nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒03‒26
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Estimating the NAIRU and the Natural Rate of Unemployment for New Zealand By Punnoose Jacob; Martin Wong
  2. Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms By Chu, Angus C.; Cozzi, Guido; Fan, Haichao; Furukawa, Yuichi; Liao, Chih-Hsing
  3. Evaluating the Unconventional Monetary Policy in Stock Markets : A Semi-parametric Approach By Shirota, Toyoichiro
  4. Equilibrium real interest rates, secular stagnation, and the financial cycle: Empirical evidence for euro-area member countries By Belke, Ansgar; Klose, Jens
  5. Self-selection and treatment effects in macroeconomics: Revisiting the effectiveness of foreign exchange intervention By Victor Pontines
  6. Yield curve modelling and a conceptual framework for estimating yield curves: evidence from the European Central Bank’s yield curves By Nymand-Andersen, Per
  7. Price Level Targeting with Evolving Credibility By Honkapohja, Seppo; Mitra, Kaushik
  8. Inflation, Inflation Uncertainty, and Growth: Evidence from Ghana By Njindan Iyke, Bernard; Ho, Sin-Yu
  9. Volatility in equity markets and monetary policy rate uncertainty By Kaminska, Iryna; Roberts-Sklar, Matt
  10. Unconventional Fiscal Policy By Francesco D'Acunto; Daniel Hoang; Michael Weber
  11. Money demand stability, monetary overhang and inflation forecast in the CEE countries By Claudiu Tiberiu Albulescu; Dominique Pépin
  12. Estimating the Effective Lower Bound for the Czech National Bank's Policy Rate By Kolcunova, Dominika; Havranek, Tomas
  13. Exchange Rate Misalignment, Capital Flows, and Optimal Monetary Policy Trade-offs By Corsetti, G.; Dedola, L.; Leduc, S.
  14. Dismiss the Gap? A Real-Time Assessment of the Usefulness of Canadian Output Gaps in Forecasting Inflation By Lise Pichette; Marie-Noëlle Robitaille; Mohanad Salameh; Pierre St-Amant
  15. Funding cost pass-through to mortgage rates By Bevan Cook; Daan Steenkamp
  16. Monetary Policy and Collateral Constraints since the European Debt Crisis By J. Barthélemy; V. Bignon; B. Nguyen
  17. Inflation Expectations and Choices of Households: Evidence from Matched Survey and Administrative Data By Mirko Wiederholt; Nathanael Vellekoop
  18. Over-the-counter interest rate derivatives: The clock is ticking for the UK and the EU By Thomadakis, Apostolos
  19. Pricing in Multiple Currencies in Domestic Markets By Andres Drenik
  20. Out of Sync Subnational Housing Markets and Macroprudential Policies By Michael Funke; Petar Mihaylovski; Adrian Wende
  21. Valuation, Liquidity Price, and Stability of Cryptocurrencies By Carey Caginalp; Gunduz Caginalp
  22. A Monetary Business Cycle Model for India By Shesadri Banerjee; Parantap Basu; Chetan Ghate; Pawan Gopalakrishnan; Sargam Gupta
  23. Interest on Reserves and Arbitrage in Post-Crisis Money Markets By Thomas Keating; Marco Macchiavelli
  24. The Macroeconomic Effects of Quantitative Easing in the Euro Area: Evidence from an Estimated DSGE Model By Stefan Hohberger; Romanos Priftis; Lukas Vogel
  25. How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold By Christoph Basten; Mike Mariathasan
  26. The role of exchange rate undervaluations on the inflation-growth nexus By Florian Morvillier
  27. Does a bank levy increase frictions on the interbank market? By Aneta Hryckiewicz; Piotr Mielus; Karolina Skorulska; Malgorzata Snarska
  28. Reassessing the information content of the Commitments of Traders positioning data for exchange rate changes By Nicholas Mulligan; Daan Steenkamp
  29. Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity By Dolado, Juan J.; Motyovszki, Gergo; Pappa, Evi
  30. Explaining and Forecasting Euro Area Inflation: the Role of Domestic and Global Factors By S. Béreau; V. Faubert; K. Schmidt
  31. Two-country Model and Foreign Exchange Dynamics By Talmain, Gabriel
  32. Unconventional views on inflation control: Forward guidance, the Neo-Fisherian approach, and the fiscal theory of the price level By Spahn, Peter
  33. Role of Foreign Exchange Reserve in Exchange Rate Behaviour The Persisting Asymmetry: A Historical Account By Atulan Guha

  1. By: Punnoose Jacob; Martin Wong (Reserve Bank of New Zealand)
