nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒05‒07
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Matthias Neuenkirch; Matthias Nöckel
  2. Central Banks Going Long By Reis, Ricardo
  3. Global liquidity and exchange market pressure in emerging market economies By Hossfeld, Oliver; Pramor, Marcus
  4. Price Stickiness along the Income Distribution and the Effects of Monetary Policy By Javier Cravino; Ting Lan; Andrei A. Levchenko
  5. Foreign Exchange Intervention Redux By Roberto Chang
  6. A Policy Framework for E-Money: A Report on Bank of Canada Research By Mohammad Davoodalhosseini; Francisco Rivadeneyra
  7. Anchoring of Inflation Expectations in Latin America By Gondo, Rocío; Yetman, James
  8. The International Transmission of Monetary Policy By Claudia M. Buch; Matthieu Bussiere; Linda Goldberg; Robert Hills
  9. Central Bank Capital as an Instrument of Monetary Policy By Hampl, Mojmir; Havranek, Tomas
  10. Some Simple Bitcoin Economics By Linda Schilling; Harald Uhlig
  11. International Monetary Policy Transmission through Banks in Small Open Economies By Simone Auer; Christian Friedrich; Maja Ganarin; Teodora Paligorova; Pascal Towbin
  12. The behavioral economics of currency unions: Economic integration and monetary policy By Akvile Bertasiute; Domenico Massaro; Matthias Weber
  13. On the Persistence of UK Inflation: A Long-Range Dependence Approach By Guglielmo Maria Caporale; Luis A. Gil-Alana; Tommaso Trani
  14. 25 years of inflation targeting in Australia: Are there better alternatives for the next 25 years? By Warwick J. McKibbin; Augustus Panton
  15. Trend Inflation and Monetary Policy Regimes in Japan By OKIMOTO Tatsuyoshi
  16. The Preeminence of Gold and Silver as Money By Krichene, Noureddine; Ghassan, Hassan B.
  17. An old wine in new shari'a compliant bottles? A time-frequency wavelet analysis of the efficiency of monetary policy in dual financial systems By Amine Ben Amar
  18. Forward Guidance By Hagedorn, Marcus; Luo, Jinfeng; Manovskii, Iourii; Mitman, Kurt
  19. The impact of monetary policy iInterventions on the insurance industry By Pelizzon, Loriana; Sottocornola, Matteo
  20. Estimating the Taylor Rule in the Time-Frequency Domain By Luís Aguiar-Conraria; Manuel M. F. Martins; Maria Joana Soares
  21. Crisis, contagion and international policy spillovers under foreign ownership of banks By Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  22. The Role of Financial Policy By Farmer, Roger E A
  23. Why does the revovery show so little inflation By Christophe Blot; Jérôme Creel; Paul Hubert
  24. Inequality and Imbalances : a Monetary Union Agent-Based Model By Alberto Cardacci; Francesco Saraceno
  25. Budget deficit-money demand nexus in Nigeria: A myth or reality? By Ibrahim, Taofik
  26. Interbank market turmoils and the macroeconomy By Paweł Kopiec
  27. Measuring the Stance of Monetary Policy in a Time-Varying World By Pérez-Forero, Fernando
  28. The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework Q2 2016 - Q4 2017 By Bock, Alexander; Cajnko, Miha; Daskalova, Svetla; Durka, Iwona; Gallagher, Brian; Grandia, Roel; Haberbush, Glenn; Kamps, Annette; Luskin, Alaoishe; Russo, Michelina Lo; Lozoya, Mª Carmen Castillo; Pasqualone, Filippo; Thomas, Michael; Vasconcelos, Isabel
  29. Economic recovery and inflation By Marek Dabrowski
  30. On the Effect of Government Spending on Money Demand in the United States: An ARDL Cointegration Approach By Ebadi, Esmaeil
  31. Further insights on endogenous money and the liquidity preference theory of interest By Marc Lavoie; Severin Reissl
  32. Banking, Trade, and the making of a Dominant Currency By Gita Gopinath; Jeremy C. Stein

  1. By: Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through the relaxation of lending standards for borrowers. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react aggressively to an expansionary monetary policy shock by lowering their lending standards. The banks’ efforts to keep their lending margin stable, however, are not successful as we detect a significant compression. We document these findings for the euro area as a whole and for its individual member states. In particular, banks in the Netherlands, Portugal, Spain, and Ireland lowered their lending standards after expansionary monetary policy shocks. The compression of the lending margin is most pronounced in the five crisis countries (Greece, Ireland, Italy, Portugal, and Spain).
