nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒03‒19
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. A comprehensive classification of monetary policy frameworks for advanced and emerging economies By Cobham, David
  2. The Competition Between Cash and Mobile Payments in Markets with Mobile Partnerships A Monetary Search Model Point of View By Françoise Vasselin
  3. Deflation expectations By Ryan Niladri Banerjee; Aaron Mehrotra
  4. One Money, Many Markets By Giancarlo Corsetti; Joao B. Duarte; Samuel Mann
  5. Exchange Rate Misalignment, Capital Flows, and Optimal Monetary Policy Trade-off By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  6. The perils of approximating fixed-horizon inflation forecasts with fixed-event forecasts By James Yetman
  7. The macroeconomic effects of asset purchases revisited By Hesse, Henning; Hofmann, Boris; Weber, James
  8. Income Inequality, Financial Crises and Monetary Policy By Isabel Cairo; Jae Sim
  9. Money and trust: lessons from the 1620s for money in the digital age By Isabel Schnabel; Hyun Song Shin
  10. Monetary policy spillovers in the first age of financial globalisation: a narrative VAR approach 1884–1913 By Green, Georgina
  11. Central Bank Reserve Management and International Financial Stability—Some Post-Crisis Reflections By Bradley Jones
  12. Financial Stability and Fractional Reserve Banking By Shengxing Zhang; Cyril Monet; Stephan Imhof
  13. Effects of official and unofficial central bank communication on the Brazilian interest rate curve By Azevedo, Luis Fernando Pereira; Pereira, Pedro L. Valls
  14. An introduction of a simple monetary policy with savings taxation in the overlapping generations model By Taro Ikeda
  15. Monetary Policy and Models of Currency Demand By Mariam El Hamiani Khatat
  16. Estimating the Effective Lower Bound for the Czech National Bank's Policy Rate By Kolcunova, Dominika; Havranek, Tomas
  17. Steuart, Smith, and the ‘system of commerce’: international trade and monetary theory in late-18th century british political economy By Maurício C. Coutinho; Carlos Eduardo Suprinyak
  18. Financial markets effects of ECB unconventional monetary policy announcements By Guido Bulligan; Davide Delle Monache
  19. Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy? By Jin Cao; Valeriya Dinger
  20. Oil price pass-through into core inflation By Cristina Conflitti; Matteo Luciani
  21. Is Chinese monetary policy forward-looking? By Zhang, Chengsi; Dang, Chao
  22. The negative interest rate policy and the yield curve By Dora Xia; Jing Cynthia Wu
  23. The Optimal Inflation Target and the Natural Rate of Interest By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  24. Price level targeting with evolving credibility By Honkapohja, Seppo; Kaushik, Mitra
  25. Money Aggregates and Determinacy : A Reinterpretation of Monetary Policy During the Great Inflation By Qureshi, Irfan
  26. Beliefs formation and the puzzle of forward guidance power By Di Bartolomeo, Giovanni; Beqiraj, Elton; Di Pietro, Marco
  27. The Federal Reserve’s implicit inflation target and Macroeconomic dynamics. A SVAR analysis. By Haroon Mumtaz; Konstantinos Theodoridis
  28. High trend inflation and passive monetary detours By Ascari, Guido; Florio, Anna; Gobbi, Alessandro
  29. Monetary Policy, Oil Stabilization Fund and the Dutch Disease By Jean-Pierre Allegret; Mohamed Tahar Benkhodjay; Tovonony Razafindrabe
  30. Positive and Normative Implications of Liability Dollarization for Sudden Stops Models of Macroprudential Policy By Enrique G. Mendoza; Eugenio I. Rojas

  1. By: Cobham, David
    Abstract: The paper presents a new classification of monetary policy frameworks which it applies to ‘advanced’ and 'emerging' economies for the period since the end of the Bretton Woods international monetary system. The classification is multi-dimensional, in particular while the main focus is on the monetary authorities' objectives and account is taken of both pre-announced targets and actual performance, it also emphasises the development of the underlying monetary and financial infrastructure which conditions the instruments available to the monetary authorities and therefore the coherence of different policy frameworks. It is based in large part on information obtained from a close reading of the monetary policy elements of IMF Article IV consultations. The two major changes which can be seen in the data are the swing over time in these countries towards a heavier focus on inflation, and the trend towards more systematic and coherent monetary arrangements which are typically associated with lower inflation and better, or at least not lower, economic growth. The classification, which will eventually be extended to cover developing countries as well, should enable researchers in the future to address a number of questions about comparative economic performance in a more nuanced way than has so far been possible.
