nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒04‒02
forty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Rules Verus Discretion: Assessing the Debate Over the Conduct of Monetary Policy By John B. Taylor
  2. Time-consistent monetary policy, terms of trade manipulation and welfare in open economies By Schmidt, Sebastian
  3. Credit markets, Limited commitment and Optimal monetary policy By Francesca Carapella
  4. Tight money - tight credit: coordination failure in the conduct of monetary and financial policies By Carrillo, Julio A.; Mendoza, Enrique G.; Nuguer, Victoria; Roldán-Peña, Jessica
  5. Bolivianization And Effectiveness Of The Monetary Policy By Osmar Jasan Bolívar Rosales
  6. Prices and Inflation when Government Bonds are Net Wealth By Hagedorn, Marcus
  7. The Single Monetary Policy and Its Decentralised Implementation: An assessment By Gros, Daniel
  8. Deconstructing Monetary Policy Surprises - The Role of Information Shocks By Jarocinski, Marek; Karadi, Peter
  9. Optimal Monetary Policy and Portfolio Choice By Sebastian Fanelli
  10. The Implication of Monetary and Fiscal Policy Interactions for the Price Levels: the Fiscal Theory of the Price Level Revisited By Assadi, Marzieh
  11. Overnight index swap market-based measures of monetary policy expectations By Lloyd, Simon
  12. Paul van Zeeland and the first decade of the US Federal Reserve System : The analysis from a European central banker who was a student of Kemmerer By Ivo Maes; Rebeca Gomez Betancourt
  13. Monetary and macroprudential policies under rules and discretion By Laureys, Lien; Meeks, Roland
  14. Targeting financial stress as opposed to the exchange rate By Raputsoane, Leroi
  15. Monetary policy reaction function pre and post the global financial crisis By Raputsoane, Leroi
  16. Hamilton’s Paradox Revisited: Alternative lessons from US history By Schelkle, Waltraud
  17. Stabilising virtues of central banks: (re)matching bank liquidity By V. Legroux; I. Rahmouni-Rousseau; U. Szczerbowicz; N. Valla
  18. Interbank Network Disruptions and The Real Economy By Dasha Safonova
  19. An Equilibrium Model of the Market for Bitcoin Mining By Julien Prat; Benjamin Walter
  20. Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? By Ahnert, Toni; Forbes, Kristin; Friedrich, Christian; Reinhardt, Dennis
  21. Estimating a Nonlinear New Keynesian Model with a Zero Lower Bound for Japan By Hirokuni Iiboshi; Mototsugu Shintani; Kozo Ueda
  22. The Relation between Monetary Policy and the Stock Market in Europe By Helmut Lütkepohl; Aleksei Netsunajev
  23. Plotting interest rates: The FOMC's projections and the economy By Gerlach, Stefan; Stuart, Rebecca
  24. On the Necessary and Sufficient Conditions for Legitimate Banking Contracts By Bagus, Philipp; Gabriel, Amadeus; Howden, David
  25. Oil price shocks, monetary policy and current account imbalances within a currency union By Baas, Timo; Belke, Ansgar
  26. Quantitative easing and preferred habitat investors in the euro area bond market By Martijn Boermans; Robert Vermeulen
  27. Alternatives For Reserve Balances And The Fed's Balance Sheet In The Future By John B. Taylor
  28. Inquiry on the Transmission of U.S. Aggregate Shocks to Mexico: A SVAR Approach By Julio Carrillo
  29. Liquidity and exchange rate volatility By Thi Hong Hanh Pham
  30. Unobserved Components with Stochastic Volatility in U.S. Inflation: Estimation and Signal Extraction By Mengheng Li; Siem Jan (S.J.) Koopman
  31. What drives bitcoin adoption by retailers By Nicole Jonker
  32. Target imbalances at record levels: Should we worry? By Gros, Daniel
  33. Is Credit Easing Viable in Emerging and Developing Economies? An Empirical Approach By Luis I. Jacome H.; Tahsin Saadi Sedik; Alexander Ziegenbein
  34. Labour tax reforms, cross-country coordination and the monetary policy stance in the euro area: a structural model-based approach By Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano
  35. Capital Flows in the Euro Area and TARGET2 Balances By Nikolay Hristov; Oliver Hülsewig; Timo Wollmershäuser
  36. A European Monetary Fund: Why and how? By Gros, Daniel; Mayer, Thomas
  37. The impact of the Bank of England’s Corporate Bond Purchase Scheme on yield spreads By Boneva, Lena; de Roure, Calebe; Morley, Ben
  38. The Hubris of Hybrids By Bagus, Philipp; Howden, David; Gabriel, Amadeus
  39. Inflation Anchoring and Growth: Evidence from Sectoral Data By Sangyup Choi; Davide Furceri; Prakash Loungani
  40. Testing for spillovers in Naira exchange rates: The role of electioneering& global financial crisis By Afees A. Salisu; Taofeek O. Ayinde
  41. The Effect of Financial Market Integration on Monetary Policy and Long-term Interest Rate in Korea and Its Policy Implications By Kim, Kyunghun; Kim, Soyoung; Yang, Da Young; Kang, Eunjung
  42. Condominium Prices and Inflation: The Role of Financial Inflows and Transaction Volumes in Japan By Jun Nagayasu
  44. Governing cryptocurrencies through forward guidance? By Goldmann, Matthias; Pustovit, Grygoriy
  45. Lost in Translation: What do Engel Curves Tell us about the Cost of Living? By Ingvild Almås; Timothy K.M. Beatty; Thomas F. Crossley
  46. Estimating the Demand for Reserve Assets Across Diverse Groups By Rina Bhattacharya; Katja Mann; Mwanza Nkusu

  1. By: John B. Taylor
    Abstract: This paper reviews the state of the debate over rules versus discretion in monetary policy, focusing on the role of economic research in this debate. It shows that proposals for policy rules are largely based on empirical research using economic models. The models demonstrate the advantages of a systematic approach to monetary policy, though proposed rules have changed and generally improved over time. Rules derived from research help central bankers formulate monetary policy as they operate in domestic financial markets and the global monetary system. However, the line of demarcation between rules and discretion is difficult to establish in practice which makes contrasting the two approaches difficult. History shows that research on policy rules has had an impact on the practice of central banking. Economic research also shows that while central bank independence is crucial for good monetary policy making, it has not been enough to prevent swings away from rules-based policy, implying that policy-makers might consider enhanced reporting about how rules are used in monetary policy. The paper also shows that during the past year there has been an increased focus on policy rules in implementing monetary policy in the United States.
