nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒06‒11
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Alexandre Lamfalussy and the monetary policy debates among central bankers during the Great Inflation By Ivo Maes; Piet Clement
  2. Inflation Dynamics in The Gambia By Cham, Tamsir
  3. Central bank policies and income and wealth inequality: A survey By Andrea Colciago; Anna Samarina; Jakob de Haan
  4. Financial stability and the ECB By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance; Xavier Ragot
  5. Lessons from historical monetary unions - is the European monetary union making the same mistakes? By Ryan, John; Loughlin, John
  6. A Sequential Bargaining Model of the Fed Funds Market with Excess Reserves By Schulhofer-Wohl, Sam; Clouse, James A.
  7. Central Bank sentiment and policy expectations By Fabien Labondance; Paul Hubert
  8. "Twenty Years after the Fall of the Berlin Wall: Rethinking the Role of Money and Markets in the Global Economy" By W. Lee Hoskins; Walker F. Todd
  9. International Spillovers of Forward Guidance Shocks By Callum Jones; Mariano Kulish; Daniel M. Rees
  10. Concerted efforts? Monetary policy and macro-prudential tools By Ferrero, Andrea; Harrison, Richard; Nelson, Ben
  11. Spillovers from Euro Area Monetary Policy: A Focus on Emerging Europe By Sona Benecka; Ludmila Fadejeva; Martin Feldkircher
  12. Monetary Policy Effects on the Chilean Stock Market: An Automated Content Approach By Mario González; Raúl Tadle
  13. Re-Exploring the Nexus between Monetary Policy and Banks' Risk-Taking By Melchisedek Joslem Ngambou Djatche
  14. The Impact of Shocks on Core Inflation; Evidence from India By Sahu, Priyanka
  15. Inference in Structural Vector Autoregressions when the Identifying Assumptions are not Fully Believed: Re-evaluating the Role of Monetary Policy in Economic Fluctuations By Christiane Baumeister; James D. Hamilton
  16. Optimal Trend Inflation By Klaus Adam; Henning Weber
  17. Asymmetric Inflation Expectations, Downward Rigidity of Wages, and Asymmetric Business Cycles By Baqaee, David Rezza
  18. Monetary Policy and Inequality under Labor Market Frictions and Capital-Skill Complementarity By Dolado, Juan J.; Motyovszki, Gergö; Pappa, Evi
  19. Measuring Monetary Policy Spillovers between U.S. and German Bond Yields By Stephanie E. Curcuru; Michiel De Pooter; George Eckerd
  20. The ECB's Fiscal Policy By Hans-Werner Sinn
  21. Scarcity Effects of Quantitative Easing on Market Liquidity: Evidence from the Japanese Government Bond Market By Fei Han; Dulani Seneviratne
  22. Foreign Effects of Higher U.S. Interest Rates By Matteo Iacoviello; Gaston Navarro
  23. Country-Specific Euro Area Government Bond Yield Reactions to ECB’s Non-Standard Monetary Policy Announcements By Ralf Fendel; Frederik Neugebauer
  24. Term structure of interest rates: modelling the risk premium using a two horizons framework By Georges Prat; Remzi Uctum
  25. Is the Anchoring of Consumers' Inflation Expectations Shaped by Inflational Experience? By Lena Dräger; Michael Lamla
  26. Fiscal and Monetary Regimes: A Strategic Approach By Barthelemy, Jean; Plantin, Guillaume
  27. Savings, asset scarcity, and monetary policy By Altermatt, Lukas
  28. Analyse de la transmission de la politique monétaire vers les taux souverains By Bennouna, Hicham; Bounader, Lahcen
  29. Explaining Inflation in Colombia: A Disaggregated Phillips Curve Approach By Sergi Lanau; Adrian Robles; Frederik G Toscani
  30. Point versus Band Targets for Inflation By Beechey, Meredith; Österholm, Pär
  31. Optimal Inflation and the Identification of the Phillips Curve By Michael McLeay; Silvana Tenreyro

  1. By: Ivo Maes (National Bank of Belgium and Robert Triffin Chair, Université catholique de Louvain and ICHEC Brussels Management School, Boulevard de Berlaimont 14, 1000 Brussels, Belgium); Piet Clement (Bank for International Settlements.)