    Abstract: Indicators of labour market slack such as the unemployment rate provide an important input into the Reserve Bank’s assessment of capacity pressures in the economy, and therefore wage and price inflation. A measure of capacity pressure in the labour market is the unemployment gap, the difference between the headline rate of unemployment and some ‘equilibrium’ level of unemployment. Economists typically refer to this underlying level as the natural rate of unemployment or the Non-Accelerating Inflation Rate of Unemployment (NAIRU), and the two terms are sometimes used inter-changeably. In this Analytical Note, we distinguish between these two unobservable measures of equilibrium unemployment. Then, using estimated macroeconomic relationships, we filter the data to obtain measures of the NAIRU and the natural rate for New Zealand. While the natural rate of unemployment and the NAIRU are synonymous in the long run, there is an important distinction between the two concepts over shorter horizons. The natural rate is essentially a steady-state concept – it is the level of unemployment that reflects the structure of the labour market (for example, its demographic make-up, institutional and contractual factors, and technology), and after transitory shocks have fully worked through labour and product markets. The NAIRU concept is similar to the extent that it is affected by similar structural forces in the economy. However it is not a steady-state concept – instead it represents the level of unemployment consistent with stable inflation in the short to medium term. The NAIRU takes into account the influence of structural changes and other shocks in the economy, and how they interact with frictions in labour and product markets. In the long run, the NAIRU converges to the natural rate of unemployment once the effects of the shocks hitting the economy have faded. Much of this Analytical Note focuses on the NAIRU, which is the more relevant concept for understanding inflationary pressure over the medium-term time horizon relevant for monetary policy. The focus of monetary policy is to minimise fluctuations in cyclical unemployment, as indicated by the gap between the unemployment rate and the NAIRU, while also maintaining its objective of price stability. Monetary policy has limited influence on the natural rate of unemployment. However, since the natural rate can be influenced via structural policies, it is the more relevant measure of equilibrium unemployment for the long-term objectives of the Government. For 2017Q3, the end-point of our sample, our NAIRU estimates correspond to an unemployment gap that is around zero. This is consistent with other measures of capacity pressures. However, we emphasise that point estimates of the NAIRU and the natural rate are imprecise and highly sensitive to sample periods, data choices, and model specifications. The confidence interval of our estimates approximately spans from 4.0 to 5.5 percent. This imprecision suggests that other observable indicators are needed to supplement estimates of equilibrium unemployment in assessing the overall degree of labour market slack.
    Date: 2018–03
  2. By: Chu, Angus C.; Cozzi, Guido; Fan, Haichao; Furukawa, Yuichi; Liao, Chih-Hsing
    Abstract: This study develops a Schumpeterian growth model with heterogeneous households and heterogeneous firms to explore the effects of monetary policy on innovation and income inequality. Household heterogeneity arises from an unequal distribution of wealth. Firm heterogeneity arises from random quality improvements and a cost of entry. We find that under endogenous firm entry, inflation has inverted-U effects on economic growth and income inequality. We also calibrate the model for a quantitative analysis and find that the model is able to match the growth-maximizing inflation rate and the inequality-maximizing inflation rate that we estimate using cross-country panel data.
    Keywords: inflation, income inequality, economic growth, heterogeneity
    JEL: D3 E41 O3 O4
    Date: 2018–02
  3. By: Shirota, Toyoichiro
    Abstract: This study analyzes the effect of a central bank’s intervention in stock markets, while allowing for nonlinearities and state dependencies, using a semi-parametric approach. A causal inference on such intervention is difficult because of the selfselective behavior of central banks. To address these problems, we apply the propensity score method in a time series context, exploiting stock price information of a single day. We find that first, there are demand pressure effects in stock markets if an intervention is large enough. Second, the effects are state-dependent and stronger during market downturns. Finally, a central bank’s interventions have a considerable impact on stock prices only when we take permanent demand pressure effects into consideration.
