nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒04‒30
eighteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Exchange Rate Misalignment, Capital Flows, and Optimal Monetary Policy Trade-offs By Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
  2. Optimal monetary policy under bounded rationality By Benchimol, Jonathan; Bounader, Lahcen
  3. (Real-)Time Is Money By Christian Pfister
  4. Who benefits from the corporate QE? A regression discontinuity design approach By Abidi, Nordine; Miquel-Flores, Ixart
  5. Policy Conflicts and Inflation Targeting: The Role of Credit Markets By Woon Gyu Choi; David Cook
  6. Sovereign Credit Risk and Exchange Rates: Evidence from CDS Quanto Spreads By Patrick Augustin; Mikhail Chernov; Dongho Song
  7. Forward Guidance By Marcus Hagedorn; Jinfeng Luo; Iourii Manovskii; Kurt Mitman
  8. An historical perspective on financial stability and monetary policy regimes: A case for caution in central banks current obsession with financial stability By Michael D. Bordo
  9. Monetary policy rule under inflation targeting: the case of Mongolia By Taguchi, Hiroyuki
  10. International monetary policy coordination in a new Keynesian model with NICE features By Jean-Christophe Poutineau; Gauthier Vermandel
  11. Real wage effects of Japan's monetary policy By Latsos, Sophia
  12. On real interest rates, tariff policy, exchange rates and the ZLB By van Wijnbergen, Sweder
  13. Optimal Trend Inflation By Klaus Adam; Henning Weber
  14. Accounting for Busines Cycles in Canada: II. The Role of Money By Accolley, Delali
  15. Exchange Rate Policy and External Vulnerabilities in Sub-Saharan Africa: Nominal, Real or Mixed Targeting? By Fadia Al Hajj; Gilles Dufrenot; Benjamin Keddad
  16. Nonlinear and Asymmetric Exchange Rate Pass-Through to Consumer Prices In Nigeria: Evidence from a Smooth Transition Autoregressive Model By Musti, Babagana Mala; Siddiki, Jalal Uddin
  17. Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles By Barbone Gonzalez, Rodrigo; Khametshin, Dmitry; Peydró, José Luis; Polo, Andrea
  18. Forecasting Exchange Rates with Commodity Prices - A Global Country Analysis By Martin Baumgaertner; Jens Klose

  1. By: Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
    Abstract: What determines the optimal monetary trade-off between internal objectives (inflation, and output gap) and external objectives (competitiveness and trade imbalances) when inefficient capital flows cause exchange rate misalignment and distort current account positions? We characterize this trade-off analytically, using the workhorse model of modern monetary theory in open economies under incomplete markets–where inefficient capital flows and exchange rate misalignments can arise independently of nominal distortions. We derive a quadratic approximation of the utility-based global policy loss function under fairly general assumptions on preferences and openness, and solve for the optimal targeting rules under co- operation. We show that, in economies with a low degree of exchange rate pass-through, the optimal response to inefficient capital inflows associated with real appreciation is contractionary, above and beyond the natural rate: the optimal policy curbs excessive demand at the cost of exacerbating currency overvaluation. In contrast, a high degree of pass-through, and/or low trade elasticities, warrants expansionary policies that lean against exchange rate appreciation and competitive losses, at the cost of inefficient inflation.
    Keywords: asset markets and risk sharing; Currency misalignments; exchange rate pass-through; international policy cooperation; optimal targeting rules; trade imbalances
    JEL: E44 E52 E61 F41 F42
    Date: 2018–04
  2. By: Benchimol, Jonathan; Bounader, Lahcen
    Abstract: Optimal monetary policy under discretion, commitment, and optimal simple rules regimes is analyzed through a behavioral New Keynesian model. Flexible price level targeting dominates under discretion; flexible inflation targeting dominates under commitment; and strict price level targeting dominates when using optimal simple rules. The optimality of a particular regime is found to be independent of bounded rationality and only regime 's stabilizing properties condition its hierarchy. For every targeting regime, the policymaker 's knowledge of agents' myopia is decisive in terms of policy reactions. Welfare evaluation of different targeting regimes reveals that bounded rationality is not necessarily associated with decreased welfare. Several forms of economic inattention can increase welfare.
    JEL: C53 E37 E52 D01 D11
    Date: 2018–04–19
  3. By: Christian Pfister
    Abstract: In the age of high-frequency trading in financial markets and faster payment services in account-to-account (A2A) transactions of bank retail customers, it may seem odd that the shortest maturity that is traded in the money market is overnight. This situation reflects policies implemented by central banks, which provide banks with free intraday liquidity. Such policies are difficult to ground in theory and have limitations which central banks could remedy by conducting real-time monetary policies. The article details how, following that decision, central banks could adapt some features of their monetary policy operational frameworks and of their real-time gross settlement systems. In any case, the potential benefits of such a move should be carefully weighed against the costs for the central banks, financial intermediaries and society.