    Keywords: monetary policy framework, monetary targeting, exchange rate targeting, inflation targeting
    JEL: E42 E52 F33
    Date: 2018–02–20
  2. By: Françoise Vasselin (MATISSE - Modélisation Appliquée, Trajectoires Institutionnelles et Stratégies Socio-Économiques - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: A payment platform provides mobile money (M-money) to buyers who can also use cash to transact. An exogenous fraction of " traditional sellers " only accepts cash and creates no partnership with buyers while the remainder fraction consists of " mobile sellers " who accept M-money only and create partnerships with buyers to reduce search frictions. So, buyers without a partner must use cash and buyers with a partner must use M-money to trade. Buyers without a partner may hold cash, M-money, both monies or none while buyers with a partner always choose to hold M-money only or both monies. Hence, we obtain different equilibria where M-money always circulates, alone or in addition to cash. So, the partnership is a valuable coordination mechanism that makes M-money circulation permanent. Our model can explain why it may be useful to implement prescribed usages to trigger the adoption of a new payment instrument that aims to replace cash and why retailers implement partnerships through loyalty programs before the launching of their own M-money application. However, cash disappears only if traditional sellers have almost all disappeared.
    Keywords: cash,mobile payments,search theory,partnerships,investment cost,mobile money
    Date: 2018–03–03
  3. By: Ryan Niladri Banerjee; Aaron Mehrotra
    Abstract: We analyse the behaviour of inflation expectations during periods of deflation, using a large cross-country data set of individual professional forecasters' expectations. We find some evidence that expectations become less well anchored during deflations. Deflations are associated with a downward shift in inflation expectations and a somewhat higher backward-lookingness of those expectations. We also find that deflations are correlated with greater forecast disagreement. Delving deeper into such disagreement, we find that deflations are associated with movements in the lefthand tail of the distribution. Econometric evidence indicates that such shifts may have consequences for real activity.
    Keywords: deflation; inflation expectations; forecast disagreement; monetary policy
    JEL: E31 E58
    Date: 2018–02
  4. By: Giancarlo Corsetti (Centre for Macroeconomics (CFM); University of Cambridge); Joao B. Duarte (University of Cambridge; Nova School of Business and Economics); Samuel Mann (Centre for Macroeconomics (CFM); University of Cambridge)
    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 E44
    Date: 2018–02
  5. By: Giancarlo Corsetti (Centre for Economic Policy Research (CEPR); Centre for Macroeconomics (CFM); University of Cambridge); Luca Dedola (Centre for Macroeconomics (CFM); European Central Bank); Sylvain Leduc (Bank of Canada)
    Abstract: What determines the optimal monetary trade-off between internal objectives (inflation and output gap) and external objectives (competitiveness and trade imbalances) when inefficient capital flows cause exchange rate misalignment and distort current account positions? We characterize this trade-off analytically, using the workhorse model of modern monetary theory in open economies under incomplete markets–where inefficient capital flows and exchange rate misalignments can arise independently of nominal distortions. We derive aquadratic approximation of the utility-based global policy loss function under fairly general assumptions on preferences and openness, and solve for the optimal targeting rules under cooperation. We show that, in economies with a low degree of exchange rate pass-through, the optimal response to inefficient capital inflows associated with real appreciation is contractionary, above and beyond the natural rate: the optimal policy curbs excessive demand at the cost of exacerbating currency overvaluation. In contrast, a high degree of pass-through, and/or low trade elasticities, warrants expansionary policies that lean against exchange rate appreciation and competitive losses, at the cost of inefficient inflation.
