nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒03‒12
twenty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Disagreement in consumer inflation expectations By Tomasz Łyziak; Xuguang Sheng
  2. Should the ECB coordinate EMU fiscal policies? By Tatiana Kirsanova; Celsa Machado; Ana Paula Ribeiro
  3. Monetary policy shocks, expectations and information rigidities By Joscha Beckmann; Robert Czudaj
  4. Unmoored expectations and the price puzzle By Anna Florio
  5. Beliefs formation and the puzzle of forward guidance power By Beqiraj Elton; Di Bartolomeo Giovanni; Di Pietro Marco
  6. High-Frequency Impact of Monetary Policy and Macroeconomic Surprises on US MSAs and Aggregate US Housing Returns and Volatility: A GJR-GARCH Approach By Wendy Nyakabawo; Rangan Gupta; Hardik A. Marfatia
  7. The Optimal Inflation Target and the Natural Rate of Interest By Andrade, Philippe; Galí, Jordi; Lebihan, Hervé; Matheron, Julien
  8. The Effect of News Shocks and Monetary Policy By Luca Gambetti; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
  9. Inflation Targeting as a Shock Absorber By Marcel Fratzscher; Christoph Grosse Steffen; Malte Rieth
  10. EMU stability: Direct and indirect risk sharing By Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello
  11. Liquidity Risk, Credit Risk and the Money Multiplier By Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
  12. The Signaling Effect of Raising Inflation By Mengus, Eric; Barthelemy, Jean
  13. Uncertainty-dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation By Efrem Castelnuovo; Giovanni Pellegrino
  14. Central Bank Independence Revisited By Peter Kriesler; G. C. Harcourt; Joseph Halevi
  15. Exchange Rate Pass-Through in Brazil: a Markov switching estimation for the inflation targeting period (2000-2015) By Fabrizio Almeida Marodin; Marcelo Savino Portugal
  16. On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint By Debortoli, Davide; Galí, Jordi; Gambetti, Luca
  17. Monetary policy and the asset risk-taking channel By Angela Abbate; Dominik Thaler
  18. International monetary regimes and the German model By Scharpf, Fritz W.
  19. On the Transactions Costs of UK Quantitative Easing By Francis Breedon;
  20. A model of the federal funds market: yesterday, today, and tomorrow By Afonso, Gara M.; Armenter, Roc; Lester, Benjamin

  1. By: Tomasz Łyziak (Narodowy Bank Polski); Xuguang Sheng (American University)
    Abstract: We posit that consumers form expectations about inflation by combining two sources of information: their beliefs from shopping experience and news about inflation they learn from experts. Disagreement among consumers in our model comes from four sources: (i) consumers’ divergent prior beliefs, (ii) heterogeneity in their propensities to learn from experts, (iii) experts’ different views about future inflation, and (iv) difference in mean expectations between consumers and experts. By carefully matching the datasets from the Michigan Survey of Consumers with the Survey of Professional Forecasters, we find that inflation expectations between households and experts differ substantially and persistently from each other, and households pay close attention to salient price changes, while experts respond more to monetary policy and macro indicators. Our empirical estimates imply economically significant degrees of information rigidity and these estimates vary substantially across households. This significant heterogeneity poses a great challenge for the canonical sticky-information model that assumes a single rate of information acquisition and for noisy-information model in which all agents place the same weight on new information received.
    Keywords: Consumers, Disagreement, Inflation Expectation, Noisy Information, Sticky Information
    JEL: E32 E52
    Date: 2018
  2. By: Tatiana Kirsanova; Celsa Machado; Ana Paula Ribeiro
    Abstract: In a monetary union where fiscal authorities act strategical ly fiscal cooperation is unlikely to emerge as an equilibrium. Even when the cooperative outco me is the best for a national fiscal authority, it is either not a Nash equilibrium, or only one of several Nash equilibria. The monetary authority may have an important coordinating role ; however, the Pareto-preferred equilibrium will not necessarily involve cooperation.
