective and both targets and instruments of monetary policy making will not be under the control of monetary authority. The policy package of a structural balanced fiscal rule combined with smoothing of quasi-fiscal operations is the appropriate policy measure that enhances the ability of central bank to conduct more effective countercyclical monetary policies.
    Keywords: Pro-cyclicality, Fiscal Dominance, Monetary policy, Ricardian
    JEL: E5
    Date: 2017–08–01
  12. By: Adrian, Tobias; Duarte, Fernando; Grinberg, Federico; Mancini-Griffoli, Tommaso
    Abstract: Loose financiall conditions forecast high output growth and low output volatility up to six quarters into the future, generating time varying downside risk to the output gap which we measure by GDP-at-Risk (GaR). This finding is robust across countries, conditioning variables, and time periods. We study the implications for monetary policy in a reduced form New Keynesian model with financial intermediaries that are subject to a Value at Risk (VaR) constraint. Optimal monetary policy depends on the magnitude downside risk to GDP, as it impacts the consumption-savings decision via the Euler constraint, and the financial conditions via the tightness of the VaR constraint. The optimal monetary policy rule exhibits a pronounced response to shifts in financial conditions for most countries in our sample. Welfare gains from taking financial conditions into account are shown to be sizable.
    Keywords: financial conditions; Financial Stability; monetary policy
    JEL: E52
    Date: 2018–02
  13. By: Boneva, Lena (Monetary Policy Committee Unit, Bank of England); Cloyne, James (Monetary Policy Committee Unit, Bank of England); Weale, Martin (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper investigates the effect of quantitative easing (QE) and other unconventional monetary policies on inflation and wage expectations of UK manufacturing firms. To identify the effect of QE on firms’ expectations, we use a novel approach of combining microeconometric data with macroeconomic shocks: QE is exogenous to inflation expectations of individual firms, and so are other macroeconomic developments like aggregate inflation or GDP growth. We find that firms’ inflation expectations increase by 0.22 percentage points in response to £50 billion of QE, implying that inflation expectations are part of the transmission mechanism of QE. In contrast, we find a positive but small and insignificant effect of forward guidance on inflation and wage expectations.
    Keywords: Inflation expectations; firm survey data; unconventional monetary policy; quantitative easing
    JEL: D22 E31 E52
    Date: 2016–07–21
  14. By: Cristina Conflitti (Bank of Italy); Riccardo Cristadoro (Bank of Italy)
    Abstract: In line with other recent studies, we find that oil price changes have had a statistically significant impact on long-term inflation expectations in the euro area since the global financial crisis. However, over the same period, (i) oil prices have shifted together with economic indicators, such as stock prices, and (ii) the correlation between short- and long-term expectations has increased. Once these factors are taken into account, the effect of oil prices on long-term inflation expectations is no longer significant. This suggests that the link between oil prices and long-term inflation expectations is not direct, but rather the result of underlying factors: the prolonged feeble economic conditions and the possible de-anchoring of long-term inflation expectations from the objective of price stability.
    Keywords: inflation expectations, oil prices, inflation swaps, de-anchoring, monetary policy
    JEL: C20 E31 E59 Q41
    Date: 2018–01
  15. By: Nicole Aregger
    Abstract: Motivated by the potential contribution of China's unilateral peg to asset price in flation in the US before the financial crisis of 2007-2009, this paper studies the effect of alternative exchange rate regimes ( flexible versus fixed) on the response of asset prices to economic shocks. I use a two-country general equilibrium model with sticky prices and extend earlier work on this topic by making use of a newer method for analyzing portfolio choice in DSGE models. My findings suggest that asset price responses to shocks differ across regimes. In particular, under a fixed regime, which is operated by the foreign country, responses to shocks in the home country are stronger than under a flexible regime. For home asset prices, however, the amplification of shock responses tends to be small. Applied to the US and China, this implies that, under China's prevailing unilateral peg, the Fed's expansionary monetary policy before the crisis resulted in a slightly but not substantially stronger US asset price infl ation relative to the one that would have been observed under a floating USD/CNY exchange rate.
    Date: 2018–02
  16. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Christine Blandhol (University of Chicago and Statistics Norway)
    Abstract: We investigate the importance of a global financial cycle for gross capital inflows based on monthly balance sheet data for Norwegian banks. The VIX index has been interpreted as an “investor fear gauge” and associated with a global financial cycle. This index has also been found to impact real activity. We include both a global activity variable and the VIX index in our structural VAR model of capital inflows. We find that when global activity falls, banks’ foreign funding share falls. Our results suggest that global real activity rather than a global financial cycle is a main driver behind the volume of bank capital inflows. We also study domestic monetary policy and implications for capital flows. Domestic monetary policy helps absorb VIX shocks and there is no indication of procyclical (“carry trade”) effects on funding. Monetary policy affects activity and inflation in a standard fashion, and the exchange rate acts as a buffer when shocks hit the economy.