    Keywords: Â
    JEL: E52 E58 F33
    Date: 2018–02
  2. By: Schmidt, Sebastian
    Abstract: A key insight from the open economy literature is that domestic price stability is in general not optimal for countries that exert some market power over their terms of trade. Under commitment, a national benevolent monetary policymaker improves upon the allocation associated with stable domestic prices by manipulating the terms of trade to her own country’s advantage. In this paper, I study optimal monetary policy in a sticky-price small open economy model when the policymaker lacks a commitment device. Without commitment, the benevolent policymaker’s attempt to improve national welfare by manipulating the terms of trade can be self-defeating. By steering international relative prices the discretionary policymaker induces fluctuations in domestic prices, the costs of which she is unable to fully internalize in her decision-making. Society may thus be better off if it appoints an inward-looking policymaker who aims for domestic price stability and resists the temptation to exploit the country’s monopoly power in trade. Accounting for the effective lower bound on nominal interest rates further strengthens the case for the inward-looking policy objective. JEL Classification: E52, F41
    Keywords: delegation, discretion, optimal monetary policy, small open economy, terms of trade externality
    Date: 2018–02
  3. By: Francesca Carapella (Federal Reserve Board)
    Abstract: In a dynamic model with credit under limited commitment money can be essential when limited memory weakens the effects of punishment for default. There exist equilibria where both money and credit are used as media of exchange, and default occurs. In this equilibria the Friedman rule is not optimal. Inflation acts to discourage default by raising the cost of holding money, which is primarily held by defaulters. This results in relaxing the limited commitment constraint and raising welfare for all agents, including defaulting ones. The equilibrium is unique if and only if monetary policy and agents' money holdings are chosen sequentially.
    Date: 2017
  4. By: Carrillo, Julio A.; Mendoza, Enrique G.; Nuguer, Victoria; Roldán-Peña, Jessica
    Abstract: Quantitative analysis of a New Keynesian model with the Bernanke-Gertler accelerator and risk shocks shows that violations of Tinbergen’s Rule and strategic interaction between policymaking authorities undermine significantly the effectiveness of monetary and financial policies. Separate monetary and financial policy rules, with the latter subsidizing lenders to encourage lending when credit spreads rise, produce higher welfare and smoother business cycles than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to adverse credit conditions. Reaction curves for the choice of policy-rule elasticity that minimizes each authority’s loss function given the other authority’s elasticity are nonlinear, reflecting shifts from strategic substitutes to complements in setting policy-rule parameters. The Nash equilibrium is significantly inferior to the Cooperative equilibrium, both are inferior to a first-best outcome that maximizes welfare, and both produce tight money-tight credit regimes. JEL Classification: E44, E52, E58
    Keywords: financial frictions, financial policy, monetary policy
    Date: 2018–02
  5. By: Osmar Jasan Bolívar Rosales (Ministerio de Economía y Finanzas Públicas)
    Abstract: This research paper examines whether the expansion of the degree of bolivianization of the financial system has implications in terms of a greater effectiveness of the monetary policy. In this regard, an estimation is made of the function associated to the liquidity of the financial system, as the operational objective of the Central Bank of Bolivia’s monetary policy. The explanatory variables considered are the interactions between the instruments of the monetary policy, which are the Open Market Operations and the monetary regulation rate, with bolivianization of the financial system. The incorporation of these interaction variables approximates the variable effects of each instrument on liquidity control of the financial system for each specific value of the bolivianization in the period covered by the analysis. In addition, a Structural VAR is estimated which interrelates bolivianization and the variables making up the instruments, transmission mechanisms and the target variables of the monetary policy, with the aim of analyzing the implications of the effects of the bolivianization on the monetary policy transmission.
    Keywords: Bolivianization, Monetary Policy
    JEL: C10 E52 E58
    Date: 2016–07
  6. By: Hagedorn, Marcus
    Abstract: In this paper I show that models in which government bonds are net wealth - that is, their value exceeds that of tax liabilities (Barro, 1974) - offer a new perspective on several issues in monetary economics. First and foremost, prices and inflation are jointly and uniquely determined by fiscal and monetary policy. In contrast to the conventional view, the long-run inflation rate here is, in the absence of output growth, and even when monetary policy operates an interest rate rule with a different inflation target, equal to the growth rate of nominal fiscal variables, which are controlled by fiscal policy. This novel theory also offers a different perspective on the fiscal and monetary transmission mechanism, policies at the zero-lower bound, U.S. inflation history, recent attempts to stimulate inflation in the Euro area and several puzzles which arise in New Keyensian models during a liquidity trap. To derive my findings, I first use a reduced form approach in which households derive utility from holding bonds. I prove how and for which policy rules the price level is globally determinate, then showing that the reduced form results carry over to a Bewley-Imrohoroglu-Huggett-Aiyagari heterogenous agent incomplete market model.
    Keywords: Fiscal Multiplier; Fiscal policy; incomplete markets; inflation; monetary policy; Policy Coordination; Price Level Determinacy; Ricardian Equivalence; zero lower bound
    JEL: D52 E31 E43 E52 E62 E63
    Date: 2018–03
  7. By: Gros, Daniel
    Abstract: The statutes of the European Central Bank (ECB) stipulate that it should have recourse to national central banks (NCBs) to carry out monetary policy operations. Such a structure would not be a problem if these operations were all identical across member states and if the resulting profits and losses were shared. But this is not the case today. In this sense, the euro area no longer has a ‘single’ monetary policy. There is little one can do about this situation, except to wait until the government purchase programme ends and is then reversed. However, two steps could be undertaken already now: i) the granting of emergency liquidity assistance should be shifted to the ECB, and ii) the NCBs should be forbidden to undertake any financial operation that is not a direct consequence of their execution of the ECB’s monetary policy decisions. The existing stocks of assets (and liabilities), the so-called ANFA (Agreement on Net Financial Assets) holdings, which are not related to monetary policy, should be transferred to either national finance ministries or national special purpose vehicles.
