nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒04‒09
forty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Global Factors and Trend Inflation By Güneş Kamber; Benjamin Wong
  2. Portfolio rebalancing and the transmission of large-scale asset programmes: evidence from the euro area By Albertazzi, Ugo; Becker, Bo; Boucinha, Miguel
  3. US Infl ation and Infl ation Uncertainty Over 200 Years By Don Bredin; Stilianos Fountas
  4. Are BRICS Exchange Rates Chaotic? By Vasilios Plakandaras; Rangan Gupta; Luis A. Gil-Alana; Mark E. Wohar
  5. A Lesson from the Great Depression that the Fed Might Have Learned: A Comparison of the 1932 Open Market Purchases with Quantitative Easing By Michael D. Bordo; Arunima Sinha
  6. Real-time forecasting with macro-finance models in the presence of a zero lower bound By Leo Krippner; Michelle Lewis
  7. Reach for Yield and Fickle Capital Flows By Ricardo J. Caballero; Alp Simsek
  8. Deliberation in Committees : Theory and Evidence from the FOMC By Alessandro RIBONI; Francisco RUGE-MURCIA
  9. The inflation-growth relationship in SSA inflation targeting countries By Nomahlubi Mavikela; Simba Mhaka; Andrew Phiri
  10. Implications of the Expanding Use of Cash for Monetary Policy By Gros, Daniel
  11. The Fed's Discount Window: An Overview of Recent Data By Felix P. , Ackon; Ennis, Huberto M.
  12. Real exchange rate misalignments in the euro area By Michael Fidora; Claire Giordano; Martin Schmitz
  13. Cultural Differences in Monetary Policy Preferences By Adriel Jost
  14. Observing and shaping the market: the dilemma of central banks By Romain Baeriswyl; Camille Cornand; Bruno Ziliotto
  15. Technologies of money in the Middle Ages: the 'Principles of Minting' By Volckart, Oliver
  16. The dynamic impact of monetary policy on regional housing prices in the US: Evidence based on factor-augmented vector autoregressions By Fischer, Manfred M.; Huber, Florian; Pfarrhofer, Michael; Staufer-Steinnocher, Petra
  17. Allan Meltzer and the History of the Federal Reserve By Michael D. Bordo
  18. Pros and Cons of Demonetization as a Major Economic Leap Forward By Shaktiraj Bhavsar
  19. The Role of Financial Policy By Roger E A Farmer
  20. Central Bank Policy Announcements and Changes in Trading Behavior: Evidence from Bond Futures High Frequency Price Data By Koichiro Kamada; Tetsuo Kurosaki; Ko Miura; Tetsuya Yamada
  21. Central Banks: Evolution and Innovation in Historical Perspective By Michael D. Bordo; Pierre Siklos
  22. Some Thoughts On International Monetary Policy Coordination By Charles I. Plosser
  23. Deconstructing monetary policy surprises: the role of information shocks By Jarociński, Marek; Karadi, Peter
  24. Monetary policy in the grip of a pincer movement By Claudio Borio; Piti Disyatat; Mikael Juselius; Phurichai Rungcharoenkitkul
  25. The Risks of a Fed Balance Sheet Unconstrained by Monetary Policy By Charles I. Plosser
  26. Proposals for monetary reform: A critical assessment using the general quantity equation by Wolfgang Stützel By Tarne, Ruben
  27. Could a Higher Inflation Target Enhance Macroeconomic Stability? By José Dorich; Nicholas Labelle; Vadym Lepetyuk; Rhys R. Mendes
  29. Financial Disruption and State Dependant Credit Policy By Thibaud Cargoet; Jean-Christophe Poutineau
  30. Tightening by Stealth: Why keeping the balance sheet of the Federal Reserve constant is equivalent to a gradual exit By Gros, Daniel
  31. The Optimal Inflation Target and the Natural Rate of Interest By P. Andrade; J. Galí; H. Le Bihan; J. Matheron
  32. The liquidity effect of the Federal Reserve’s balance sheet reduction on short-term interest rates By Brauning, Falk
  33. Monetary Policy, Heterogeneity, and the Housing Channel By Serdar Ozkan; Kurt Mitman; Fatih Karahan; Aaron Hedlund
  34. Sovereign Default and Monetary Policy Tradeoffs By Bi, Huixin; Leeper, Eric M.; Leith, Campbell
  35. Central Bank Digital Currency And The Future Of Monetary Policy By Michael D. Bordo; Andrew T. Levin
  36. How does monetary policy affect income inequality in Japan? Evidence from grouped data By Martin Feldkircher; Kazuhiko Kakamu
  37. Monetary Policy Obeying the Taylor Principle Turns Prices Into Strategic Substitutes By Cornand, Camille; Heinemann, Frank
  38. Interbank Market Turmoils and the Macroeconomy By Kopiec, Pawel
  39. The distributional impact of monetary policy easing in the UK between 2008 and 2014 By Bunn, Philip; Pugh, Alice; Yeates, Chris
  40. New Perspectives on Forecasting Inflation in Emerging Market Economies: An Empirical Assessment By Duncan, Roberto; Martinez-Garcia, Enrique
  41. An Historical Perspective on the Quest for Financial Stability and the Monetary Policy Regime By Michael D. Bordo

  1. By: Güneş Kamber; Benjamin Wong (Reserve Bank of New Zealand)
    Abstract: Many studies have shown that domestic inflation in different countries tends to behave similarly. One possible explanation for this observation is that domestic inflation dynamics are in part determined by global factors. This implies that central banks need to account for global factors when explaining and predicting inflation. Their importance however depends on whether they have long lasting effects on domestic inflation rates. Using a large macroeconomic dataset, we propose a methodology to decompose inflation into its permanent (trend) and transitory (gap) components. We then quantify the role of domestic and global factors in determining each of these components. We first apply the model to a sample of economies with long-standing inflation targeting regimes. We then extend our analysis to a sample of ten Asian economies to draw comparisons. In our first sample, we find that global factors have a sizeable influence on inflation behaviour. However, this is mainly temporary and appears to reflect movements in commodity prices. The effect of global factors on trend inflation is small. In our second sample, a set of countries with more diverse monetary policy regimes, we find global factors have a much larger role. A possible explanation is that inflation targeting may have reduced the influence of global factors on trend inflation.
