nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒03‒05
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Are Eastern European Taylor Reaction Functions Asymmetric in Inflation or Output: Empirical Evidence for four Countries By Jens Klose
  2. Forward Guidance and the Exchange Rate By Jordi Galí
  3. Mortgage Debt and Time-Varying Monetary Policy Transmission By David Finck; Joerg Schmidt; Peter Tillmann
  4. Analysis of Regional Price Differentiations By Perevyshin, Yury; Sinelnikov-Murylev, Sergei Germanovich; Skrobotov, Anton; Trunin, Pavel
  5. Has Monetary Policy Changed? How the Crisis Shifted the Ground Under Central Banks By Pierre L. Siklos
  6. Monetary theory reversed: Virtual currency issuance and miners’ remuneration By Luca Marchiori
  7. A New Wave of ECB’s Unconventional Monetary Policies: Domestic Impact and Spillovers By Richard Varghese; Yuanyan Sophia Zhang
  8. Intermediation markups and monetary policy pass-through By Malamud, Semyon; Schrimpf, Andreas
  9. Optimal Monetary Policy Under Bounded Rationality By Benchimol, Jonathan; Bounader, Lachen
  10. A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow By Afonso, Gara M.; Armenter, Roc; Lester, Benjamin
  11. Money in Spain. New historical statistics. 1830-1998 By Pablo Martín-Aceña
  12. The Macroeconomic Effects of Exchange Rate Movements By Pablo Anaya; Stefan Hasenclever
  13. Protecting Target Zone Currency Markets from Speculative Investors By Eyal Neuman; Alexander Schied
  14. Optimality of the Friedman rule under ambiguity By Eisei Ohtaki
  15. Euroization Drivers and Effective Policy Response: An Application to the case of Albania By Guido della Valle; Vasilika Kota; Romain M Veyrune; Ezequiel Cabezon; Shaoyu Guo
  16. Is the Renminbi a Safe Haven?Abstract: We investigate the relationship between market uncertainty and the relative value of the Renminbi against currencies that the safe haven literature typically considers as the traditional safe haven currency candidates. Our sample spans the February 2011 to April 2016 period. Band spectral regression models enable us to capture that the relationship between market uncertainty and the relative value of the Renminbi is frequency dependent. While we find evidence of some degree of safe haven currency behavior of the Renminbi during the early part of our sample, our findings do not support the suggestion that the Renminbi is currently a safe haven currency or that the Renminbi is progressing towards safe haven currency status. By Rasmus Fatum; Yohei Yamamoto; Guozhong Zhu
  17. Affine Endeavour: Estimating a Joint Model of the Nominal and Real Term Structures of Interest Rates in Australia By Jonathan Hambur; Richard Finlay
  18. Central bank forward guidance and the signal value of market prices By Stephen Morris; Hyun Song Shin
  19. Can Countries Manage Their Financial Conditions Amid Globalization? By Nicolas Arregui; Selim Elekdag; R. G Gelos; Romain Lafarguette; Dulani Seneviratne
  20. Financial Crisis, Monetary Base Expansion and Risk By Stylianos Tsiaras
  21. On the Economics of Digital Currencies By Fernandez-Villaverde, Jesus; Sanches, Daniel R.
  22. A Global Lending Channel Unplugged? Does U.S. Monetary Policy Affect Cross-border and Affiliate Lending by Global U.S. Banks? By Temesvary, Judit; Ongena, Steven; Owen, Ann L.
  23. Reserve Currency Blocs: A Changing International Monetary System? By Camilo E Tovar Mora; Tania Mohd Nor
  24. Understanding HANK: insights from a PRANK By Acharya, Sushant; Dogra, Keshav
  25. Open Mouth Operations By Campbell, Jeffrey R.; Weber, Jacob P.
  26. Role of Expectation in a Liquidity Trap By Kohei Hasui; Yoshiyuki Nakazono; Yuki Teranishi
  27. One Money, Many Markets - A Factor Model Approach to Monetary Policy in the Euro Area with High-Frequency Identification By Corsetti, G.; Duarte, J. B.; Mann, S.