    Date: 2017–09
  8. By: Jarocinski, Marek; Karadi, Peter
    Abstract: Central bank announcements simultaneously convey information about monetary policy and the central bank's assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression estimated on both US and euro area data. It relies on the information inherent in high-frequency comovement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy non-neutrality. We make this point formally and offer an interpretation of the central bank information shock using a New Keynesian macroeconomic model with financial frictions.
    Keywords: Central Bank Private Information; High-Frequency Identification; Monetary Policy Shock; structural VAR
    JEL: E32 E52 E58
    Date: 2018–03
  9. By: Sebastian Fanelli (MIT)
    Abstract: A recent and rapidly increasing literature has documented the presence of sizeable cross-currency mismatches in countries' balance sheets. Yet, existing studies of optimal monetary policy focus on economies with either a single bond or complete markets. We bridge this gap by studying a small open economy with nominal rigidities where home agents are able to borrow abroad in both home- and foreign-currency bonds. In this environment, monetary policy faces a trade-off between providing insurance and doing inflation-targeting. To solve the optimal policy problem, we develop a technique to approximate the solution around the deterministic steady state with locally incomplete markets. When home-currency-bond markets are perfect, the central bank commits to a smooth exchange rate to induce agents to be significantly exposed to currency risk, giving monetary policy firepower to create wealth transfers at low cost. In contrast, if markets are imperfect and agents cannot choose such large positions, a volatile exchange rate is the only way to provide insurance. Finally, we show that despite the presence of aggregate demand externalities, private portfolio choice decisions are efficient in the approximated model.
    Date: 2017
  10. By: Assadi, Marzieh
    Abstract: This paper aims to contribute to the empirical literature on the interaction between monetary and fiscal policy. We consider the impact of monetary and fiscal policy shocks on inflation and output dynamics using a Time-Varying Parameter Factor-Augmented VAR (TVP-FAVAR). In baseline results from a linear model, including fiscal policy in the factors has implications for the impact of monetary policy shocks on inflation. This can be explained with the generated positive wealth effects. Moreover, results from our TVPFAVAR indicate that price puzzles from monetary policy shocks are more accentuated during particular regimes. For example, under coordination of Fiscal-Active with Monetary-Passive policy during the Burns and Volcker regime of 1970s and 1980s inflation rise in response to a contractionary monetary policy shock. Likewise the baseline model, the underlying mechanism can be explained through the wealth effect channel. Finally, the results of a fiscal expansionary policy provide support for the non-Ricardian view on fiscal policy within both the linear and non-linear FAVAR model.
    Keywords: Monetary and Fiscal Policy Interaction; Ricardian Equivalence; Price Puzzle; TVPFAVAR
    JEL: E61 E62 E63 E65
    Date: 2017–10–01
  11. By: Lloyd, Simon (Bank of England)
    Abstract: I assess the use of overnight indexed swap (OIS) rates as measures of monetary policy expectations. I find that one to twelve-month US OIS rates provide measures of investors’ interest rate expectations that are comparable to those from corresponding-horizon federal funds futures rates, which have regularly been used as financial market-based measures of US interest rate expectations. More generally, I find that one to 24-month US, euro-zone and Japanese OIS rates and one to 18-month UK OIS rates tend to accurately measure expectations of future short-term interest rates. Motivated by these results, researchers can look to OIS rates as globally comparable measures of monetary policy expectations.
    Keywords: Federal funds futures; overnight indexed swaps; monetary policy expectations
    JEL: E43 E44 E52
    Date: 2018–03–01
  12. By: Ivo Maes (National Bank of Belgium and Robert Triffin Chair, Université catholique de Louvain and ICHEC Brussels Management School, Boulevard de Berlaimont 14, 1000 Brussels, Belgium); Rebeca Gomez Betancourt (University of Lyon 2. Triangle-ISH)
    Abstract: The establishment of a central bank occurred at very different moments in the process of economic integration in the United States and the European Union. In this paper, we go into the first years of the Federal Reserve System through the lens of Paul van Zeeland’s PhD dissertation. Paul van Zeeland (1893-1973) became the first Head of the Economics Service of the National Bank of Belgium in 1921, after his studies in Princeton with Edwin Walter Kemmerer. There are clear similarities in their analyses of the Federal Reserve System, for instance in their adherence to the gold standard and the real bills doctrine as well as in their emphasis on the elasticity of the money supply. Moreover, they shared a view - with hindsight a rather naïve view - that with the Fed in place, financial crises would be a distant memory. However, there were also important differences. So, van Zeeland, like several other economists as Warburg, accorded greater significance to the discount market (a key factor for the international role of the dollar) and to a stronger centralization of the Fed (which would be taken up in the 1935 Banking Act). Moreover, very specific for van Zeeland is the importance given to the Fed's independence from the State (an element related to his continental European background and Belgium's experience of monetary financing during the war).
    Keywords: van Zeeland, Kemmerer, Federal Reserve System, financial crisis, banking reform
    JEL: A11 B1 E58 F02 N23
    Date: 2018–03
  13. By: Laureys, Lien (Bank of England); Meeks, Roland (Bank of England)
    Abstract: We study the policy design problem faced by central banks with both monetary and macroprudential objectives. We find that a time-consistent policy is often superior to a widely studied class of simple monetary and macroprudential rules. Better outcomes result when interest rates adjust to macroprudential policy in an augmented monetary policy rule.