    Keywords: European Central Bank, macroprudential policy, monetary policy transmission, risk-taking channel, vector autoregression
    JEL: E44 E51 E52 E58 G28
    Date: 2018
  2. By: Reis, Ricardo
    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: affine models; ceilings; pegs; Taylor rule; Yield Curve
    JEL: E31 E52 E58
    Date: 2018–03
  3. By: Hossfeld, Oliver; Pramor, Marcus
    Abstract: We analyse the relationship between global liquidity and exchange market pressure in 32 emerging market economies. Exchange market pressure is a measure of excess currency demand that is applicable across different exchange rate regimes as it accounts for changes in exchange rates, foreign exchange reserves and, optionally, interest rates. Surges in monetary liquidity, credit provision, and short-term funding in advanced economies are shown to be robustly associated with appreciation pressure on emerging market currencies. The underlying transmission mechanism, however, only operates under regular financial market conditions: ample liquidity provision in advanced economies contributes to the build-up of financial stability risks in emerging market economies in tranquil times, but further liquidity injections do not avert the pronounced depreciation pressure on emerging market currencies in times of high market volatility.
    Keywords: global liquidity,emerging markets,exchange market pressure,search for yield,global financial cycle
    JEL: F31 E51 E58 C23
    Date: 2018
  4. By: Javier Cravino (University of Michigan and NBER); Ting Lan (University of Michigan); Andrei A. Levchenko (University of Michigan, NBER, and CEPR)
    Abstract: We document that the prices of the goods consumed by high-income households are more sticky and less volatile than those of the goods consumed by middle-income households. This suggests that monetary shocks can have distributional consequences by affecting the relative prices of the goods consumed at different points on the income distribution. We use a Factor-Augmented VAR (FAVAR) model to show that, following a monetary policy shock, the estimated impulse responses of high-income householdsÕ consumer price indices are 22% lower than those of the middle-income households. We then evaluate the macroeconomic implications of our empirical findings in a quantitative New-Keynesian model featuring households that are heterogeneous in their income and consumption patterns, and sectors that are heterogeneous in their frequency of price changes. We find that: (i) the distributional consequences of monetary policy shocks are large and similar to those in the FAVAR model, and (ii) greater income inequality increases the effectiveness of monetary policy, although this effect is modest for realistic changes in inequality.
    Keywords: Inflation, distributional effects, consumption baskets, monetary policy.
    JEL: E31 E52
    Date: 2018–04
  5. By: Roberto Chang
    Abstract: Received wisdom posits that sterilized foreign exchange intervention can be effective by altering the currency composition of assets held by the public. This paper proposes an alternative channel: sterilized intervention may (or may not) have real effects because it changes the net credit position of the central bank vis a vis financial intermediaries, thereby affecting external debt limits. This argument is developed in the context of an open economy model with domestic banks subject to occasionally binding collateral constraints. Intervention has real effects if and only if it occurs when the constraints bind; at such times, a sterilized sale of official reserves relaxes the constraints by reducing the central bank's debt to domestic banks, freeing resources for the latter to increase the supply of credit to domestic agents. The analysis yields several noteworthy implications for intervention policy, official reserves accumulation, and the interaction between intervention and monetary policy.
    JEL: E58 F33 F41
    Date: 2018–03
  6. By: Mohammad Davoodalhosseini; Francisco Rivadeneyra
    Abstract: We present a policy framework for electronic money and payments. The framework poses a set of positive questions related to the areas of responsibility of central banks: payments systems, monetary policy and financial stability. The questions are posed to four broad forms of e-money: privately or publicly issued, and with centralized or decentralized verification of transactions. This framework is intended to help evaluate the trade-offs that central banks face in the decision to issue new forms of e-money.
    Keywords: Digital currencies; Monetary policy; Payment clearing and settlement systems
    JEL: E41 E51 E52 E58
    Date: 2018
  7. By: Gondo, Rocío (Banco Central de Reserva del Perú); Yetman, James (Bank for International Settlements)
    Abstract: We use inflation survey data from Consensus Economics to assess the degree of inflation expectations anchoring in Latin America. Following the methodology proposed by Mehrotra and Yetman (2017), we model inflation forecasts using a decay function, where forecasts monotonically diverge from an estimated anchor towards recent actual inflation as the forecast horizon shortens. Our results suggest that most countries do have an inflation anchor, with the estimated weight of the anchor increasing through time, indicating more strongly anchored expectations. This is consistent with the improving credibility of central banks’ monetary policy management over our sample period (1993-2016). For countries with formal inflation targets, our results indicate that inflation targeting regimes are generally credible, with estimated anchors lying within the inflation target range for all countries in the most recent sample that we consider.
