nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒05‒21
eighteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Credibility and Monetary Policy By Jean Barthélemy; Eric Mengus
  2. Eurozone bond market dynamics, ECB monetary policy and financial stress By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  3. Central Banks Going Long By Ricardo Reis
  4. The link between monetary policy and the direct European office market: some empirical evidence By Alain Coen; Benoit Lefebvre; Arnaud Simon
  5. Monetary Base Controllability after the Exit of Quantitative Easing By Atsushi Tanaka
  6. The speed of exchange rate pass-through By Barthélémy Bonadio; Andreas M. Fischer; Philip Sauré
  7. How Important are the International Financial Market Imperfections for the Foreign Exchange Rate Dynamics: A Study of the Sterling Exchange Rate By Xue, Dong; Minford, Patrick; Meenagh, David
  8. Developing an underlying inflation gauge for China By Amstad, Marlene; Ye, Huan; Ma, Guonan
  9. Is interest rate still the right tool for stimulating economic growth ? evidence from Japan By Al-Dailami, Mohammed Abdullah; Masih, Mansur
  10. The Causal Relationships between Inflation and Inflation Uncertainty By William Barnett; Zied Ftiti; Fredj Jawadi
  11. Commercial Banks, Credit Unions, and Monetary Policy By Edgar A. Ghossoub
  12. Central Bank information and the effects of monetary shocks By Paul Hubert
  13. A Model for Policy Interest Rates By Armin Seibert; Andrei Sirchenko; Gernot Muller
  14. Multihorizon Currency Returns and Purchasing Power Parity By Mikhail Chernov; Drew D. Creal
  15. Money and the Commons: An Investigation of Complementary Currencies and their Ethical Implications By Camille Meyer; Marek Hudon
  16. ANALYSING Inflation in Nigeria: A Fractionally Integrated ARFIMA-GARCH Modelling Approach By Iorember, Paul; Usar, Terzungwe; Ibrahim, Kabiru
  17. Systematic Managed Floating By Frankel, Jeffrey
  18. Future exchange rates and Siegel's paradox By Keivan Mallahi-Karai; Pedram Safari

  1. By: Jean Barthélemy (Département d'économie); Eric Mengus (HEC Paris - Recherche - Hors Laboratoire)
    Abstract: This paper revisits the ability of central banks to manage private sector's expectations depending on its credibility and how this affects the use of interest rate rules and pegs to achieve monetary policy objectives. When private agents can only provide limited incentives for the central bank to follow a policy, we show that resulting limited credibility allows a central bank to prevents the inflation from diverging by defaulting on past promises if necessary. As a result, the Taylor rule, when expected, anchors inflation expectations on a unique equilibrium path as long as the Taylor principle is satisfied. Finally, we also show that limited credibility restricts the impact of long-term interest rate pegs, so as to make current conditions less dependent on future policy changes.
    Date: 2017–02
  2. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: We investigate the role of both ECB’s asset purchases and market sentiment in the Eurozone sovereign debt crisis context. We explain the evolution of long-term interest rates in the Eurozone and in some Member States since the ECB started to purchase various securities for monetary policy purposes. We control for four categories of fundamentals: macroeconomic, international, financial and expectations. We show that unconventional monetary policies and country-specific market sentiment have significant negative and positive effects respectively. Our results suggest that ECB’s unconventional policies have been effective in mitigating the disruption in the channels of transmission across the different Eurozone countries.
    Keywords: Asset purchase programmes; ECB; Sovereign yields; Unconventional monetary policies; CISS
    JEL: E58 E52
    Date: 2017–09
  3. By: Ricardo Reis
    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
  4. By: Alain Coen; Benoit Lefebvre; Arnaud Simon
    Abstract: Since the financial crisis Central Banks have used unconventional monetary policy and increased the quantity of money available in the economy. The purpose of this paper is to study the effect of money supply on commercial real estate prices. The paper uses a panel estimation to determine the relationship between office price indexes and explanatory variables, both at different locations and at different periods. The panel analysis allows understanding price movements across the 15 main office markets in continental Europe between 2005 and 2015. To pick-up the relation between prices and money supply, we have constructed, for each market a monetary index adapted to commercial real estate. Results show that office prices are driven by economic variables, but there is also a positive relationship between the monetary index and the office prices. Restricting the analysis between 2010 and 2015 we found a reinforced causal relation between prices and money. Quantitative easing has an important impact on real estate.