    Abstract: The 1970s were a turbulent period in postwar monetary history. This paper focuses on how central bankers at the Bank for International Settlements (BIS), especially Alexandre Lamfalussy, the BIS’s Economic Adviser, responded to the Great Inflation. The breakdown of Bretton Woods forced central bankers to look for new monetary policy strategies as the exchange rate lost its central role. Lamfalussy, in his early years a Keynesian in favour of discretionary policies, moved to a "conservative Keynesian" position, acknowledging that a medium term orientation and the credibility of monetary policy were important to break inflationary expectations. However, Lamfalussy never moved to “monetarist” positions. Lamfalussy certainly acknowledged that monetary targets could reinforce the credibility and independence of monetary policy. However, he rejected mechanical rules. In essence he aimed for a middle position: rules applied with a pragmatic sense of discretion. In the early 1980s, with the rise of financial innovations, Lamfalussy would stress even more the limitations of monetary targeting. His focus turned increasingly to systemic financial stability risks, preparing the ground for the macroprudential approach of the BIS. In Lamfalussy's view, central banking remained an art, not a science.
    Keywords: Great Inflation, monetary policy, central banking, Alexandre Lamfalussy, BIS
    JEL: B22 E58 F44
    Date: 2018–04
  2. By: Cham, Tamsir (The Islamic Research and Teaching Institute (IRTI))
    Abstract: Gambia inflation rate has picked-up in recent years. This paper investigates the inflation dynamics in The Gambia using monthly time series data for the period 2005-2014. Several econometrics models are applied including single equation model, Structural Vector Autoregression (SVAR) model and Vector Error Correction Model (VECM). The empirical results confirm the existence of stable relation between money supply and inflation, and exchange rate and inflation. We found that the depreciation of the exchange rate has a much more immediate impact on inflation. In addition, the exchange rate pass-through for GMD/ US dollar exchange rate is stronger. The study shows that current inflation is affected significantly by past inflation. The results also reveal that inflation in neighboring country, Senegal, significantly influences inflation in the Gambia in all specifications. Furthermore, the empirical findings reveal that the artificial fixing of the exchange rate or fear of float in recent years further exert inflation pressure. In the short-run external shocks of money supply, exchange rate and prices in Senegal account for significant variations of inflation. However, in the medium term domestic demand and the exchange rate pass-through for GMD/US dollar exchange rate account for larger variations in inflation.
    Keywords: Inflation; Money Supply; Exchange Rate
    JEL: C32 E31 E52
    Date: 2017–07–01
  3. By: Andrea Colciago; Anna Samarina; Jakob de Haan
    Abstract: This paper takes stock of the literature on the relationship between central bank policies and inequality. A new paradigm which integrates sticky-prices, incomplete markets and heterogeneity among households is emerging, which allows to jointly study how inequality shapes macroeconomic aggregates and how macroeconomic shocks and policies affect inequality. While the new paradigm features multiple distributional channels of monetary policy, most empirical analyses analyse each potential channel of redistribution in isolation. Our review suggests that empirical research on the effect of conventional monetary policy on income and wealth inequality yields very mixed findings, although there seems to be a consensus that higher inflation, at least above some threshold, increases inequality. In contrast to common wisdom, the conclusions concerning the impact of unconventional monetary policies on income inequality are also not clear cut. This is so since these policies may reduce income inequality by stimulating economic activity, but may also increase inequality by boosting asset prices. Similarly, results concerning the impact of unconventional monetary policies on wealth inequality are rather mixed. The scant literature on the impact of macro-prudential policies on inequality finds evidence for redistributive effects, but in view of its limitations it may be too early to come to conclusions.