    Keywords: inflation expectations, inflation anchoring, decay function
    JEL: E31 E58
    Date: 2018–04
  8. By: Claudia M. Buch; Matthieu Bussiere; Linda Goldberg; Robert Hills
    Abstract: This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from seventeen countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the U.S., euro area, Japan, and United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for U.S. policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into nonbank lending generally are not large.
    JEL: E4 E5 F30 F4 G15 G21
    Date: 2018–03
  9. By: Hampl, Mojmir; Havranek, Tomas
    Abstract: We examine the use of central bank capital as an unconventional monetary policy tool. In this setting, a central bank employs digital currency to transfer digital cash to each household, thus supporting consumption directly when needed. The asset side of the central bank’s balance sheet remains unchanged, and the creation of new digital cash is offset by a decrease in central bank capital. The central bank thus incurs an immediate loss but does not take on any additional risks for its future income statements. We address several objections to this policy, paying particular attention to the claim that weakening the financial strength of the central bank endangers long-term price stability. Through a meta-analysis of 176 estimates reported previously in the literature, we find that central bank financial strength has not historically correlated with inflation performance.
    Keywords: Central bank capital,inflation,seigniorage,monetary policy,helicopter money,central bank digital currency
    JEL: E42 E52 E58
    Date: 2018
  10. By: Linda Schilling; Harald Uhlig
    Abstract: How do Bitcoin prices evolve? What are the consequences for monetary policy? We answer these questions in a novel, yet simple endowment economy. There are two types of money, both useful for transactions: Bitcoins and Dollars. A central bank keeps the real value of Dollars constant, while Bitcoin production is decentralized via proof-of-work. We obtain a “fundamental condition,” which is a version of the exchange-rate indeterminacy result in Kareken-Wallace (1981), and a “speculative” condition. Under some conditions, we show that Bitcoin prices form convergent supermartingales or submartingales and derive implications for monetary policy.
    JEL: D50 E40 E42 E50
    Date: 2018–04
  11. By: Simone Auer; Christian Friedrich; Maja Ganarin; Teodora Paligorova; Pascal Towbin
    Abstract: This paper studies the international transmission of monetary policy through banks in small open economies using the examples of Switzerland and Canada. We assess the inward transmission of foreign monetary policy for Switzerland and the outward transmission of domestic monetary policy for Canada. In both country cases, we focus on the international bank lending and the international portfolio channel, which make opposing predictions about how monetary policy transmits internationally through banks. Our results on the inward transmission of foreign monetary policy through banks in Switzerland are consistent with a role for the international portfolio channel, but we find no evidence for the traditional international bank lending channel. The results on the outward transmission of domestic monetary policy in Canada suggest that foreign lending by Canadian banks is affected through both channels, which work as predicted and largely balance each other.
    Keywords: International banking, monetary policy, inward transmission, outward transmission, small open economies, Switzerland, Canada
    JEL: G21 E5 F21 F32
    Date: 2018
  12. By: Akvile Bertasiute (Budget Policy Monitoring Department, National Audit Office of Lithuania); Domenico Massaro (Universita Cattolica del Sacro Cuore & Complexity Lab in Economics); Matthias Weber (CEFER, Bank of Lithuania & Faculty of Economics, Vilnius University)
    Abstract: Currency unions are often modeled as homogeneous economies, although they are fundamentally different. The expectations that impact macroeconomic behavior in any given country are not the expectations of variables at the currency-union level but at the country level. We model these expectations with a behavioral reinforcement learning model. In our model, economic integration is of particular importance in determining whether economic behavior in a currency union is stable. Monetary policy alone is insufficient to guarantee stable economic behavior, as the central bank cannot conduct different monetary policies in different countries. These results are easily overlooked when modeling expectations as rational.