  28. Asset Price Spillovers From Unconventional Monetary Policy: A Global Empirical Perspective By Domenico Lombardi, Pierre Siklos, Samantha St. Amand
  29. Disagreement about Future Inflation: Understanding the Benefits of Inflation Targeting and Transparency By Steve Brito; Yan Carriere-Swallow; Bertrand Gruss
  30. Nontraditional Monetary Policy in a Model of Default Risks and Collateral in the Absence of Commitment By Hiroshi FUJIKI
  31. Why Are Inflation and Real Interest Rates So Low? A Mechanism of Low and Floating Real Interest and Inflation Rates By Harashima, Taiji
  32. A new theory of seigniorage and optimal inflation By Reich, Jens
  33. Why are inflation forecasts sticky? By Frédérique BEC
  34. From window guidance to interbank rates : Tracing the transition of monetary policy in Japan and China By Angrick, Stefan; Naoyuki, Yoshino

  1. By: Jens Klose (THM Business School)
    Abstract: Do central banks in Eastern European countries react asymmetrically and in a non-linear fashion to changes in inflation and output? We tackle this question by expanding the standard Taylor reaction function for the four inflation targeting countries Czech Republic, Hungary, Poland and Romania. We do so taking explicitly inflation rates below or above target and output below or above potential, the so-called state of the economy, into account. The results reveal that there are indeed substantial asymmetries in the reaction function of the Czech, Polish and Romanian central bank, which are only evident when the combination of inflation and output thresholds is explicitly modelled in one estimation equation. For these three central banks also non-linearities in the inflation and output response could be verified.
    Keywords: Taylor reaction function, Asymmetries, Eastern European countries
    JEL: E52 E58
    Date: 2018
  2. By: Jordi Galí
    Abstract: I analyze the effectiveness of forward guidance policies in open economies, focusing on the role played by the exchange rate in their transmission. An open economy version of the "forward guidance puzzle" is shown to emerge. In partial equilibrium, the effect on the current exchange rate of an anticipated change in the interest rate does not decline with the horizon of implementation. In general equilibrium, the size of the effect is larger the longer is that horizon. Empirical evidence using U.S. and euro area data euro-dollar points to the presence of a forward guidance exchange rate puzzle: expectations of interest rate differentials in the near (distant) future have much larger (smaller) effects on the euro-dollar exchange rate than is implied by the theory.
    Keywords: forward guidance puzzle, uncovered interest rate parity, unconventional monetary policies, open economy New Keynesian model
    JEL: E43 E58 F41
    Date: 2018–02
  3. By: David Finck (University of Giessen); Joerg Schmidt (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: We study the role of monetary policy for the dynamics of U.S. mortgage debt, which is the largest component of household indebtedness. A time-varying parameter VAR model allows us to study the variation in the mortgage debt sensitivity to monetary policy. We find that an identically-sized policy shock became less effective over time. We use a DSGE model to show that a fall in the share of adjustable-rate mortgages (ARMs) could replicate this finding. Calibrating the model to the drop in the ARM share since the 1980s yields a drop in the sensitivity of housing debt to monetary policy which is quantitatively similar to the VAR results. A sacrifice ratio for mortgage debt reveals that a policy tightening directed towards reducing household debt became more expensive in terms of a loss in employment. Counterfactuals show that this result cannot be attributed to changes in monetary policy itself. The results are consistent with the "mortgage rate conundrum" found by Justiniano et al. (2017) and have strong implications for policy.
    Keywords: mortgage debt, monetary policy, deleveraging, time-varying VAR, DSGE
    JEL: E3 E5 G2
    Date: 2018
  4. By: Perevyshin, Yury (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Sinelnikov-Murylev, Sergei Germanovich (Russian Foreign Trade Academy, Gaidar Institute for Economic Policy, Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Skrobotov, Anton (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Trunin, Pavel (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: This paper studies factors of differentiation of regional price levels in Russian regions. We tested the law of one price in 76 Russian regions for 69 goods on the monthly data for the period from 2003 to 2015. Based on econometric methods of panel data analysis, it was established that in the period 2000–2015, differences in regional prices were caused by the following factors: the Balassa — Samuelson effect; the costs of regional trade; the level of monopolization of retail trade. The results obtained in the article can be used in developing and implementing economic policy aimed at poverty reduction, since differences in the purchasing power of the same income in different regions of Russia create prerequisites for unforeseen changes in inequality. It is equally important to take into account regional price differences in assessing the efficiency of transport and logistics projects, since such projects can lead to a reduction in regional price differences due to lower interregional trade costs. The results are important in the development and analysis of the consequences of monetary policy. Decisions in the sphere of monetary policy are the same for all regions, however, due to regional price differentiation, their influence on inflation in individual regions may be different. Thus, accounting for price differences between regions can improve the accuracy of forecasting the consequences of monetary policy measures.