    Date: 2018–02
  2. By: Albertazzi, Ugo; Becker, Bo; Boucinha, Miguel
    Abstract: Large-scale asset programmes aim to impact the real economy through the financial system. The ECB has focused much of its policies on safe assets. An intended channel of transmission of this type of programme is the “portfolio rebalancing channel”, whereby investors are influenced to shift their investments away from such safe assets towards assets with higher expected returns, including lending to households and firms. We examine the portfolio rebalancing channel around the ECB’s asset purchase program (APP). We exploit cross-sectional heterogeneity in the impact of APP on the valuation of the financial portfolio held by different sectors of the European economy. Overall, our results provide evidence of an active portfolio rebalancing channel. In more vulnerable countries, where macroeconomic unbalances and relatively high risk premia remain, APP was mostly reflected into a rebalancing towards riskier securities. In less vulnerable countries, where constraints on loan demand and supply are less significant, the rebalancing was observed mostly in terms of bank loans. Examining large European banks, we confirm similar geographical differences. JEL Classification: E44, E51, G21
    Keywords: portfolio rebalancing, quantitative easing, search for yield, unconventional monetary policy
    Date: 2018–01
  3. By: Don Bredin (University College Dublin, Ireland); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: This paper uses historical US infl ation data covering over two centuries, to examine the impact of the establishment of the US Federal Reserve on average US in flation and infl ation uncertainty. We find that the founding of the Fed is associated with higher average US infl ation and lower infl ation uncertainty. Critically, these results are not driven by the post-1980 period, where the Fed policy is characterized by the dual mandate. Other important results are that the Gold Standard period is associated with both lower infl ation and in flation uncertainty, and that banking and stock market crises are a positive determinant of infl ation uncertainty and perhaps infl ation. The two world wars and the US civil war are associated with both higher infl ation and higher infl ation uncertainty. In addition, we find that the central bank has responded to increasing in flation uncertainty in a stabilizing manner in support of the Holland hypothesis.
    Keywords: asymmetric GARCH, recession, infl ation uncertainty.
    JEL: C22 E31
    Date: 2018–04
  4. By: Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Komotini, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Luis A. Gil-Alana (Department of Economics, University of Navarra, Spain); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha USA, and School of Business and Economics, Loughborough University, UK.)
    Abstract: In this paper, we focus on the stochastic (chaotic) attributes of the US dollar-based exchange rates for Brazil, Russia, India, China and South Africa (BRICS) using a long-run monthly dataset covering 1812M01-2017M12, 1814M01-2017M12, 1822M07-2017M12, 1948M08-2017M12, and 1844M01-2017M12, respectively. For our purpose, we consider the Lyapunov exponents, robust to nonlinear and stochastic systems, in both full—samples and in rolling windows. For comparative purposes, we also evaluate a long-run dataset of a developed currency market, namely British pound over the period of 1791M01-2017M12. Our empirical findings detect chaotic behavior only episodically for all countries before the dissolution of the Bretton Woods system, with the exception of the Russian ruble. Overall, our findings suggest that the establishment of the free floating exchange rate system have altered the path of exchange rates removing chaotic dynamics from the phenomenon, and hence, the need for policymakers to intervene in the currency markets for the most important emerging market bloc, should be carefully examined.