    Keywords: Behavioral Macroeconomics, Monetary Unions, Reinforcement Learning, Expectation Formation
    JEL: E52 D84
    Date: 2018–04–27
  13. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Tommaso Trani
    Abstract: This paper examines the degree of persistence in UK inflation by applying long-memory methods to historical data that span the period from 1660 to 2016. Specifically, we use both parametric and non-parametric fractional integration techniques, that are more general than those based on the classical I(0) vs. I(1) dichotomy. Further, we carry out break tests to detect any shifts in the degree of persistence, and also run rolling-window and recursive regressions to investigate its evolution over time. On the whole, the evidence suggests that the degree of persistence of UK inflation has been relatively stable following the Bretton Woods period, despite the adoption of different monetary regimes. The estimation of an unobserved-components stochastic volatility model sheds further light on the issues of interest by showing that post-Bretton Woods changes in UK inflation are attributable to a fall in the volatility of permanent shocks.
    Keywords: UK inflation, persistence, fractional integration
    JEL: C14 C22 E31
    Date: 2018
  14. By: Warwick J. McKibbin; Augustus Panton
    Abstract: This papers surveys alternative monetary frameworks and evaluates whether the current inflation targeting framework followed by the RBA for the past 25 years is likely to be the most appropriate framework for the next 25 years. While flexible inflation targeting has appeared to work well in Australia in the past decades, the nature of future shocks suggests that some form of nominal income targeting is worth considering as an evolutionary changes the Australia’s framework for monetary policy.
    Keywords: Inflation targeting, nominal income targeting, monetary framework
    Date: 2018–05
  15. By: OKIMOTO Tatsuyoshi
    Abstract: This paper examines the dynamics of trend inflation in Japan over the last three decades based on the smooth transition Phillips curve model. We find that there is a strong connection between the trend inflation and monetary policy regimes. The results also suggest that the introduction of the inflation targeting policy and quantitative and qualitative easing in the beginning of 2013 successfully escaped from the deflationary regime, but were not enough to achieve the 2% inflation target. Finally, our results indicate the significance of exchange rates in explaining the recent fluctuations of inflation and the importance of oil and stock prices in maintaining the positive trend inflation regime.
    Date: 2018–04
  16. By: Krichene, Noureddine; Ghassan, Hassan B.
    Abstract: Historically, money is gold and silver, supplied by the market on profit criterion. Everywhere, government inconvertible paper money arose from bankruptcy. A government with balanced budgets would never need it. Imposed by force, inconvertible paper is a taxation mean, highly inflationary, and causes impoverishment. Unjust and bankrupt governments will continue to force this despotic money. Islamic Monetary Economics refutes the idea of money as a policy tool. Fully convertible paper is Shariah compliant. Shariah requires a just government to balance its budgets and restore fully gold and silver as lawful money.
    Keywords: Money, Gold-silver, Inconvertible paper, Inflation, Bankruptcy, Shariah.
    JEL: E42 E5 F33
    Date: 2017
  17. By: Amine Ben Amar (Leda-Sdfi - Université Paris Dauphine (Paris 9))
    Abstract: Understanding the interrelationships between Islamic and conventional banks in dual financial systems is crucial for monetary policy decision makers. Using the wavelet coherence approach, this paper empirically investigates the dependency between the LIBOR and an Islamic benchmark rate, namely the IIBR (Islamic Interbank Benchmark Rate). This approach allows us to study the dynamics of the relationship between the LIBOR and the IIBR in the time-frequency space, then, to analyze to which extent Islamic financial institutions react to interest rate and, finally, to conclude whether the presence of Islamic banks enhance (or not) the efficiency of monetary policy. The result suggests not only that Islamic and conventional banks are alike, in terms of their business model, but also that Islamic banks react to changes in interest rates with some delay, which may affect the effectiveness of the monetary policy transmission mechanism.
    Keywords: Islamic banks,conventional banks,IIBR,LIBOR,wavelet coherence
    Date: 2018
  18. By: Hagedorn, Marcus; Luo, Jinfeng; Manovskii, Iourii; Mitman, Kurt
    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.