    Keywords: Currency misalignments, Trade imbalences, Asset markets and risk sharing, Optimal targeting rules, International Policy, Exchange rate pass-through
    JEL: E44 E52 E61 F41 F42
    Date: 2018–03
  6. By: James Yetman
    Abstract: A common practice in studies using inflation forecasts is to approximate fixed-horizon forecasts with fixed-event ones. Here we show that this may be problematic. In a panel of US inflation forecast data that allows us to compare the two, the approximation results in a mean absolute approximation error of around 0.2-0.3 percentage points (around 10% of the level of inflation), and statistically significant differences in both the variances and persistence of the approximate inflation forecasts relative to the actual forecasts. To reduce these problems, we propose an adjustment to the approximation, consistent with a model where longer-horizon forecasts are more heavily "anchored", while shorter-horizon forecasts more closely reflect current inflation levels.
    Keywords: fixed-event forecasts, fixed-horizon forecasts, inflation expectations
    JEL: C43 E31
    Date: 2018–02
  7. By: Hesse, Henning; Hofmann, Boris; Weber, James
    Abstract: This paper revisits the macroeconomic effects of the large-scale asset purchase programmes launched by the Federal Reserve and the Bank of England from 2008. Using a Bayesian VAR, we investigate the macroeconomic impact of shocks to asset purchase announcements and assess changes in their effectiveness based on subsample analysis. The results suggest that the early asset purchase programmes had significant positive macroeconomic effects, while those of the subsequent ones were weaker and in part not significantly different from zero. The reduced effectiveness seems to reflect in part better anticipation of asset purchase programmes over time, since we find significant positive macroeconomic effects when we consider shocks to survey expectations of the Federal Reserve's last asset purchase programme. Finally, in all estimations we find a significant and persistent positive impact of asset purchase shocks on stock prices.
    Keywords: unconventional monetary policy,asset purchases,monetary transmission
    JEL: E50 E51 E52
    Date: 2018
  8. By: Isabel Cairo (Board of Governors of the Federal Reserve System); Jae Sim (Federal Reserve Board)
    Abstract: We construct a general equilibrium model in which income inequality results in insufficient aggregate demand and deflation pressure by allocating a greater share of national income to a group with the least marginal propensity to consume, and if excessive, can lead to an endogenous financial crisis. The effectiveness of monetary policy during financial crises is severely distorted by the zero lower bound (ZLB) constraint. Such an economy generates left-skewed distributions for equilibrium prices and quantities, creating disproportionately large downside risks. Consequently, symmetric monetary policy rules that are designed to minimize the fluctuations in equilibrium quantities and prices around fixed means become inefficient. We evaluate alternative monetary policy rules in their ability to minimize not only the variance but also the skewness of the target variable. We find that a type of forward guidance rule of promising to lower the long-run natural rate of interest persistently in response to crises may bring large welfare gains by correcting the skewness of the distributions and thus increasing the means of aggregate output and inflation. While we assume no direct preferences of central bankers over income inequality, monetary policy rules correcting the skewed distributions also lessen the degree of income inequality substantially as low income households suffer the most from the asymmetric macroeconomic risks.
    Date: 2017
  9. By: Isabel Schnabel; Hyun Song Shin
    Abstract: Money is a social convention where one party accepts it as payment in the expectation that others will do so too. Over the ages, various forms of private money have come and gone, giving way to central bank money. The reasons for the resilience of central bank money are of particular interest given current debates about cryptocurrencies and how far they will supplant central bank money. We draw lessons from the role of public deposit banks in the 1600s, which quelled the hyper-in‡flation in Europe during the Thirty Years War (1618-1648). As the precursors of modern central banks, public deposit banks established trust in monetary exchange by making the value of money common knowledge.