    Keywords: income inequality; wealth inequality; monetary policy; macro-prudential policy
    JEL: D63 E52 E58
    Date: 2018–05
  4. 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); Xavier Ragot (Observatoire français des conjonctures économiques)
    Abstract: For nearly two decades, the policy debate has focused on the attitude of central banks regarding financial stability and asset price bubbles. This debate is resurfacing with the recent episodes of expansionary monetary policies implemented through unconventional measures. The aim of this policy brief is to feed reflections on the risks for financial stability associated with the extension of quantitative easing (QE) by the ECB. We first recall that the theoretical and empirical literature does not provide a clear consensus on the influence of monetary policy on asset price bubbles. Then, we propose indicators of asset price bubbles for the euro area and we discuss the effect of monetary policy on these indicators. So far, there is no evidence of presence of asset price bubbles in the euro area. Besides, the change in the ECB balance sheet would not trigger bubbles in the stock and housing markets. However, it may be a concern for the bond market. From this, we argue that a gradual decline in ECB’s balance sheet would be important to limit the risk of a new banking crisis in the euro area.
    Keywords: financial stability; price bubbles
    JEL: E5
    Date: 2017–02
  5. By: Ryan, John; Loughlin, John
    Abstract: This article examines three historical monetary unions: the Latin Monetary Union (LMU), the Scandinavian Monetary Union (SMU), and the Austro-Hungarian Monetary Union (AHMU) in an attempt to derive possible lessons for the European Monetary Union (EMU). The term ‘monetary union’ can be defined either narrowly or broadly depending on how closely it conforms to Mundell’s notion of ‘Optimal Currency Area’. After examining each of the historical monetary unions from this perspective, the article concludes that none of them ever truly conformed to Mundell’s concept, nor does the EMU. Nevertheless, the article argues that some lessons may be learned from these historical experiences. First, it is necessary that there exist robust institutions such as a common central bank and a unified fiscal policy in order to withstand external shocks. The three early unions could not withstand the shock of WWI. Another important lesson is that continuing national rivalries can undermine any monetary union.
    Keywords: Latin monetary union; Scandinavian monetary union; Austro-Hungarian monetary union; European monetary union; Eurozone crisis; European Central Bank
    JEL: E42 E50 E52 F02 F50
    Date: 2018–04–04
  6. By: Schulhofer-Wohl, Sam (Federal Reserve Bank of Chicago); Clouse, James A. (Board of the Governors of the Federal Reserve System)
    Abstract: We model bargaining between non-bank investors and heterogeneous bank borrowers in the federal funds market. The analysis highlights how the federal funds rate will respond to movements in other money market interest rates in an environment with elevated levels of excess reserves. The model predicts that the administered rate offered through the Federal Reserve's overnight reverse repurchase agreement facility influences the fed funds rate even when the facility is not used. Changes in repo rates pass through to the federal funds rate, but by less than one-for-one. We calibrate the model to data from 2017 and find in an out-of-sample test that the model quantitatively matches the increase in the federal funds rate in the first four months of 2018. The rise in the fed funds rate in 2018 is attributed to movements in repo rates and not to changes in the scarcity value of reserves.
    Keywords: Federal funds market; federal funds rate; Federal Reserve; interest rates; money market
    JEL: E42 E43 E47 E52 E58
    Date: 2018–05–01
  7. By: Fabien Labondance (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: We explore empirically the theoretical prediction that optimism or pessimism have aggregate effects, in the context of monetary policy. First, we quantify the tone conveyed by FOMC policymakers in their statements using computational linguistics. Second, we identify sentiment as the unpredictable component of tone, orthogonal to fundamentals, expectations, monetary shocks and investors’ sentiment. Third, we estimate the impact of FOMC sentiment on the term structure of private interest rate expectations using a high-frequency methodology and an ARCH model. Optimistic FOMC sentiment increases policy expectations primarily at the one-year maturity. We also find that sentiment affects inflation and industrial production beyond monetary shocks.
    Keywords: Animal spirits; Optimism; Confidence; FOMC; Interest rate expectations; Central Bank Communication; Eurpean Central Bank; Aggregate Effects
    JEL: E43 E52 E58
    Date: 2017–03
  8. By: W. Lee Hoskins; Walker F. Todd
    Abstract: Many of the hopes arising from the 1989 fall of the Berlin Wall were still unrealized in 2010 and remain so today, especially in monetary policy and financial supervision. The major players that helped bring on the 2008 financial crisis still exist, with rising levels of moral hazard, including Fannie Mae, Freddie Mac, the too-big-to-fail banks, and even AIG. In monetary policy, the Federal Reserve has only just begun to reduce its vastly increased balance sheet, while the European Central Bank has yet to begin. The Dodd-Frank Act of 2010 imposed new conditions on but did not contract the greatly expanded federal safety net and failed to reduce the substantial increase in moral hazard. The larger budget deficits since 2008 were simply decisions to spend at higher levels instead of rational responses to the crisis. Only an increased reliance on market discipline in financial services, avoidance of Federal Reserve market interventions to rescue financial players while doing little or nothing for households and firms, and elimination of the Treasury's backdoor borrowings that conceal the real costs of increasing budget deficits can enable the American public to achieve the meaningful improvements in living standards that were reasonably expected when the Berlin Wall fell.