    Keywords: Bank Capital flows, Uncertainty-shocks, Structural VAR
    JEL: E32 E44 F32 G15
    Date: 2018–02–19
  17. By: Benjamin Garcia; Arsenios Skaperdas
    Abstract: We estimate a shadow rate consistent with the paths of time series capturing real activity. This allows us to quantify the real effects of unconventional monetary policy in terms of equivalent short-term interest rate movements. We find that large-scale asset purchases and forward guidance had significant real effects equivalent of up to a four percent reduction in the federal funds rate.
    Keywords: External instrument VAR ; Kalman filter ; Unconventional monetary policy ; Effective lower bound ; Shadow rate
    JEL: E43 E47 E52
  18. By: Adrian, Tobias; Estrella, Arturo; Shin, Hyun Song
    Abstract: One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. We propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries and the risk-taking channel of monetary policy. Monetary tightening leads to the flattening of the term spread, reducing net interest margin and credit supply. We provide empirical support for the risk-taking channel.
    Keywords: risk taking channel of monetary policy
    Date: 2018–02
  19. By: Belke, Ansgar; Klose, Jens
    Abstract: Is the Euro area as a whole, or are individual Euro-area member countries facing a period of sustained lower economic growth, a phenomenon known as secular stagnation? We tackle this question by estimating equilibrium real interest rates and comparing them to actual real rates. Since the financial crisis has altered the degree of leverage in several European economies, we expand our model to incorporate the financial cycle. We estimate the model for the Euro area as a whole and for nine Euro-area member countries. Incorporating the financial cycle changes the estimated equilibrium real interest rates: For some Euro-area member countries, estimates of the equilibrium real interest rate are substantially higher than the standard estimates. In other cases, including our estimates for the Euro area as a whole, the estimated equilibrium real rates are slightly lower than without taking the financial cycle into account but are still higher than the actual rates. This indicates that real monetary policy rates were set even more systematically and consistently below (or not as far above) the natural real rate. Comparing the sequence of actual and equilibrium real rates, only Belgium, France, and Greece are likely to face a period of secular stagnation.
    Keywords: equilibrium real interest rate,Euro area,financial cycle,heterogeneity,monetary policy,secular stagnation
    JEL: E43 C32
    Date: 2018
  20. By: Pablo Ottonello; Thomas Winberry
    Abstract: We study the role of heterogeneity in firms' financial positions in determining the investment channel of monetary policy. Empirically, we show that firms with low leverage or high credit ratings are the most responsive to monetary policy shocks. We develop a heterogeneous firm New Keynesian model with default risk to interpret these facts and study their aggregate implications. In the model, firms with high default risk are less responsive to monetary shocks because their marginal cost of external finance is high. The aggregate effect of monetary policy therefore depends on the distribution of default risk across firms.
    JEL: D22 E22 E44 E52
    Date: 2018–01
  21. By: Edward Nelson
    Abstract: This paper analyzes Milton Friedman's (1968) article "The Role of Monetary Policy," via a discussion of seven fallacies concerning the article. These fallacies are: (1) "The Role of Monetary Policy" was Friedman’s first public statement of the natural rate hypothesis. (2) The Friedman-Phelps Phillips curve was already presented in Samuelson and Solow's (1960) analysis. (3) Friedman's specification of the Phillips curve was based on perfect competition and no nominal rigidities. (4) Friedman’s (1968) account of monetary policy in the Great Depression contradicted the Monetary History's version. (5) Friedman (1968) stated that a monetary expansion will keep the unemployment rate and the real interest rate below their natural rates for two decades. (6) The zero lower bound on nominal interest rates invalidates the natural rate hypothesis. (7) Friedman's (1968) treatment of an interest-rate peg was refuted by the rational expectations revolution. The discussion lays out the reasons why each of these seven items is a fallacy and infers key aspects of the framework underlying Friedman’s (1968) analysis.
    Keywords: Fisher effect ; Milton Friedman ; Phillips curve ; Liquidity effect ; Natural rate hypothesis ; Price stickiness ; Zero lower bound
    JEL: E31 E43 E52
    Date: 2018–02–14
  22. By: Alvarez, Fernando; Lippi, Francesco
    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.