    Keywords: unconventional monetary policy, stock market intervention, demand pressure effect, semi-parametric approach, propensity score,
    Date: 2018–03
  4. By: Belke, Ansgar; Klose, Jens
    Abstract: Is the Euro area as a whole, or are individual Euro-area member countries facing a period of sustained lower economic growth, a phenomenon known as secular stagnation? We tackle this question by estimating equilibrium real interest rates and comparing them to actual real rates. Since the financial crisis has altered the degree of leverage in several European economies, we expand our model to incorporate the financial cycle. We estimate the model for the Euro area as a whole and for nine Euro-area member countries. Incorporating the financial cycle changes the estimated equilibrium real interest rates: For some Euro-area member countries, estimates of the equilibrium real interest rate are substantially higher than the standard estimates. In other cases, including our estimates for the Euro area as a whole, the estimated equilibrium real rates are slightly lower than without taking the financial cycle into account but are still higher than the actual rates. This indicates that real monetary policy rates were set even more systematically and consistently below (or not as far above) the natural real rate. Comparing the sequence of actual and equilibrium real rates, only Belgium, France, and Greece are likely to face a period of secular stagnation.
    Keywords: equilibrium real interest rate,Euro area,financial cycle,heterogeneity,monetary policy,secular stagnation
    JEL: E43 C32
    Date: 2018
  5. By: Victor Pontines
    Abstract: Along the lines of the treatment effects literature, this paper empirically revisits the issue of the so-called “intervention effect”, i.e., the effectiveness of official foreign exchange intervention on the movement of the exchange rate. We extended in a continuous treatment setting the inverse probability weights estimator developed by Jorda and Taylor (2015) and Angrist, Jorda and Kuersteiner (forthcoming) to control for self-selection bias. We then illustrate the application of this technique by examining the effectiveness of official daily interventions by Japanese monetary authorities in the JPY/USD market. In accordance with existing evidence using this intervention data, this paper finds that periods of intervention characterized by large, infrequent and sporadic interventions are effective in moving the changes in the exchange rate in the desired direction. We also find evidence that the intervention effect does not last longer than two days after the intervention takes place.
    Keywords: Foreign Exchange Intervention, Self-selection, JPY/USD Exchange Rate, Censored Data, Tobit, Inverse Probability Weights, Local Projections
    JEL: C14 C32 E52 E58 F31
    Date: 2018–03
  6. By: Nymand-Andersen, Per
    Abstract: The European Central Bank (ECB), as part of its forward-looking strategy, needs high-quality financial market statistical indicators as a means to facilitate evidence-based and sound decision-making. Such indicators include timely market intelligence and information to gauge investors’ expectations and reaction functions with regard to policy decisions. The main use of yield curve estimations from an ECB monetary policy perspective is to obtain a proper empirical representation of the term structure of interest rates for the euro area which can be interpreted in terms of market expectations of monetary policy, economic activity and inflation expectations over short-, medium- and long-term horizons. Yield curves therefore play a pivotal role in the monitoring of the term structure of interest rates in the euro area. In this context, the purpose of this paper is twofold: firstly, to pave the way for a conceptual framework with recommendations for selecting a high-quality government bond sample for yield curve estimations, where changes mainly reflect changes in the yields-to-maturity rather than in other attributes of the underlying debt securities and models; and secondly, to supplement the comprehensive – mainly theoretical – literature with the more empirical side of term structure estimations by applying statistical tests to select and produce representative yield curves for policymakers and market-makers. JEL Classification: G1, E4, E5
    Keywords: data quality, term structure, yield curve models
    Date: 2018–02
  7. By: Honkapohja, Seppo; Mitra, Kaushik
    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 30's.
    Keywords: Adaptive Learning; Inflation targeting; Limited Credibility; Zero Interest Rate Lower Bound
    JEL: E52 E58 E63
    Date: 2018–02
  8. By: Njindan Iyke, Bernard; Ho, Sin-Yu
    Abstract: Inflation and inflation uncertainty are critical factors influencing the functioning of markets, and thus the efficient flow of economic activities. In this study, we investigated the effects of inflation and inflation uncertainty on growth in Ghana. Unlike majority of the previous studies, we distinguished the short-run effects of inflation and inflation uncertainty on growth from the long-run effects. Also, unlike the previous studies, we examined whether increases in inflation uncertainty have the same effects on growth as decreases in it. By taking linear and nonlinear specifications to a dataset covering the period 1963 to 2015, we found that inflation has both short and long-run negative effects on growth. Inflation uncertainty has differential short-run effect and a negative long-run effect on growth. Increases in inflation uncertainty hurt growth, while decreases may reverse this pattern but slowly. Both inflation and inflation uncertainty are critical determinants of growth in the country. To promote growth, policymakers should continue to pursue a lower inflation target, while ensuring minimum inflation uncertainty.