    Keywords: Monetary and Fiscal Policy Coordination, Monetary Union
    JEL: E52 E61 E63
    Date: 2017–11
  3. By: Joscha Beckmann (University of Duisburg-Essen, Department of Economics); Robert Czudaj
    Abstract: This paper contributes to the literature by assessing expectation effects from monetary policy for the G7 economies. We consider a sample period running from 1995M1 to 2016M6 based on a panel VAR framework, which accounts for international spillovers and time-variation. Relying on a broad set of expectation data from Consensus Economics, we start by analyzing whether monetary policy has changed the degree of information rigidity after the emergence of the subprime crisis. We proceed by estimating potential effects of interest rate changes on expectations, disagreements and forecast errors. We find strong evidence for information rigidities and identify higher forecast errors by professionals after monetary policy shocks. Our results suggest that the international transmission of monetary policy shocks introduces noisy information and partly increases disagreement among forecasters.
    Keywords: Bayesian econometrics, expectations, information rigidity, monetary policy, panel VAR
    JEL: E31 E52
    Date: 2018–02
  4. By: Anna Florio (Department of Management, Economics and Industrial Engineering, Politecnico di Milano)
    Abstract: We explore the possibility that the price puzzle - the positive response of prices to a negative monetary policy shock- arises in the presence of unmoored expectations. Looking at the pre-Great Recession period, employing a VAR analysis, we compare the behavior of prices after a monetary policy shock in countries with clearly defined nominal anchors (Canada, New Zealand, Sweden, United Kingdom, Switzerland and EMU) to their behavior in countries that, at that time, did not possess any such anchor (Japan and United States). While in this last group we find evidence of a price puzzle, in the first, starting from the period when this anchor was set, we do not find such a perverse dynamic. We argue that those countries characterised by clearly defined nominal anchors, having anchored inflation expectations, have managed to rule out the persistent increase in the price level.
    Keywords: VAR, Price Puzzle, Monetary Policy Shocks.
    Date: 2018–03
  5. By: Beqiraj Elton; Di Bartolomeo Giovanni; Di Pietro Marco
    Abstract: We study the extent to which the belief-formation process affects the dynamics of macroeconomic variables when the central bank uses forward guidance. Standard sticky-price models imply that far future forward guidance has huge and implausible effects on current outcomes, these effects grow in its horizon (forward guidance power puzzle). By a parsimonious macro-model that allows for the role of bounded rationality and heterogeneous agents, we obtain tempered responses for real and nominal variables.
    Date: 2017–11
  6. By: Wendy Nyakabawo (Department of Economics, University of Pretoria, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, Chicago, USA)
    Abstract: This paper explores the impact of monetary policy and macroeconomic surprises on the U.S housing market returns and volatility at the Metropolitan Statistical Area (MSA) and aggregate level using a Glosten–Jagannathan-Runkle generalized autoregressive conditional heteroscedasticity (GJR-GARCH) model. Using daily data and sampling periods which cover both the conventional and unconventional monetary policy periods, empirical results show that monetary policy surprises have a greater impact on the volatility of housing market returns across time with particularly pronounced effect during the conventional monetary policy period. We also show that macroeconomic surprises do not have a significant impact on housing returns for most MSAs for the full sample, conventional and unconventional monetary policy periods
    Keywords: Monetary policy and macroeconomic surprises, Asymmetric GARCH, Housing market returns and volatility
    JEL: C32 E32 E44 E52 R31
    Date: 2018–03
  7. By: Andrade, Philippe; Galí, Jordi; Lebihan, Hervé; Matheron, Julien
    Abstract: We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-for-one: increases in the optimal inflation rate are generally lower than declines in the steady-state real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.
    Keywords: effective lower bound; inflation target
    JEL: E31 E52 E58
    Date: 2018–02
  8. By: Luca Gambetti; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
    Abstract: A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline significantly, and durable spending rises significantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over inflation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, Business cycles, VAR models, DSGE models
    JEL: E20 E32 E43 E52
    Date: 2017–09
  9. By: Marcel Fratzscher; Christoph Grosse Steffen; Malte Rieth
    Abstract: We study the characteristics of inflation targeting as a shock absorber, using quarterly data for a large panel of countries. To overcome an endogeneity problem between monetary regimes and the likelihood of crises, we propose to study large natural disasters. We find that inflation targeting improves macroeconomic performance following such exogenous shocks. It lowers inflation, raises output growth, and reduces inflation and growth variability compared to alternative monetary regimes. This performance is mostly due to a different response of monetary policy and fiscal policy under inflation targeting. Finally, we show that only hard but not soft targeting reaps the fruits: deeds, not words, matter for successful monetary stabilization.