    Keywords: Exchange rate, chaos, Lyapunov exponent
    JEL: C46 E52
    Date: 2018–03
  5. By: Michael D. Bordo; Arunima Sinha
    Abstract: We examine the first QE program through the lens of an open-market operation under- taken by the Federal Reserve in 1932, at the height of the Great Depression. This program entailed large purchases of medium- and long-term securities over a four-month period. There were no prior announcements about the size or composition of the operation, how long it would be put in place, and the program ended abruptly. We use the narrative record to conduct an event study analysis of the operation. To do this, we construct a dataset of weekly-level Treasury holdings of the Federal Reserve in 1932, and the daily term structure of yields obtained from newspaper quotes. The event study indicates that the 1932 pro- gram dramatically lowered medium- and long-term Treasury yields; the declines in Treasury Notes and Bonds around the start of the operation were as large as 128 and 42 basis points respectively. A significant proportion of this decline in yields is attributed to the portfolio composition effect. We then use a segmented markets model to analyze the channel through which the open-market purchases affected the economy, namely portfolio rebalancing and signaling effects. Quarterly data from 1920-32 is used to estimate the model with Bayesian methods. We find that the significant degree of financial market segmentation in this period made the historical open market purchase operation more effective than QE in stimulating output growth. Additionally, if the Federal Reserve had continued its operations in 1932, and used the announcement strategy of the QE operation, the upturn in economic activity during the Great Depression could have been achieved sooner.
    Keywords: Â
    JEL: E43 E44 E58
    Date: 2016–10
  6. By: Leo Krippner; Michelle Lewis (Reserve Bank of New Zealand)
    Abstract: We investigate the real-time forecasting performance of macro-finance vector auto-regression models, which incorporate macroeconomic data and yield curve component estimates as would have been available at the time of each forecast, for the United States. Our results show a clear benefit from using yield curve information when forecasting macroeconomic variables, both prior to the Global Financial Crisis and continuing into the period where the lower-bound constrained shorter-maturity interest rates. The forecasting gains, relative to traditional macroeconomic models, for inflation and the Federal Funds Rate are generally statistically significant and economically material for the horizons up to the four years that we tested. However, macro-finance models do not improve the real-time forecasts over shorter horizons for capacity utilisation, our variable representing real economic activity. This is in contrast to the related recent macro-finance literature, which establishes such results (as do we) with pseudo real-time, i.e. truncated final-vintage, data. Nevertheless, for longer horizons that are more relevant for central bankers, yield curve information does improve activity forecasts. Overall, our results suggest that the yield curve contains fundamental information about the likely evolution of the macroeconomy. We find less convincing evidence for the reverse direction, which is likely because expectations of macroeconomic variables are already reflected in the yield curve. However, for longer horizons, we find there are still some gains from using macroeconomic variables to forecast the yield curve.
    Date: 2018–03
  7. By: Ricardo J. Caballero; Alp Simsek
    Abstract: In Caballero and Simsek (2018), we develop a model of fickle capital flows and show that, when countries are similar, international flows create global liquidity and mitigate crises despite their fickleness. In this paper, we focus on the asymmetric situation of Emerging Markets (EM) exchanging flows with Developed Markets (DM) that feature lower returns but less frequent crises. Relatively high DM returns help to mitigate EM crises, by reducing fickle inflows, and by providing greater liquidity. The situation dramatically changes as the DM returns fall, as this increases the fickle inflows driven by reach for yield and exacerbates EM crises.
    JEL: F3 F34 F4 G15
    Date: 2018–03
  8. By: Alessandro RIBONI; Francisco RUGE-MURCIA
    Abstract: This paper develops a model of committee decision-making where members of different expertise deliberate and share private information prior to voting. The model predicts that members truthfully reveal their private information and are willing to "change their minds" as a result of deliberation. The predictions of the model are evaluated using data from the Federal Open Market Committee.
    Keywords: deliberation, voting, mind-changes
    JEL: D7 E5
    Date: 2018
  9. By: Nomahlubi Mavikela (Department of Economics, Nelson Mandela University); Simba Mhaka (Department of Economics, Nelson Mandela University); Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: This paper investigates the relationship between inflation and economic growth for South Africa and Ghana using quarterly empirical data collected from 2001 to 2016 applied to the quantile regression method. For our full sample estimates we find that inflation is positively related with growth in Ghana at high inflation levels whilst inflation in South Africa exerts its least adverse effects at high inflation levels. However, when particularly focusing on the post-crisis period, we find inflation exerts negative effects at all levels of inflation for both countries with inflation having its least adverse effects at high levels for Ghana and at moderate levels for South Arica. Based on these findings bear important implications for inflation targeting frameworks adopted by Central Banks in both countries.
    Keywords: Inflation, Economic Growth, quantile regression, Inflation targeting; South Africa, Ghana, Sub-Saharan Africa (SSA).
    JEL: C32 C51 E31 E52 O40
    Date: 2018–01
  10. By: Gros, Daniel
    Abstract: Financial innovation seems to have had little impact on the oldest medium of transaction, namely cash. The ratio of currency in circulation to GDP has increased in most countries, independently of the continuing spread of cashless transactions. Currency is part of the monetary base. Its increase thus leads to an automatic increase in central banks’ balance sheets. This becomes relevant when the size of a central bank’s balance sheet becomes a policy instrument. Taking account of the increase in cash holdings can lead to a different view of the monetary policy stance over longer periods of time. Holding the size of the overall balance sheet constant is equivalent to a gradual exit when currency holdings continue to increase.