    Keywords: Inflation; Inflation Uncertainty; Growth; Ghana
    JEL: C22 E31 O47 O55
    Date: 2018–03
  9. By: Kaminska, Iryna (Bank of England); Roberts-Sklar, Matt (Bank of England)
    Abstract: Asset pricing models assume the risk-free rate to be a key factor for equity prices. Hence, there should be a strong link between monetary policy rate uncertainty and equity return volatility, both in theory and data. This paper uses regression-based projections for realized variance to examine the relationship between short horizon forecasts of equity variance and proxies for monetary policy rate uncertainty. By assessing various projection models for UK, US and euro-area equity indices, we show that the proxies for monetary policy rate uncertainty have a significant and positive predictive power for the equity return variance. Adding monetary policy rate uncertainty variables can significantly improve forecasting models for equity variance and volatility at weekly, monthly and even quarterly horizons. The findings imply that market views of short-term interest rate developments may indeed be embedded in equity prices and their variations.
    Keywords: Equity indices; monetary policy rate uncertainty; option implied volatility; realized volatility; risk-free interest rates; volatility forecasting
    JEL: C22 C52 E52 G12
    Date: 2017–12–21
  10. By: Francesco D'Acunto; Daniel Hoang; Michael Weber
    Abstract: Unconventional fiscal policy uses announcements of future increases in consumption taxes to generate inflation expectations and accelerate consumption expenditure. It is budget neutral and time consistent. We provide preliminary evidence for the effectiveness of such policies using changes in value-added tax (VAT) and household survey data for Poland. We find households increased their inflation expectations and willingness to purchase durables before the increase in VAT. Future research has to ensure income, wealth effects, or intratemporal substitution channels cannot explain these results and ideally exploit exogenous variation in VAT in a fixed nominal interest rate environment.
    JEL: D12 D84 D91 E21 E31 E32 E52 E65
    Date: 2018
  11. By: Claudiu Tiberiu Albulescu; Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper first shows that the long-run money demand in Central and Eastern European (CEE) countries is better described by an open-economy model (OEM), which considers a currency substitution effect, than by a closed-economy model (CEM) used in several previous studies. Second, from the estimated models we derive two different measures of monetary overhang. Then we compare the ability of the OEM-based and the CEM-based measures of monetary overhang to predict inflation in the CEE countries, namely the Czech Republic, Hungary and Poland. While we cannot detect a significant difference of forecast accuracy between the two competing models, we show that the OEM-based forecast model that reveals a stable long-run money demand encompasses the CEM-based version for the CEE countries.
    Keywords: CEE countries ,currency substitution,money demand stability,monetary overhang,inflation forecasts
    Date: 2018–03–01
  12. 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,negative interest rates,costs of holding cash,transmission of monetary policy
    JEL: E52 E58
    Date: 2018
  13. By: Corsetti, G.; Dedola, L.; Leduc, S.
    Abstract: What determines the optimal monetary trade-offs 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-offs 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 a quadratic 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 imbalances, asset markets and risk sharing, optimal targeting rules, international policy cooperation, exchange rate pass-through
    JEL: E44 E52 E61 F41 F42
    Date: 2018–03–15
  14. By: Lise Pichette; Marie-Noëlle Robitaille; Mohanad Salameh; Pierre St-Amant
    Abstract: We use a new real-time database for Canada to study various output gap measures. This includes recently developed measures based on models incorporating many variables as inputs (and therefore requiring real-time data for many variables). We analyze output gap revisions and assess the usefulness of these gaps in forecasting total CPI inflation and three newly developed measures of core CPI inflation: CPI-median, CPI-trim and CPI-common. We also study whether labour-input gaps, projected output gaps, and simple combinations of output gaps can add useful information for forecasting inflation. We find that estimates of excess capacity (the extent to which the economy is below potential) were probably too large around the 2008-2009 recession, as they subsequently tended to be revised down. In addition, we find that, when forecasting CPI-common and CPI-trim, some gaps appear to provide information that reduces forecast errors when compared with models that use only lags of inflation. However, forecast improvements are rarely statistically significant. In addition, we find little evidence of the usefulness of output gaps for forecasting inflation measured by total CPI and CPI-median.