    Keywords: Too Big To Fail; Moral Hazard; Section 13(3); Credit Allocation; Domestic Price Level Stability
    JEL: E42 E52 E58 E61 E63
    Date: 2018–06
  9. By: Callum Jones; Mariano Kulish; Daniel M. Rees
    Abstract: After 2007, countries that cut their policy interest rates close to zero turned, among other policies, to forward guidance. We estimate a two-country model of the U.S. and Canada to quantify how unexpected changes in U.S. forward guidance affected Canada. Expansionary U.S. forward guidance shocks, like conventional policy shocks, are beggar-thy-neighbor and depress Canadian output, but by twice as much as conventional shocks. We find that the effect of U.S. forward guidance shocks on Canadian output, unlike conventional policy shocks, depends on the state of U.S. demand and can be five times smaller when U.S. demand is weak.
    Date: 2018–05–15
  10. By: Ferrero, Andrea (Oxford University); Harrison, Richard (Bank of England); Nelson, Ben (Bank of England)
    Abstract: The inception of macro-prudential policy frameworks in the wake of the global financial crisis raises questions of how macro-prudential and monetary policies should be coordinated. We examine these questions through the lens of a macroeconomic model featuring nominal rigidities, housing, incomplete risk-sharing between borrower and saver households, and macro-prudential tools in the form of mortgage loan-to-value and bank capital requirements. We derive a welfare-based loss function which suggests a role for active macro-prudential policy to enhance risk sharing. Macro-prudential policy faces trade-offs, however, and complete macro-prudential stabilization is not generally possible in our model. Nonetheless, simulations of a house price boom and subsequent correction suggest that macro-prudential tools could alleviate debt-deleveraging and help avoid zero lower bound episodes, even when macro-prudential tools themselves impose only occasionally binding constraints on debt dynamics in the economy.
    Keywords: Monetary policy; macro-prudential policy; time-consistent policy; policy coordination; occasionally binding constraints
    JEL: E32 E61
    Date: 2018–05–25
  11. By: Sona Benecka; Ludmila Fadejeva; Martin Feldkircher
    Abstract: This paper investigates the international effects of a euro area monetary policy shock, focusing on countries from Central, Eastern, and Southeastern Europe (CESEE). To that end, we use a global vector autoregressive (GVAR) model and employ shadow rates as a proxy for the monetary policy stance during normal and zero-lower-bound periods. We propose a new way of modeling euro area countries in a multi-country framework, accounting for joint monetary policy, and a novel approach to simultaneously identifying shocks. Our results show that in most euro area and CESEE countries, prices adjust and output falls in response to a euro area monetary tightening, but with a substantial degree of heterogeneity.
    Keywords: Euro area monetary policy, global vector autoregression, spillovers
    JEL: C32 E32 F44 O54
  12. By: Mario González; Raúl Tadle
    Abstract: The latest financial crisis has increased the interest in understanding how monetary policy announcements impact financial markets. For the US there are several studies that cover this area of research, however, for emerging markets the number of studies is scarce. This paper studies how the Chilean stock market is affected by monetary policy announcements made by the Central Bank of Chile. In their monthly monetary policy meetings the Central Bank of Chile decides the monetary policy rate and circulates press releases that effectively explain their decision. The information contained in those documents include policy decisions for the current month, the central bank's economic outlook, and the signals about likely future central bank policy decisions. We therefore examine these monetary policy changes and the corresponding additional information from the meeting statements. Using Automated Content Analysis, we identify qualitative information from the statement releases of the Central Bank of Chile and create a quantitative measure for the signals indicating likely future monetary policy. This quantitative measure, which we call them sentiment score - proxies for the monetary policy tilt. We then evaluate how the surprise component of the sentiment scores - together with unexpected policy changes - impact Chilean financial assets.