    Date: 2017–06
  11. By: Felix P. , Ackon (Federal Reserve Bank of Richmond); Ennis, Huberto M. (Federal Reserve Bank of Richmond)
    Abstract: From July 2010 until June 2015, the Federal Reserve made over 16,000 loans to financial institutions through the discount window. Recent regulations mandate the release of detailed information about individual loans two years after their occurrence. We study the newly available loan data and uncover the main patterns that broadly describe activity at the Fed’s discount window in recent years.
    Keywords: discount window;
    Date: 2018–03–23
  12. By: Michael Fidora (European Central Bank); Claire Giordano (Banca d’Italia); Martin Schmitz (European Central Bank)
    Abstract: Building upon a behavioural equilibrium exchange rate (BEER) model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses whether both the size and persistence of real effective exchange rate misalignments from the levels implied by economic fundamentals have been affected by the adoption of a single currency. A comparison of real misalignments across different country groupings (euro area, non-euro area, advanced and emerging economies), shows they are smaller in the euro area than in its main trading partners. However, in the euro area real disequilibria are also more persistent, although after the global financial crisis the reactivity of real exchange rates to past misalignments increased, and therefore the persistence decreased. In the absence of the nominal adjustment channel, an improvement in the quality of regulation and institutions is found to reduce the persistence of real exchange rate misalignments, plausibly by removing real rigidities.
    Keywords: Real effective exchange rate, equilibrium exchange rate, monetary union, regulation.
    JEL: E24 E30 F00
    Date: 2018–01
  13. By: Adriel Jost
    Abstract: The monetary policy preferences of a population are often explained by the country’s economic history. Based on Swiss data, this paper indicates that while different language groups may share the economic history, they demonstrate distinct monetary policy preferences. This suggests that distinct monetary policy preferences among the populations of different countries may be determined by not only their economic histories but also their distinct cultural backgrounds.
    Keywords: Inflation preferences, Culture, Monetary policy
    JEL: D01 E31 E52 E58 Z13
    Date: 2018
  14. By: Romain Baeriswyl; Camille Cornand; Bruno Ziliotto
    Abstract: While the central bank observes market activity to assess economic fundamentals, it shapes the market outcome through the conduct of monetary policy. A dilemma arises from this dual role because the more the central bank shapes the market, the more it influences the informational content of market prices. This paper analyses the optimal monetary policy action and disclosure when central bank information is endogenous for three operational frameworks: pure communication, action and communication, and signalling action. Although taking the endogenous nature of central bank information into account calls for less activism from the central bank, full transparency remains optimal when the weight assigned to price dispersion in social welfare takes on its micro-founded value.
    Keywords: Endogenous information, overreaction, central bank communication
    JEL: D82 E52 E58
    Date: 2018
  15. By: Volckart, Oliver
    Abstract: The paper discusses which options medieval political authorities had to satisfy the demand for complex currencies. It distinguishes several models, each of which caused problems: A first one, where the basic unit was supplemented by a range of other denominations whose weight and purity where exactly proportional. While this did not take the proportionally larger labour costs involved in the production of small change into account, the second model did: here, small change had an over proportionally high content of base metal. In consequence, the stable numerical ratios between units of the same currency began to shift. The third option involved using gold for high purchasing power coins; a strategy that made currencies vulnerable to changes in the relative market prices of gold and silver. Again, the outcome was a that the numerical ratios between units of the same currency became instable. The paper discusses how political authorities chose between these options, how they supplied their mints with the necessary bullion and how minting was organised.
    Keywords: Medieval monetary policies; mining; minting
    JEL: E42 E52 N13
    Date: 2018–02
  16. By: Fischer, Manfred M.; Huber, Florian; Pfarrhofer, Michael; Staufer-Steinnocher, Petra
    Abstract: In this study interest centers on regional differences in the response of housing prices to monetary policy shocks in the US. We address this issue by analyzing monthly home price data for metropolitan regions using a factor-augmented vector autoregression (FAVAR) model. Bayesian model estimation is based on Gibbs sampling with Normal-Gamma shrinkage priors for the autoregressive coefficients and factor loadings, while monetary policy shocks are identified using high-frequency surprises around policy announcements as external instruments. The empirical results indicate that monetary policy actions typically have sizeable and significant positive effects on regional housing prices, revealing differences in magnitude and duration. The largest effects are observed in regions located in states on both the East and West Coasts, notably California, Arizona and Florida.
    Keywords: Regional housing prices, metropolitan regions, Bayesian estimation, high-frequency identification
    Date: 2018
  17. By: Michael D. Bordo
    Abstract: Allan Meltzer was one of the leading monetary economists of the twentieth century. Allan was a key player in the debates over Monetarist and Keynesian doctrines as well as the debates over how to conduct monetary policy. He was always a strong advocate for rules-based monetary and lender of last resort policy. A salient part of his contribution was his monumental two volume History of the Federal Reserve 1913 to 1986 (2003 and 2010). In this essay, I present the main arguments of the History and provide an evaluation his contribution.