    Keywords: Monetary policy; macroprudential policy; DSGE models
    JEL: E44 E52 G28
    Date: 2017–12–21
  14. By: Raputsoane, Leroi
    Abstract: This paper analyses the role of monetary policy in targeting financial stress as opposed to the exchange rate in South Africa. This is achieved by augmenting the central bank’s monetary policy reaction function with the composite indicator of financial stress and the nominal bilateral exchange rate between the US dollar and the South African rand. The results show that the monetary authority adopts an accommodative monetary policy stance in the face of financially stressful economic conditions. The paper further finds a statistical insignificant as well as negligible reaction of the nominal bilateral foreign exchange rate to the changes in the monetary policy interest rate. The paper concludes that, although evidence exists that the monetary policy interest rate in South Africa has reacted to both the indicator of financial stress and the nominal bilateral foreign exchange rate, the impact of such a reaction seems to be more significant on the indicator financial stress as opposed to the exchange rate.
    Keywords: Monetary policy, Financial stress, Foreign exchange rate
    JEL: C11 E43 E58 F31
    Date: 2018–02–28
  15. By: Raputsoane, Leroi
    Abstract: This paper analyses the monetary policy reaction function pre and post the recent global financial crisis in South Africa. This is achieved by comparing the reaction function of the the monetary policy interest rate to changes in the target variables that comprise the inflation rate, output gap and financial stress index pre and post the recent global financial crisis. The results show a negligible reaction of the monetary policy to changes in inflation in the pre and post the recent global financial crisis period. The results further show a relatively loose monetary policy stance during the financially stressful economic conditions in the pre and post the recent global financial crisis period. Most importantly, the results show that the reaction of monetary policy to changes in the target variables pre the recent global financial crisis period has not changed significantly compared to post the recent global financial crisis period. Therefore the paper concludes that there is no material difference in the conduct of monetary policy by the monetary authority in South Africa pre and post the recent global financial crisis.
    Keywords: Monetary policy, Financial stress, Foreign exchange rate
    JEL: C11 E43 E58 F31
    Date: 2018–02–28
  16. By: Schelkle, Waltraud
    Abstract: Armed with the knowledge of today, a scholar revisits the US historical experience with fiscal federalism and learns how it avoided three pitfalls now facing the euro area. The lingering crisis of the euro area has made leading observers call for the completion of the economic and monetary union with fiscal federalism. They point to the US federation as the example to emulate. Opponents can point to evidence from US history that strong fiscal capacities at the federal level lead to free-riding at the member state level, with “spectacular debt accumulation and disastrous failures of macroeconomic policy” (Rodden, 2006: 2) in its wake. This paper revisits the historical US evidence with the knowledge of today. It takes lessons from the euro area crisis to see whether they apply to the history of the US dollar area. The first lesson asks whether political-fiscal union should come before monetary union; a second lesson concerns the need for fiscal union; and the final lesson is about the question where fiscal discipline should be located in a monetary union. Lessons from the euro area crisis reveal trade-offs that neither monetary union can evade. This becomes apparent if one looks at the interfaces of a fiscal federation with financial and monetary integration.
    Date: 2017–09
  17. By: V. Legroux; I. Rahmouni-Rousseau; U. Szczerbowicz; N. Valla
    Abstract: The liquidity of financial system plays a central role in systemic crises. In this paper, we show that the ECB haircut policies provided an important liquidity support to distressed financial institutions during the euro area sovereign debt turmoil. Using novel, micro data on the pool of collateral eligible to ECB open market operations, we construct a “public” liquidity mismatch indicator (LMI) for the French aggregate banking sector based on the ECB haircuts. We then compare it to the “private” LMI based on the haircuts in private repo markets in a spirit of Bai et al. (2018). The difference between the two indicators represents a new measure of the ECB liquidity support. Our results suggest that the ECB haircut policies have indeed helped French banks to reduce the liquidity mismatch.
    Keywords: Bank liquidity, liquidity mismatch, monetary policy, central bank, haircuts, collateral framework.
    JEL: E58 G21 G28
    Date: 2018
  18. By: Dasha Safonova (University of Notre Dame)
    Abstract: Shocks to the structure of the interbank lending network can have important macroeconomic repercussions. This paper examines the impact of the dynamic structure of the interbank lending network on interest rates and investment in the nonfinancial sector. By incorporating a network of bank relationships into a general equilibrium model with monetary policy, I show that the aggregate interest rate increases in response to a shock that destroys a large fraction of bank relationships and decreases in response to a shock that destroys a small fraction of relationships. Moreover, the shape of the interbank network matters for these dynamics: the interest rate is least responsive to the network disruptions if the interbank network is scale-free. Additionally, the amplification and propagation of the network shocks depend on the corridor of the policy rates set by the central bank. In particular, as the difference between the discount rate and the excess reserve rate decreases, the effect of a network disruption on interest rates becomes less significant but more persistent, which in turn leads to a smaller but more prolonged effect on the real sector.
    Date: 2017
  19. By: Julien Prat; Benjamin Walter
    Abstract: We propose a model which uses the Bitcoin/US dollar exchange rate to predict the computing power of the Bitcoin network. We show that free entry places an upper-bound on mining revenues and we devise a structural framework to measure its value. Calibrating the model’s parameters allows us to accurately forecast the evolution of the network computing power over time. We establish the accuracy of the model through out-of-sample tests and investigation of the entry rule.
    Keywords: Bitcoin, blockchain, miners, industry dynamics
    JEL: D41 L10
    Date: 2018
  20. By: Ahnert, Toni; Forbes, Kristin; Friedrich, Christian; Reinhardt, Dennis
    Abstract: Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulation, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.
    Keywords: Banking flows; FX regulations; International debt issuance; macroprudential policies
    JEL: F32 F34 G15 G21 G28
    Date: 2018–03
  21. By: Hirokuni Iiboshi; Mototsugu Shintani; Kozo Ueda
    Abstract: We estimate a small-scale macroeconomic model for Japan by taking into account the nonlinearity stemming from the zero lower bound (ZLB) of the nominal interest rate. To this end, we apply the Sequential Monte Carlo Squared method to the case of Japan, where the ZLB has constrained the country's monetary policy for a considerably long period. Employing a nonlinear estimation is crucial to deriving implications for monetary policy. For example, the Bayesian model selection suggests that past experience of recessions reducing the nominal interest rate to zero is carried over to today's monetary policy. However, a nonlinear estimation has little effect on the estimate of the natural rate of interest, which has often been negative since the mid-1990s.