    Keywords: price, regional price policy, law of one price
    Date: 2017–02–12
  5. By: Pierre L. Siklos (Department of Economics, Wilfrid Laurier University, Canada; Balsillie School of International Affairs, Canada; Rimini Centre for Economic Analysis)
    Abstract: Central bank communication is more important than only a decade ago. This paper examines the results of a Survey begun in 2013, in cooperation with the BIS, to assess how and why central bank communication strategies have changed in light of the financial crisis of 2008-10. Existing metrics of central bank transparency are found to be relatively less informative about the role of financial stability in transparency. Inflation targeting central banks are more likely to incorporate market reactions to their policies and place greater weight on the modelling exercise used to generate macroeconomic forecasts. Central banks also believe that forward guidance is beneficial. Inflation targeting central banks are also more vocal in publicly explaining the role and function of macroprudential tools. Few differences in views about communicating in normal versus crisis times are observed. Therefore, communicating in normal versus crisis times are not seen as being very different.
    Keywords: central bank communication, transparency, forward guidance, quantitative easing, macroprudential tools
    JEL: E58 E3 E61 E63
    Date: 2018–02
  6. By: Luca Marchiori
    Abstract: This study analyzes the macroeconomic implications of virtual currency issuance. It builds on a standard cash-in-advance model extended with (i) ‘virtual’ goods, sold against virtual currency, and (ii) miners, the agents providing payment services. The main finding is that virtual currency growthmay have effects opposite to those predicted by monetary theory when miners are rewarded with newly created coins. Declining currency issuance, as in Bitcoin, raises the price of virtual goods, which counteracts the traditional impact of a reduced inflation tax. The paper also shows how fiat money growth affects the welfare effects of virtual currency creation.
    Keywords: Cash-in-advance, virtual currency, fiat money, money supply
    JEL: E41 E42 E51
    Date: 2018–02
  7. By: Richard Varghese; Yuanyan Sophia Zhang
    Abstract: ECB President Draghi’s Jackson Hole speech in August 2014 arguably marked a new phase of unconventional monetary policies (UMPs) in the euro area. This paper examines the market impact and tranmission channels of this new wave of UMPs using a modified event study framework. They are found to have a more prominent impact on inflation expectations and exchange rates compared to the earlier UMP announcements. The impact on bank equity, however, is less significant in part due to narrowing profit margin in a low interest rate environment; and the marginal effect on sovereign spread compression has diminished. By extracting components of monetary policy shocks from the yield curve, we find that the traditional signaling channel of the monetary policy transmission continued to play an important role, but the portfolio rebalancing channel became more important in the new phase. Spillovers to non-euro area EU countries (the Czech Republic, Denmark, Poland, and Sweden) are transmitted mainly through the portfolio rebalancing channel, largely affecting sovereign yields and exchange rates.
    Date: 2018–01–24
  8. By: Malamud, Semyon; Schrimpf, Andreas
    Abstract: We introduce intermediation frictions into the classical monetary model with fully flexible prices. In our model, monetary policy is redistributive because it affects intermediaries' ability to extract rents. The pass-through efficiency of quantitative easing (QE) and tightening (QT) policies depends crucially on the anticipated relationship between future monetary policy and future stock market returns (the "Central Bank Put"). When the Central Bank Put is too weak, balance sheet policies become inefficient. When the Central Bank Put is very strong, however, monetary policy may be destabilizing and lead to greater frequency of market tantrums.
    JEL: E40 E44 E52 G12
    Date: 2018–01
  9. By: Benchimol, Jonathan (Bank of Israel); Bounader, Lachen (Mohammed V University)
    Abstract: Optimal monetary policy under discretion, commitment, and optimal simple rules regimes is analyzed through a behavioral New Keynesian model. Flexible price level targeting dominates under discretion; flexible inflation targeting dominates under commitment; and strict price level targeting dominates when using optimal simple rules. Stabilizing properties and bounded rationality-independence generally affect the regime's optimality. The policymaker's knowledge of an agent's myopia is decisive, whereas bounded rationality is not necessarily associated with decreased welfare. Several forms of economic inattention can be welfare increasing.