    Keywords: Meltzer, Federal Reserve, monetary economics, monetary policy
    JEL: N12 N22
    Date: 2017–07
  18. By: Shaktiraj Bhavsar (Pandit Deendayal Petroleum University, Gujarat, India)
    Abstract: Marking half of his elected term as India’s Prime Minister, Narendra Modi, announced the Policy of Demonetization. Primarily aimed at eradicating black money, this policy caught the nation off-guard, resulting in financial chaos. The old unit of currency and its highest denominations that were the notes of rupees 500 and 1000 were demonetized and pulled out of the total cash flow in the country. These two denominations constituted 86% of the domestic cash supply. The objective of this paper to systematically analyze the consequences of this bold and unexpected policy through the secondary data. This policy change was strategically placed to block financial funding to terrorist organizations at the Kashmir border.
    Keywords: Policy, Demonetization, Economy, Government
    Date: 2017
  19. By: Roger E A Farmer
    Abstract: I review the contribution and influence of Milton Friedman’s 1968 presidential address to the American Economic Association. I argue that Friedman’s influence on the practice of central banking was profound and that his argument in favour of monetary rules was responsible for thirty years of low and stable inflation in the period from 1979 through 2009. I present a critique of Friedman’s position that market-economies are self-stabilizing and I describe an alternative reconciliation of Keynesian economics with Walrasian general equilibrium theory from that which is widely accepted today by most neo-classical economists. My interpretation implies that government should intervene actively in financial markets to stabilize economic activity.
    Keywords: Keynesian economics, monetarism, natural rate of unemployment
    JEL: E3 E4
    Date: 2018–03
  20. By: Koichiro Kamada (Deputy Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Tetsuo Kurosaki (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Ko Miura (Research and Statistics Department, Bank of Japan (currently, University of Wisconsin-Madison)); Tetsuya Yamada (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan, (E-mail:
    Abstract: We present a theoretical model to explain how financial traders incorporate public and private information into security prices. We explain that the model enables us to simultaneously identify when public information caused surprises and how large an impact it had on the market. By applying the model to the tick-by-tick data on Japanese government bond futures prices, we show that the Bank of Japan fs introduction of quantitative and qualitative monetary easing was one of the most surprising episodes during the period from 2005 to 2016. We also show that the sensitivity to the Bank fs announcements has strengthened since the introduction of the negative interest rate policy, whereas the sensitivity to economic indicators and surveys has weakened substantially.
    Keywords: Central bank announcements, Government bond futures, Herding behavior, Information efficiency, Market microstructure
    JEL: C14 D40 D83 E58 G12 G14
    Date: 2018–03
  21. By: Michael D. Bordo; Pierre Siklos
    Abstract: Central banks have evolved for close to four centuries. This paper argues that for two centuries central banks caught up to the strategies followed by the leading central banks of the era; the Bank of England in the eighteenth and nineteenth centuries and the Federal Reserve in the twentieth century. It also argues that, by the late 20th century, small open economies were more prone to adopt a new policy regime when the old one no longer served its purpose whereas large, less open, and systemically important economies were more reluctant to embrace new approaches to monetary policy. Our study blends the quantitative with narrative explanations of the evolution of central banks. We begin by providing an overview of the evolution of monetary policy regimes taking note of the changing role of financial stability over time. We then provide some background to an analysis that aims, via econometric means, to quantify the similarities and idiosyncrasies of the ten central banks and the extent to which they represent a network of sorts where, in effect, some central banks learn from others.
    Keywords: monetamonetary policy regimes, inflation, small open economies
    JEL: E02 E31 E32 E42 E58
    Date: 2017–05
  22. By: Charles I. Plosser
    Abstract: In this short paper, I review previous efforts at international coordination among central banks. In particular, I highlight the ultimate failure of both the gold standard and the Bretton Woods regimes. In both cases, the desire for a fixed rate regime forcing each country to make domestic monetary and fiscal policies subservient to pressures from the external balance. These regimes were not incentive compatible with sovereign nations' desire to pursue independent monetary and fiscal policy. Thus, future efforts at coordination that seek to constrain or limit central bank's domestic goals will most likely fail as well. I agree with John Taylor that the best results are likely to arise in more rule-like regimes with flexible exchange rates and capital mobility where the rules are more incentive compatible with domestic desires.Â
    Keywords: Â
    Date: 2018–01
  23. By: Jarociński, 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. 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. JEL Classification: E32, E52, E58
    Keywords: central bank private information, event study, high-frequency identification, monetary policy shock, structural VAR
    Date: 2018–02
  24. By: Claudio Borio; Piti Disyatat; Mikael Juselius; Phurichai Rungcharoenkitkul
    Abstract: Monetary policy has been in the grip of a pincer movement, caught between growing financial cycles, on the one hand, and an inflation process that has become quite insensitive to domestic slack, on the other. This two-pronged attack has laid bare some of the limitations of prevailing monetary policy frameworks, particularly in the analytical notions that have guided much of its practice. We argue that the natural rate of interest as a guidepost for monetary policy has a couple of limitations: the concept, as traditionally conceived, neglects the state of the financial cycle in the definition of equilibrium; in addition, it underestimates the role that monetary policy regimes may play in persistent real interest rate movements. These limitations may expose monetary policy to blindsiding by the collateral damage that comes from an unhinged financial cycle. We propose a more balanced approach that recognises the difficulties monetary policy has in fine-tuning inflation and responds more systematically to the financial cycle.