    Keywords: Intraday liquidity, Real-time gross settlement systems, Monetary policy, Financial stability
    JEL: E40 E52 E58 G12 G21
    Date: 2018
  4. By: Abidi, Nordine; Miquel-Flores, Ixart
    Abstract: On March 10, 2016, the European Central Bank (ECB) announced the Corporate Sector Purchase Programme (CSPP) – commonly known as corporate quantitative easing (QE) – to improve the financing conditions of the Eurozone’s real economy and strengthen the pass-through of unconventional monetary interventions. Using a regression discontinuity design framework that exploits the rating wedge between the ECB and market participants, we show that: (i) bond yield spreads decline by around 15 basis points at the announcement of the programme, (ii) the impact is mostly noticeable in the sample of CSPP-eligible bonds that are perceived as high yield from the viewpoint of market participants and, (iii) the CSPP seems to have stimulated new issuance of corporate bonds. Overall, our results are consistent with the explanation that highlights the portfolio rebalancing mechanism and the liquidity channel. JEL Classification: E50, E52, G11, G30, G32
    Keywords: bond issuance, corporate quantitative easing (QE), cost of financing, liquidity, regression discontinuity design, unconventional monetary policy
    Date: 2018–04
  5. By: Woon Gyu Choi; David Cook
    Abstract: This paper shows that stabilizing volatility in credit growth often conflicts with price stability: unusual credit expansions often occur when inflation is low relative to goals, and credit slumps often appear when inflation is overshooting. We find that central banks with inflation targeting (IT) are responsive to credit conditions in both advanced economies and emerging-market economies (EMEs). However, EMEs are more sensitive to inflation conditions, responding to credit growth only when consistent with IT. Macroprudential measures are also deployed to address credit growth volatility when orthodox policy moves would be inconsistent with IT, complementing monetary policy.
    Date: 2018–04–06
  6. By: Patrick Augustin; Mikhail Chernov; Dongho Song
    Abstract: Sovereign CDS quanto spreads – the difference between CDS premiums denominated in U.S. dollars and a foreign currency – tell us how financial markets view the interaction between a country's likelihood of default and associated currency devaluations (the twin Ds). A no-arbitrage model applied to the term structure of quanto spreads can isolate the interaction between the twin Ds and gauge the associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate and monetary policy, allowing us to link cross-sectional variation in their term structures to cross-country differences in fiscal policies. The ratio of the risk-adjusted to the true default intensities is 2, on average. Conditional on the occurrence default, the true and risk-adjusted 1-week probabilities of devaluation are 4% and 75%, respectively. The risk premium for the euro devaluation in case of default exceeds the regular currency premium by up to 0.4% per week.
    JEL: C1 E43 E44 G12 G15
    Date: 2018–04
  7. By: Marcus Hagedorn; Jinfeng Luo; Iourii Manovskii; Kurt Mitman
    Abstract: We assess the power of forward guidance—promises about future interest rates—as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. Our results suggest the effects of forward guidance are negligible. A commitment to keep future nominal interest rates low for a few quarters—although macro indicators suggest otherwise—has only trivial effects on current output and employment. We explain theoretically why in complete markets models forward guidance is powerful—generating a “forward guidance puzzle”—and why this puzzle disappears in our model. We also clarify theoretically ambiguous conclusions from previous research about the effectiveness of forward guidance in incomplete and complete markets models.
    JEL: E21 E30 E52 E58 E62
    Date: 2018–04
  8. By: Michael D. Bordo (Rutgers University, NBER and Hoover Institution, Stanford University)
    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. Historical evidence is presented on the incidence, costs and determinants of financial crises along with some empirical evidence on the relationship between credit booms, asset price booms and serious financial crises. The results 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.
    Keywords: monetary policy, financial stability, financial crises, credit driven asset price booms
    JEL: E3 E42 G01 N1 N2
    Date: 2017–12–23
  9. By: Taguchi, Hiroyuki
    Abstract: This article aims to review the monetary policy rule under inflation targeting framework focusing on Mongolia. The empirical analysis estimates the policy reaction function to see if the inflation targeting has been linked with a monetary policy rule emphasizing on inflation stabilization since its adoption in 2007. The study contributes to the literature by examining the linkage between Mongolian monetary policy rule and inflation targeting directly and thoroughly for the first time and also by taking into account a recent progress in the inflation targeting framework toward forward-looking mode. The main findings were: the Mongolian current monetary policy rule under inflation targeting is characterized as inflation-responsive rule with forward-looking manner (one quarter ahead); the inflation responsiveness is, however, weak enough to be pro-cyclical to inflation pressure; and the rule is also responsive to exchange rate due to the “fear of floating”, which weakens the policy reaction to inflation and output gap.
