nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒04‒23
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The effects of unconventional monetary policy in the euro area By Adam Elbourne; Kan Ji; Sem Duijndam
  2. Features of Interest Rate Policy Under the Inflation Targeting Regime By Kiyutsevskaya, Anna; Trunin, Pavel
  3. Central Banks Going Long By Ricardo Reis
  4. Monetary policy, de-anchoring of inflation expectations, and the 'new normal' By Lucio Gobbi; Ronny Mazzocchi; Roberto Tamborini
  5. Monetary Policy and Liquid Government Debt By Andolfatto, David; Martin, Fernando M.
  6. “Whatever it takes” to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects By Afonso, António; Arghyrou, Michael G; Gadea, María Dolores; Kontonikas, Alexandros
  7. The Response of European Energy Prices to ECB Monetary Policy By Hipòlit Torró
  8. Monetary Policy obeying the Taylor Principle Turns Prices into Strategic Substitutes By Camille Cornand; Frank Heinemann
  9. Measuring the Impact of Monetary Policy Attention on Global Asset Volatility Using Search Data By Paul Wohlfarth
  10. Do interest rates play a major role in monetary policy transmission in China? By Güneş Kamber; Madhusudan Mohanty
  11. Analysis of the Consequences of the Development of Payment Systems for Monetary Policy in the Context of Deepening Financial Markets By Sinelnikova-Muryleva, Elena
  12. Effects of Unconventional Monetary Policy on European Corporate Credit By Machiel van Dijk; Andrei Dubovik
  13. Inflation and professional forecast dynamics: an evaluation of stickiness, persistence, and volatility By Elmar Mertens; James M. Nason
  14. Money in the Production Function By Prescott, Edward C.; Wessel, Ryan
  15. Taking Stock of Monetary and Exchange Rate Regimes in Emerging Europe By Nazim Belhocine; Ernesto Crivelli; Nan Geng; Tiberiu Scutaru; Johannes Wiegand; Zaijin Zhan
  16. Relationship Between Short-Term Interest Rates and Excess Reserves; A Logistic Approach By Romain M Veyrune; Guido della Valle; Shaoyu Guo
  17. Dirty float or clean intervention? The Bank of England on the foreign exchange market, 1952-72 By Alain Naef
  18. The Effect of Monetary Policy on Global Fixed Income Covariances By Paul Wohlfarth
  19. Modeling Inflation Expectations in the Russian Economy By Perevyshin, Yury; Rykalin, A.S.
  20. Endogenous Growth and Real Effects of Monetary Policy: R&D and Physical Capital Complementarities in a Cash-in-Advance Economy By Pedro Mazeda Gil; Gustavo Iglésias,
  21. The enduring link between demography and inflation By Juselius, Mikael; Takáts, Előd
  22. Monetary Policy Peculiarities in Countries with Natural Resources, with Significant Changes in Terms of Trade By Dobronravova, Elizaveta
  23. Exchange Rate Developments and Policies in the Caucasus and Central Asia By Mark A Horton; Hossein Samiei; Natan P. Epstein; Kevin Ross
  24. An Empirical Investigation of the Emergence of Money: Contrasting Temporal Difference and Opportunity Cost Reinforcement Learning By Lefebvre, Germain; Nioche, Aurélien; Bourgeois-Gironde, Sacha; Palminteri, Stefano
  25. Financial Bubbles in Interbank Lending By Luisa Corrado; Tobias Schuler
  26. Capital Flow Management with Multiple Instruments By Viral V. Acharya; Arvind Krishnamurthy
  27. Foreign Safe Asset Demand and the Dollar Exchange Rate By Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
  28. Empirical Evidence for Collective Motion of Prices with Macroeconomic Indicators in Japan By KICHIKAWA Yuichi; IYETOMI Hiroshi; AOYAMA Hideaki; YOSHIKAWA Hiroshi
  29. Central bank independence-the case of the National Bank of Republic of Macedonia By Anita Angelovska - Bezhoska

  1. By: Adam Elbourne (CPB Netherlands Bureau for Economic Policy Analysis); Kan Ji (CPB Netherlands Bureau for Economic Policy Analysis); Sem Duijndam (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: How effective are unconventional monetary policies? Through which mechanisms do they work? Central banks have been conducting monetary policy through unconventional means such as expanding their balance sheets or forward guidance because the conventional instrument of monetary policy, the short-term policy rate, has been at or close to the zero lower bound since shortly after the fall of Lehmann Brothers. These unconventional monetary policies are new and bring with them many questions, which were addressed in the CPB policy brief ‘Onderweg naar normaal monetair beleid’ [CPB policy brief 2017/07, 8 June 2017]. Understanding how and why unconventional monetary policy works is a crucial first step for answering subsequent questions, such as the likely effects of the withdrawal of unconventional monetary policy, or about how domestic policy makers can best respond. This discussion paper contains a detailed presentation of the new scientific evidence we reported in the policy brief, and adds to the relatively scarce literature in this field We estimate the effects of unconventional monetary policy shocks on output and inflation in the euro area using data from 2009 to 2016, which covers the period of all of the major unconventional monetary policies that the ECB has used. We employ a two stage estimation strategy: first, we identify unconventional monetary policy shocks in a dedicated euro area level structural vector autoregression (SVAR) model. Subsequently we use these unconventional monetary policy shocks in country level models. By estimating the effects of unconventional