nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒06‒18
forty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy in Sudden Stop-Prone Economies By Louphou COULIBALY
  2. Designing QE in a fiscally sound monetary union By Bletzinger, Tilman; von Thadden, Leopold
  4. Voluntary Reserve Targets By Garth Baughman; Francesca Carapella
  5. Optimal Currency Area and European Monetary Membership: Economics and Political Economy By Donato Masciandaro; Davide Romelli
  6. Measuring the effects of conventional and unconventional monetary policy in the euro area By Anttila, Juho
  7. Trade and currency weapons By Agnès Bénassy-Quéré; Matthieu Bussière; Pauline Wibaux
  9. Demographics, monetary policy, and the zero lower bound By Marcin Bielecki; Michał Brzoza-Brzezina; Marcin Kolasa
  10. Divercence between the core and the periphery and secular stagnation in the Eurozone By Botta, Alberto; Tippet, Ben; Onaran, Özlem
  11. Leaning Against Housing Prices as Robustly Optimal Monetary Policy By Adam, Klaus; Woodford, Michael
  12. Monetary policy under climate change By George Economides; Anastasios Xepapadeas
  13. The Role of International Reserves Holding in Buffering External Shocks By Jean-Pierre Allegret; Audrey Allegret-Sallenave
  14. The Effects of Conventional and Unconventional Monetary Policy on House Prices in the Scandinavian Countries By Signe Rosenberg
  15. Noisy Monetary Policy By Tatjana Dahlhaus; Luca Gambetti
  16. 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
  17. Why Are Banks Exposed to Monetary Policy? By Di Tella, Sebastian; Kurlat, Pablo
  18. Investigating credit transmission mechanism in the Republic of Macedonia: evidence from Vector Error Correction Model By Milan Eliskovski
  19. Media Perception of Fed Chair's Overconfidence and Market Expectations By Hamza Bennani
  20. The Regulatory and Monetary Policy Nexus in the Repo Market By Sriya Anbil; Zeynep Senyuz
  21. Uncertainty and Hyperinflation: European Inflation Dynamics after World War I By Lopez, Jose A; Mitchener, Kris James
  22. Effects of US Quantitative Easing on Emerging Market Economies By Bhattarai, Saroj; Chatterjee, Arpita; Park, Woong Yong
  23. The Impact of the Current Expected Credit Loss Standard (CECL) on the Timing and Comparability of Reserves By Sarah Chae; Robert F. Sarama; Cindy M. Vojtech; James Z. Wang
  24. Estimating the effect of the EMU on current account balances: a synthetic control approach By Hope, David
  25. Monetary Policy Surprises and Monetary Policy Uncertainty By Michiel De Pooter; Giovanni Favara; Michele Modugno; Jason J. Wu
  26. Monetary policy in perspective of Umer Chapra By Arikha, Dahlia
  27. The roots of the Euro By Labrinidis, George
  28. Sovereign Stress, Banking Stress, and the Monetary Transmission Mechanism in the Euro Area By Holtemöller, Oliver; Scherer, Jan-Christopher
  29. Beyond the Central Bank Independence Veil: New Evidence By Donato Masciandaro; Davide Romelli
  30. Exchange rate forecasting on a napkin By Zorzi, Michele Ca'; Rubaszek, Michał
  31. Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission By Hintermaier, Thomas; Koeniger, Winfried
  32. Foreign Safe Asset Demand and the Dollar Exchange Rate By Jiang, Zhengyang; Krishnamurthy, Arvind; Lustig, Hanno
  33. Monetary Policy, Oil Stabilization Fund and the Dutch Disease By Jean-Pierre Allegret; Mohamed Benkhodja; Tovonony Razafindrabe
  34. Coordinating monetary and financial regulatory policies By Van der Ghote, Alejandro
  35. Firm Investment, Financial Constraints and Monetary Transmission: An Investigation with Czech Firm-Level Data By Oxana Babecka Kucharcukova; Renata Pasalicova
  36. Post-FOMC Announcement Drift in U.S. Bond Markets By Brooks, Jordan; Katz, Michael; Lustig, Hanno
  37. Robust Optimal Policies in a Behavioural New Keynesian Model By Giovanni Di Bartolomeo; Carolina Serpieri
  38. Central bank policies in recent years By Goodhart, Charles
  39. Uncertainty and Hyperinflation: European Inflation Dynamics after World War I By Jose A. Lopez; Kris James Mitchener
  40. Machine Learning the Cryptocurrency Market By Laura Alessandretti; Abeer ElBahrawy; Luca Maria Aiello; Andrea Baronchelli

  1. By: Louphou COULIBALY
    Abstract: In a model featuring sudden stops and pecuniary externalities, I show that the ability to use capital controls has radical implications for the conduct of monetary policy. Absent capital controls, following an inflation targeting regime is nearly optimal. However, if the central bank lacks commitment, it will follow a monetary policy that is excessively procyclical and not desirable from an ex ante welfare prospective: it increases overall indebtedness as well as the frequency of financial crisis and reduces social welfare relative to an inflation targeting regime. Access to capital controls can correct this monetary policy bias. With capital controls, relative to an inflation targeting regime, the time-consistent regime reduces both the frequency and magnitude of crises, and increases social welfare. This paper rationalizes the procyclicality of the monetary policy observed in many emerging market economies.