    Keywords: Econometric and statistical methods, Inflation and prices, Potential output
    JEL: C53 E37
    Date: 2018
  15. By: Bevan Cook; Daan Steenkamp (Reserve Bank of New Zealand)
    Abstract: Prior to the global financial crisis (GFC), there was a relatively stable relationship between the Official Cash Rate (OCR) and retail mortgage rates. Changes in the OCR were typically accompanied by a proportional change in floating mortgage rates. However, this relationship has deteriorated since the GFC and the OCR on its own has not been a good proxy for bank funding costs. This paper examines the change in the transmission of the OCR, and the role of other funding costs for retail mortgage rates since the GFC. Banks now place greater reliance on more stable (but more costly) sources of funding. They rely on domestic deposits and long-term wholesale funding more, and less on short-term wholesale funding. This has resulted in a wider and more volatile spread between mortgage rates and the OCR. Not all changes in the OCR have passed through one-for-one into floating mortgage rates, as funding costs from other sources have sometimes been offsetting. We construct a comprehensive estimate of bank funding costs using a weighted average of the cost of domestic deposits, short-term wholesale funding and long-term wholesale funding. This weighted-average measure is further decomposed into a monetary policy rate component and a funding spread component. We use an error correction framework to measure the relative contributions of the policy rate and funding spreads to the level of mortgage rates in New Zealand, and estimate the speed of pass-through to mortgage rates from changes in funding costs. Our results suggest that funding spreads have been larger post-GFC, and have had a larger impact on the level of fixed-rate mortgages than on floating rates. There has also been a significant slowdown in the pass-through from policy and funding spreads to the floating mortgage rate. The speed of pass-through to fixed-rate mortgages has slowed only slightly.
    Date: 2018–03
  16. By: J. Barthélemy; V. Bignon; B. Nguyen
    Abstract: With the European debt crisis, the role of assets accepted by the Eurosystem as collateral for refinancing operations took on a new place in the public debate, as, against a backdrop of shifting demand for refinancing, movements in European bond prices led to significant fluctuations in the collateral constraints of credit institutions. This paper documents the change in and heterogeneity of these constraints. We assess the impact attributable to the downgrade of sovereign ratings and the decline in asset prices during the European debt crisis on the valuation of collateral available for refinancing. We also construct indicators that track the change in the quality and liquidity of posted collateral. Our findings suggest that the flexibility of the Eurosystem collateral framework enabled credit institutions to cushion the shock created by the European debt crisis by depositing assets that were less liquid than bonds without causing a relative deterioration in the average rating of assets posted as collateral compared with the average rating on the market, as measured by eligible marketable assets.
    Keywords: Collateral; Eurosystem; Transmission of monetary policy; European debt crisis.
    JEL: E52 E58 G10
    Date: 2018
  17. By: Mirko Wiederholt (Goethe University Frankfurt); Nathanael Vellekoop (Goethe University Frankfurt)
    Abstract: How do households form inflation expectations? And do households' inflation expectations affect their choices? To address the first question, we study longitudinal survey data on inflation expectations over a 24 year period. To address the second question, we link the survey data on inflation expectations at the level of the individual to administrative data on income, assets, and liabilities.
    Date: 2017
  18. By: Thomadakis, Apostolos
    Abstract: Over-the-counter (OTC) derivatives markets, in particular interest rate derivatives (IRD), have grown significantly in recent decades and now constitute a systemically important component of financial services activity. The UK plays a central role in clearing derivatives, both at a global and EU level. It is the single biggest venue for OTC derivatives activity and is even larger in terms to euro-denominated IRD contracts clearing. Yet, the fact that a large share of euros is traded, and will be traded after Brexit, in a non-euro area country raises questions about the regulation and supervision of such markets and the sustainability of liquidity provision, particularly during a time of financial turmoil. The burning question is thus whether the clearing of euro-denominated derivatives can remain in London or should be moved to the eurozone. With the aim of shedding light on this issue, this report explores the OTC IRD market and the UK’s role in it, and examines the potential costs of a relocation policy of CCPs after Brexit. It argues that there are aspects of the Commission’s proposal that require further attention and clarification. The easiest approach might be to establish a location policy to require systemically important CCPs to be located within the eurozone, but this would be an error of judgement. The report highlights the urgent need for an impact assessment of the fragmentation, risks and costs of such a move. It concludes that the best hope of addressing the risks of clearing post-Brexit is for heightened supervision, deep cooperation and clear coordination between the EU and the UK, rather than a potentially forced relocation of services currently provided by UK firms to the EU.