    Date: 2018–03
  22. By: Helmut Lütkepohl; Aleksei Netsunajev
    Abstract: We use a cointegrated structural vector autoregressive model to investigate the relation between euro area monetary policy and the stock market. Since there may be an instantaneous causal relation we consider long-run identifying restrictions for the structural shocks and also use (conditional) heteroskedasticity in the residuals for identification purposes. Heteroskedasticity is modelled by a Markov-switching mechanism. We find a plausible identification scheme for stock market and monetary policy shocks which is consistent with the second order moment structure of the variables. The model indicates that contractionary monetary policy shocks lead to a long-lasting down-turn of real stock prices.
    Keywords: Cointegrated vector autoregression, heteroskedasticity, Markov-switching model, monetary policy analysis
    JEL: C32
    Date: 2018
  23. By: Gerlach, Stefan; Stuart, Rebecca
    Abstract: The FOMC's "dot plots" contain members' views regarding what federal funds rate will be necessary in the end of this and the coming years for the FOMC to achieve its statutory objectives. The dots can be interpreted as instantaneous forward rates. We fit a curve, which is characterised by four parameters, through them and study how it moves with the economy. We find that the level of the federal funds rate the month before the FOMC meeting, the unemployment rate and (updated) estimates by Laubach and Williams (2003) of the natural real interest rate shape the curves.
    Keywords: Federal Reserve; interest rate expectations; monetary policy
    JEL: E52 E58
    Date: 2018–03
  24. By: Bagus, Philipp; Gabriel, Amadeus; Howden, David
    Abstract: What role do demand deposits serve in the financial system? The answer to this simple question has great implications in keeping the legal terms of the contract consistent with the demands of the financial system. Demand deposits are a perfect monetary substitute. Since money is only held to hedge against perceived uncertainty in both the timing and magnitude of future expenditures, demand deposits are demanded for the same reason. From this we derive three main conclusions. First, that a financial contract similar to a demand deposit (e.g., very short-term bonds, money market mutual funds, etc.) cannot substitute for money. Second, that full agreement to a financial contract does not create a perfect substitute for money unless it provides money’s two key characteristics: on demand and par value redemption. Finally, that the demand for fractional-reserve demand deposits is fostered by an exogenous source (deposit insurance) and that demand for an action is not a sufficient condition to justify its legality or ethicality.
    Keywords: Banking ethics, Demand deposit, Fractional-reserve banking, Full-reserve banking, Money substitutes
    JEL: E5
    Date: 2018–01–01
  25. By: Baas, Timo; Belke, Ansgar
    Abstract: For more than two decades now, current-account imbalances are a crucial issue in the international policy debate as they threaten the stability of the world economy. More recently, the government debt crisis of the European Union shows that internal current account imbalances inside a currency union may also add to these risks. Oil price fluctuations and a contracting monetary policy that reacts on oil prices, previously discussed to affect the current account may also be a threat to the currency union by changing internal imbalances. Therefore, in this paper, we analyze the impact of oil price shocks on current account imbalances within a currency union. Differences in institutions, especially labor market institutions and trade result in an asymmetric reaction to an otherwise symmetric shock. In this context, we show that oil price shocks can have a long-lasting impact on internal balances, as the exchange rate adjustment mechanism is not available. The common monetary policy authority, however, can reduce such effects by specifying an optimum monetary policy target. Nevertheless, we also show that there is no single best solution. CPI, core CPI or an asymmetric CPI target all come at a cost either regarding an increase in unemployment or increasing imbalances.
    Keywords: Current account deficit, Oil price shocks, DSGE models, Search and matching labor market, Monetary policy JEL Classifications: E32, F32, F45, Q43
    Date: 2017–12
  26. By: Martijn Boermans; Robert Vermeulen
    Abstract: Quantitative easing (QE) aims to lower long term interest rates and stimulate economic growth via the portfolio rebalancing channel. One of the assumptions for QE to work is that there are investors with strong preferences to hold long term bonds, i.e. so called preferred habitat investors. This paper investigates whether the ECB's Public Sector Purchase Programme (PSPP) affected euro area investors' demand for bonds using granular securities holdings data. The results show strong evidence that euro area investors acted as preferred habitat investors. These findings hold across all major euro area investors (banks, insurance companies, pension funds and investment funds). The results suggest that since the sellers of bonds in response to QE in the euro area are different from those that sold to the Fed, BoE and BoJ, policymakers need to pay particular attention to demand by non-euro area investors, especially if the ECB plans to reduce its balance sheet.
    Keywords: quantitative easing; sovereign bonds; European Central Bank; PSPP; securities holdings statistics
    JEL: E58 F42 G11 G15
    Date: 2018–02
  27. By: John B. Taylor
    Abstract: This paper traces the evolution of the Fed's balance sheet in the years since the global financial crisis and presents economic reasons why the eventual size of the balance sheet and level of reserve balances should be such that the interest rate is determined by the demand and supply of reserves—in other words, by market forces—rather than by an administered rate under interest on excess reserves (IOER). The Fed would thus be operating as it did in the years before the crisis. The paper also contrasts this size with a system where the supply of reserves remains above the demand, and the interest rate must be administered through IOER.
    Keywords: Â
    Date: 2018–03
  28. By: Julio Carrillo (Banco de Mexico)
    Abstract: We study the transmission of U.S. macro shocks to the Mexican economy. We use a SVAR model to identify, using sign and zero restrictions, six aggregate disturbances originated in the U.S., such as changes in economic policy uncertainty, total factor productivity (TFP), aggregate demand, cost-push shocks, and two types of monetary policy shocks. We then document how these foreign shocks propagated to Mexico over the period 2002Q1-2016Q2. We find that U.S. aggregate shocks may explain up to 78% of output fluctuations in Mexico in the long run, and around 60% of core inflation volatility. Further, our results suggest that shocks to U.S. aggregate demand are the more important foreign disturbances affecting Mexican output. In contrast, uncertainty shocks to U.S. economic policy explain little of Mexican output volatility, even if economic activity seemed to respond to this shock in both countries. Our evidence suggests that the economic policy uncertainty shock was mainly absorbed by the nominal exchange rate, explaining around 20% of its fluctuations.