monetary policy shocks in the individual countries of the euro area, we aim to shed some light on the most important transmission mechanisms through which unconventional monetary policy works. We find weak evidence that expansionary unconventional monetary policy shocks increase output growth, but the effects on inflation at the aggregate euro area level are economically insignificant. At the individual country level we find a range of responses across the countries in our sample, and those differences in the magnitudes of output responses are consistent with some of the transmission channels that have been proposed for how unconventional monetary policy works. Interestingly, though, we find that healthier banking systems at the start of our sample and lower government debts are associated with larger peak output responses. This is the opposite of what the bank lending channel predicts, which is one of the most important proposed channels. We are not the only authors to have found this, for example Van Dijk and Dubovik (2018) also find no evidence of the bank lending channel when they focus on the effect of the announcement of the ECB’s Asset Purchase Programme in January 2015 on lending rates.
    JEL: C32 E52
    Date: 2018–02
  2. By: Kiyutsevskaya, Anna (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Trunin, Pavel (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: For inflation targeting central banks interest rate policy is the main way to achieve the ultimate goal of monetary policy and to influence the economy. However, despite the fact that in most cases the operational goal is to achieve a certain level of short-term money market rates, the features of the operational mechanism are determined by the characteristics of the domestic economy and the global economy as a whole. Moreover, instruments of interest-rate policy available for inflation-targeting central banks are used to solve a wide range of problems, including exchange rate dynamics and capital flow control.
    Date: 2018–03
  3. By: Ricardo Reis (Centre for Macroeconomics (CFM); London School of Economics (LSE))
    Abstract: Central banks have sometimes turned their attention to long-term interest rates as a target or as a diagnosis of policy. This paper describes two historical episodes when this happened—the US in 1942-51 and the UK in the 1960s—and uses a model of inflation dynamics to evaluate monetary policies that rely on going long. It concludes that these policies for the most part fail to keep inflation under control. A complementary methodological contribution is to re-state the classic problem of monetary policy through interest-rate rules in a continuous-time setting where shocks follow diffusions in order to integrate the endogenous determination of inflation and the term structure of interest rates.
    Keywords: Taylor rule, Yield curve, Pegs, Ceilings, Affine models
    JEL: E31 E52 E58
    Date: 2018–03
  4. By: Lucio Gobbi; Ronny Mazzocchi; Roberto Tamborini
    Abstract: Persistently low inflation rates in the Euro Area raise the question whether inflation is still credibly anchored to the Euro-system’s medium term target of below, but close to 2%. The purpose of this paper is twofold. First, we investigate why agents’ expectations that over the business cycle inflation will remain in line with the target begin to falter. Our hypothesis is that agents form expectations in terms of their confidence in the "normal regime", which is updated observing the state of the economy. Second, we study how the de-anchoring of expectations interacts with monetary policy determining whether the central bank is still able to achieve its target - and hence re-anchor inflation expectations - or whether the system drifts away towards depressed states of low inflation and output. Two are our main findings. The first is that, facing unfavourable shocks, if inflation expectations "fall faster" than the policy rate, and the zero lower bound is reached without correcting the shock, the system converges to a new steady state - the “new normal†- with permanent negative gaps. The second is that a more aggressive monetary policy is ineffective both at the ZLB and above the ZLB, when the shock is large and/or when the reactivity of inflation expectations is high enough. This last finding seems to support the necessity, in those conditions, to abandon conventional monetary policy and to switch to an aggressive reflationary policy that prevents the entrenchment of deflationary expectations
    Keywords: Monetary Policy, Zero Lower Bound, New Normal, Inflation Expectations
    JEL: E50 E52 E58
    Date: 2018
  5. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Martin, Fernando M. (Federal Reserve Bank of St. Louis)
    Abstract: We examine the conduct of monetary policy in a world where the supply of outside money is controlled by the fiscal authority-a scenario increasingly relevant for many developed economies today. Central bank control over the long-run inflation rate depends on whether fiscal policy is Ricardian or Non-Ricardian. The optimal monetary policy follows a generalized Friedman rule that eliminates the liquidity premium on scarce treasury debt. We derive conditions for determinacy under both fiscal regimes and show that they do not necessarily correspond to the Taylor principle. In addition, Non-Ricardian regimes may suffer from multiplicity of steady-states when the government runs persistent deficits.