    Keywords: forward guidance; incomplete markets; monetary policy
    Date: 2018–04
  19. By: Pelizzon, Loriana; Sottocornola, Matteo
    Abstract: This paper investigates the effect of the conventional and unconventional (e.g. Quantitative Easing - QE) monetary policy intervention on the insurance industry. We first analyze the impact on the stock performances of 166 (re)insurers from the last QE programme launched by the European Central Bank (ECB) by constructing an event study around the announcement date. Then we enlarge the scope by looking at the monetary policy surprise effects on the same sample of (re)insurers over a timeframe of 12 years, also extending the analysis to the Credit Default Swaps (CDS) market. In the second part of the paper by building a set of balance sheet-based indices, we identify the characteristics of (re)insurers that determine sensitivity to monetary policy actions. Our evidences suggest that a single intervention extrapolated from the comprehensive strategy cannot be utilized to estimate the effect of monetary policy intervention on the market. With respect to the impact of monetary policies, we show how the effect of interventions changes over time. Expansionary monetary policy interventions, when generating an instantaneous reduction of interest rates, generated movement in stock prices in the same direction till September 2010. This effect turned positive during the European sovereign debt crisis. However, the effect faded away in 2014-2015. The pattern is confirmed by the impact on the CDS market. With regard to the determinants of these effects, our analysis suggests that sensitivity is mainly driven by asset allocation and in particular by exposure to fixed income assets.
    Keywords: event study,monetary policy surprise,unconventional monetary policy,conventional monetary policy,insurance industry
    JEL: E44 E52 G14 G22
    Date: 2018
  20. By: Luís Aguiar-Conraria (Department of Economics/NIPE, University of Minho); Manuel M. F. Martins (Cef.up and Faculty of Economics, University of Porto); Maria Joana Soares (NIPE and Department of Mathematics and Applications, University of Minho,)
    Abstract: We present the first assessment of U.S. monetary policy across time and frequencies within the Taylor Rule framework. We derive a novel wavelet tool - the partial wavelet gain - to estimate a parametric equation relating the federal funds rate to inflation and the output gap. We detect a gradual shift of the focus of policy from short cycles to intermediate cycles at the beginning of the Great Moderation, followed by a strengthening of policy´s reaction to long fluctuations once credibility was attained, and, during the Great Recession, a renewed interest in shorter output cycles. We document that the violation of the Taylor principle until the early 1980s and the strengthening of the reaction of policy to inflation thereafter were more marked at intermediate than at long cycles. Overall, we also detect lead-lag relationships between the policy rate and ináation and the output gap that differ along time and cyclical frequencies.
    Keywords: Monetary Policy; Taylor Rule; Partial Wavelet Gain; Time-Frequency Estimation;Continuous Wavelet Transform.
    JEL: C49 E43 E52
    Date: 2018
  21. By: Michał Brzoza-Brzezina (Narodowy Bank Polski; Warsaw School Economics); Marcin Kolasa (Narodowy Bank Polski; Warsaw School Economics); Krzysztof Makarski (Narodowy Bank Polski; Warsaw School Economics; Group for Research in Applied Economics (GRAPE))
    Abstract: This paper checks how international spillovers of shocks and policies are modified when banks are foreign owned. To this end we build a two-country macroeconomic model with banking sectors that are owned by residents of one (big and foreign) country. Consistently with empirical findings, in our model foreign ownership of banks amplifies spillovers from foreign shocks. It also strengthens the international transmission of monetary and macroprudential policies. We next use the model to replicate the financial crisis in the euro area and show how, by preventing bank capital outflow in 2009, the Polish regulatory authorities managed to reduce its contagion to Poland. We also find that under foreign bank ownership such policy is strongly preferred to a recapitalization of domestic banks. Finally, we check how foreign ownership of banks affects transmission of domestic shocks to find that it has a stabilizing effect.
    Keywords: foreign-owned banks, monetary and macroprudential policy, international spillovers, DSGE models with banking
    JEL: E32 E44 E58
    Date: 2017
  22. By: Farmer, Roger E A
    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 arguments 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
  23. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Low inflation despite economic recovery has given rise to the puzzle of “missing inflation”. Yet there would be no puzzle if the recovery is incomplete. While GDP is on the rise, some slack may still be present in some countries of the euro area. Against this backdrop, we investigate the empirical determinants of inflation and we investigate their relative contributions to actual inflation since 2000 to explain why inflation is currently low. Drawing on empirical estimations, we explain the dynamics of inflation since 2000 by different cyclical and structural factors. We also introduce an indicator of both conventional and unconventional monetary policies to assess the direct incidence of ECB's policies on actual inflation. All these factors explain the bulk of inflation variance since 2000. The most important determinants of inflation in the euro area are inflation expectations and wage growth. Both indicators have contributed negatively to inflation since 2014 but inflation expectations less so since 2015 whereas the contribution of wage growth has remained constant. Drawing on evidence of uneven recovery across euro area Member States, it shall be recommended to keep on pursuing the expansionary stance of monetary policy until the ECB achieves its inflation objective. Moreover, the evolution of inflation and its determinants do not meet the conditions that the ECB regarded as genuine progress towards its policy objective. Inflation has not yet happened and is not expected in the medium-run; moreover, without second-round effects on wages, it is not yet possible to expect that once inflation goes back to target, it will be selfsustained. The features of the ongoing developments in wage-price inflation suggest a decrease in the nominal anchor. The recent structural reforms may have put a drag on the ability of the ECB to reach its inflation target rapidly. The timing of structural reforms is important. They may be helpful at fostering innovation and productivity provided they are implemented after economic growth has been sustained and evenly distributed across the Member states, and after inflation has reached its medium-run objective.