    Date: 2017
  29. By: Thi Hong Hanh Pham (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - UN - Université de Nantes)
    Abstract: Using a large panel dataset covering both advanced and developing countries over the period 1980-2015, this paper does two things. First, it explores the impacts of liquidity on the dynamics of exchange rate. We find evidence of a significant relationship between liquidity and real exchange rate volatility, which is, however, diverse and strongly depends on the way to measure liquidity level. Second, it investigates whether the nature of the linkage between liquidity and real exchange rate depends on the level of financial development of a country. This hypothesis is empirically validated in our study.
    Keywords: Exchange rate volatility,Liquidity,Financial development
    Date: 2018–02–13
  30. By: Mengheng Li (VU Amsterdam); Siem Jan (S.J.) Koopman (VU Amsterdam; Tinbergen Institute, The Netherlands)
    Abstract: We consider unobserved components time series models where the components are stochastically evolving over time and are subject to stochastic volatility. It enables the disentanglement of dynamic structures in both the mean and the variance of the observed time series. We develop a simulated maximum likelihood estimation method based on importance sampling and assess its performance in a Monte Carlo study. This modelling framework with trend, seasonal and irregular components is applied to quarterly and monthly US inflation in an empirical study. We find that the persistence of quarterly inflation has increased during the 2008 financial crisis while it has recently returned to its pre-crisis level. The extracted volatility pattern for the trend component can be associated with the energy shocks in the 1970s while that for the irregular component responds to the monetary regime changes from the 1980s. The scale of the changes in the seasonal component has been largest during the beginning of the 1990s. We finally present empirical evidence of relative improvements in the accuracies of point and density forecasts for monthly US inflation.
    Keywords: Importance Sampling; Kalman Filter; Monte Carlo Simulation; Stochastic Volatility; Unobserved Components Time Series Model; Inflation
    JEL: C32 C53 E31 E37
    Date: 2018–03–21
  31. By: Nicole Jonker
    Abstract: Decentralised issued crypto "currencies", like bitcoin, have the potential to drastically change the existing retail payment system and even the monetary system. Insights into the factors that influence their adoption are therefore crucial. Using a large representative sample of retailers that sell their products online, we find that acceptance of crypto payments is currently modest (2%), but there is substantial interest among retailers to adopt crypto payments in the near future. Consumer demand, net transactional benefits and perceived adoption effort influence adoption intention and actual acceptance by retailers. Regarding non-financial factors, our findings suggest that service providers who act as intermediaries between retailers, their customers, and providers of payment instruments play a crucial role as facilitators of competition and innovation in the online retail payments market by lowering such barriers. The most serious barrier for crypto acceptance seems to be a lack of consumer demand. Information from consumers indicate that those who possess cryptos, don't use it for online payments. It seems therefore unlikely that the adoption of cryptos by retailers will increase substantially, making it highly unlikely that cryptos like bitcoin will drastically change the existing retail payment system.
    Keywords: bitcoin; cryptocurrency; technology adoption; two-sided markets; retailers; network externalities; cost; facilitating conditions
    JEL: D22 E42 G20 O33
    Date: 2018–02
  32. By: Gros, Daniel
    Abstract: The imbalances within the Eurosystem’s Target 2 payment system are an indication that financial markets are not fully integrated. But the increase in these imbalances in the wake of the large asset purchases (often called QE, for quantitative easing), which started in early 2015, should not be a particular cause for concern. The imbalances had declined until the start of QE, accompanied by a reduction in risk premia. QE was associated with a further reduction in financial stress. There is thus little reason to believe that the increase since 2015 reflects renewed fears about a euro break-up. The ‘technical’ nature of the increasing imbalances in the wake of QE is illustrated by the fact that the European Central Bank (the central institution of the Eurosystem) has also run up a negative Target balance of over €200 billion. No one would argue that this is motivated by a fear of a break-up of the euro area. And there are reasons to believe that the recent run-up in the negative balances of Italy and Spain is due to similarly technical reasons. This contribution does not pretend to make a new contribution to the large literature on the imbalances within the Target 2 payment system of the Eurosystem. Its main purpose is to analyse the reasons for the renewed increase in the ‘T2’ imbalances since the start of the bond purchases in early 2015.
    Date: 2017–11
  33. By: Luis I. Jacome H.; Tahsin Saadi Sedik; Alexander Ziegenbein
    Abstract: During the global financial crisis, many central banks in advanced economies engaged in credit easing. These policies have been perceived as largely successful in reducing stress in financial markets, thus avoiding larger output losses. In this paper, we study empirically whether credit easing is also a viable policy tool to cope with banking crises in emerging and developing economies. We find that credit easing leads to a sharp increase in domestic currency depreciation, high inflation, and a substantial reduction in economic growth in a large panel of emerging and developing economies. For advanced economies, we find the effects to be benign. Our results suggest that emerging and developing economies should be cautious when using credit easing as it may fuel adverse macroeconomic repercussions.