    JEL: C53 D01 D11 E37 E52
    Date: 2018–01–01
  10. By: Afonso, Gara M. (Federal Reserve Bank of New York); Armenter, Roc (Federal Reserve Bank of Philadelphia); Lester, Benjamin (Federal Reserve Bank of Philadelphia)
    Abstract: The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves, and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before and after 2008, in a single, unified framework. We use this model to quantitatively evaluate the evolution of interest rates and trading volume in the federal funds market as the supply of aggregate reserves shrinks. We find that these outcomes are highly sensitive to the dynamics of the distribution of reserves across banks.
    Keywords: Monetary Policy Implementation; Federal Funds Market; Over-the-Counter Markets
    JEL: E42 E43 E44 E52 E58
    Date: 2018–02–21
  11. By: Pablo Martín-Aceña (Universidad de Alcalá)
    Abstract: The purpose of this Working Paper is to present a reconstruction of the main monetary aggregates for the period 1830, when the first modern banknotes were issue, to1998, the last year before the substitution of the peseta by the euro. It offers series for currency in circulation and its components, bank deposits and its components, high-powered money and the money supply. With regard to previous monetary historical statistics, this Working Paper improves the quality and the time-span of the series, covering a period of more than 150 years. The Working Paper offers also a short approach to the long-term evolution of the quantity of money in Spain and the changes in its composition. The sources and methodology employed is explain in detail.
    Keywords: monetary statistics, monetary history, currency in circulation, bank deposits, money supply
    JEL: E49 E51 N1 N9 Y1
    Date: 2018–02
  12. By: Pablo Anaya; Stefan Hasenclever
    Abstract: The macroeconomic effects of exchange rate movements have been subject to an extensive debate in international economics. Traditionally, much of the discussion was focused on the relation between the effective exchange rate and the trade balance. However, the process of financial globalization has led to a sharp increase in foreign asset and liability positions across countries and also to a greater dispersion in foreign currency positions, with many countries being either large net creditors or net debtors in foreign currency. This has shifted the focus of the discussion from the trade balance to the external balance sheets of countries. This Roundup provides a brief overview of the literature on the macroeconomic impact of exchange rate movements.
    Date: 2018
  13. By: Eyal Neuman; Alexander Schied
    Abstract: We consider a stochastic game between a trader and the central bank on target zone markets. In this type of markets the price process is modeled as a diffusion which is reflected at one or more barriers. Such models arise when a currency exchange rate is kept above a certain threshold due to central bank intervention. We consider a trader who wishes to liquidate a large amount of currency, where for whom prices are optimal at the barrier. The central bank, who wishes to keep the currency exchange rate above this barrier, therefore needs to buy its own currency. The permanent price impact, which is created by the transactions of both sides, turns the optimal trading problems of the trader and the central bank into coupled singular control problems, where the common singularity arises from a local time along a random curve. We first solve the central bank's control problem by means of the Skorokhod map and then derive the trader's optimal strategy by solving a sequence of approximated control problems, thus establishing a Stackelberg equilibrium in our model.
    Date: 2018–01
  14. By: Eisei Ohtaki
    Abstract: This article reexamines optimality of the Friedman rule in an economy, wherein (i) spatial separation and limited communication create a transactions role for money (ii) banks arise to provide liquidity, and (iii) agents are nonsmooth ambiguity aversion. It is shown that the structure of the set of “second-best” monetary policies crucially depends on the relation between the set of beliefs and the marginal productivity of capital. Especially, in order for the Friedman rule to be suboptimal, it is necessary for the maximum of subjective probabilities of realizing liquidity events to be sufficiently small.
  15. By: Guido della Valle; Vasilika Kota; Romain M Veyrune; Ezequiel Cabezon; Shaoyu Guo
    Abstract: This paper proposes a methodology to develop empirically based and theoretically consistent deeuroization policies. It is derived from the experience of Albania. The paper is the first attempt to provide an empirical measure of the optimal level of euroization. The results indicate that euroization is trending above the estimated measure in Albania, calling for deeuroization policies. In the long term, deeuroization requires maintaining the commitment to low and stable inflation in a context of greater exchange rate flexibility to encourage saving in local currency. In the short term, policies that mitigate the financial stability risk due to euroization contribute to deeuroization inasmuch as they make banking intermediation in euro less financially attractive to the public.