    Keywords: Monetary Policy, Central Banks, Monetary Regimes, Dynamic Effects
    JEL: E42 E52 E58
    Date: 2018
  10. By: Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello
    Abstract: Our paper aims to analyze the effectiveness of different risk-sharing mechanisms in providing stability to a monetary union. We select two stylized tools with extreme and opposite features. The first is an expansionary but conventional monetary policy that is used to help EMU’s most fragile member states manage their public debts; the second is a centralized fiscal policy that allows for the transfer of a portion of these public debts from EMU’s most fragile member states to those considered EMU’s “core”. By a stylized periphery-core model of a monetary union, we compare the strengths and weaknesses of these two tools in order to reach some welfare implications in terms of union stability.
    Date: 2017–11
  11. By: Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan
    Abstract: Before the financial crisis there was a significant, negative relationship between the money multiplier and the risk free rate; post-crisis it was significant and positive. We develop a model where banksíreserves mitigate not only liquidity risk, but also default/credit risk. When default risk dominates, the model predicts a positive relationship between the risk free rate and the money multiplier. When liquidity risk dominates, that relationship is negative. We suggest reduced liquidity risk, from QE and remunerated reserves, helps explain the multiplier data. The model's implications linking the stock market and the money multiplier are also deduced and verified.
    Keywords: quidity risk; credit risk; excess reserves; US money multiplier, remuneration of reserves
    JEL: E40 E44 E50 E51
    Date: 2017–07
  12. By: Mengus, Eric; Barthelemy, Jean
    Abstract: This paper argues that central bankers should temporarily raise inflation when anticipating liquidity traps to signal their credibility to forward guidance policies. As stable inflation in normal times either stems from central banker's credibility, e.g. through reputation, or from his aversion to inflation, the private sector is unable to infer the central banker's type from observing stable inflation, jeopardizing the efficiency of forward guidance policy. We show that this signaling motive can justify temporary deviations of inflation from target well above 2% but also that the low inflation volatility during the Great Moderation was insufficient to ensure fully efficient forward guidance when needed.
    Keywords: Forward Guidance; Inflation; Signaling
    JEL: E31 E52 E65
    Date: 2016–07–01
  13. By: Efrem Castelnuovo; Giovanni Pellegrino
    Abstract: We estimate a nonlinear VAR model to study the real effects of monetary policy shocks in regimes characterized by high vs. low macroeconomic uncertainty. We find unexpected monetary policy moves to exert a substantially milder impact in presence of high uncertainty. We then exploit the set of impulse responses coming from the nonlinear VAR framework to estimate a medium-scale new-Keynesian DSGE model with a minimum-distance approach. The DSGE model is shown to be able to replicate the VAR evidence in both regimes thanks to different estimates of some crucial structural parameters. In particular, we identify a steeper new-Keynesian Phillips curve as the key factor behind the DSGE model’s ability to replicate the milder macroeconomic responses to a monetary policy shock estimated with our VAR in presence of high uncertainty. A version of the model featuring firm-specific capital is shown to be associated to estimates of the price frequency which are in line with some recent evidence based on micro data.
    Keywords: monetary policy shocks, uncertainty, Threshold VAR, medium scale DSGE framework, minimum-distance estimation
    JEL: C22 E32 E52
    Date: 2017
  14. By: Peter Kriesler (School of Economics, UNSW Business School, UNSW); G. C. Harcourt (School of Economics, UNSW Business School, UNSW); Joseph Halevi (University of sydney)
    Abstract: In major advanced economies, including Australia, independent central banks have become established institutions. Yet there are reasons why the sustained presence of such an institution in a democratic society should be challenged. This paper considers the arguments usually advanced for central bank independence, and the underlying arguments for a failure of democracy including the standard argument based on the importance of central bank credibility. This argument depends crucially on the role of inflationary expectations on the actual inflation rate. We question whether the standard story is really relevant – and, if not, then independence depends on the argument that politicians may not always act in the best long-term interests of their constituencies but bankers are more likely to. We show that this is a questionable assumption. The post Wold War 2 development of Europe and the emergence of the European Central Bank is examined to illustrate our underlying proposition that Central bank independence is not the result of economic argument, but of political ones leading to suboptimal economic results.