    Keywords: European real estate market; Monetary supply; office prices; Panel Estimation
    JEL: R3
    Date: 2017–07–01
  5. By: Atsushi Tanaka (School of Economics, Kwansei Gakuin University)
    Abstract: In this paper, the problem that a central bank might face after exiting monetary quantitative easing policy is examined. This paper develops a simple dynamic optimization model of a central bank, and the model finds that if the bank needs to absorb a substantial amount of excess reserves at the exit, then the monetary base might become uncontrollable. In this case, the bank has no option but to increase the monetary base by more than the target amount, which leads to undesirable money supply expansion and ultimately to inflation pressures. The model derives the condition that a central bank falls into such a difficult situation.
    Keywords: central bank, monetary base, quantitative easing, exit strategy
    JEL: E5
    Date: 2018–05
  6. By: Barthélémy Bonadio; Andreas M. Fischer; Philip Sauré
    Abstract: On January 15, 2015, the Swiss National Bank discontinued its minimum exchange rate policy of one euro against 1.2 Swiss francs. This policy shift resulted in a sharp, unanticipated and permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the pass-through of this unusually clean exchange rate shock into import unit values at the daily frequency using Swiss transaction-level trade data. Our key findings are twofold. First, for goods invoiced in euros, the pass-through is immediate and complete. Second, for goods invoiced in Swiss francs, the pass-through is partial and exceptionally fast, beginning on the second working day after the exchange rate shock and reaching the medium-run pass-through after twelve working days on average.
    Keywords: Daily exchange rate pass-through, speed, large exchange rate shock
    JEL: F14 F31 F41
    Date: 2018
  7. By: Xue, Dong (Cardiff Business School); Minford, Patrick (Cardiff Business School); Meenagh, David (Cardiff Business School)
    Abstract: The UK has been a net debtor over the past two decades and the sterling exchange rates are sensitive to any chaos that might occur in the Financial market. This paper examines the importance of the inter-national financial imperfections in the sterling exchange rate dynamics. We build a small open economy DSGE model with the constrained international financial institutions that intermediate capital flows, and derive tractable analytical solutions. The constraint works to introduce a wedge between lending and borrowing rates, which compensates financiers for their currency risk-taking. The model has been estimated by using a simulation-based Indirect Inference approach, which provides a natural framework for testing the hypothesis implied by the model. We find that the model cannot be rejected by the UK data. Shocks to financial forces are the main driving forces behind the large and sudden depreciation of the Sterling exchange rates in the aftermath of the collapse of Lehman Brothers and the Brexit vote. Furthermore, the optimal policy rules have been proposed.
    Keywords: Small open economy DSGE model, International financial imperfections, Sterling exchange rates, Indirect Inference, Crisis, Policy rules
    JEL: E63 F31 F34 F41 F47
    Date: 2018–05
  8. By: Amstad, Marlene; Ye, Huan; Ma, Guonan
    Abstract: Inflation in emerging markets is often driven by large, persistent changes in food and energy prices. Core inflation measures that neglect or under-weight volatile CPI subcomponents such as food and energy risk excluding information helpful in assessing current and future inflation trends. This paper develops an underlying inflation gauge (UIG) for China, extracting the persistent part of the common component in a broad dataset of price and non-price variables. Our proposed UIG for China avoids the excess volatility reduction that plagues traditional Chinese core inflation measures. When forecasting headline CPI, the proposed UIG outperforms traditional core inflation measures over a variety of samples.