    Keywords: menu cost models; price flexibility; price plans; reference prices; sticky prices; temporary price changes
    JEL: E3 E5
    Date: 2018–01
  23. By: Hernán Rincón-Castro; Norberto Rodríguez-Niño
    Abstract: This paper examines the nature of the pass-through of exchange rate shocks on prices along the distribution chain, and estimates its short and long-term path. It uses monthly data from a small open economy and a smooth transition auto-regressive vector model estimated by Bayesian methods. The main finding is that exchange rate pass-through is nonlinear and state and shock dependent. There are two main policy implications of these findings. First, models used by central banks for policymaking should take into account the nonlinear and endogenous nature of the pass-through. Second, a specific rule on pass-through for monetary policy decisions should be avoided.
    Keywords: exchange rate pass-through to prices, pricing along the distribution chain, statedependent, shock-dependent, LST-VAR, Bayesian estimation
    JEL: F31 E31 E52 C51 C52
    Date: 2018–01
  24. By: Bianchi, Francesco; Lettau, Martin; Ludvigson, Sydney
    Abstract: This paper presents evidence of infrequent shifts, or regimes,in the mean of the consumption-wealth variable cay that are strongly associated with low frequency fluctuations in the real value of the Federal Reserveís primary policy rate, with low policy rates associated with high asset valuations, and vice versa. By contrast, there is no evidence that infrequent shifts to high asset valuations and low policy rates are associated with higher economic growth or lower economic uncertainty; indeed the opposite is true. Additional evidence shows that low interest rate/high asset valuation regimes coincide with significantly lower equity market risk premia.
    JEL: G10 G12 G17
    Date: 2018–01
  25. By: Stephane Auray (CREST;ENSAI); Aurelien Eyquem (Université Lumière Lyon 2; GATE L-SE)
    Abstract: The inception of the euro allowed countries from the periphery to experience a large fall in the cost of borrowing. Lower nominal rates were only partially o?set by lower in?ation rates. We rationalize this real interest rate reversal using a two-region model of a monetary union where, consistently with real interest rate data, discount factors are initially heterogeneous, leading the periphery to be borrowing-constrained. We model the inception of the euro as a partial convergence process in in?ation rates and a slow rise in the discount factor of the periphery, relaxing the borrowing constraint. This simple set-up accounts for the bulk of post-euro ?uctuations in both regions. In particular, it replicates very well the observed joint dynamics of current accounts and terms of trade
    Keywords: Monetary union; in?ation convergence; current account imbalances; borrowing constraints
    JEL: E32 E52 F32 F41
    Date: 2017–01–11
  26. By: Cortuk, Orcan
    Abstract: In this paper, we empirically examine the theoretical concept of “impossible trinity” (financial trilemma) for Sweden for the period of 2010-2017. While doing this, we modified the Aizenman, Chinn and Ito approach by adding an extra interaction term to the main regression which shows whether these three policies are implemented in harmony without creating any trade-offs. Similarly, this interaction term also reflects the effectiveness of all supportive policies (i.e. hoarding international reserves, liquidity policies etc.) in order to eliminate the trade-offs between the monetary independence, exchange rate stability and capital openness. Our results indicate that the standard ACI approach is not sufficient in explaining Sweden’s economic policies and adding an interaction term to the main trilemma regression is both necessary and critical. From the latter perspective, the interaction term has a negative contribution indicating that Sweden could achieve to relax the binding trilemma trade-offs in this period. Lastly, our analysis continues by exploring the implications of the interaction term for inflation in a VAR and Granger Causality analyses where we find that interaction term has certain decreasing impact on inflation.
    Keywords: Financial Trilemma, impossible trinity, Sweden's economy
    JEL: E44 E5 F4
    Date: 2018–02
  27. By: Adrian, Tobias; Duarte, Fernando
    Abstract: We present a microfounded New Keynesian model that features financial vulnerabilities. Financial intermediaries' occasionally binding value at risk constraints give rise to variation in the pricing of risk that generate time varying risk in the conditional mean and volatility of the output gap. The conditional mean and volatility are negatively related: during times of easy financial conditions, growth tends to be high, and risk tends to be low. Monetary policy affects output directly via the IS curve, and indirectly via the pricing of risk that relates to the tightness of the value at risk constraint. The optimal monetary policy rule always depends on financial vulnerabilities in addition to the output gap, inflation, and the natural rate. We show that a classic Taylor rule exacerbates deviations of the output gap from its target value of zero relative to an optimal interest rate rule that includes vulnerability. Simulations show that optimal policy significantly increases welfare relative to a classic Taylor rule. Alternative policy paths using historical examples illustrate the usefulness of the proposed policy rule.