    Keywords: monetary policy, financial stability, financial cycle, natural interest rate, inflation
    JEL: E32 E40 E44 E50 E52
    Date: 2018–03
  25. By: Charles I. Plosser
    Abstract: A consequence of the unconventional policies adopted by the Federal Reserve during the financial crisis and subsequent recession is that its balance sheet is about five times larger than prior to the crisis. A return to the pre-crisis operating regime of adjusting bank reserves to achieve a fed funds rate target would likely require a dramatic reduction in the current balance sheet. Some suggest that the Fed replace the funds rate target with the interest rate it pays on reserves (IOR) as the instrument of policy. This regime would untether the balance sheet from the conduct of monetary policy, eliminating the necessity of shrinking the current balance sheet and freeing the Fed to use the balance sheet for other purposes. I focus on the ramifications of a balance sheet unconstrained by monetary policy. My concerns stem, in part, from the nature of our institutions and the incentives of political actors and policy-makers that must operate within these institutions. A large balance sheet untethered to the conduct of monetary policy creates the opportunity and incentive for political actors to exploit the Fed's balance sheet to conduct off-budget fiscal policy and credit allocation. Such actions would undermine independence and further politicize the Federal Reserve.
    Keywords: Â
    Date: 2017–02
  26. By: Tarne, Ruben
    Abstract: Europe is still suffering from the turmoil created by the Great Financial Crisis. Finding solutions to the danger of new financial crises is an important criterion for a stable European Union. Proponents of the Sovereign Money System (SMS) identify the ability of private banks to create money as the main contributor to the outbreak of financial crisis. Hence, they want to put the control of the monetary base into the hands of a public institution. This paper will investigate whether the strategy of setting the monetary base - in a SMS - is grounded in realistic assumptions. They claim that the velocity for "real" transactions is stable and therefore, a "workable" link from money base to economic activity can be established. Yet, this claim stands on the shaky assumption that "payment traditions" are unchanging and the dubious concept of "velocity of circulation". Post-Keynesians have criticised the latter, but have not contributed an alternative concept of the relationship between the level of economic activity and the means of payment necessary to achieve it. This, however, would help clarify the critique of a monetary policy strategy, which tries to set the monetary base in the SMS environment, as it would illuminate the specific assumptions that need to hold in order for a link between economic activity and the money supply to be stable. Already in 1957, Stützel tried to establish a relationship - based on balance mechanics - between economic activity and changes in means of payment that was free of the limitations of the equation of exchange. The paper will reformulate Stützel's equation and clarify it with the help of stock-flow consistent Taccounts in order to apply it to the SMS. In doing so, it becomes obvious that the connection between economic activity and changes in means of payment is quite unpredictable. For a stable relationship, a lot of very specific, unrealistic assumptions need to hold. Therefore, the setting of an "optimal" amount of the monetary base in the SMS is, apart from many other of the SMS' problems, not realistic. Stützel's "general quantity equation" provides a clear relationship between money and economic activity that could help the existing endogenous money theory to be more precise in that regard.
    Keywords: Sovereign Money,Balance mechanics,Stock-flow consistency,Demand for money,Money supply,Financial crises
    JEL: E41 E42 E51 E58 G01
    Date: 2018
  27. By: José Dorich; Nicholas Labelle; Vadym Lepetyuk; Rhys R. Mendes
    Abstract: Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2 per cent. We evaluate whether an increase in the inflation target to 3 or 4 per cent could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound and (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP.
    Keywords: Economic models, Inflation targets, Monetary policy framework
    JEL: E32 E37 E43 E52
    Date: 2018
  28. By: Hanna O. Sakhno (National Research University Higher School of Economics)
    Abstract: After the recent global financial crisis, central banks in advanced and developing economies found themselves unable to stick to their mandate goal of price stability by resorting to traditional instruments of monetary policy. When key interest rates approached the zero bound, the need to develop a new toolkit of liquidity provision arose. Central banks embarked on numerous non-standard monetary policy measures aimed at ensuring financial stability and restoring economic growth. Communication has become an effective auxiliary instrument of economic policy, and markets started paying precise attention to the way central bankers report information regarding the future path of monetary policy. The purpose of this paper is to provide an overview of recent trends and developments in central bank communication strategies. By resorting to the existing literature, we analyze the origins of central bank communication and the evolution of its role in time. We also study the main instruments of communication strategies of large central banks. In the final part of the study, we investigate the communication strategy of the US Federal Reserve and the way it may cause spillovers to fragile markets abroad. We outline at least three major channels of international policy transmission: through stocks, bonds and exchange rates fluctuations
    Keywords: central bank communication, unconventional monetary policy, international spillovers, the Federal Reserve.