    JEL: C13 C33 E31 E37 G15 C43
    Date: 2018–04–27
  9. By: Al-Dailami, Mohammed Abdullah; Masih, Mansur
    Abstract: A lot of advanced economies have reached a stage of stale economic growth and very low inflation rates or even occasionally deflation. Their policy maker’s response was to stimulate the economy through monetary easing in order to make funds available for potential businesses to borrow and grow. Countries such as Japan for example have reduced their interest rates to negative nominal rates in order to try to push the money back into the economy but so far all efforts were futile. This calls for a relook at the real situation and whether interest rates are actually the right tool to stimulate the economy or not. This paper takes a completely different perspective on economic development and attempts to discover the relationship between interest rates and entrepreneurship indicators in Japan with the latter being taken as a proxy for economic development as it is a major driver for economic activity – a proxy that was totally neglected by previous literature. The study performs a time series regression to determine the relationship between interest rates and four drivers of entrepreneurship in order to determine whether interest rates actually stimulate these or not. The study showed that interest rates are rather a driven factor, not a driver when it comes to entrepreneurship and efforts done on interest rates won’t have an impact on the real economic entrepreneurship.
    Keywords: interest rates, entrepreneurship, Variance Decompositions
    JEL: C58 E44
    Date: 2017–12–28
  10. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Zied Ftiti (EDC Paris Business School, France); Fredj Jawadi (University of Evry, France)
    Abstract: Since the publication of Friedman’s (1977) Nobel lecture, the relationship between the mean function of the inflation stochastic process and its uncertainty has been the subject of much research. Friedman postulated that high inflation causes increased inflation uncertainty. Ball (1992) produces macroeconomic theory that could justify that causality. But other researchers have found the converse causality, from increased inflation uncertainty to increased mean inflation, and postulated macroeconomic theory that could support their views. In addition, some researchers have found inverse correlation between mean inflation and inflation volatility with causation in either direction. These controversies are important, since they have different implications for economic theory and policy. We conduct a systematic econometric study of the relationship among the first two moments of the inflation stochastic process using state of the art approaches. We propose a time-varying inflation uncertainty measure based on stochastic volatility to take into account unpredictable shocks. Further, we extend previous related literature by providing a new econometric specification of this relationship using two semi-parametric approaches: the frequency evolutionary co-spectral approach and the continuous wavelet methodology. We theoretically justify their use through an extension of Ball's (1992) model. These frequency approaches have two advantages, they provide the analyses for different frequency horizons and do not impose restriction on the data. While related literature always focused on the US data, our study explores this relationship for five major developed and emerging countries (the US, the UK, the Euro area, South Africa, and China) over the last five decades to investigate robustness of our inferences and investigate sources of prior inconsistencies in inferences among prior studies. This selection of countries permits investigation of the inflation versus inflation uncertainty relationship under different hypotheses, including explicit versus implicit inflation targets, conventional versus unconventional monetary policy, independent versus dependent central banks, and calm versus crisis periods. Our findings depict a significant relationship between inflation and inflation uncertainty that varies with time and frequency and offer an improved comprehension of the ambiguous inflation versus inflation uncertainty relationship. This relationship seems positive in the short and medium terms during stable periods, confirming the Friedman-Ball theory, while it is negative during crisis periods. In addition, our analysis identifies the phases of leading and lagging inflation uncertainty. Our general approach nests within it the earlier approaches, permitting explanation of the prior appearances of ambiguity in the relationship and identifies the conditions associated with the various outcomes.