    Keywords: financial crises, monetary policy, capital controls, time consistency, aggregate demand externality, pecuniary externality
    JEL: E44 E52 F41 G01
    Date: 2018
  2. By: Bletzinger, Tilman; von Thadden, Leopold
    Abstract: This paper develops a tractable model of a monetary union with a sound fiscal governance structure and shows how in such environment the design of monetary policy above and at the lower bound constraint on short-term interest rates can be linked to well-known findings from the literature dealing with single closed economies. The model adds a portfolio balance channel to a New Keynesian two-country model of a monetary union. If the monetary union is symmetric and the portfolio balance channel is not active, the model becomes isomorphic to the canonical New Keynesian three-equation economy in which central bank purchases of long-term debt (QE) at the lower bound are ineffective. If the portfolio balance channel is active, QE becomes effective and we prove that for sufficiently small shocks there exists an interest rate rule augmented by QE at the lower bound which replicates the equilibrium allocation and the welfare level of a hypothetically unconstrained economy. Shocks large enough to push the whole yield curve to the lower bound require, in addition, forward guidance. We generalise these results to an asymmetric monetary union and illustrate them through simulations, distinguishing between asymmetric shocks and asymmetric structures. In general, asymmetries give rise to current account imbalances which are, depending on the degree of financial integration, funded by private capital imports or through the central bank balance sheet channel. Moreover, our findings support that at the lower bound, as long as asymmetries between countries result from shocks, outcomes under an unconstrained policy rule can be replicated via a symmetric QE design. By contrast, asymmetric structures of the countries which matter for the transmission of monetary policy can translate into an asymmetric QE design. JEL Classification: E43, E52, E61, E63
    Keywords: lower bound, monetary policy, monetary union, quantitative easing
    Date: 2018–06
  3. By: Emanuele Borgonovo; Stefano Caselli; Alessandra Cillo; Donato Masciandaro
    Abstract: The aim of this paper is to analyse the demand of a central bank digital currency (CBDC). Using a financial portfolio approach and assuming that individual preferences and policy votes are consistent, we identify the drivers of the political consensus in favour or against such as new currency. Given three different properties of a currency – where the first two are the standard functions of medium of exchange and store of value and the third one is the less explored function of store of information – and three different existing moneys – paper currency, banking currency and cryptocurrency – if the individuals are rational but at the same time can be affected by behavioural biases – loss aversion - three different groups of individuals – respectively lovers, neutrals and haters – emerge respect to the CBDC option. Given the alternative opportunity costs of the different currencies, the CBDC issuing is more likely to occur the more the individuals likes to use a legal tender, and/or are indifferent respect to anonymity; at the same time, the probability of the CBDC introduction increases if a return can be paid on it, and/or its implementation can guarantee at least the counterparty anonymity.