    Date: 2018–03–08
  34. By: Jacquinot, Pascal; Lozej, Matija; Pisani, Massimiliano
    Abstract: We evaluate the effects of permanently reducing labour tax rates in the euro area (EA) by simulating a large-scale open economy dynamic general equilibrium model. The model features the EA as a monetary union, split in two regions (Home and the rest of the EA - REA), the US, and the rest of the world, region-specific labour markets with search and matching frictions, and public employment. Our results are as follows. First, a permanent reduction in labour tax rates in the Home region would have stimulating effects on domestic economic activity and employment. Second, reducing labour tax rates simultaneously in both Home and REA would have additional expansionary effects on the Home region. Third, in the short run the expansionary effects on the EA economy of a EA-wide tax reduction are enhanced if the EA monetary policy is accommodative. JEL Classification: E24, E32, E52, E62, F45
    Keywords: DSGE models, labour taxes, monetary union, open-economy macroeconomics, unemployment
    Date: 2018–02
  35. By: Nikolay Hristov; Oliver Hülsewig; Timo Wollmershäuser
    Abstract: We estimate a panel VAR model for the euro area to quantitatively asses the contribution of the TARGET2 system to the propagation of different types of structural economic shocks as well as to the historical evolution of aggregate economic activity in euro area member countries. Our results suggest that TARGET2 has significantly affected the transmission of capital ow shocks while leaving the macroeconomic responses to other aggregate shocks virtually unaltered. Furthermore, on basis of counterfactual analyses, we find that TARGET2 has contributed substantially to avoid deeper recessions in distressed periphery member countries like Spain, Italy, Ireland and Portugal, while to a smaller degree depressing aggregate economic activity in core member states, such as Germany, the Netherlands and Finland.
    Keywords: euro area, TARGET2 balances, capital inflow shocks, panel vector autoregressive model
    JEL: E42 F32 F41
    Date: 2018
  36. By: Gros, Daniel; Mayer, Thomas
    Abstract: As early as 2010, at the outset of the sovereign debt crisis, Daniel Gros and Thomas Mayer argued that Europe needed a European Monetary Fund (EMF). In the meantime, the European Stability Mechanism (ESM) has been created, which performs the function of an EMF. It was critical in containing the cost of the crisis and four of its five country programmes have been a success. But the case of Greece shows that one needs to be prepared for failure as well. They propose in this paper to keep the ESM essentially as it is, but would empower it to set conditions on countries receiving its financial support. Such support would have a limit, however, to prevent situations in which the ESM would ‘own’ a country. The authors conceive of the ESM/EMF literally as a financial stability mechanism, whose main function is to ensure that a bailout is no longer “alternativlos”, as Chancellor Angela Merkel used to say. In 2010, the rescue of Greece was presented as TINA (There Is No Alternative) because the stability of the financial system of the entire euro area appeared to be in danger. With financial stability guaranteed by the ESM/EMF in combination with the Banking Union, default becomes an alternative that should be considered dispassionately. Whether the debt of a country is sustainable is rarely known with certainty beforehand. Accordingly, they argue that it is proper that the Union, in the ‘spirit of solidarity’, initially gives a country the benefit of the doubt and provides financial support for an adjustment programme, but caution that the exposure should be limited. If the programme goes awry, the ESM/EMF could be of great help, as it could provide bridge financing to soften the cost of default.
    Keywords: European Monetary Fund; European Stability Mechanism; EMU reform; debt restructuring in EMU; EMU exit
    Date: 2017–12
  37. By: Boneva, Lena (Bank of England); de Roure, Calebe (Bank of Australia); Morley, Ben (Bank of England)
    Abstract: As part of its August 2016 policy package, the Bank of England announced a scheme to purchase up to £10 billion of corporate bonds. Only sterling investment-grade bonds issued by firms making a ‘material’ contribution to the UK economy were eligible to be purchased. So eligible bonds constitute a natural treatment group to estimate the announcement effect of the policy in a difference-in-differences approach. Our results suggest that the scheme reduced spreads of eligible bonds by 13–14 basis points compared to foreign bonds issued by the same set of firms, and by 2–5 basis points compared to ineligible sterling corporate bonds. But because of spillover effects, these estimates should be interpreted as a lower bound.
    Keywords: Central bank asset purchases; corporate bond; announcement effect
    JEL: E43 E58 G12
    Date: 2018–03–26
  38. By: Bagus, Philipp; Howden, David; Gabriel, Amadeus
    Abstract: In the pages of this journal, a fruitful debate has evolved on the ethical legitimacy of fractional-reserve banking. In this article we respond to the new arguments raised by Evans (forthcoming) as we clarify our (Bagus, Howden and Gabriel 2015) position on the unethical and illegitimate nature of fractional-reserve banking. Fractional-reserve banking is not a recent financial innovation (unlike, e.g., money market mutual funds) but represents a long-standing legal aberration. The co-mingling of two mutually exclusive financial contracts, deposit and loan, confounds the contracting parties´ purposes, intents, rights and obligations. As a result it creates unsolvable legal difficulties and ethical dilemmas. While these problems are most evident in the case of a bank run, they also arise when trying to answer the simple question of “who owns a deposit?”
    Keywords: 100 % reserve requirement, Banking, Demand deposits, Fractional-reserve banking, Fraud
    JEL: E5
    Date: 2017–12–31
  39. By: Sangyup Choi; Davide Furceri; Prakash Loungani
    Abstract: Central bankers often assert that low inflation and anchoring of inflation expectations are good for economic growth (Bernanke 2007, Plosser 2007). We test this claim using panel data on sectoral growth for 22 manufacturing industries for 36 advanced and emerging market economies over the period 1990-2014. Inflation anchoring in each country is measured as the response of inflation expectations to inflation surprises (Levin et al., 2004). We find that credit constrained industries—those characterized by high external financial dependence and R&D intensity and low asset tangibility—tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, such as financial development, inflation, the size of government, overall economic growth, monetary policy counter-cyclicality and the level of inflation. Importantly, the results suggest that it is inflation anchoring and not the level of inflation per se that has a significant effect on average industry growth. Finally, the results are robust to IV techniques, using as instruments indicators of monetary policy transparency and independence.
    Date: 2018–03–02
  40. By: Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan); Taofeek O. Ayinde (Department of Economics, Fountain University, Nigeria.)
    Abstract: This study offers a new dimension to the analysis of spillover transmission in foreign exchange markets by accounting for the role of electioneering in addition to the global financial crisis. It does so by using Nigeria as a case study whose electioneering activities seem to be characterized by “money bags†with attendant effects on the behaviour of its domestic currency (Naira). Thus, the study tests for spillover transmission among Nigeria’s six most traded currencies namely the US Dollar, Euro, Pound Sterling, Yen, Swiss Franc and the West African Unit of Account (WAUA). Data utilized involve daily frequency over the period of 2001 to2015 and is partitioned into sub-samples on the basis of the electioneering periods in Nigeria and global financial crisis. The novel approaches of Diebold and Yilmaz (DY) (2009, 2012) are employed to compute the spillovers. The results show that electioneering process in Nigeria appears to have greater spillover effects on the naira than the global financial crisis and this finding is robust to alternative measures of exchange rates. Some implications of the findings to investors and policy makers are documented.