    Date: 2018–02
  19. By: Andres Drenik (Columbia University)
    Abstract: We document that in emerging economies a significant fraction of prices in do- mestic markets are set in dollars. The currency of prices is not homogeneous across goods. More expensive goods are more likely to be set in dollars and also take longer time to sell. We rationalize these facts using a model of price setting in multiple currencies with search frictions. Pricing in dollars prevents erosion of real prices caused by inflation at the expense of a lower willingness to pay from buyers. When goods take longer to sell the relative value of preventing price erosion is higher. Consistent with empirical evidence, our model predicts that the share of prices in foreign currency increases when domestic inflation is high.
    Date: 2017
  20. By: Michael Funke; Petar Mihaylovski; Adrian Wende
    Abstract: In view of regional house prices drifting apart, we examine whether regionally differentiated macroprudential policies can address financial stability concerns and moderate house price differences. To this end, we disaggregate both the household sector and the housing stock in a two-region DSGE model with out of sync subnational housing markets and compare four macroprudentail policy types: standard monetary policy by means of a standard Taylor rule, leaning against the wind monetary policy, national macroprudential policy or one that targets region-specific LTV ratios. In terms of reducing variances of house prices, regionally differentiated macroprudential policy performs best, provided the policy authorities are concerned with stabilising output and house prices rather than simply minimising the variance of inflation. Thus the findings point to a critical role for policy in regionalising macroprudential tools.
    Keywords: macroprudential policies, housing, DSGE, Great Britain
    JEL: E32 E44 E52 E58
    Date: 2018
  21. By: Carey Caginalp; Gunduz Caginalp
    Abstract: Cryptocurrencies are examined through the asset flow equations and experimental asset markets. Since tangible value of a typical cryptocurrency is non-existent, the theory suggests that price will gravitate toward liquidity value, i.e., the total amount of cash available for purchase of the asset divided by the number of units. Thus it is unlikely that cryptocurrencies in their current form will be stable in the absence of a mechanism of a link to value.
    Date: 2018–02
  22. By: Shesadri Banerjee (Madras Institute of Development Studies); Parantap Basu (Durham University, Durham University Business School); Chetan Ghate (Indian Statistical Institute); Pawan Gopalakrishnan (Reserve Bank of India); Sargam Gupta (Indian Statistical Institute)
    Abstract: We build and calibrate a New Keynesian monetary business cycle model to theIndian economy to understand why the aggregate demand channel of monetary transmission is weak. Our main Önding is that base money shocks have a larger and more persistent effect on output than an interest rate shock, as in the data. We show that Önancial repression, in the form of a statutory liquidity ratio and administered interest rates, does not weaken monetary transmission. This is contrary to the consensus view in policy discussions on Indian monetary policy. We show that the presence of an informal sector hinders monetary transmission.
    Keywords: Monetary Business Cycles, Monetary Transmission, Ináation Targeting.
    JEL: E31 E32 E44 E52 E63
    Date: 2018–03
  23. By: Thomas Keating; Marco Macchiavelli
    Abstract: In this note, we use confidential, daily data on wholesale unsecured borrowing and reserve balances to empirically document several salient features of IOR arbitrage trades.
    Date: 2018–03–01
  24. By: Stefan Hohberger; Romanos Priftis; Lukas Vogel
    Abstract: This paper estimates an open-economy dynamic stochastic general equilibrium model with Bayesian techniques to analyse the macroeconomic effects of the European Central Bank’s (ECB’s) quantitative easing (QE) programme. Using data on government debt stocks and yields across maturities, we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to annual euro area output growth and inflation in 2015-16 of up to 0.3 and 0.6 percentage points (pp) in the linearised version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact to up to 0.7 and 0.8 pp.