    Keywords: monetary policy; in ation; Taylor rule; determinacy; Ri- cardian; liquid bonds
    JEL: E40 E52 E60 E63
    Date: 2018–01–16
  6. By: Afonso, António; Arghyrou, Michael G; Gadea, María Dolores; Kontonikas, Alexandros
    Abstract: This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach. First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016. Second, we estimate the impact of ECB policy interventions on the time-varying risk factor sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programme in August 2012. This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk. Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis.
    Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy
    Date: 2018–04–01
  7. By: Hipòlit Torró (University of Valencia, Department of Financial and Actuarial Economics)
    Abstract: To our knowledge, this paper is the first to discuss the response of European energy commodity prices to unexpected monetary policy surprises from the European Central Bank. Using the Rigobon (2003) identification through heteroscedasticity method, we find a significant and positive response during the crisis period for Brent and coal. Similar results are obtained by other authors for European financial assets in this period. This result reinforces the idea that during this period, financial assets and some commodities positively responded to conventional and unconventional expansionary monetary policy measures, increasing confidence about the survival of the European monetary union. The remaining European energy commodities (electricity, EUAs, and natural gas prices) seem to be unaffected by monetary policy actions. We think these results are of interest to those economic agents and institutions involved in European energy markets and are especially important for the European Central Bank in order to predict the consequences of its monetary policy on the inflation objective.
    Keywords: Brent, Monetary Policy, European Central Bank, Energy Commodities
    JEL: C26 E58 G13 Q41
    Date: 2018–03
  8. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Frank Heinemann (TUB - Technische Universität 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. 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 monopolis-tic 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
    Date: 2018–04–05
  9. By: Paul Wohlfarth (Birkbeck, University of London)
    Abstract: We study monetary policy introducing a novel measure for policy attention based on Google Trends data. We apply the obtained indices to fixed income data for the US and the Eurozone in a specification motivated by a preferred-habitat model to test for monetary policy transmission domestically and internationally. Our findings suggest an impact of monetary policy on variance processes only and provides evidence for an international channel of monetary transmission on both money and capital markets. This is, to our knowledge, the first attempt to use search-engine data in the context of monetary policy.
    Keywords: attention, internet search, Google, monetary policy, ECB, FED, international financial markets, macro-finance, sovereign bonds, international finance, bond markets, preferred habitat models.
    JEL: E52 E43 E44 G10 G15
    Date: 2018–03
  10. By: Güneş Kamber; Madhusudan Mohanty
    Abstract: We explore the role of interest rates in monetary policy transmission in China in the context of its multiple instrument setting. In doing so, we construct a new series of monetary policy surprises using information from high frequency Chinese finan- cial market data around major monetary policy announcements. Our event analysis shows that monetary policy surprises have persistent effects on interest rates. We then use these surprise measures as external instruments to identify monetary pol- icy shocks in an SVAR. We find that a contractionary monetary policy surprise increases interest rates and significantly reduces inflation and economic activity. Our findings provide further support to recent studies suggesting that monetary policy transmission in China has become increasingly similar to that in advanced economies.