    Date: 2018–05
  13. By: Melchisedek Joslem Ngambou Djatche (Université Côte d'Azur; GREDEG CNRS)
    Abstract: In this paper, we analyse the link between monetary policy and banks’ risk-taking behaviour. Some theoretical and empirical studies show that monetary easy whet banks’ risk appetite through asset valuation and search for yield process. However, since 2010, the low interest rate environment has cast doubt on these results. Our study deepens the analysis of the monetary risk-taking channel considering non-linearity, especially through threshold effects model. Using a dataset of US banks, we find that the impact of low interest rates on banks risk depend on the regime of the monetary stance, i.e on the deviation of monetary rate from the Taylor rule.
    Keywords: Monetary policy, financial stability, bank risk-taking, non-dynamic panel threshold model
    JEL: E44 E58 G21
    Date: 2018–05
  14. By: Sahu, Priyanka
    Abstract: This paper attempts to investigate the impact of demand and supply shocks on core inflation in India. Firstly, it calculates core inflation through asymmetric trim mean approach and secondly autoregressive distributed model is used to explain the dynamic effects of shocks on core inflation. Empirical findings based on ARDL bound test confirms the existence of long run relationship between core inflation with other macroeconomic variables and CUSUM and CUSUMSQ test show stability of coefficients in the model. Overall, the response of core inflation to demand shock is high in case of real variables as compared to monetary variables and its response to skewness-based supply shock is high as compared to food and fuel inflation.
    Keywords: Headline Inflation, Core Inflation, Demand Shocks, Supply Shocks, Asymmetric trimmed Mean, Autoregressive Model, Bound Test.
    JEL: C22 E31 E51 E52
    Date: 2018–03–10
  15. By: Christiane Baumeister; James D. Hamilton
    Abstract: Reporting point estimates and error bands for structural vector autoregressions that are only set identified is a very common practice. However, unless the researcher is persuaded on the basis of prior information that some parameter values are more plausible than others, this common practice has no formal justification. When the role and reliability of prior information is defended, Bayesian posterior probabilities can be used to form an inference that incorporates doubts about the identifying assumptions. We illustrate how prior information can be used about both structural coefficients and the impacts of shocks, and propose a new distribution, which we call the asymmetric t distribution, for incorporating prior beliefs about the signs of equilibrium impacts in a nondogmatic way. We apply these methods to a three-variable macroeconomic model and conclude that monetary policy shocks were not the major driver of output, inflation, or interest rates during the Great Moderation.
    Keywords: structural vector autoregressions, set identification, monetary policy, impulse-response functions, historical decompositions, model uncertainty, informative priors
    JEL: C11 C32 E52
    Date: 2018
  16. 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
  17. By: Baqaee, David Rezza
    Abstract: This paper shows that household expectations of the inflation rate are more responsive to inflationary news than to disinflationary news. This asymmetry in inflation expectations can be a source of downward nominal wage rigidity, since workers expectations adjust more quickly to inflationary shocks than disinflationary shocks. I embed asymmetric beliefs into a general equilibrium model and show that, in such a model, monetary policy has asymmetric effects on employment, output, and wage inflation consistent with the data. I microfound asymmetric household expectations using ambiguity-aversion: households, who do not know the quality of their information, overweight inflationary news since it reduces their purchasing power, and underweight deflationary news since it increases their purchasing power. Although wages are downwardly rigid in this environment, monetary policy need not have a bias towards using inflation to grease the wheels of the labor market.