    Keywords: Dollarization;Europe;Financial stability;Albania;Central banks and their policies;euroization, and reserve requirement, reserve requirement
    Date: 2018–01–25
  16. By: Rasmus Fatum; Yohei Yamamoto; Guozhong Zhu
  17. By: Jonathan Hambur (Reserve Bank of Australia); Richard Finlay (Reserve Bank of Australia)
    Abstract: We outline a 'workhouse' affine term structure model of nominal and real interest rates in Australia. The model allows us to decompose observed yields paid on nominal and inflation-indexed government bonds into expectations for real and nominal interest rates, expectations for inflation, as well as real term premia and inflation risk premia. The results should not be interpreted too precisely given data limitations and the complexity of the model. Nevertheless, they suggest that medium- to long-term expectations for real interest rates, a market-based measure of the neutral real interest rate, have declined in recent years. At the same time, long-term inflation expectations have remained firmly within the Reserve Bank's 2 to 3 per cent target band and have been more stable than suggested by measures of break-even inflation. Finally, the results suggest that real term premia have declined since the global financial crisis, which may reflect overseas factors given it has coincided with declines in US term premia.
    Keywords: affine term structure model; joint real and nominal; survey data
    JEL: E31 E43 G12
    Date: 2018–02
  18. By: Stephen Morris; Hyun Song Shin
    Abstract: The analysis suggests that relying less on market signals increases the effectiveness of central bank communication. In their eagerness to correctly anticipate policy moves, market participants risk giving too much weight to central bankers' utterances and not enough to assessing economic data. If central bankers, in turn, trust markets to guide their actions, they may end up creating a feedback loop that cancels out the value of the very market signals they rely on. In this circular relationship, market outcomes reflect central bank actions, which in turn reflect market outcomes.
    Keywords: central bank communication, market expectations, crowding out
    JEL: D82 E43 E58
    Date: 2018–01
  19. By: Nicolas Arregui; Selim Elekdag; R. G Gelos; Romain Lafarguette; Dulani Seneviratne
    Abstract: This paper examines the evolving importance of common global components underlying domestic financial conditions. It develops financial conditions indices (FCIs) that make it possible to compare a large set of advanced and emerging market economies. It finds that a common component, “global financial conditions,” accounts for about 20 percent to 40 percent of the variation in countries’ domestic FCIs, with notable heterogeneity across countries. Its importance, however, does not seem to have increased markedly over the past two decades. Global financial conditions loom large, but evidence suggests that, on average, countries still appear to hold considerable sway over their own financial conditions—specifically, through monetary policy. Nevertheless, the rapid speed at which foreign shocks affect domestic financial conditions may also make it difficult to react in a timely and effective manner, if deemed necessary.
    Keywords: Monetary policy;Financial conditions, international policy transmission, Financial Markets and the Macroeconomy, General, General, General
    Date: 2018–01–24
  20. By: Stylianos Tsiaras (University of Surrey)
    Abstract: This paper examines the post-2008 European Central Bank's liquidity enhancing policies, namely 'Long Term Refinancing Operations', and the increase of banks' excess reserves that followed. To evaluate this in a quantitative environment, I build a dynamic, general equilibrium model that incorporates financial frictions in both the supply and demand for credit and allows banks to receive liquidity and hold reserves. Results suggest the existence of a risk-shifting channel of monetary policy in the recent ECB operations. Specifically, I show that when the central bank supplies liquidity during turbulent times, banks grant loans to riskier _rms. This increases the firms' default on new credit and worsens the performance of the economy although the banks' health is improved. Additionally, I find that an increase in the riskiness of the non-financial corporations can explain the recent reserve accumulation by the banking system. Lastly, I evaluate the effects of negative interest rates on credit and assess the welfare implications of the recent policies.