    Keywords: monetary policy in China, structural VAR, external instruments
    JEL: C22 E5 G14
    Date: 2018–04
  11. By: Sinelnikova-Muryleva, Elena (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: This workpaper is devoted to the study of payment systems development implications to the monetary authorities’ possibility to conduct effective monetary policy. The first section of the paper is devoted to the review of theoretical models connecting the development level of payment instruments and such macroeconomic indicators as demand for money, consumption, output and agents’ welfare. The analysis of “money” transformation due to evolution of new payment innovations. The second section is devoted to the overview and analysis of international experience in the sphere of payment systems research, in particular, their effect on money demand. The third section contains model estimations showing that the level of retail payment systems development significantly influences the monetary sphere of the country. The conclusion summarizes the main results of the workpaper.
    Date: 2018–03
  12. By: Machiel van Dijk (CPB Netherlands Bureau for Economic Policy Analysis); Andrei Dubovik (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: In this paper we investigate whether the targeted longer-term refinancing operations (TLTRO) and the asset purchase program (APP) led to lower interest rates on new corporate credit, and whether the signalling channel and the capital relief channel played any role in the transmission of these ECB policies. We find that both APP and TLTRO contributed to lower long-term interest rates on new corporate credit and to flatter yield curves, with APP having a stronger effect. However, we find no support that either the signalling or the capital relief channel were conducive in this respect.
    JEL: E43 E58 G21
    Date: 2018–02
  13. By: Elmar Mertens; James M. Nason
    Abstract: This paper studies the joint dynamics of real-time U.S. inflation and average inflation predictions of the Survey of Professional Forecasters (SPF) based on sample ranging from 1968Q4 to 2017Q2. The joint data generating process (DGP) comprises an unobserved components (UC) model of inflation and a sticky information (SI) prediction mechanism for the SPF predictions. We add drifting gap inflation persistence to a UC model in which stochastic volatility (SV) affects trend and gap inflation. Another innovation puts a time-varying frequency of inflation forecast updating into the SI prediction mechanism. The joint DGP is a nonlinear state space model (SSM). We estimate the SSM using Bayesian tools grounded in a Rao-Blackwellized auxiliary particle filter, particle learning, and a particle smoother. The estimates show that (i) longer horizon average SPF inflation predictions inform estimates of trend inflation; (ii) gap inflation persistence is procyclical and SI inflation updating is frequent before the Volcker disinflation; and (iii) subsequently, gap inflation persistence turns countercyclical and SI inflation updating becomes infrequent.
    Keywords: inflation; unobserved components;professional forecasts; sticky information; stochastic volatility; time-varying parameters; Bayesian; particle filter
    JEL: E31 C11 C32
    Date: 2018–04
  14. By: Prescott, Edward C. (Federal Reserve Bank of Minneapolis); Wessel, Ryan (Arizona State University)
    Abstract: Businesses hold large quantities of cash reserves, which have average returns well below their investments in tangible capital. Businesses do this because these monetary assets provide services. One implication is that money services is a factor of production in capital theoretic valuation equilibrium models. Our aggregate production function is consistent with both the classical demand for money function relationship and with extended periods of near zero short-term nominal interest rates. In our model economy, there is a 100 percent reserve requirement on all demand deposits. Demand deposits are legal tender. We find (i) money services in the production function necessitates revisions in the national accounts; (ii) monetary and fiscal policy cannot be completely separated; (iii) for a given policy, equilibrium is either unique or does not exist; and (iv) Friedman’s monetary satiation is not optimal. We make quantitative comparisons between interest rate targeting regimes and between inflation rate targeting regimes. The best inflation rate target was 2 percent. {{p}} This paper is related to but fundamentally different from Staff Report 530: "Fiat Value in the Theory of Value.”
    Keywords: 100 percent reserve banking; Money in production function; Interest rate targeting; Inflation rate targeting; Friedman monetary satiation; zero lower bound
    JEL: E0 E4 E5 E6
    Date: 2018–04–10
  15. By: Nazim Belhocine; Ernesto Crivelli; Nan Geng; Tiberiu Scutaru; Johannes Wiegand; Zaijin Zhan
    Abstract: The demands on monetary and exchange rate regimes in CESEE have evolved, in line with the region’s development. In the 1990s, the immediate challenge was to rein in excessive inflation following transition, and to establish basic monetary order. These objectives have been achieved, owing largely to successful exchange rate–based stabilization. With this accomplished, the focus has shifted to cyclical monetary management, and to appropriately managing monetary conditions during CESEE’s growth and income convergence to the euro area. Flexible exchange rates—and the ensuing capacity of monetary conditions to adapt to the economies’ needs—are likely to remain advantages, especially to extent that CESEE’s GDP and income levels will resume convergence to the euro area. Once this process restarts, tighter monetary conditions will again be needed to limit goods and asset price inflation, and to contain growth imbalances.