    Keywords: Gresham's Law; debasement; common knowledge; central banks
    JEL: E42 E58 N13
    Date: 2018–02
  10. By: Green, Georgina (Bank of England)
    Abstract: This paper investigates whether movements in the Bank of England’s interest rate hindered the development of the United States by transmitting or amplifying crises during the first age of financial globalisation. Evidence that US monetary and financial developments entered into the Bank’s reaction function implies that a Bank Rate series must include some endogenous rate changes. In order to clean Bank Rate of such movements the narrative approach is applied to a previously unexploited source in the Bank’s archives, ‘The Record of Outstanding Events’. The Bank also followed a known rule of adjusting Bank Rate to preserve its reserves to liabilities ratio. Bank Rate is also cleaned of the contemporaneous impact of this ratio in order to control for any reflex policy movements that could have been anticipated. This ensures that only true monetary policy shocks to the United States are identified. Estimates derived from this new measure indicate that although the Bank was able, via abrupt rate rises, to attract gold to the United Kingdom and replenish its reserves ratio, it was not responsible for causing or aggravating US crises. This result runs counter to conventional wisdom in the literature and contradicts the hypothesis that many US financial crises extended directly back to Threadneedle Street.
    Keywords: Bank of England; monetary policy; business cycles; financial crises; international economic history; central banking
    JEL: E52 E58 F44 G01 G20 N10 N12
    Date: 2018–03–09
  11. By: Bradley Jones
    Abstract: Motivated by the tension first revealed during the global financial crisis between the domestic and international financial stability obligations of central bank reserve managers, this paper offers some reflections along four main lines. First, the paper highlights how official reserve management has evolved to mirror important aspects of private institutional investor behavior over time, and addresses the policy relevance of this convergence. Second, evidence is documented of procyclical portfolio behavior by reserve managers during the crisis, which added to the stabilization burden shouldered by central banks in reserve currency-issuing countries. Third, in appraising the evolution of related vulnerabilities since the crisis, the paper finds grounds for both cautious optimism and lingering concern, the balance of which points to an uncertain future resolution. Fourth, some potential remedies are presented to help dampen the procyclical impulses of reserve managers in future periods of international financial turbulence.
    Date: 2018–02–16
  12. By: Shengxing Zhang (London School of Economics); Cyril Monet; Stephan Imhof (Swiss National Bank)
    Abstract: We analyze the optimal risk-return trade-off when banks can issue inside money. Optimally the quantity of inside money is restricted by some reserve requirements. Increasing the reserve requirements or decreasing the rate of return on central bank money makes loans to the private sector more expensive. This induces borrowers to take more risk. However, leverage also decline, which induces borrowers to take safer decision. The optimal combination of reserve requirement and inflation trades-off both effects. The Friedman rule or zero reserve requirement is not necessarily optimal, as it would induce too much leverage. In spite of being the safest system, fully backed inside money is not optimal as it reduces leverage too much.
    Date: 2017
  13. By: Azevedo, Luis Fernando Pereira; Pereira, Pedro L. Valls
    Abstract: In order to provide greater transparency in their opinions and decisions, central banks around the world use both their official channels and the specialized media to communicate with the general public. Using an unique news dataset with intraday frequency, this paper finds evidence that the volatility of the long end of the interest curve in Brazil is higher in days of official publications on the website of the Central Bank of Brazil and that the short end is affected on days on which the president or any director of the institution is quoted in the specialized media. The effects are greater from 2014.
    Date: 2018–03
  14. By: Taro Ikeda (Graduate School of Economics, Kobe University)
    Abstract: In this paper, we introduce a simple monetary policy with savings taxation into Samuelson’s (1958) overlapping generations model. In our model, we confirm that the real market interest rate increases in response to an increase in the rate of the savings taxation as a policy lending rate.
    Keywords: overlapping generations model; monetary policy; savings taxation
    JEL: E10 E20 E52
    Date: 2018–03
  15. By: Mariam El Hamiani Khatat
    Abstract: Two types of currency in circulation models are identified: (1) a first generation derived from the theory of money demand and (2) a second generation aimed at producing daily forecasts of currency in circulation. In this paper, we transform the currency demand function into a VAR to capture the dynamic link between interest rates and the demand for cash. We also apply ARIMA modeling to forecast the daily currency in circulation for Brazil, Kazakhstan, Morocco, New Zealand, and Sudan. Our empirical work shows that some of the conclusions in the economic literature on the impact of interest rates on the demand for currency do not necessarily hold, and that central banks would benefit from running both generations of currency in circulation models. The fundamental longer-run determinants of the demand for cash are distinct from its short-run determinants.