    Date: 2018–05
  18. By: Dolado, Juan J. (European University Institute); Motyovszki, Gergö (European University Institute); Pappa, Evi (European University Institute)
    Abstract: In order to improve our understanding of the channels through which monetary policy has distributional consequences, we build a New Keynesian model with incomplete asset markets, asymmetric search and matching (SAM) frictions across skilled and unskilled workers and, foremost, capital-skill complementarity (CSC) in the production function. Our main finding is that an unexpected monetary easing increases labor income inequality between high and low-skilled workers, and that the interaction between CSC and SAM asymmetry is crucial in delivering this result. The increase in labor demand driven by such a monetary shock leads to larger wage increases for high-skilled workers than for low-skilled workers, due to the smaller matching frictions of the former (SAM-asymmetry channel). Moreover, the increase in capital demand amplifies this wage divergence due to skilled workers being more complementary to capital than substitutable unskilled workers are (CSC channel). Strict inflation targeting is often the most successful rule in stabilizing measures of earnings inequality even in the presence of shocks which introduce a trade-off between stabilizing inflation and aggregate demand.
    Keywords: monetary policy, search and matching, capital-skill complementarity, inequality
    JEL: E24 E25 E52 J64
    Date: 2018–04
  19. By: Stephanie E. Curcuru; Michiel De Pooter; George Eckerd
    Abstract: In this paper we estimate the magnitude of spillovers between bond markets in the U.S. and Germany following monetary policy communications by the FOMC and the ECB. The identification of policy-related co-movements following FOMC announcements, in particular, can be difficult because many foreign bond markets, including those in Germany, are closed at the time of the announcement. To address this issue we use intraday futures market data to estimate spillovers during a narrow and overlapping event window. We find that about half of the reaction in German domestic yields spills over to U.S. yields following ECB announcements, which is nearly identical to the spillover from U.S. yields to German Bund yields following FOMC announcements. This result contrasts with the conventional wisdom that FOMC announcements spill over to other countries but that there is not much effect in the other direction. We also find that spillover estimates are slightly higher in the post-crisis period, but that there is little difference in the spillover impact of conventional versus unconventional monetary policy. Our results based on futures prices differ noticeably from those using daily prices, which suggests that spillover estimates based on cash market data can be misleading.
    Keywords: Monetary policy ; Quantitative easing ; Interest rate differentials
    JEL: E5 F3
    Date: 2018–04
  20. By: Hans-Werner Sinn
    Abstract: While the ECB helped mitigate the euro crisis in the aftermath of Lehman, it has stretched its monetary mandate and moved into fiscal territory. This text describes and summarises the crucial role played by the ECB in the intervention spiral resulting from its bid to manage the crisis. It also outlines ongoing competitiveness problems in southern Europe, discusses the so-called austerity policy of the Troika, comments on QE and presents two alternative paths for the future development of Europe.
    JEL: E02 E50 E52 E58 H50 H60 H63
    Date: 2018
  21. By: Fei Han; Dulani Seneviratne
    Abstract: Quantitative easing could improve market liquidity through many channels such as relaxing bank funding constraints, increasing risk appetite, and facilitating trades. However, it can also reduce market liquidity when the increase in the central bank’s holdings of certain securities leads to a scarcity of those securities and hence higher search costs in the market. Using security-level data from the Japanese government bond (JGB) market, this paper finds evidence of the scarcity (flow) effects of the Bank of Japan (BOJ)’s JGB purchases on market liquidity. Moreover, we also find evidence that such scarcity effects could dominate other effects when the share of the BOJ’s holdings exceeds certain thresholds, suggesting that the flow effects may also depend on the stock.
    Date: 2018–05–09
  22. By: Matteo Iacoviello; Gaston Navarro
    Abstract: This paper analyzes the spillovers of higher U.S. interest rates on economic activity in a large panel of 50 advanced and emerging economies. We allow the response of GDP in each country to vary according to its exchange rate regime, trade openness, and a vulnerability index that includes current account, foreign reserves, inflation, and external debt. We document large heterogeneity in the response of advanced and emerging economies to U.S. interest rate surprises. In response to a U.S. monetary tightening, GDP in foreign economies drops about as much as it does in the United States, with a larger decline in emerging economies than in advanced economies. In advanced economies, trade openness with the United States and the exchange rate regime account for a large portion of the contraction in activity. In emerging economies, the responses do not depend on the exchange rate regime or trade openness, but are larger when vulnerability is high.