    JEL: E44 E58
    Date: 2018–01
  21. By: Fernandez-Villaverde, Jesus (University of Pennsylvania); Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: Can a monetary system in which privately issued cryptocurrencies circulate as media of exchange work? Is such a system stable? How should governments react to digital currencies? Can these currencies and government-issued money coexist? Are cryptocurrencies consistent with an efficient allocation? These are some of the important questions that the sudden rise of cryptocurrencies has brought to contemporary policy discussions. To answer these questions, we construct a model of competition among privately issued .at currencies. We .nd that a purely private arrangement fails to implement an efficient allocation, even though it candeliver price stability under certain technological conditions. Currency comptition creates problems for monetary policy implementation under conventional methods. However, it is possible to design a policy rule that uniquely implements an efficient allocation by driving private currencies out of the market. We also show that unique implementation of an efficient allocation can be achieved without government intervention if productive capital is introduced.
    Keywords: Currency competition; cryptocurrencies; monetary policy
    JEL: E40 E42 E52
    Date: 2018–02–02
  22. By: Temesvary, Judit; Ongena, Steven; Owen, Ann L.
    Abstract: We examine how U.S. monetary policy affects the international activities of U.S. Banks. We access a rarely studied U.S. bank-level regulatory dataset to assess at a quarterly frequency how changes in the U.S. Federal funds rate (before the crisis) and quantitative easing (after the onset of the crisis) affects changes in cross-border claims by U.S. banks across countries, maturities and sectors, and also affects changes in claims by their foreign affiliates. We find robust evidence consistent with the existence of a potent global bank lending channel. In response to changes in U.S. monetary conditions, U.S. banks strongly adjust their cross-border claims in both the pre and post-crisis period. However, we also find that U.S. bank affiliate claims respond mainly to host country monetary conditions.
    Keywords: Bank lending channel; Cross-country analysis; Global banking; Monetary transmission
    JEL: E44 E52 F42 G15 G21
    Date: 2018–02–02
  23. By: Camilo E Tovar Mora; Tania Mohd Nor
    Abstract: What is the extent of currency diversification in the international monetary system? How has it evolved over time? In this paper, we quantify the degree of currency diversification using regression methods of currency co-movements to determine the extent to which national currencies across the world belong to a reserve currency bloc. We then use these estimates to calculate the economic size of each currency bloc. A key contribution of our paper is that we quantify the size of the Chinese renminbi bloc. Our analysis suggests that the international monetary system has transitioned from a bi-polar system - consisting of the U.S. dollar and the euro - to a tri-polar one that includes the renminbi. The dollar bloc is estimated to continue to dominate, having the largest share in global GDP (40 percent), followed by the renminbi (30 percent) and the euro blocs (20 percent). The geographical area of influence for the RMB bloc appears to be most evident among the BRICS’ currencies. The British pound and the Japanese yen blocs appear to play minor roles.
    Keywords: Economic integration;Foreign exchange;International monetary system;Currency Bloc, Internatinal Monetary System, International Monetary Arrangements and Institutions, Financial Aspects of Economic Integration, Open Economy Macroeconomics
    Date: 2018–01–24
  24. By: Acharya, Sushant (Federal Reserve Bank of New York); Dogra, Keshav (Federal Reserve Bank of New York)
    Abstract: Does market incompleteness radically transform the properties of monetary economies? Using an analytically tractable heterogeneous agent New Keynesian (HANK) model, we show that whether incomplete markets resolve “policy paradoxes” in the representative agent New Keynesian model (RANK) depends primarily on the cyclicality of income risk, rather than incomplete markets per se. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only if risk is procyclical. Acyclical or countercyclical risk amplifies these puzzles relative to RANK. Cyclicality of risk also affects determinacy: procyclical risk permits determinacy even under an interest rate peg, while countercyclical income risk generates indeterminacy even if the Taylor principle holds. Finally, we uncover a new dimension of monetary-fiscal interaction. Since fiscal policy affects the cyclicality of income risk, it influences the effects of monetary policy even when “passive.”
    Keywords: New Keynesian; incomplete markets; monetary and fiscal policy; determinacy; forward guidance; fiscal multipliers
    JEL: E21 E30 E52 E62 E63
    Date: 2018–02–01
  25. By: Campbell, Jeffrey R. (Federal Reserve Bank of Chicago); Weber, Jacob P. (Federal Reserve Bank of Chicago)
    Abstract: We examine the standard New Keynesian economy’s Ramsey problem written in terms of instrument settings instead of allocations. Its standard formulation makes two instruments available: the path of current and future interest rates, and an “open mouth operation” which selects one of the many equilibria consistent with the chosen interest rates. Removing the open mouth operation by imposing a finite commitment horizon yields pathological policy advice that relies on the model's forward guidance puzzle.