    Keywords: Inflation; Inflation uncertainty; Frequency approach; Wavelet; Semi-parametric approach; Stochastic volatility
    JEL: C14 E31
    Date: 2018–03
  11. By: Edgar A. Ghossoub (UTSA)
    Abstract: The objective of this manuscript is to study the strategic interaction between different types of financial institutions and its implications for economic activity and monetary policy. While commercial banks and credit unions provide similar financial services, they have different ownership structure and therefore have different objectives. For instance, banks are often perceived as profit maximizers, while credit unions act like cooperative entities seeking value and aim to maximize the welfare of their depositors. Following the 2007-2008 financial crisis, credit unions gained more market share and their role in the process of financial intermediation became more pronounced. Such changes raise some important questions that I attempt to address in this manuscript. First, how does the strategic interaction between credit unions and commercial banks affect risk sharing, total welfare, and capital formation? Second, will the effects of monetary policy become stronger if credit unions gain more market share? Finally, what is the optimal size of each financial institution? In order to address these important questions, I study a dynamic general equilibrium model with an important role for money and where different types of financial intermediaries interact strategically in deposit and capital markets. Length: 22 pages
    Keywords: Credit Union, Banking Competition, Monetary Policy
    JEL: E31 E41 E44 O42
    Date: 2016–11–30
  12. By: Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Does the effect of monetary policy depend on the macroeconomic information released by the central bank? Because differences between central bank’s and private agents’ information sets affect private agents’ interpretation of policy decisions, this paper aims to investigate whether the publication of macroeconomic information by the central bank modifies private responses to monetary policy. We assess the non-linear effects of monetary shocks conditional on the Bank of England’s macroeconomic projections on UK private inflation expectations. We find that inflation projections modify the impact of monetary shocks. When contractionary monetary shocks are interacted with positive (negative) projections, the negative effect of policy on inflation expectations is amplified (reduced). This suggests that providing guidance about central bank future expected inflation helps private agents’ information processing, and therefore changes their response to policy decisions..
    Keywords: Monetary policy; Information processing; Signal extraction; Market based inflation expectations; Central bank projections; Real time forecasts
    JEL: E52 E58
    Date: 2017–09
  13. By: Armin Seibert (National Research University Higher School of Economics); Andrei Sirchenko (National Research University Higher School of Economics); Gernot Muller (National Research University Higher School of Economics)
    Abstract: This paper introduces a model that addresses the key worldwide features of modern monetary policy making: the discreteness of policy interest rates both in magnitude and in timing, the preponderance of status quo decisions, policy inertia and regime switching. We capture them by developing a new dynamic discrete-choice model with switching among three latent policy regimes (dovish, neutral and hawkish), estimated via the Gibbs sampler with data augmentation. The simulations and an application to federal funds rate target demonstrate that ignoring these features leads to biased estimates, worse in- and out-of-sample fit, and qualitatively different inference. Using all Federal Open Market Committee?s (FOMC) decisions made both at scheduled and unscheduled meetings as sample observations, we model the Federal Reserve?s response to real-time data available right before each meeting, and control for the endogeneity of monetary policy shocks. The new model, fitted for Greenspan?s tenure, correctly predicts the directions of about 90% of the next decisions on the target rate (hike, no change, or cut) out of sample during Bernanke?s term including the status quo decisions after reaching the zero lower bound, while the conventional linear model fails to adequately tackle the zero bound and wrongly predicts further cuts.
    Keywords: Federal funds rate target, FOMC, discrete ordered choice, regime switching, endogeneity, MCMC, Gibbs sampler, data augmentation, autoregressive ordered probit, real-time data
    JEL: C11 C34 C35 E52
    Date: 2018
  14. By: Mikhail Chernov; Drew D. Creal
    Abstract: Exposures of expected future depreciation rates to the current interest rate differential violate the UIP hypothesis in a distinctive pattern that is a non-monotonic function of horizon. Conversely, forward, risk-adjusted expected depreciation rates are monotonic. We explain the two patterns by incorporating the weak form of PPP into a no-arbitrage joint model of the depreciation rate, inflation differential, domestic and foreign yield curves. Short-term departures from PPP generate the first pattern. The risk premiums for these departures generate the second pattern.