    Keywords: Monetary policy rule, Inflation targeting, The Bank of Mongolia, Policy reaction function, and Fear of floating
    JEL: E52 E58 O53
    Date: 2018–04
  10. By: 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); Gauthier Vermandel (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)
    Abstract: This paper provides a static two country new Keynesian model to teach two related questions in international macroeconomics: the international transmission of unilateral monetary policy decisions and the gains coming from the coordination monetary rules. We concentrate on “normal times” and use a thoroughly graphical approach to analyze the questions at hands. In this setting monetary policy is conducted using interest rates rules and economic integration between nations does not necessarily create the case for the coordination of monetary policy. In particular, we show that the conduct of optimal national monetary policies does not make any difference with the coordination of national policies, as this creates a situation where the international monetary system operates “Near an International Cooperative Equilibrium”.
    Keywords: monetary policy,New Keynesian macroeconomics,international macroeconomics,economic policy,optimal interest rate rules,A20,E10,E50,F41
    Date: 2018
  11. By: Latsos, Sophia
    Abstract: This paper examines real wage effects of monetary policy in Japan, particularly during the past two decades of monetary easing. The literature generally attributes real wage trends to structural factors that influence the nominal wage components, such as the disappearance of downward nominal wage rigidity. The contribution of this paper is twofold. First, it offers a theoretical framework for the transmission of monetary policy shocks to real wages, emphasizing the responsiveness of labor productivity growth to monetary expansion. Secondly, it alludes to the significance of real wage effects of monetary policy for optimal policy design.
    Keywords: Japanese monetary policy,Bank of Japan,monetary easing,policy effects,real wages,monetary transmission channels
    JEL: E52 E58 E24
    Date: 2018
  12. By: van Wijnbergen, Sweder
    Abstract: What could be the drivers of low real rates? What are the implications of the Zero Lower Bound for economic policy? To discuss these questions we introduce a full general equilibrium model of the world economy with a simple (2 period) intertemporal structure. The model is simple enough to allow for full analytical solution yet sufficiently complex to allow us to address the impact of anticipated future productivity slow down, aging, structural reform and fiscal policy on real interest rates if markets clear and on aggregate economic activity if they do not because of the ZLB. We extend both the equilibrium model and the ZLB variant to a more-goods-per-period set up with complete specialization to address (real) exchange rate policy and the macroeconomic impact of trade tariffs.
    Keywords: aging; equilibrium real interest rates; import tariffs; productivity change; the ZLB; real exchange rates
    JEL: E62 F13 F40 F41 H30
    Date: 2018–04
  13. By: Klaus Adam; Henning Weber
    Abstract: Sticky price models featuring heterogeneous firms and systematic firm-level productivity trends deliver radically different predictions for the optimal inflation rate than their popular homogenous-firm counterparts: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. We show this by aggregating a heterogenous-firm model with sticky prices in closed form. Using firm-level data from the U.S. Census Bureau, we estimate the historically optimal inflation path for the U.S. economy. In the year 1977, the optimal inflation rate stood at 1.5%, but subsequently declined to around 1.0% in the year 2015. Inflation rates up to twice these numbers can be rationalized if one considers product demand elasticities more in line with the trade literature or if one considers firms that (partially) index prices to lagged inflation rates
    Keywords: optimal inflation rate, sticky prices, firm heterogeneity
    JEL: E52 E31 E32
    Date: 2018–04
  14. By: Accolley, Delali
    Abstract: I have explained business cycles in Canada focusing on the role of money. To do that, I have used both empirical and theoretical models. The empirical investigations include performing causality tests and computing impulse responses based on structural and co-integrated vector autoregressive models. The theoretical models consist of RBC and new-Keynesian models. Some of these theoretical models are: the inflation tax, the inflation and tax code, the sticky price, and the financial accelerator models. The empirical models indicate monetary disturbances are instrumental in business cycle fluctuations but do not necessarily cause them. The theoretical models also point out that monetary disturbances contribute to business cycle fluctuations but not as much as technological change. Some channels through which they propagate are: nominal capital gain tax, price stickiness, and deteriorating financial conditions. Price stickiness turns out to play a major r
    Keywords: Business Cycles, Macroeconomics, Monetary Policy, Sticky Prices, Vector Autoregression, Vector Error Correction.