    Keywords: Keynesian economics; equilibrium multiplicity; monetary policy; open market operations
    JEL: E12 E52 E58
    Date: 2018–02–05
  26. By: Kohei Hasui (Matsuyama University); Yoshiyuki Nakazono (Yokohama City University); Yuki Teranishi (Keio University)
    Abstract: This paper investigates how expectation formation affects monetary policy ef- fectiveness in a liquidity trap. We examine two expectation formations: (i) different degrees in anchoring expectation and (ii) different degrees in forward-lookingness to form expectation. We reveal several points as follows. First, under optimal commitment policy, expectation formation for an inflation rate does not markedly change the effects of monetary policy. Second, contrary to optimal commitment policy, the effects of monetary policy significantly change according to different inflation expectation formations under the Taylor rule. The reductions to an infla- tion rate and the output gap are mitigated if the expectation is well anchored. This rule, however, can not avoid large drops when the degree of forward-lookingness to form expectation decreases. Third, a simple rule with price-level targeting shows some similar outcomes according to different expectation formations as the Taylor rule does. However, in a simple rule with price-level targeting, an inflation rate and the output gap drop less severe due to a history dependent easing and are less sensitive to expectation formations than in the Taylor rule. Even for the Japanese economy, the effects of monetary policy on economic dynamics significantly change according to expectation formations for rules except optimal commitment policy. Furthermore, when the same expectation formations for the output gap are as- sumed, we observe similar outcomes.
    Keywords: Expectation; Liquidity Trap; Monetary Policy
    JEL: E31 E52 E58 E61
    Date: 2018–02
  27. By: Corsetti, G.; Duarte, J. B.; Mann, S.
    Abstract: We reconsider the effects of common monetary policy shocks across countries in the euro area, using a data-rich factor model and identifying shocks with high-frequency surprises around policy announcements. We show that the degree of heterogeneity in the response to shocks, while being low in financial variables and output, is significant in consumption, consumer prices and macro variables related to the labour and housing markets. Mirroring country-specific institutional and market differences, we find that home ownership rates are significantly correlated with the strength of the housing channel in monetary policy transmission. We document a high dispersion in the response to shocks of house prices and rents and show that, similar to responses in the US, these variables tend to move in different directions.
    Keywords: Monetary Policy, High-Frequency Identification, Monetary Union, Labour Market, Housing Market.
    JEL: E21 E31 E44 E52 F44
    Date: 2018–02–22
  28. By: Domenico Lombardi, Pierre Siklos, Samantha St. Amand (Wilfrid Laurier University)
    Abstract: This paper sheds new light on spillovers from US monetary policies before, during and after the 2008-09 global financial crisis by examining the behavior of select financial asset returns and incorporating indicators of the content of US Federal Open Market Committee announcements. The impact of US monetary policies is examined for systematically-important and small-open advanced economies. US monetary policy surprise easings are found to have decreased yields in advanced economies post-crisis. The impact of the content of US Federal Open Market Committee statements, coded using text analysis software, is also found to be significant but sensitive to the state of the economy.
    Keywords: central bank communication, financial asset prices, monetary policy spillovers, unconventional monetary policy
    JEL: G12 G28 E52 E58
    Date: 2018–01–30
  29. By: Steve Brito; Yan Carriere-Swallow; Bertrand Gruss
    Abstract: We estimate the determinants of disagreement about future inflation in a large and diverse sample of countries, focusing on the role of monetary policy frameworks. We offer novel insights that allow us to reconcile mixed findings in the literature on the benefits of inflation targeting regimes and central bank transparency. The reduction in disagreement that follows the adoption of inflation targeting is entirely due to increased central bank transparency. Since the benefits of increased transparency are non-linear, the gains from inflation targeting adoption have accrued mainly to countries that started from a low level of transparency. These have tended to be developing countries.