    Date: 2018–02–16
  16. By: Kolcunova, Dominika; Havranek, Tomas
    Abstract: The paper focuses on the estimation of the effective lower bound for the Czech National Bank's policy rate. The effective lower bound is determined by the value below which holding and using cash would be more convenient than deposits with negative yields. This bound is approximated based on storage, the insurance and transportation costs of cash and the costs associated with the loss of the convenience of cashless payments and complemented with the estimate based on interest charges, which present direct costs to the profitability of the bank. Overall, the estimated value is below -1% and is approximately in the interval -1.6%, -1.1%. In addition, by means of a vector autoregression, we show that the potential of negative rates would not be sufficient to deliver monetary policy easing with effects similar to those of the exchange rate commitment.
    Keywords: effective lower bound; zero lower bound; negative interest rates; costs of holding cash; transmission of monetary policy
    JEL: E43 E44 E52 E58
    Date: 2018–02–20
  17. By: Maurício C. Coutinho (Universidade de Campinas); Carlos Eduardo Suprinyak (Cedeplar/UFMG)
    Abstract: Though contemporaries, Adam Smith and Sir James Steuart are commonly portrayed as men belonging to different eras. Whereas Smith went down in history both as founder of Classical Political Economy and patron of economic liberalism, Steuart became known as the last, outdated advocate of mercantilist policies in Britain. Smith himself was responsible for popularizing the notion of the ‘system of commerce’ as an approach to political economy that dominated British thought during the early modern period. As it evolved into a historiographical concept, the mercantile system came to be seen as an international trade theory grounded upon the fallacious doctrine of the favorable balance of trade. In the Wealth of Nations, however, Smith puts limited emphasis on international trade as a theoretical concern. His analysis of the subject, moreover, was marred by lack of analytical clarity, which caused him to be chastised by some among his followers who adhered more enthusiastically to the free trade cause. Given Smith’s doubtful credentials as a free trade theorist, in this paper we try to analyze the reasons that led him and Steuart to be historically placed on opposite sides of the mercantilist divide. To do so, we analyze the works of both authors in depth, showing that their disagreements in matters of economic policy have chiefly to do with different views about the role of money in the economy. Additionally, we explore how early-19th century writers helped forge the intellectual profiles of both Steuart and Smith.
    Keywords: Free trade, money, mercantilism, Adam Smith, James Steuart
    JEL: B11 B12 E40 F10
    Date: 2018–02
  18. By: Guido Bulligan (Banca d’Italia); Davide Delle Monache (Banca d’Italia)
    Abstract: This paper provides empirical evidence about the announcement effects of the ECB unconventional monetary policies carried out during the period September 2014 - July 2017. The variables considered are selected looking at the various transmission channels through which unconventional measures operate. We find that monetary policy news had significant effects on the exchange rate and sovereign long term yields, especially in those countries that were most severely hit by the crisis. Unlike previous studies, we look at the impact of announcements over different sub-periods in order to identify time-varying effects possibly due to different market conditions, policy instruments and communication strategies. We find that the strongest effects on the exchange rates and on sovereign bonds occurred in the initial phase of the Asset Purchase Programme; over the more recent period a statistically significant rise of inflation expectations was instead detected.
    Keywords: monetary policy announcements, event study, financial markets, unconventional monetary policy
    JEL: E44 E52 E58 E65 G14
    Date: 2018–02
  19. By: Jin Cao (Norges Bank (Central Bank of Norway)); Valeriya Dinger (Universität Osnabrück)
    Abstract: We empirically analyze how bank lending reacts to monetary policy in the presence of global financial flows. Employing a unique and novel dataset of the funding modes and currency composition of the full population of Norwegian banks in structurally identified regressions, we show that the efficiency of the bank lending channel is affected when banks can shift to international funding and thus insulate their costs of funding from domestic monetary policy. We isolate the effect of global factors from domestic monetary policy by focusing on the deviation of exchange rates from the prediction of (uncovered and covered) interest rate parity. The Norwegian banking sector represents an ideal laboratory since the exogenous exchange rate dynamics allows for a convincing identification of the relation between lending and global factors.