    Keywords: Emerging markets;Flexible exchange rates;Exchange rate regimes;Cross country analysis;Central and Eastern Europe;Transition economies;Monetary policy;exchange rates
    Date: 2016–11–29
  16. By: Romain M Veyrune; Guido della Valle; Shaoyu Guo
    Abstract: This paper models the relationship between short-term rates and excess reserves in an interest rate corridor as a logistic function estimated for the Eurosystem. The estimate helps to identify conditions in which short-term rates become unanchored, that is, they move away from the policy rates and become more volatile within the interest rate corridor defined by the interest rates of the central bank’s standing facilities. These conditions are attributed to coordination failures among counterparties at open market operations under fixed-rate and full-allotment procedures in the context of segmented markets. A model of the functioning of segmented markets describes how “un-anchoring” takes place when counterparties pursue bidding strategies optimal from an individual perspective but sub-optimal from an aggregate perspective.
    Date: 2018–04–06
  17. By: Alain Naef (University of Cambridge)
    Abstract: Using over 40,000 new observations on intervention and exchange rates, this paper is the first study of Bank of England foreign exchange intervention between 1952 and 1972. The main finding is that the Bank was unsuccessful in managing a credible exchange rate. By estimating a reaction function, I find that the Bank of England during most of the period refused to intervene on the forward market which was growing in importance. Analysing alternative exchange rates, I show how the Bank failed to maintain credibility in offshore markets. The Bank was eventually forced to manipulate the publication of its reserve figures to avoid a run on sterling.
    Keywords: Bretton Woods, Foreign exchange intervention, Bank of England, exchange rate
    JEL: F31 N24 E42 E58
  18. By: Paul Wohlfarth (Birkbeck, University of London)
    Abstract: We analyse the effect of monetary policy on dynamic covariances on global fixed income markets, using a novel measure for monetary policy attention based on Google Search data. We filter covariances using a Dynamic Conditional Correlation model as baseline case and a BEKK model as well as a long-memory exponential smoother proposed by RiskMetrics for robustness. We find evidence for direct impact of policy on both asset variances and covariances domestically and internationally, supporting both signalling and portfolio rebalancing channels in the context of international policy transmission.
    Keywords: attention, internet search, Google, monetary policy, ECB, FED, policy effects, international financial markets, macro-finance, sovereign bonds, international finance, bond markets.
    JEL: E52 E44 G1 G10 G15 C32
    Date: 2018–02
  19. By: Perevyshin, Yury (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Rykalin, A.S. (Gaidar Institute for Economic Policy)
    Abstract: The study considers the following concepts of inflationary expectations: adaptive, rational, and limited rational. To quantify the inflation expectations of the population and firms obtained on the basis of surveys, apply probability, regression, balance and logistic methods. The Bank of Russia uses a probability method. We also construct series of inflation expectations of households based on the probability approach. Empirical studies on testing the method of generating inflation expectations are mainly based on methods of estimating time series. The results of their application to Russian data, detailed in the work, indicate that the hypothesis of rational expectations is not confirmed, but the inflationary expectations of Russian households and representatives of the expert community are not fully adaptive. The study found that the inflation expectations of Russian economic agents are not yet fully anchored. The Bank of Russia has the opportunity to increase the effectiveness of the inflation targeting policy by developing and implementing measures to increase the impact on inflation expectations.
    Date: 2018–03
  20. By: Pedro Mazeda Gil (University of Porto, Faculty of Economics, and cef.up); Gustavo Iglésias, (University of Porto, Faculty of Economics)
    Abstract: We study the real long-run effects of inflation and of the structural stance of monetary policy in the context of a monetary model of R&D-driven endogenous growth complemented with physical capital accumulation. We look into the effects on a set of real macroeconomic variables that have been of interest to policymakers – the economic growth rate, the real interest rate, the physical investment rate, R&D intensity, and the velocity of money –, and which have been analysed from the perspective of different, separated, strands of the theoretical and empirical literature. Additionally, we analyse the theoretical predictions of our model as regards the effects of inflation on the effectiveness of real industrial policy shocks and on the market structure, assessed namely by the average firm size, and present novel cross-country evidence on the empirical relationship between the latter and the long-run inflation rate.