    Keywords: European Central Bank; Quantitative Easing; Low inflation; Inflation expectations; Wage dynamics; Output gap
    Date: 2018–03
  24. By: Alberto Cardacci (Lombardy Advanced School of Economics Milan); Francesco Saraceno (Observatoire français des conjonctures économiques)
    Abstract: Our paper investigates the impact of rising inequality in a two-country macroeconomic model with an agent-based household sector characterised by peer effects in consumption. In particular, the model highlights the role of inequality in determining diverging balance of payments dynamics within a currency union. Inequality may drive the two countries into different growth patterns: where peer effects in consumption interact with higher credit availability, rising income inequality leads to the emergence of a debt-led growth. Where social norms determine weaker emulation and credit availability is lower, an export-led regime arises. Eventually, a crisis emerges endogenously due to the sudden-stop of capital ows from the net lending country, triggered by the excessive risk associated to the dramatic amount of private debt accumulated by households in the borrowing country. Monte Carlo simulations for a wide range of calibrations confirm the robustness of our results.
    Keywords: Inequality; Current Account; Currency Union; Agent -based model
    JEL: C63 D31 E21 F32 F43
    Date: 2017–12
  25. By: Ibrahim, Taofik
    Abstract: Budget deficit has an implication for monetary policy formulation and thus aggregate macroeconomic performance. An important question often asked is whether an increase in budget deficit is able to change the money market equilibrium. In order to answer this question, this paper investigates empirically the sensitivity and validity of the Keynesian and Neoclassical propositions and the Ricardian equivalence hypothesis. The study utilized cointegration analysis and ECM methodology to ascertain the short and long-run effect of budget deficit on money demand. The results of the cointegration test confirmed the existence of a strong and stable long-term relationship among the variables in the money demand model. Also, the estimates of the ECM model indicate the existence of a short- and long-term, positive and significant relationship between money demand and budget deficit suggesting that the Keynesian and Neoclassical views hold for Nigeria. Therefore the study suggests that there should be increased emphasis on productivity and efficiency of government expenditure since it impacts positively on aggregate money demand via increase in aggregate demand.
    Keywords: Budget Deficit, Money Demand, Error Correction Model (ECM), Nigeria
    JEL: E41 H62
    Date: 2017–07–03
  26. By: Paweł Kopiec (Narodowy Bank Polski)
    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: D80 E44 E58 G21
    Date: 2018
  27. By: Pérez-Forero, Fernando (Banco Central de Reserva del Perú)
    Abstract: Knowing the stance of monetary policy is a general theme of interest for academics, policy makers and private sector agents. The mentioned stance is not necessarily observable, since the Fed have used different monetary instruments at different points in time. This paper provides a measure of this stance for the last forty five years, which is a weighted average of a pool of instruments. We extend Bernanke and Mihov (1998)'s Interbank Market model by allowing structural parameters and shock variances to change over time. In particular, we follow the recent work of Canova and Perez Forero (2015) for estimating non-recursive TVCVARs with Bayesian Methods. The estimated stance measure describes how tight/loose was monetary policy over time and takes into account the uncertainty related with posterior estimates of time varying parameters. Finally, we present how has monetary transmission mechanism changed over time, focusing our attention in the period after the Great Recession.