    Keywords: monetary policy, foreign funding channel, bank lending channel, exchange rate dynamics
    JEL: E52 F36 G21
    Date: 2018–02–23
  20. By: Cristina Conflitti (Bank of Italy); Matteo Luciani (Federal Reserve Board)
    Abstract: This work estimates the effect that fluctuations in oil prices have on changes in consumer prices in both the United States and the euro area. For many of the basic items in the basket of goods used to estimate inflation, the effects of oil price trends are divided into two components: the first is linked to the specific characteristics of individual products (such as, for example, the importance of energy in the production process), while the second is related to macroeconomic factors which are in turn connected with changes in oil prices. The results show that changes in oil prices mainly pass through to core inflation (or rather to inflation excluding food and energy products) by means of macroeconomic factors; while the effect is limited, it is statistically different from zero and persists over time.
    Keywords: Core inflation, oil price, dynamic factor model, pass-through, disaggregate consumer prices
    JEL: C32 E31 E32 Q43
    Date: 2017–11
  21. By: Zhang, Chengsi; Dang, Chao
    Abstract: This paper investigates the empirical validity of the claim that China employed a forward-looking monetary policy rule from 2001 to 2016. Survey expectations are used in conjunction with competing money supply and interest rate rules. The paper contributes to the literature by addressing the problems of serial correlation and structural breaks in the underlying policy reaction function. Un-like earlier studies indicating a strong role for expectations in Chinese monetary policy, we find expectations only began to play a significant role after 2008. This finding is robust for expectations series based on surveys of both households and forecasting experts. We also find that the People’s Bank of China promotes economic growth in procyclical fashion, but applies countercyclical policy in managing inflation.
    JEL: E58 E31
    Date: 2018–02–22
  22. By: Dora Xia; Jing Cynthia Wu
    Abstract: We extract the market's expectations about the ECB's negative interest rate policy from the euro area's yield curve and study its impact on the yield curve. To capture the rich dynamics taking place at the short end of the yield curve, we introduce two policy indicators that summarise the immediate and longer-horizon future monetary policy stances. The ECB has cut interest rates four times under zero. We find that the June 2014 and December 2015 cuts were expected one month ahead but that the September 2014 cut was unanticipated. Most interestingly, the March 2016 cut was expected four months ahead of the actual cut.
    Keywords: negative interest rate policy, effective lower bound, term structure of interest rates, shadow rate term structure model, regime-switching model
    JEL: E43 E52 E58
    Date: 2018–02
  23. By: Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
    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
    JEL: E31 E51 E58
    Date: 2018–02
  24. By: Honkapohja, Seppo; Kaushik, Mitra
    Abstract: We examine global dynamics under learning in a nonlinear New Keynesian model when monetary policy uses price-level targeting and compare it to inflation targeting. Domain of attraction of the targeted steady state gives a robustness criterion for policy regimes. Robustness of price-level targeting depends on whether a known target path is incorporated into learning. Credibility is measured by accuracy of this forecasting method relative to simple statistical forecasts. Credibility evolves through reinforcement learning. Initial credibility and initial level of target price are key factors influencing performance. Results match the Swedish experience of price level stabilization in 1920's and 30s.
    JEL: E63 E52 E58
    Date: 2018–02–23
  25. By: Qureshi, Irfan (Department of Economics,University of Warwick)
    Abstract: Should a policy rule include money? Including money exerts policy inertia and increases inflation aversion. In a New-Keynesian model with trend inflation,these features guarantee price determinacy even when the Taylor principle is not satisfied. Novel Greenbook data confirm money aggregates as U.S.Federal Open Market Committee policy objectives, enabling monetary policy to insulate the U.S.economy from self-fulfilling fluctuations despite positive trend inflation. A high response to inflation and lowtrend inflation guarantees determinacy post-1982. Cross-country applications highlight the superiority of the rule with money. Raising the inflation target from 2 percent to 4 percent violates the Taylor principle ; including money resolves this issue
    Keywords: Determinacy, Great Inflation, Inflation Target, Money Aggregates, Time-Varying Policy