    Keywords: Central Bank Digital Currencies, Cash, Bitcoin, Cryptocurrencies
    JEL: B22 D72 E41 E42 E52 E58 G38 K42
    Date: 2018
  4. By: Garth Baughman; Francesca Carapella
    Abstract: This paper updates the standard workhorse model of banks' reserve management to include frictions inherent to money markets. We apply the model to study monetary policy implementation through an operating regime involving voluntary reserve targets (VRT). When reserves are abundant, as is the case following the unconventional policies adopted during the recent financial crisis, operating regimes based on reserve requirements may lead to a collapse in interbank trade. We show that, no matter the relative abundance of reserves, VRT encourage market activity and support the central bank's control over interest rates. In addition to this characterization, we consider (i) the impact of routine and non-routine liquidity injections by the central bank on market outcomes and (ii) a comparison with the implementation framework currently adopted by the Federal Reserve. Overall, we show that a VRT framework may provide several advantages over other frameworks.
    Keywords: Monetary policy ; Reserve targets ; Money markets
    JEL: G21 G28 E42 E43 E44 E51 E52 E58
    Date: 2018–05–07
  5. By: Donato Masciandaro; Davide Romelli
    Abstract: The recent Global Crisis are posing challenges to the stability of the European Monetary Integration process. The pillar of the European Monetary Integration is the evolution of the European Monetary Union (EMU). Being the EMU the establishment of a currency union, such as international agreement implies for the member countries the inability to use exchange rates and national monetary policy to deal with real and financial shocks. It is natural then to wonder under which conditions the net benefits of a currency union are likely to be positive, comparing the abovementioned limitations with the medium long term gains in having on the one side perpetual fixed exchange rates and on the other side the delegation of the monetary policy action to an independent and supranational central bank, i.e. the European Central Bank (ECB) that manages the European Monetary Union (EMU). A natural question arises: how to evaluate the economic pros and cons in having the EMU membership? The aim of this paper is to analyse the economics and the political economy of the EMU membership.
    JEL: E52 E58
    Date: 2017
  6. By: Anttila, Juho
    Abstract: I estimate the effects of conventional and unconventional monetary policy in the euro area by using a factor-augmented vector autoregression.I complement the standard monetary policy analysis using the short rate with models where the shadow rates by Kortela (2016) and Wu and Xia (2017) are used as proxies for unconventional monetary policy. I quantify the effects of unanticipated monetary policy shocks using impulse response functions, forecast-error variance decompositions, and counterfactual simulations. The results indicate that unconventional monetary policy shocks have similar, expansionary effects on the economy as conventional monetary policy shocks.
    JEL: E43 E44 E52 E58
    Date: 2018–05–29
  7. By: Agnès Bénassy-Quéré; Matthieu Bussière; Pauline Wibaux
    Abstract: The debate on trade wars and currency wars has re-emerged since the Great recession of 2009. We study the two forms of non-cooperative policies within a single framework. First, we compare the elasticity of trade flows to import tariffs and to the real exchange rate, based on product level data for 110 countries over the 1989-2013 period. We find that a 1 percent depreciation of the importer's currency reduces imports by around 0.5 percent in current dollar, whereas an increase in import tariffs by 1 percentage point reduces imports by around 1.4 percent. Hence the two instruments are not equivalent. Second, we build a stylized short-term macroeconomic model where the government aims at internal and external balance. We find that, in this setting, monetary policy is more stabilizing for the economy than trade policy, except when the internal transmission channel of monetary policy is muted (at the zero-lower bound). One implication is that, in normal times, a country will more likely react to a trade "aggression" through monetary easing rather than through a tariff increase. The result is reversed at the ZLB.
    Keywords: tariffs;exchange rates;trade elasticities;protectionism
    JEL: F13 F14 F31
    Date: 2018–06
  8. By: Donato Masciandaro; Francesco Passarelli
    Abstract: This paper examines myopic, populist policies that guarantee short-term financial protection of the people from the elite without regard for long-term fiscal or monetary distortions. Assuming that citizens arefinancially heterogeneous, this paper shows that inefficient outcomes can arise when the majority of citizens are bank stakeholders. Populist policies promote politically controlled central banks.