    Keywords: Panel unit root, PANICCA, Stock exchanges, OECD
    JEL: C12 C23 C33 G12 G23
    Date: 2018–03
  41. By: Kim, Kyunghun (Korea Institute for International Economic Policy); Kim, Soyoung (Seoul National University); Yang, Da Young (Korea Institute for International Economic Policy); Kang, Eunjung (Korea Institute for International Economic Policy)
    Abstract: Financial market integration mitigates production shocks that occur in a country by pooling the risk through portfolio diversification and this contributes to consumption smoothing for life-time utility maximization. Financial market integration also contributes to economic growth by supplying capital to developing countries via the integrated financial market. However, the integrated financial market also serves as a transition channel where the financial shock which originated from the center country spreads to its neighboring economies. In the event of a financial crisis, there is a potential risk of capital flight from neighboring countries to the financial center, meaning that many countries in the integrated financial market have an economic structure that is vulnerable to external shocks. As the uncertainties in the international financial market increased significantly during the financial crisis, financial variables such as asset prices, leverage, credit growth, and capital flows in many countries were heavily affected by global financial market sentiments rather than their own monetary policies. This is evidence supporting that many countries in the global financial market have constrained monetary policies. In this report, we try to understand how monetary policy is constrained in the context of the international financial market, from which we can derive relevant policy implications. To this end we analyze how monetary policies are restricted by introducing the concept of monetary policy independence.
    Keywords: Financial Market Integration; Monetary Policy
    Date: 2018–03–09
  42. By: Jun Nagayasu
    Abstract: We investigate the dynamics of condominium prices by using a new dataset contain- ing national and regional data on prices and disaggregate transaction volumes for Japan. In particular, we are interested in the role of capital inflows and transaction volumes, which have recently been discussed worldwide as important determinants of property prices. First, by using the multivariate cointegration method, we show that the condominium market has not experienced real estate bubbles since 2008. We document several economic fundamentals; notably, real income, mortgage rates, and capital flows, have influenced the long-term trend in condominium prices. Sec- ond, on some occasions, we find that condominium price inflation can be explained by transaction volumes, which are positively linked to information inflows, consis- tent with the market microstructure model. Transaction volumes influence price inflation in Tokyo, in particular at times of high market activities.
    Date: 2018–03
    Date: 2018
  44. By: Goldmann, Matthias; Pustovit, Grygoriy
    Abstract: While the debate about the needs and merits of cryptocurrency regulation is ongoing, the unprecedented price hikes of cryptocurrencies towards the end of 2017 triggered a somewhat unexpected sort of regulation in the form of public statements by governments and financial supervisors. It kicked in rather quickly and turned out to be much more effective than imagined. These interventions can be identified as one of the main factors that drove asset prices down, thereby preventing destabilizing bubbles. The experience of the supervisory response to the cryptocurrency bubble of the past months keeps important insights for any prospective regulation of cryptocurrencies. First, public statements are a highly effective regulatory tool in the short term as they manage market expectations, a fact which is well-known as forward guidance in monetary policy. So far, the legal framework in the EU takes insufficient account of the regulatory role of public statements. Second, regulation needs to keep up with the incredible speed of fintech innovations. Some regulators addressed the challenge by adopting a "sandbox" approach. However, the "sandbox" approach clearly calls for international cooperation. To achieve a balance between safety and innovation, international cooperation should emulate the experimental character of sandboxes. One could conceive of a "sandbox for regulators", an arrangement which would facilitate the exchange of information on regulatory initiatives among authorities but also the coordination of communication and forward guidance.
    Keywords: cryptocurrencies,blockchain,distributed ledger technology,regulation,forward guidance
    Date: 2018
  45. By: Ingvild Almås; Timothy K.M. Beatty; Thomas F. Crossley
    Abstract: The Hamilton method for estimating CPI bias is simple, intuitive, and has been widely adopted. We show that the method confiates CPI bias with variation in cost-of-living across income levels. Assuming a single price index across the income distribution is inconsistent with the downward sloping Engel curves that are necessary to implement the method. We develop and implement the Translated Engel curve (TEC) method that disentangles genuine CPI bias from differences caused by comparing changes in the cost of living across different income levels - non-homotheticity. The TEC method gives substantially different estimates of CPI bias prior to major reforms to the CPI in 1999 (post-Boskin), but both methods suggest very little CPI bias thereafter.
    Keywords: Engel curves, current price index, cost of living
    JEL: C43 C82 D12 D31 E31
    Date: 2018
  46. By: Rina Bhattacharya; Katja Mann; Mwanza Nkusu
    Abstract: This paper takes a fresh look at the determinants of reserves holding with the aim of highlighting similarities and differences in the motives for holding reserves among emerging markets (EMs), advanced economies (AEs), and low-income countries (LICs). We apply two panel estimation techniques: fixed effects (FE) and common correlated effects pooled mean group (CCEPMG). FE regression results suggest that precautionary savings motives, both current account- and capital account-related, are generally the most important determinants of reserves holding across country groups and that their importance has increased for AEs and LICs since the global financial crisis while receding for EMs. Mercantilist motives matter mostly for EMs. Intertemporal motives have been gaining importance everywhere over time. The CCEPMG results confirm the importance of precautionary motives and suggest that current account motives matter only for EMs and LICs and capital account motives matter for all groups while being more important for EMs in both the short and long runs. The CCEPMG results also point to the importance of taking into account unobserved common factors that affect coefficient estimates and the dynamic process through which reserves adjust to changes. At about 0.6, the speed of adjustment to the long-run equilibrium implies that more than half of the gap between actual and desired reserve holdings is closed within a year.
    Date: 2018–03–09

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