    JEL: E42 E52 E58
    Date: 2018
  29. By: Thibaud Cargoet (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique); Jean-Christophe Poutineau (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper analyses how long credit policy measures should last to restore a normal function-ning of the loan market. We build a DSGE model where financial intermediaries and non financial agents face balance sheet constraints. Our results are two. First, we find that a credit policy has an intertemporal effect as it smoothes the negative shock along a greater number of periods. It dampens the inital negative consequences of financial shocks at the expense of a higherlength of the uncoventional period. Second, accounting for the joint effect of shocks on the length of the starurated period and on the fluctuation of activity in the transitory period back to the steady state situation, we find that the positive effect of this policy requires some qualification. For the benchmark calibration, conducting such a policy affects activity positively. However, for a high value of firm's leverage we find that unconventional monetary policy can be counterproductive. Ignoring credit policy will generate higher short run losses in activity but the transition to the steady state would be quicker, implying lower short run activity losses than those encountered with a credit policy where the transition to the steady state would last longer.
    Keywords: Financial Frictions,Financial Accelerator,DSGE model
    Date: 2018–01
  30. By: Gros, Daniel
    Abstract: Exiting from unconventional monetary policies is now a key issue for central banks, and especially for the US Federal Reserve. This paper argues that the Fed already began this exit some time ago, and that the relevant part of its balance sheet has already shrunk by about one-quarter of GDP. Pursuing the current policy of reinvesting would lead to a full exit within ten years.
    Date: 2017–06
  31. By: P. Andrade; J. Galí; H. Le Bihan; J. Matheron
    Abstract: We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-forone: increases in the optimal inflation rate are generally lower than declines in the steadystate real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.
    Keywords: inflation target, effective lower bound.
    JEL: E31 E52 E58
    Date: 2018
  32. By: Brauning, Falk (Federal Reserve Bank of Boston)
    Abstract: I examine the impact of the Federal Reserve’s balance sheet reduction on short-term interest rates emanating from the declining supply of reserve balances. Using an exogenous shift in the supply of reserves, I estimate that by January 2019, when the Fed will have reduced its portfolio by $500 billion, the overnight repurchase agreement (repo) spread (relative to the lower bound of the federal funds target range) will be 10 basis points higher and the fed funds spread will be 2 basis points higher than in October 2017, all else being equal. I also find that a declining supply of reserve balances reduces recourse to the Fed’s overnight reverse repo (RRP) facility, which might initially dampen the tightening effects on short-term rates of the Fed’s balance sheet reduction.
    Keywords: monetary policy; interest rates; liquidity effect; Federal Reserve balance sheet
    JEL: E42 E43 E52 G21
    Date: 2017–10–01
  33. By: Serdar Ozkan (University of Toronto); Kurt Mitman (Stockholm University); Fatih Karahan (Federal Reserve Bank of New York); Aaron Hedlund (University of Missouri)
    Abstract: We investigate the role of housing and mortgage debt in the transmission and effectiveness of monetary policy. First, monetary policy induced-movements in house prices translate into consumption changes because of wealth effects. Second, a contractionary monetary shock raises the cost of borrowing which reduces the demand and as a result the liquidity of the housing market, further depressing house prices and further increases the cost of borrowing. Furthermore, nominal long-term mortgage debt implies that changes in monetary policy result in redistribution between lenders and borrowers and generate cash-flow effects that are larger for borrowing constrained households. We build a heterogenous agent New Keynesian model with a frictional housing market to quantify the various mechanisms. The model is able to match the rich empirical heterogeneity in home ownership, leverage and MPC across households. In particular, our model is consistent with the significant difference in MPC between low- and high-LTV households that we document in the data. Our quantitative findings are as follows: First, we find that about 20% of the drop in aggregate consumption against a contractionary monetary shock is due to declining house prices. Second, we find asymmetric responses of the economy to shocks, with contractionary shocks yielding a larger response of all variables. Finally, we investigate how the transmission of monetary policy depends on the distribution of mortgage debt and find that monetary policy is more effective in stimulating the economy in an high-LTV environment.
    Date: 2017
  34. By: Bi, Huixin (Federal Reserve Bank of Kansas City); Leeper, Eric M.; Leith, Campbell
    Abstract: The paper is organized around the following question: when the economy moves from a debt-GDP level where the probability of default is nil to a higher level- the "fiscal limit" where the default probability is non-negligible, how do the effects of routine monetary operations designed to achieve macroeconomic stabilization change?
    Keywords: Fiscal Sustainability; Sovereign Debt Default; Fiscal Limit
    JEL: E30 E62 H30 H60
    Date: 2018–03–12
  35. By: Michael D. Bordo; Andrew T. Levin
    Abstract: We consider how a central bank digital currency (CBDC) can transform all aspects of the monetary system and facilitate the systematic and transparent conduct of monetary policy. Drawing on a very long strand of literature in monetary economics, we find a compelling rationale for establishing a CBDC that serves as a stable unit of account, a practically costless medium of exchange, and a secure store of value. In particular, the CBDC should be universally accessible and interest-bearing, and the central bank should adjust its interest rate to foster true price stability.
    Keywords: monetary policy frameworks, payment technologies, simple rules.