    Date: 2018–01–25
  30. By: Hiroshi FUJIKI
    Abstract: We show that a central bank could improve the allocation of resources by delivering the defaulting party’s collateral goods to those who consume the most quickly. We base our discussion on Mills and Reed (2012)’s repo contract model, which shows that the consumption of the lender will be the same whether the borrower is a productive agent or an unproductive agent. We extend their model by considering shocks to the second period of lenders’ lives, which force them to consume within an early stage of the second period of their lives. The shock could make the consumption of lenders vary depending on the timing of transactions in the goods market. We show that a central bank could make the consumption of lenders constant regardless of the timing of transactions in the goods market, and could achieve better resource allocation by using various nontraditional monetary policy tools.Length: 31 pages
  31. By: Harashima, Taiji
    Abstract: Real interest and inflation rates have been very low in many industrialized countries since the Great Recession. In this paper, a mechanism of low and floating real interest and inflation rates is examined based on the concept a “Nash equilibrium of a Pareto inefficient path” and the law of motion for trend inflation. I show that, because the link between the marginal product of capital and the real interest rate is severed on this path, the real interest rate loses its anchor and therefore floats. In addition, the inflation rate floats together with the real interest rate. There are, however, upper and lower bounds of the floating rates. It is also likely that the real interest rate floats below the marginal product of capital on this path and the inflation rate floats below the target rate of inflation.
    Keywords: Real interest rate; Inflation; Deflation; Marginal product of capital; Pareto inefficiency; Monetary policy; Fiscal policy; Bank behavior
    JEL: E21 E22 E31 E32 E43 E52 E62 G21
    Date: 2018–04–02
  32. By: Reich, Jens
    Abstract: Central banks like the Bank of England or the Bundesbank have highlighted recently that the supply of currency is achieved not by means of printing and spending but by means of credit. This clarification raises further issues. This article addresses the issue of seigniorage and optimal inflation. So far approaches to seigniorage and optimal inflation are still based on the assumption of a currency which is printed and spend by a central authority. From this perspective central banks’ inflation targets and optimal inflation targets are at odds with those suggested by economic theory. The so-called Friedman-rule, the common core of optimal inflation theory, determines optimal inflation via the (opportunity) cost of producing currency. This basic approach is amended by “external effects”, e.g. the impact of monetary non-neutrality or wage rigidities and so on. However, even under consideration of external effects there remains a significant gap between actual inflation targets and optimal rates as suggested by theory. The supply by means of credit, however, involves “costs of production” which do not appear in Friedman’s case: losses from borrower defaults. Incorporating expected losses into economic theory contributes significantly in aligning central banks’ optima with economic theory and provides a new theory of seigniorage for a credit currency.
    Keywords: Optimal inflation, seigniorage, monetary policy, central banking.
    JEL: E31 E51 E52 E58
    Date: 2017–11–01
  33. By: Frédérique BEC (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper proposes a theoretical model of forecasts formation which implies that in presence of information observation and forecasts communication costs, rational professional forecasters might find it optimal not to revise their forecasts continuously, or at any time. The threshold time- and state-dependence of the observation reviews and forecasts revisions implied by this model are then tested using inflation forecast updates of professional forecasters from recent Consensus Economics panel data for France and Germany. Our empirical results support the presence of both kinds of dependence, as well as their threshold-type shape. They also imply an upper bound of the optimal time between two information observations of about six months and the co-existence of both types of costs, the observation cost being about 1.5 times larger than the communication cost.
    Keywords: Forecast revision, binary choice models, information and communication costs.
    JEL: C23 D8 E31
    Date: 2017
  34. By: Angrick, Stefan; Naoyuki, Yoshino
    Abstract: Monetary policy in most major economies has traditionally focused on control of the interbank interest rate to achieve an inflation target. Monetary policy in transition economies, in contrast, relied on a mixed system of price-based and quantity based instruments and targets. Japanese monetary policy up to the 1990s was based on such a mix, and echoes of this system are today found in China’s monetary policy set-up. We explore the transition of these two monetary policy regimes historically and quantitatively with institutional comparison and Structural Vector Autoregressive (SVAR) models. Specifically, we examine the role of the interbank rate and “window guidance,” a policy by which authorities use “moral suasion” to communicate target quotas for lending growth directly to commercial banks. In Japan’s case, we compile historical statistics on window guidance from newspapers and industry sources. For China, we apply Romer–Romer text analysis and computational linguistic techniques to policy reports to quantify information on window guidance.We empirically demonstrate the declining effectiveness of quantity measures and the increasing importance of price measures. We end with a policy assessment of managing the transition of monetary policy from a quantity-based system to a price-based system.
    JEL: E5 E52 E58
    Date: 2018–02–21

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