    Keywords: Economic models, Interest rates, Transmission of monetary policy
    JEL: E44 E52 E53 F41
    Date: 2018
  25. By: Christoph Basten; Mike Mariathasan
    Abstract: We analyze the effect of negative monetary policy rates on banks, using detailed supervisory information from Switzerland. For identification, we compare changes in the behavior of banks that had different fractions of their central bank reserves exempt from negative rates. More affected banks reduce costly reserves and bond financing while maintaining non-negative deposit rates and larger deposit ratios. Higher fee and interest income successfully compensates for squeezed liability margins, but credit and interest rate risk increase. Portfolio rebalancing implies relatively more lending, also compared to an earlier rate cut within positive territory, and risk-taking reduces regulatory capital cushions and liquidity.
    Keywords: monetary policy transmission, negative interest rates, bank profitability, risk-taking, bank lending, Basel III
    JEL: E43 E44 E52 E58 G20 G21
    Date: 2018
  26. By: Florian Morvillier
    Abstract: The link between exchange rate undervaluations and growth has been an important source of concern over the past years, but the role of undervaluations on the inflation-growth nexus has not been yet studied. We fill up this gap by showing to what extent undervaluation's level change the effect of inflation on growth. Our analysis is based on a sample of 62 countries over the period 1980-2015. In a first time, we rely on the Bayesian Model Averaging (BMA) methodology to select the relevant growth determinants. Then, using the System Generalized Method of Moments (GMM), we find evidence that higher is the lagged undervaluation, higher is the negative effect of inflation on growth. This result is robust to the exclusion of currency crises episodes.
    Keywords: Exchange rate undervaluation, Inflation, Growth, GMM
    JEL: F41 O47 E31
    Date: 2018
  27. By: Aneta Hryckiewicz; Piotr Mielus; Karolina Skorulska; Malgorzata Snarska
    Abstract: The crisis has shown that a drop in liquidity, as well as the shortened maturity of interbank transactions, has caused many problems for banks. We analyze how the introduction of a bank levy on bank assets in Poland has affected the interbank market, as well as money market pricing. Analyzing daily volume and number of interbank transactions, along with daily bank quotes, we document that the bank levy has significantly reduced trading intensity on the market, shortening the maturity of transactions. We also find that it has increased the dispersion of bank quotes for short-term transactions, while at the same time ''killing'' interbank long-term transactions, including the pricing for this market. The regulators should re-think the nature of bank levies in several countries, as they negatively affect the functioning of the interbank market and brings intoquestion the credibility of interbank benchmarks.
    Keywords: C32, G28, E43, C54
    Date: 2018–03
  28. By: Nicholas Mulligan; Daan Steenkamp (Reserve Bank of New Zealand)
    Abstract: There is a large literature focused on exchange rate forecasting. A common finding is that it is difficult to systematically predict exchange rate movements, consistent with the results of Meese and Rogoff (1983), who showed that it is difficult to beat a random walk forecast. This note heads down the same well-worn path, but assesses the usefulness of the Commitments of Traders (COT) positioning data for understanding and predicting exchange rate movements. COT data has been used extensively in research assessing the impact of speculation in commodity markets, but there has been comparatively little recent research into the usefulness of this data for thinking about foreign exchange market developments. COT data also provides classifications of trading entities that allow the trading behaviour of different groups of traders (such as hedgers and speculators), and their respective market impact, to be examined. This note focuses on the positioning of speculative traders who are thought to express their beliefs of future currency movements through futures positions. The COT data is available at weekly frequency and aggregates holdings of futures in key US markets. The lag between the collection of the COT data and its publication may in fact limit its information content. For example, assuming markets are informationally efficient, new information is expected to be quickly incorporated into spot exchange rates and futures positions at the same time. Therefore, the data cannot provide insight as to whether exchange rates change contemporaneously as futures positions are opened or closed (in real-time). The key question examined in this note is what the information content of COT positioning data is for major currencies, and at what horizon is positioning data best for forecasting exchange rate changes. As has been found by earlier studies, our results suggest that futures positioning data can help with interpretation of historical exchange rate changes, although its use as a predictor of exchange rates is limited. However, higher frequency positioning data, such as hourly or daily data, may in fact have predictive power.