    Keywords: Central bank independence, democracy, European Central Bank, inflation, inflationary expectations
    JEL: E58 E50 G20
    Date: 2018–01
  15. By: Fabrizio Almeida Marodin; Marcelo Savino Portugal
    Abstract: This paper investigates the nonlinearity of exchange rate pass-through in the Brazilian economy during the floating exchange rate period (2000-2015) using a Markov-switching semi-structural new Keynesian model. We apply the methods proposed by Baele et al. (2015) and a basic new Keynesian model, with the addition of new elements to the AS curve and a new equation for the exchange rate dynamics. We find evidence of two distinct regimes for the exchange rate pass-through and for the volatility of shocks to inflation. Under the so-called “normal” regime, the long-run pass-through to consumer prices inflation is estimated at near zero value, only 0.00057 percentage point given a 1% exchange rate shock. Comparatively, the expected pass-through under a “crisis” regime is of 0.1035 percentage point to inflation, for the same exchange rate shock. The Markov-switching (MS) model outperforms the fixed parameters model according to several comparison criteria. The results allowed us to identify the occurrence of three distinct cycles for the exchange rate pass-through during the inflation targeting period in Brazil
    Date: 2018–02
  16. By: Debortoli, Davide; Galí, Jordi; Gambetti, Luca
    Abstract: We estimate a time-varying structural VAR that describes the dynamic responses of a number of U.S. macro variables to different identified shocks. We find no significant changes in the estimated responses over the period when the federal funds rate attained the zero lower bound (ZLB). This result is consistent with the hypothesis of "perfect substitutability" between conventional and unconventional monetary policies. Montecarlo simulations based on artificial time series generated from a standard New Keynesian model point to the validity of our empirical approach to detect the changes in equilibrium dynamics associated with ZLB episodes.
    Keywords: liquidity trap; regime changes; time-varying structural vector-autoregressive models; unconventional monetary policies
    JEL: E44 E52
    Date: 2018–02
  17. By: Angela Abbate (Swiss National Bank); Dominik Thaler (Banco de España)
    Abstract: How important is the risk-taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking.
    Keywords: bank risk, monetary policy, DSGE models
    JEL: E12 E44 E58
    Date: 2018–02
  18. By: Scharpf, Fritz W.
    Abstract: The end of the Bretton Woods regime and the fall of the Iron Curtain deepened the export orientation of the German model of the economy. Only after entry into the Monetary Union, however, did rising exports turn into a persistent export-import gap that became a problem for other eurozone economies. This Discussion Paper shows why the present asymmetric euro regime will not be able to enforce their structural transformation on the German model. Neither will German governments be able to respond to demands that would bring the performance of the German economy closer to eurozone averages. Instead, it is more likely that present initiatives for financial and fiscal risk sharing will transform the Monetary Union into a transfer union.
    Keywords: German model,export surpluses,currency regimes,Monetary Union,structural divergence,risk sharing,deutsches Modell,Exportüberschüsse,Währungsregime,Währungsunion,strukturelle Divergenz,Risikoteilung
    Date: 2018
  19. By: Francis Breedon (Queen Mary University of London);
    Abstract: Most quantitative easing programmes primarily involve central banks acquiring government liabilities in return for central bank reserves. In all cases this process is undertaken by purchasing these liabilities from private sector intermediaries rather than directly from the government. This paper estimates the cost of this round-trip transaction – government issuance of liabilities and central bank purchases of those liabilities in the secondary market – for the UK. I estimate that this cost amounts to about 0.5% of the total value of QE (over £1.8 billion in my sample). I also find some evidence that this figure is inflated by the unusual design of UK QE operations.
    Keywords: Quantitative Easing, Auctions, Government Bonds
    JEL: G12 E58
    Date: 2018–01–11
  20. 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: 2018–02–01

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