    Keywords: SVARs, Interbank Market, Operating Procedures, Monetary Policy Stance, Time-varying parameters, Bayesian Methods, Multi-move Metropolis within Gibbs Sampling
    JEL: C11 E51 E52 E58
    Date: 2018–04
  28. By: Bock, Alexander; Cajnko, Miha; Daskalova, Svetla; Durka, Iwona; Gallagher, Brian; Grandia, Roel; Haberbush, Glenn; Kamps, Annette; Luskin, Alaoishe; Russo, Michelina Lo; Lozoya, Mª Carmen Castillo; Pasqualone, Filippo; Thomas, Michael; Vasconcelos, Isabel
    Abstract: This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework from the second quarter of 2016 to the last quarter of 2017. It reviews the context of Eurosystem market operations; the design and operation of the Eurosystem’s counterparty and collateral frameworks; the fulfilment of minimum reserve requirements; participation in credit operations and recourse to standing facilities; and the conduct of outright asset purchase programmes. The paper also discusses the impact of monetary policy implementation on the Eurosystem's balance sheet, excess liquidity and money market liquidity conditions. JEL Classification: D02, E43, E58, E65, G01
    Keywords: central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures
    Date: 2018–04
  29. By: Marek Dabrowski
    Abstract: In the last decade, advanced economies, including the euro area, experienced deflationary pressures caused by the global financial crisis of 2007-2009 and the anti-crisis policies that followed—in particular, the new financial regulations (which led to a deep decline in the money multiplier). However, there are numerous signs in both the real and financial spheres that these pressures are disappearing.
    Keywords: monetary policy, inflation, economic growth, unemployment, money multiplier, money velocity
    JEL: E24 E31 E41 E51 E52
    Date: 2018
  30. By: Ebadi, Esmaeil
    Abstract: This paper sheds light on the effect of government spending on money demand. The conventional literature of money demand has been developed with money demand defined as a function of income, interest rate, exchange rate, and inflation. I propose the new method of income decomposition to the public sector and the private sector following Barro’s (1990) spending model. I include government spending in the conventional money demand function to investigate the impact of government spending on the demand for money. The results confirm the long-run significant effect of government spending on money demand. In addition, I find that money demand tends to be unstable and moves on the edge of structural break during recessions. Moreover, the tendency of instability lasted longer in the early recession of 2000s than in the Great Recession 2007-2008 and the results do not support Friedman’s (1969) idea that the demand for money is “highly stable”. Instead, the findings suggest that money demand is “slightly stable” during recessions.
    Keywords: Monetary Policy, Money Demand, Stability, ARDL Cointegration Approach
    JEL: E41 E62
    Date: 2018–04–28
  31. By: Marc Lavoie; Severin Reissl
    Abstract: We present a simple stock-ow consistent (SFC) model to discuss some recent claims made by Angel Asensio in the Journal of Post Keynesian Economics regarding the relationship between endogenous money theory and the liquidity preference theory of the rate of interest. We incorporate Asensio's assumptions as far as possible and use simulation experiments to investigate his arguments regarding the presence of a crowding-out effect, the relationship between interest rates and credit demand, and the ability of the central bank to steer interest rates through varying the stock of money. We show that in a fully-specified SFC model, some of Asensio's conclusions are not generally valid (most importantly, the presence of a crowding-out effect is ambiguous), and that in any case, his use of a non-SFC framework leads him to ignore important mechanisms which can contribute to a better understanding of the behaviour of interest rates. More generally, this paper hence once more demonstrates the utility of the SFC approach in research on monetary economics 1930s.
    Keywords: Horizontalism, structuralism, endogenous money, interest rates, stock-flow consistency
    JEL: E5 E12 E40 E43
    Date: 2018
  32. By: Gita Gopinath; Jeremy C. Stein
    Abstract: We explore the interplay between trade invoicing patterns and the pricing of safe assets in different currencies. Our theory highlights the following points: 1) a currency’s role as a unit of account for invoicing decisions is complementary to its role as a safe store of value; 2) this complementarity can lead to the emergence of a single dominant currency in trade invoicing and global banking, even when multiple large candidate countries share similar economic fundamentals; 3) firms in emerging-market countries endogenously take on currency mismatches by borrowing in the dominant currency; 4) the expected return on dominant-currency safe assets is lower than that on similarly safe assets denominated in other currencies, thereby bestowing an “exorbitant privilege” on the dominant currency. The theory thus provides a unified explanation for why a dominant currency is so heavily used in both trade invoicing and in global finance.
    JEL: E0 F0 G0
    Date: 2018–04
    Date: 2018

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