    Date: 2018–03
  29. By: Dolado, Juan J.; Motyovszki, Gergo; Pappa, Evi
    Abstract: Contrary to previous beliefs, recent empirical work has found that the effects of monetary policy on inequality are far from modest. In order to improve our understanding of the channels through which monetary policy has distributional consequences, we build a New Keynesian model with incomplete asset markets, asymmetric search and matching (SAM) frictions across skilled and unskilled workers and, foremost, capital-skill complementarity (CSC) in the production function. Our main finding is that an unexpected monetary easing increases labor income inequality between high and low-skilled workers, and that the interaction between CSC and SAM asymmetry is crucial in delivering this result. This is so since the increase in labor demand driven by a monetary expansion leads to larger wage increases for high-skilled workers than for low-skilled workers since the former have smaller matching frictions (SAM-asymmetry channel). Moreover, the increase in capital demand amplifies this wage divergence due to skilled workers being more complementary to capital than substitutable unskilled workers are (CSC channel). Strict inflation targeting is often the most successful rule in stabilizing measures of earnings inequality even in the presence of shocks which introduce a trade-off between stabilizing inflation and aggregate demand.
    Keywords: capital-skill complementarity; inequality; monetary policy; Search and Matching
    JEL: E24 E25 E52 J64
    Date: 2018–02
  30. By: S. Béreau; V. Faubert; K. Schmidt
    Abstract: In this paper, we study the fit and the predictive performance of the Phillips curve for euro area inflation with regard to different inflation series, time periods and predictor variables, notably different global factors. We compare the relative performance of a large set of alternative global factors in the Phillips curve, such as commodity prices, import prices, global consumer inflation, global economic slack and foreign demand. We find that traditional global indicators such as oil prices and import prices provide more accurate information for euro area headline inflation than global slack measures. In what regards the forecast ability of the Phillips curve for headline inflation, we show that it is unstable and depends strongly on the time period. Global factors provide only limited additional information for forecasting. In addition, we explore whether domestic demand and global factors are useful for analysing the entire conditional distribution of euro area inflation. We find that their impact varies across inflation quantiles (low vs. high inflation) and that inflation is more persistent at the low end of the distribution. We provide evidence that quantile information can lead to more accurate forecasts in periods of persistently low inflation.
    Keywords: Inflation; Forecasting; Phillips curve; Quantile regression.
    JEL: E31 E37 C22 C53
    Date: 2018
  31. By: Talmain, Gabriel
    Abstract: We establish the nature of the dynamics of the exchange rate in a two country model with heterogenous firms a la Abadir and Talmain (2002).
    Keywords: General Equilibrium, Exchange Rate Models, Exchange Rate Dynamics.
    JEL: F31 G15
    Date: 2017–11–01
  32. By: Spahn, Peter
    Abstract: In recent years, various "unconventional" views have been advanced that promise to offer new analytical insights and policy approaches that are suited to control the value of money, particularly in a constellation of low growth and unemployment. Whereas Forward Guidance attempts to decrease the real interest rate by low nominal rates and by creating excessive inflationary expectations, the Neo-Fisherian approach suggests to increase nominal rates immediately to the long-run equilibrium value that corresponds to the inflation target. The Fiscal Theory of the Price Level believes that goods prices jump to a level that validates the long-run sustainability condition of government debt. All three views are criticized for analytical and empirical reasons.
    Keywords: interest rate policy,zero-lower bound,low-growth equilibrium
    JEL: E52 E58
    Date: 2018
  33. By: Atulan Guha (Indian Institute of Management Kashipur)
    Abstract: Foreign exchange and monetary gold reserve is a very important factor to determine nominal exchange rate for the countries whose currency has very little use as reserve currency. Whereas, for the reserve currency countries it is not so important ?it is primarily because of their greater money pulling power internationally through rate of interest change. They have this power because their currencies are having greater use as international money. Though the international monetary systems have changed from fixed exchange rate of Gold Standard period to independent float or managed float exchange rate systems of today?s world, this asymmetry between the reserve currency countries and the other countries has not change. Though, ideally under flexible exchange rate system, the importance of foreign exchange reserve in determining nominal exchange rate should be very little. This paper takes an historical review of all the International Monetary System to establish the importance of foreign exchange reserve in determining exchange rate for developing countries; but it is not be the case with the reserve currency countries.
    Keywords: Exchange Rate, Foreign Exchange Reserve, fixed exchange rate, flexible exchange rate
    JEL: F31 F33 F41
    Date: 2017–10

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