    Keywords: U.S. Monetary Policy ; Foreign Spillovers ; Local Projection ; Macroeconomic Transmission ; Panel Data
    JEL: F4 E5 C3
    Date: 2018–05
  23. By: Ralf Fendel; Frederik Neugebauer
    Abstract: This paper employs event study methods to evaluate the effects of ECB’s non-standard monetary policy program announcements on 10-year government bond yields of euro area member states. It covers data from 11 euro area countries from January 1, 2007 to August 31, 2017 and distinguishes between the more solvent countries (Austria, Belgium, Finland, France, Germany, the Netherlands) and the less solvent ones (Greece, Ireland, Italy, Portugal, Spain). The paper makes three contributions to the literature. First, it is the first paper to reveal that measurable effects of announcements arise with a one-day delay meaning that government bond markets take some time to react to ECB announcements. Second, it quantifies the country-specific extent of yield reduction which seems inversely related to the solvency rating of the corresponding countries. The reduction of the spread between both groups in response to an event is due to a stronger decrease in the less solvent group. Third, this result is confirmed by letting the announcement variable interact with the spread level, which is an innovation in this strand of literature. By employing different data as control variables, it turns out that the results are robust for a given event set.
    Keywords: ECB, non-standard monetary policy, government bond yields, event study
    JEL: E44 E52 E58 G14
    Date: 2018–06–06
  24. By: Georges Prat; Remzi Uctum
    Abstract: This paper proposes a hybrid two-horizon risk premium model with one- and two-period maturity debts, among which the risky asset and the riskless one depend on agents’ investment horizon. A representative investor compares at each horizon the ex-ante premium offered by the market with the value they require to take a risky position, with the aim of choosing between a riskless and a risky strategy. Due to market frictions, the premium offered adjusts gradually to its required value determined by the portfolio choice theory. The required market risk premium is defined as a time-varying weighted average of the required 1- and 2-period horizon premia, where the weights represent the degree of preference of the market for each of the horizons. Our framework is more general than the standard model of the term structure of interest rates where it is assumed that the 1-period rate is the riskless rate at any time and for all agents. Setting one period equal to three months, we use 3-month ahead expected values of the US 3-month Treasury Bill rate provided by Consensus Economics surveys to estimate our 3- and 6-month horizon risk premium model using the Kalman filter methodology. We find that both 3- and 6-month maturity rates represent the riskless and the risky rates with a time-varying market preference for the former rate of about two-thirds. This result strongly rejects the standard model and shows the importance of taking into account the market preference for alternative horizons when describing risky strategies in interest rate term structure modelling.
    Keywords: interest rates, risk premium, survey data
    JEL: C51 D84 E43 G11 G14
    Date: 2018
  25. By: Lena Dräger; Michael Lamla
    Abstract: In this paper, we explore the degree of anchoring of consumers’ individual long-run inflation expectations utilizing the University of Michigan Survey of Consumer’s rotating panel micro-structure. Our results indicate that long-run inflation expectations became more anchored over the last decades, as the degree of co-movement between short- and long-run expectations fell significantly. While we observe that the anchoring of expectations increases for all age and birth cohorts, it seems that older cohorts, who experienced the high inflation period of the 1970s, remain less anchored in their long-run inflation expectations as compared to the young cohorts. Older cohorts show a higher volatility in their degree of anchoring and react more to adverse news shocks. This alludes to potentially long-lasting costs of high inflation spells.
    Keywords: anchoring, inflation expectations, micro data, birth cohort effects, news
    JEL: E31 E52 E58 D84 C25
    Date: 2018
  26. By: Barthelemy, Jean; Plantin, Guillaume
    Abstract: This paper develops a full-fledged strategic analysis of Wallace's "game of chicken". A public sector facing legacy nominal liabilities is comprised of fiscal and monetary authorities that respectively set the primary surplus and the price level in a non-cooperative fashion. We find that the post 2008 feature of indefinitely postponed fiscal consolidation and rapid expansion of the Federal Reserve's balance sheet is consistent with a strategic setting in which neither authority can commit to a policy beyond its current mandate, and the fiscal authority has more bargaining power than the monetary one at each date.