    JEL: F31 F47 G12 G15
    Date: 2018–04
  15. By: Camille Meyer; Marek Hudon
    Abstract: The commons is a concept increasingly used with the promise of creating new collective wealth. In the aftermath of the economic and financial crises, finance and money have been criticized and redesigned to serve the collective interest. In this article, we analyze three types of complementary currency (CC) systems: community currencies, inter-enterprise currencies, and cryptocurrencies. We investigate whether these systems can be considered as commons. To address this question, we use two main theoretical frameworks that are usually separate: the “new commons” in organization studies and the “common good” in business ethics. Our findings show that these monetary systems and organizations may be considered as commons under the “common good” framework since they promote the common interest by creating new communities. Nevertheless, according to the “new commons” framework, only systems relying on collective action and self-management can be said to form commons. This allows us to suggest two new categories of commons: the “social commons”, which fit into both the “new commons” and the “common good” frameworks, and the “commercial commons”, which fit the “common good” but not the “new commons” framework. This research advances a new conceptualization of the commons and of the ethical implications of complementary currencies.
    Keywords: Common good; Commons; Complementary currencies; Community currencies; Cryptocurrencies; Ethics in finance
    JEL: F35 G21 G28 L31 M14
    Date: 2018–05–14
  16. By: Iorember, Paul; Usar, Terzungwe; Ibrahim, Kabiru
    Abstract: The study looked into the stochastic properties of CPI-inflation rate for Nigeria from 1995Q1 to 2016Q4. The study employed an autoregressive fractionally integrated moving average and a general autoregressive conditional heteroskedasticity (ARFIMA-GARCH) methodology as well as ADF/KPSS to investigate the long-memory properties of CPI-Inflation for Nigeria. The study found that CPI-inflation in Nigeria is shock dissipating at a geometric rate (fast mean reverting ability). The ARFIMA-GARCH process showed that CPI inflation in Nigeria is a heteroskedastic fractionally integrated process with quick mean reverting ability. The study therefore concludes that shocks to CPI-inflation in Nigeria such as sudden hikes in prices of energy products will not cause a permanent change in general price level but will eventually return to its mean state, and therefore having an implication for the Inflation-Unemployment tradeoff of the Philips curve.
    Keywords: Inflation, AFIMA, GARCH, Fractional Integrated and Long Memory, ADF and KPSS
    JEL: B26
    Date: 2018–01–07
  17. By: Frankel, Jeffrey (Harvard University)
    Abstract: A majority of countries neither freely float their currencies nor firmly peg. But most of the remainder in practice also don't obey such well-defined intermediate exchange rate regimes as target zones. This paper proposes to define an intermediate regime, to be called "systematic managed floating," as an arrangement where the central bank regularly responds to changes in total exchange market pressure by allowing some fraction to be reflected as a change in the exchange rate and the remaining fraction to be absorbed as a change in foreign exchange reserves. An operational criterion for judging systematic managed floaters is a high correlation between exchange rate changes and reserve changes. The paper rejects the view that exchange rate regimes make no difference. In regressions to test effects on real exchange rates, we find that positive external shocks tend to cause real appreciation for most systematic managed-floaters; more strongly so for pure floaters; and not at all for most firm peggers. Two measures of exogenous external shocks are used: (i) for commodity-exporters, a country-specific index of global prices of the export commodities and (ii) for other Asian emerging market economies, the VIX.
    Date: 2017–06
  18. By: Keivan Mallahi-Karai; Pedram Safari
    Abstract: Siegel's paradox is a fundamental question in international finance about exchange rates for futures contracts and has puzzled many scholars for over forty years. The unorthodox approach presented in this article leads to an arbitrage-free solution which is invariant under currency re-denominations and is symmetric, as explained. We will also give a complete classification of all such aggregators in the general case. The formula obtained in this setting therefore describes all the negotiated no-arbitrage forward exchange rates in terms of a reciprocity function. Keywords: Siegel's paradox, forward exchange rates, discount bias.
    Date: 2018–05

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