    Keywords: Keywords: Endogenous growth, R&D, physical capital, firm size, cash-in-advance, inflation, money.
    JEL: O41 O31 E41
    Date: 2018–04
  21. By: Juselius, Mikael; Takáts, Előd
    Abstract: Demographic shifts, such as population ageing, have been suggested as possible explanations for the recent decade-long spell of low inflation. We identify age structure effects on inflation from cross-country variation in a panel of 22 countries from 1870 to 2016 that includes standard monetary factors. We document a robust relationship that is in line with the lifecycle hypothesis: a larger share of dependent population is inflationary, whereas a larger share of working age population is disinflationary. This relationship accounts for the bulk of trend inflation, for instance, about 7 percentage points of US disinflation since the 1980s. It predicts rising inflation over the coming decades.
    JEL: E31 E52 J11
    Date: 2018–04–06
  22. By: Dobronravova, Elizaveta (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: This paper assesses the reaction of the aggregate output, the real exchange rate and inflation in response to the shock of the terms of trade, both in the Russian economy and in the panel of countries specializing in oil exports. We divide shocks of world oil prices into positive and negative ones using Mork and Hamilton approaches. This could help us to show that changes in macroeconomic indicators in response to the positive and negative shocks in the terms of trade are asymmetric. The sharp negative dynamics of oil prices has a greater impact on the economy of the oil-exporting country in comparison with the unexpected increase in energy prices. It is shown that in the group of countries using the inflation targeting regime, output reacts to the shock of oil prices to a lesser extent than in the group of countries adhering to the fixed exchange rate regime.
    Date: 2018–03
  23. By: Mark A Horton; Hossein Samiei; Natan P. Epstein; Kevin Ross
    Abstract: Since late 2014, exchange rates (ERs) and ER regimes of the Caucasus and Central Asia (CCA) countries have come under strong pressure. This reflects the decline of oil and other commodity prices, weaker growth in Russia and China, depreciation of the Russian ruble, and appreciation of the U.S. dollar, to which CCA currencies have historically been linked. Weaker fiscal and current account balances and increased dollarization have complicated the picture. CCA countries entered this period with closely managed ER regimes and, in many cases, currencies assessed by IMF staff to be overvalued. CCA central banks have price stability as their main policy objective, and most have relied on ER stability to achieve this objective. Thus, the first policy response involved intervention in local foreign exchange (FX) markets, often with limited communication. In this context, the IMF staff has reviewed ER policy advice and implementation strategies for CCA countries.
    Date: 2016–05–16
  24. By: Lefebvre, Germain; Nioche, Aurélien; Bourgeois-Gironde, Sacha; Palminteri, Stefano
    Abstract: Money is a fundamental and ubiquitous institution in modern economies. However, the question of its emergence remains a central one for economists. The monetary search-theoretic approach studies the conditions under which commodity money emerges as a solution to override frictions inherent to inter-individual exchanges in a decentralized economy. Although among these conditions, agents' rationality is classically essential and a prerequisite to any theoretical monetary equilibrium, human subjects often fail to adopt optimal strategies in tasks implementing a search-theoretic paradigm when these strategies are speculative, i.e., involve the use of a costly medium of exchange to increase the probability of subsequent and successful trades. In the present work, we hypothesize that implementing such speculative behaviors relies on reinforcement learning instead of lifetime utility calculations, as supposed by classical economic theory. To test this hypothesis, we operationalized the Kiyotaki and Wright paradigm of money emergence in a multi-step exchange task and fitted behavioral data regarding human subjects performing this task with two reinforcement learning models. Each of them implements a distinct cognitive hypothesis regarding the weight of future or counterfactual rewards in current decisions. We found that both models outperformed theoretical predictions about subjects' behaviors regarding the implementation of speculative strategies and that the latter relies on the degree of the opportunity costs consideration in the learning process. Speculating about the marketability advantage of money thus seems to depend on mental simulations of counterfactual events that agents are performing in exchange situations.
    Keywords: Money, Speculative Behaviours, Reinforcement Learning
    JEL: C91 D83
    Date: 2018
  25. By: Luisa Corrado; Tobias Schuler
    Abstract: As a result of the global financial crisis countercyclical capital requirements have been discussed to prevent financial bubbles generated in the banking sector and to mitigate the adverse effects of financial repression after a bubble burst. This paper analyses the effects of an endogenous capital requirement based on the credit-to-GDP gap along with other policy instruments. We develop a macroeconomic framework which endogenizes market expectations on asset values and allows for interbank transactions. We then show how a bubble in the banking sector relaxes financing constraints. In policy experiments we find that an endogenous capital requirement can effectively reduce the impact of a financial bubble. We show that central bank intervention (\leaning against the wind") instead has only a minor effect.