    Date: 2018–05
  27. By: Altermatt, Lukas (University of Basel)
    Abstract: This paper analyzes optimal monetary and fiscal policy in a model where money and savings are essential and asset markets matter. The model is able to match some stylized facts about the correlation of real interest rates and stock price-dividend ratios. The results show that fiscal policy can improve welfare by increasing the amount of outstanding government debt. If the fiscal authority is not willing or able to increase debt, the monetary authority can improve welfare of current generations by reacting procyclically to asset return shocks; however, this policy affects welfare of future generations if it is not coordinated with fiscal policy measures. The model also shows that policies like QE reduce welfare of future generations.
    Keywords: New monetarism, overlapping generations, zero lower bound, optimal stabilization
    JEL: E43 E44 E52 G12 G18
    Date: 2018–05–07
  28. By: Bennouna, Hicham (Bank Al-Maghrib, Département de la Recherche); Bounader, Lahcen (Bank Al-Maghrib, Département de la Recherche)
    Abstract: The objective of this study is to evaluate the monetary policy transmission along the sovereign bond yield curve (2, 5 and 10 years) in Morocco through the estimation of several SVAR models between 2007-2017. Two different approaches for identifying structural shocks were used: (1) recursive factorization of Christiano-Eichenbaum-Evans (1999) and (2) non-recursive identification of Sims-Zha (2006). The variance decomposition suggests that macroeconomic impulses account for the vast preponderance of 5-year and 10-year variability compared to 2-year government bills. Similarly, the impulse response functions show that tighter monetary policy makes the yield curve steeper, meaning that the long-end of the yield curve increases more than the short-end. Moreover, the results suggest that an important part of 5 and 10 years sovereign bond reaction is explained by the « risk premium » component while the 2-year treasury bills are driven by monetary policy shocks.
    Keywords: Courbe des taux; prime de risque; décomposition de la variance; chocs de politique monétaire.
    JEL: E43 E52 E58 G12
    Date: 2018–05–14
  29. By: Sergi Lanau; Adrian Robles; Frederik G Toscani
    Abstract: We study inflation dynamics in Colombia using a bottom-up Phillips curve approach. This allows us to capture the different drivers of individual inflation components. We find that the Phillips curve is relatively flat in Colombia but steeper than recent estimates for the U.S. Supply side shocks play an important role for tradable and food prices, while indexation dynamics are important for non-tradable goods. We show that besides allowing for a more detailed understanding of inflation drivers, the bottom-up approach also improves on an aggregate Phillips curve in terms of forecasting ability. In the baseline forecast scenario, both headline and core inflation converge towards the Central Bank’s inflation target of 3 percent by end-2018 but these favorable inflation dynamics are vulnerable to large supply shocks.
    Date: 2018–05–10
  30. By: Beechey, Meredith (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: Inflation targets come in different shapes and sizes. We explore the choice of a point or band target for inflation in a stylised economy in which agents learn about the inflation-generating process. We simulate under two conditions, namely i) a point inflation target and ii) a band inflation target from within which the central bank chooses its current spe-cific target. In many parameterizations of the model, the preferred target type rests on the inflation-output stabilization preferences of the central bank. A band target tends to be associated with higher volatility of inflation and lower volatility of the output gap than a point target. As such, a very strong preference for output stabilisation speaks in favour of a band inflation target.With preferences for inflation stabilisation closer to those thought to prevail in practice, a point target almost always outperforms a band target.
    Keywords: Inflation targeting; Learning; Constant gain least squares
    JEL: E52 E58
    Date: 2018–06–01
  31. By: Michael McLeay (Bank of England); Silvana Tenreyro (Bank of England; Centre for Macroeconomics (CFM); London School of Economics and Political Science (LSE); Centre for Economic Policy Research)
    Abstract: This note explains why inflation follows a seemingly exogenous statistical process, unrelated to the output gap. In other words, it explains why it is difficult to empirically identify a Phillips curve. We show why this result need not imply that the Phillips curve does not hold – on the contrary, our conceptual framework is built under the assumption that the Phillips curve always holds. The reason is simple: if monetary policy is set with the goal of minimising welfare losses (measured as the sum of deviations of inflation from its target and output from its potential), subject to a Phillips curve, a central bank will seek to increase inflation when output is below potential. This targeting rule will impart a negative correlation between inflation and the output gap, blurring the identification of the (positively sloped) Phillips curve.
    Date: 2018–04

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