    JEL: B12 B13 B22 E42 E52 E58 E63
    Date: 2017–04
  36. By: Martin Feldkircher; Kazuhiko Kakamu
    Abstract: We examine the effects of monetary policy on income inequality in Japan using a novel econometric approach that jointly estimates the Gini coefficient based on micro-level grouped data of households and the dynamics of macroeconomic quantities. Our results indicate different effects on income inequality for different types of households: A monetary tightening increases inequality when income data is based on households whose head is employed (workers' households), while the effect reverses over the medium term when considering a broader definition of households. Differences in the relative strength of the transmission channels can account for this finding. Finally we demonstrate that the proposed joint estimation strategy leads to more informative inference while results based on the frequently used two-step estimation approach yields inconclusive results.
    Date: 2018–03
  37. By: Cornand, Camille (University of Lyon); Heinemann, Frank (TU Berlin)
    Abstract: Monetary policy affects the degree of strategic complementarity in firms pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications.
    Keywords: monopolistic competition; monetary policy rule; pricing decisions; strategic complementarity; strategic substitutability.;
    JEL: E52 C72
    Date: 2018–04–04
  38. By: Kopiec, Pawel
    Abstract: This paper studies the macroeconomic consequences of interbank market disruptions caused by higher counterparty risk. I propose a novel, dynamic model of banking sector where banks trade liquidity in the frictional OTC market à la Afonso and Lagos (2015) that features counterparty risk. The model is then embedded into an otherwise standard New Keynesian framework to analyze the macroeconomic impact of interbank market turmoils: economy suffers from a prolonged slump and deflationary pressure during such episodes. I use the model to analyze the effectiveness of two policy measures: rise in the supply of central bank reserves and interbank market guarantees in mitigating the adverse effects of those disruptions.
    Keywords: Financial crisis, Interbank market, Policy intervention, OTC market
    JEL: E44 E58 G21
    Date: 2018–03–07
  39. By: Bunn, Philip (Bank of England); Pugh, Alice (Bank of England); Yeates, Chris (Bank of England)
    Abstract: Monetary policy has the potential to affect income and wealth inequality in the short run. This has always been true, but given the unprecedented period of accommodative policy in a number of advanced economies including the UK over the past decade, it has become more important to understand the size and direction of these effects. We use panel data from the ONS Wealth and Assets Survey on households’ characteristics and balance sheet positions to estimate the distributional impacts of UK monetary policy between 2008 and 2014. Our results suggest that the overall effect of monetary policy on standard relative measures of income and wealth inequality has been small. Given the pre-existing disparities in income and wealth, we estimate that the impact on each household varied substantially across the income and wealth distributions in cash terms, but in percentage terms the effects were broadly similar. We estimate that households around retirement age gained the most from the support to wealth, but that support to incomes disproportionately benefited the young. Overall, our results illustrate the importance of taking a broad-based approach to studying the distributional impacts of monetary policy and of considering channels jointly rather than in isolation.
    Keywords: Monetary policy; households; inequality; distributional effects
    JEL: D12 D31 E52 E58
    Date: 2018–03–27
  40. By: Duncan, Roberto (Ohio University); Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: We use a broad-range set of inflation models and pseudo out-of-sample forecasts to assess their predictive ability among 14 emerging market economies (EMEs) at different horizons (1 to 12 quarters ahead) with quarterly data over the period 1980Q1-2016Q4. We find, in general, that a simple arithmetic average of the current and three previous observations (the RW-AO model) consistently outperforms its standard competitors - based on the root mean squared prediction error (RMSPE) and on the accuracy in predicting the direction of change. These include conventional models based on domestic factors, existing open-economy Phillips curve-based specifications, factor-augmented models, and time-varying parameter models. Often, the RMSPE and directional accuracy gains of the RW-AO model are shown to be statistically significant. Our results are robust to forecast combinations, intercept corrections, alternative transformations of the target variable, different lag structures, and additional tests of (conditional) predictability. We argue that the RW-AO model is successful among EMEs because it is a straightforward method to downweight later data, which is a useful strategy when there are unknown structural breaks and model misspecification.
    JEL: E31 F41 F42 F47
    Date: 2018–01–01
  41. By: Michael D. Bordo
    Abstract: This paper surveys the co-evolution of monetary policy and financial stability for a number of countries across four exchange rate regimes from 1880 to the present. I present historical evidence on the incidence, costs and determinants of financial crises, combined with narratives on some famous financial crises. I then focus on some empirical historical evidence on the relationship between credit booms, asset price booms and serious financial crises. My exploration suggests that financial crises have many causes, including credit driven asset price booms, which have become more prevalent in recent decades, but that in general financial crises are very heterogeneous and hard to categorize. Two key historical examples stand out in the record of serious financial crises which were linked to credit driven asset price booms and busts: the 1920s and 30s and the Global Financial Crisis of 2007-2008. The question that arises is whether these two 'perfect storms' should be grounds for permanent changes in the monetary and financial environment. I raise some doubts.
    Keywords: monetary policy, financial stability, financial crises, credit driven asset price booms
    JEL: E3 E42 G01 N1 N2
    Date: 2017–08

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