    Keywords: Financial bubbles, credit-to-GDP gap, endogenous capital requirement, stabilization policies
    JEL: E44 E52
    Date: 2018
  26. By: Viral V. Acharya; Arvind Krishnamurthy
    Abstract: We examine theoretically the role of reserves management and macro-prudential capital controls as ex-post and ex-ante safeguards, respectively, against sudden stops, and argue that these measures are complements rather than substitutes. Absent capital controls, reserves to be deployed ex post are partially undone ex ante by short-term capital flows, a form of moral hazard from the insurance provided by reserves in sudden stops. Ex ante capital controls offset this distortion and thereby increase the benefit of holding reserves. Thus, these instruments are complements. With foreign investment flows into both domestic and external borrowing markets, capital controls need to account for the possibility of regulatory arbitrage between the markets. Through the lens of the model, we analyze movements in foreign reserves, external debt, and the range of capital controls being employed by one large emerging market, viz. India.
    JEL: E44 F3 G01 G18
    Date: 2018–03
  27. By: Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
    Abstract: We develop a theory that links foreign investors' demand for the safety of U.S. Treasury bonds to the value of the dollar in spot markets. An increase in the convenience yield that foreign investors derive from holding U.S. Treasurys induces an immediate appreciation of the US dollar and, going forward, lowers the expected return to a foreign investor from owning Treasury bonds. Under our theory, we show that the foreign convenience yield can be measured by the ‘Treasury basis,’ defined as the wedge between the yield on foreign government bonds and the currency-hedged yield on U.S. Treasury bonds. We measure the convenience yield using data from a cross-country panel going back to 1988 and the US/UK cross going back to 1970. In both datasets, regression evidence strongly supports the theory. Our results help to resolve the exchange rate disconnect puzzle: the Treasury basis variation accounts for up to 41% of the quarterly variation in the dollar. Our results also provide support for recent theories which ascribe a special role to the U.S. as a provider of world safe assets.
    JEL: G15
    Date: 2018–03
  28. By: KICHIKAWA Yuichi; IYETOMI Hiroshi; AOYAMA Hideaki; YOSHIKAWA Hiroshi
    Abstract: We apply a complex Hilbert principal component analysis (CHPCA) to a set of Japanese economic data collected over the last 32 years, comprising individual price indices of middle classification level (imported goods, producer goods, consumption goods and services), indices of business conditions (leading, coincident, lagging), yen-dollar exchange rate, monetary stock, and monetary base. The CHPCA gives new insight into the dynamical linkages of price movements with business cycles and financial conditions. A statistical test identifies two significant eigenmodes with the largest and second largest eigenvalues. The lead-lag relations among domestic prices in the two modes are quite similar, indicating the individual prices behave in a collective way. However, the collective motion of prices is driven differently, namely, by the exchange rate at the upper stream side in the first mode and domestic demand at the lower stream side in the second mode. In contrast, the monetary variables play no important role in the two modes.
    Date: 2018–02
  29. By: Anita Angelovska - Bezhoska (National Bank of the Republic of Macedonia)
    Abstract: This paper explores the level of independence of the National Bank of the Republic of Macedonia by primarily focusing on the legal provisions that pertain to the key aspects for achieving and maintaining price stability. It provides a historical perspective of the evolution of the independence since the first years of transition. The assessment of the independence of the NBRM is based on the index of Cukierman, Webb, and Neyapti (1992), as one of the most commonly used indices, and the index of Jacome and Vazquez (2005), which incorporates some specific aspects relevant for transition economies. Both indices indicate that throughout the years the legal independence of the NBRM has increased and that the current legal framework provides high level of independence. Yet, it should be emphasized that there is a room for further strengthening, in particular in the areas of policy formulation and the process of appointment of the non-executive members of the council of the NBRM. As the indices are based on the legal provisions, they can serve only as an indication of the actual independence of the central bank.
    Keywords: central bank independence, monetary policy, indices, Macedonia
    JEL: E42 E58
    Date: 2018
    Date: 2018

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