    JEL: E41 E42 E51 E52 E58 E61 E65
    Date: 2018
  26. By: Di Bartolomeo, Giovanni; Beqiraj, Elton; 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.
    Keywords: forward guidance power,heterogeneous agents,bounded rationality,monetary policy,announcements
    JEL: E40 E50 E21
    Date: 2017
  27. By: Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Lancaster University Management School and the Bank of England)
    Abstract: This paper identifies shocks to the Federal Reserve’s inflation target as VAR innovations that make the largest contribution to future movements in long-horizon inflation expectations. The effectiveness of this scheme is documented via Monte-Carlo experiments. The estimated impulse responses indicate that a positive shock to the target is associated with a large increase in inflation, GDP growth and long-term interest rates. Target shocks are estimated to be a vital factor behind the increase in inflation during the pre-1980 period and are an important driver of the decline in long-term interest rates over the last two decades.
    Keywords: SVAR, DSGE model, inflation target
    JEL: C5 E1 E5 E6
    Date: 2017–04–17
  28. By: Ascari, Guido; Florio, Anna; Gobbi, Alessandro
    Abstract: According to the long-run Taylor principle (Davig and Leeper, 2007), a central bank can deviate to a passive monetary policy and still obtain equilibrium uniqueness if a sufficiently aggressive monetary policy is expected for the future. Does this principle hold true when both monetary and fiscal policies can switch between active and passive and there is positive trend inflation? We find that passive monetary detours are no longer possible when trend inflation is high, whatever fiscal policy is in place. This has important policy implications in terms of flexibility and monetary-fiscal authorities coordination.
    JEL: E52 E62
    Date: 2018–02–26
  29. By: Jean-Pierre Allegret (Université Côte d'Azur, France; GREDEG CNRS); Mohamed Tahar Benkhodjay (ESSCA, School of Management); Tovonony Razafindrabe (CREM, Université Rennes 1)
    Abstract: This paper contributes to the literature on the Dutch disease effect in a small open oil exporting economy. Specifically, our contribution to the literature is twofold. On the one hand, we formulate a DSGE model in line with the balanced-growth path theory. On the other hand, besides alternative monetary rules, the model introduces an oil stabilization fund, an oil price rule, and a fiscal rule. Our aim is to analyze to what extent the combinations between our alternative monetary rules and fiscal policy are effective to prevent a Dutch disease effect in the aftermath of a positive oil price shock. Our main findings show that the Dutch disease, through the spending effect, occurs only in the case of inflation targeting regime. An expansionary fiscal policy contributes to improve the state of the economy through its impact on the productivity of the manufacturing sector.
    Keywords: Monetary Policy, Oil Stabilization Fund, Dutch disease, Oil Prices, DSGE model
    JEL: E52 F41 Q40
    Date: 2018–03
  30. By: Enrique G. Mendoza; Eugenio I. Rojas
    Abstract: "Liability dollarization,'' namely intermediation of capital inflows in units of tradables into domestic loans in units of aggregate consumption, adds three important effects driven by real-exchange-rate fluctuations that alter standard models of Sudden Stops significantly: Changes on the debt repayment burden, on the price of new debt, and on a risk-taking incentive (i.e. a negative premium on domestic debt). Under perfect foresight, the first effect makes Sudden Stops milder and multiple equilibria harder to obtain. The three effects add an ``intermediation externality'' to the macroprudential externality of standard models, which is present even without credit constraints. Optimal policy under commitment can be decentralized equally by taxing domestic credit or capital inflows, and hence capital controls as a separate instrument are not justified. This optimal policy is time-inconsistent and follows a complex, non-linear schedule. Quantitatively, an optimized pair of constant taxes on domestic debt and capital inflows makes crises slightly less likely and yields a small welfare gain, but other pairs reduce welfare sharply. For high effective debt taxes, capital controls and domestic debt taxes are again equivalent, and for low ones welfare is higher with higher taxes on domestic debt than on capital inflows.
    JEL: E44 F34 F41
    Date: 2018–02

This nep-mon issue is ©2018 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.