    JEL: E31 E32 E37 E52
    Date: 2018–03–25
  15. By: Fadia Al Hajj (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales); Gilles Dufrenot (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales); Benjamin Keddad (PSB - Paris School of Business)
    Abstract: This paper discusses the theoretical choice of exchange rate anchors in Sub-Saharan African countries that are facing external vulnerabilities. To reduce instability, policymakers choose among promoting external competitiveness using a real anchor, lowering the burden of external debt using a nominal anchor or using a policy mix of both anchors. We observe that these countries tend to adopt mixed anchor policies. We solve a state space model to explain the determinants of and the strategy behind this policy. We find that the choice of policy mix is a two-step strategy: First, authorities choose the degree of nominal exchange rate flexibility according to the velocity of money, trade openness, foreign debt, degree of exchange rate pass-through and exchange rate target zone. Second, authorities seek to stabilize the real exchange rate depending on the degree of trade integration with the rest of world and the degree of foreign exchange interventions. We conclude with regime-switching estimations to provide empirical evidence of how these economic fundamentals influence exchange rate policy in Sub-Saharan Africa.
    Keywords: African countries,exchange rate policy,external vulnerabilities,regime-switching model
    Date: 2018–03
  16. By: Musti, Babagana Mala (Kingston University London); Siddiki, Jalal Uddin (Kingston University London)
    Abstract: This paper examines the nonlinearities and asymmetries in the exchange rate pass-through (ERPT) to consumer prices in Nigeria using quarterly time series data from 1986 to 2013 and the nonlinear smooth transition autoregressive (STAR) method. The standard literature assumes linearity and symmetry in the ERPT to consumer prices in a developing country, despite the importance and presence of potential asymmetries and nonlinearities which are generated by the presence of various factors such as menu costs, capacity constraints, market share objectives and production switching. This study develops a partial equilibrium microeconomic mark-up model to investigate asymmetric and nonlinear behaviour in the ERPT. The study confirms the presence of nonlinear ERPTs due to different inflation levels. The results also show asymmetric ERPTs in the appreciation and depreciation of exchange rates. The magnitude of the ERPT also depends on the size of the exchange rate change. The ERPT is higher during depreciation than during the appreciation episodes of the Naira; nonlinearity is more prevalent during the high inflationary period of the 1990s than in other periods. The policy implication of the results is that the government, despite temptations to do so, should avoid the devaluation of the Naira during high inflation periods in order to reduce the impact on consumer prices and the associated costs.
    Keywords: Exchange rate pass-through; Asymmetry; Nonlinearity; Nigeria.
    JEL: F30 F40
    Date: 2018–04–24
  17. By: Barbone Gonzalez, Rodrigo; Khametshin, Dmitry; Peydró, José Luis; Polo, Andrea
    Abstract: We analyze whether the global financial cycle (GFC) affects local credit supply and the real effects, and whether local unconventional policies can attenuate such spillovers. For identification, we exploit GFC shocks, differential bank reliance on global funding, local central bank interventions in FX derivatives, and three matched administrative registers in Brazil: the register of foreign credit flows to domestic banks, the credit register, and the matched employer-employee register. We show that after the announcement of US Quantitative Easing tapering by Bernanke in May 2013, which is associated with massive FX depreciation and increased volatility, domestic banks with larger foreign liabilities reduce the supply of credit to firms, in turn reducing employment. However, these negative effects are attenuated after the Central Bank of Brazil announces a large intervention in the FX derivatives market, which consists in supplying insurance against FX risks - hedger of last resort. In addition to these two subsequent shocks, we also analyze a panel over 2008-2015. Banks with larger foreign liabilities cut credit supply after US Dollar appreciation or after an increase of FX volatility (even for US FX changes with EMs excluding Brazil). Moreover, the FX effects on credit supply and real effects are mitigated after the FX intervention of the central bank, thereby confirming that the policy of hedger of last resort has been effective in decreasing local economy spillovers to global financial conditions. Our results have important implications for international macro-finance models and policy.
    Keywords: Bank credit; central bank; foreign exchange; Hedging; monetary policy
    JEL: E5 F3 G01 G21 G28
    Date: 2018–03
  18. By: Martin Baumgaertner (THM Business School); Jens Klose (THM Business School)
    Abstract: This paper investigates the predictive properties of import and export prices of commodities on the exchange rates. A period from 1993 to 2016 is considered. We find that forecasts of the exchange rate adding commodity export and import prices are superior to those neglecting these variables. This holds irrespective of whether the countries are net exporters or importers of commodities. However, the forecasting power was even better in the 1990s and seems to have decreased since that that time. Nevertheless forecasts can even today be improved considerably by adding commodity prices.
    Keywords: Exchange Rate, Commodity Prices, Forecast, Panel-Analysis
    JEL: F17 F31 F47 C23
    Date: 2018

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