    Keywords: Financial Stability; Macro-Finance; monetary policy
    JEL: E52 G10 G12
    Date: 2018–02
  28. By: Laura Bartiloro (Bank of Italy); Marco Bottone (Bank of Italy); Alfonso Rosolia (Bank of Italy)
    Abstract: Quite a lot. We investigate how the cross-sectional heterogeneity of firms’ inflation expectations reflects information availability and awareness of recent macroeconomic developments, observable firm characteristics and broader macroeconomic developments using the Bank of Italy’s survey on businesses’ inflation and growth expectations. We find that: on average about half of the dispersion of expectations is traceable to a lack of information about the most recent price developments; firms incorporate new information into their expectations within a quarter; the dispersion of expectations is related in a statistically significant way to some important aggregate economic variables, and it is greater when current inflation is farther away from the ECB’s price stability goal. Since 2015 the weight attributed to prior beliefs of low inflation has steadily increased and the uncertainty surrounding them has decreased. Furthermore, since 2014 there has no longer been an empirical connection between the dispersion of expectations and the distance from the ECB price stability. These two facts suggest an increased risk of inflation expectations being de-anchored."
    Keywords: Inflation Expectations, Learning, Firms
    JEL: D22 D8 E31
    Date: 2017–12
  29. By: Cooke, Dudley (University of Exeter); Kara, Engin (Cardiff University)
    Abstract: We develop an open economy New Keynesian model with heterogeneity in price stickiness and positive trend inflation. The main insight of our analysis is that, in the presence of heterogeneity in price stickiness, there is a strong link between trend inflation and the timing of the peak response of the real exchange rate to a monetary policy shock. Without trend inflation, the real exchange rate peaks almost immediately. With trend inflation set at historical values, the peak occurs at around 2 years. Delayed overshooting is a consequence of the interaction between heterogeneity in price stickiness and trend inflation.
    JEL: E52 F41 F44
    Date: 2018–01–01
  30. By: Baas, Timo (University of Duisburg-Essen); Belke, Ansgar H. (University of Duisburg-Essen)
    Abstract: For more than two decades now, current-account imbalances are a crucial issue in the international policy debate as they threaten the stability of the world economy. More recently, the government debt crisis of the European Union shows that internal current account imbalances inside a currency union may also add to these risks. Oil price fluctuations and a contracting monetary policy that reacts on oil prices, previously discussed to affect the current account may also be a threat to the currency union by changing internal imbalances. Therefore, in this paper, we analyze the impact of oil price shocks on current account imbalances within a currency union. Differences in institutions, especially labor market institutions and trade result in an asymmetric reaction to an otherwise symmetric shock. In this context, we show that oil price shocks can have a long-lasting impact on internal balances, as the exchange rate adjustment mechanism is not available. The common monetary policy authority, however, can reduce such effects by specifying an optimum monetary policy target. Nevertheless, we also show that there is no single best solution. CPI, core CPI or an asymmetric CPI target all come at a cost either regarding an increase in unemployment or increasing imbalances.
    Keywords: current account deficit, oil price shocks, DSGE models, search and matching labor market, monetary policy
    JEL: E32 F32 Q43
    Date: 2017–12
  31. By: Andrew Filardo; Jouchi Nakajima
    Abstract: Have unconventional monetary policies (UMPs) become less effective at stimulating economies in persistently low interest rate environments? This paper examines that question with a time-varying parameter VAR for the United States, the United Kingdom, the euro area and Japan. One advantage of our approach is the ability to measure an economy's evolving interest rate sensitivity during the post-GFC macroeconomy. Another advantage is the ability to capture time variation in the "natural", or steady state, rate of interest, which allows us to separate interest rate movements that are associated with changes in the stance of monetary policy from those that are not.
    Keywords: lending rate, quantitative easing, time-varying parameter VAR model, unconventional monetary policy
    JEL: E43 E44 E52 E58
    Date: 2018–01
  32. By: Jinill, Kim; Ruge-Murcia, Francisco
    Abstract: This paper studies the implication of extreme shocks for monetary policy. The analysis is based on a small-scale New Keynesian model with sticky prices and wages where shocks are drawn from asymmetric Generalized Extreme Value distributions. A nonlinear perturbation solution of the model is estimated by the simulated method of moments. Under the Ramsey policy, the central bank responds nonlinearly and asymmetrically to shocks. The trade-off between targeting a gross inflation rate above 1 (or a net inflation rate above 0) as insurance against extreme shocks and targeting an average gross inflation at unity to avoid adjustment costs is unambiguously decided in favour of strict price stability.
    JEL: E4 E5
    Date: 2018–02–06

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