    Keywords: Populism, central bank independence, monetary policy, banking policy, political economy
    JEL: D72 D78 E31 E52 E58 E62
    Date: 2018
  9. By: Marcin Bielecki (Narodowy Bank Polski and University of Warsaw); Michał Brzoza-Brzezina (Narodowy Bank Polski and SGH Warsaw School of Economics); Marcin Kolasa (Narodowy Bank Polski and SGH Warsaw School of Economics)
    Abstract: The recent literature shows that demographic trends may affect the natural rate of interest (NRI), which is one of the key parameters affecting stabilization policies implemented by central banks. However, little is known about the quantitative impact of these processes on monetary policy, especially in the European context, despite persistently low fertility rates and an ongoing increase in longevity in many euro area economies. In this paper we develop a New Keynesian life-cycle model, and use it to assess the importance of population ageing for monetary policy. The model is fitted to euro area data and successfully matches the age profiles of consumption-savings decisions made by European households. It implies that demographic trends have contributed and are projected to continue to contribute significantly to the decline in the NRI, lowering it by more than 1.5 percentage points between 1980 and 2030. Despite being spread over a long time, the impact of ageing on the NRI may lead to a sizable and persistent deflationary bias if the monetary authority fails to account for this slow moving process in real time. We also show that, with the current level of the inflation target, demographic trends have already exacerbated the risk of hitting the lower bound (ZLB) and that the pressure is expected to continue. Delays in updating the NRI estimates by the central bank elevate the ZLB risk even further.
    Keywords: ageing, monetary policy, zero lower bound, life-cycle models
    JEL: E31 E52 J11
    Date: 2018
  10. By: Botta, Alberto; Tippet, Ben; Onaran, Özlem
    Abstract: In this paper, we provide empirical evidence about the widening divergence between the macroeconomic performances of core eurozone countries and peripheral economies. We note that, while core economies operate close to full employment, there are evident signs of secular stagnation, i.e. widespread long-term unemployment and reduced growth potential, in the periphery. In such a context, we stress that the unconventional monetary policy implemented by the European Central Bank since 2015 has proved largely ineffective to stimulate investment demand and economic recovery in the periphery. More than this, it may even deepen the existing gap between core and peripheral countries. We suggest that a reform of EU industrial policy, which put emphasis on the productive development of underdeveloped regions in the euro area, stands out as the best strategy against the eurozone core-periphery divide and for improving the functioning and effectiveness of EU macro policies.
    Keywords: Secular stagnation; Eurozone; quantitative easing; core-periphery divergence; industrial policy;
    JEL: E58 F36 L52 O52
    Date: 2018–06–05
  11. By: Adam, Klaus; Woodford, Michael
    Abstract: We analytically characterize optimal monetary policy for a New Keynesian model with a housing sector. If one supposes that the private sector has rational expectations about future housing prices and inflation, optimal monetary policy can be characterized without making reference to housing price developments: commitment to a "target criterion" that refers only to inflation and the output gap is optimal, as in the standard model without a housing sector. But when a policymaker seeks to choose a policy that is robust to potential departures of private sector expectations from model-consistent ones, then the optimal target criterion must also depend on housing prices. In the empirically realistic case where housing is subsidized and where monopoly power causes output to fall short of its optimal level, the robustly optimal target criterion requires the central bank to "lean against" housing prices: following unexpected housing price increases, policy should adopt a stance that is projected to undershoot its normal targets for inflation and the output gap, and similarly aim to overshoot those targets in the case of unexpected declines in housing prices. The robustly optimal target criterion does not require that policy distinguish between "fundamental" and "non-fundamental" movements in housing prices.
    Keywords: Asset price bubbles; Inflation targeting; leaning against the wind; optimal target criterion
    JEL: D81 D84 E52
    Date: 2018–05
  12. By: George Economides (Athens University of Economics and Business, and CESifo); Anastasios Xepapadeas (Athens University of Economics and Business, University of Bologna)
    Abstract: We study monetary policy under climate change in order to answer the question of whether monetary policy should take into account the expected impacts of climate change. The setup is a new Keynesian dynamic stochastic general equilibrium model of a closed economy in which a climate module that interacts with the economy has been incorporated, and the monetary authorities follow a Taylor rule for the nominal interest rate. The model is solved numerically using common parameter values and fiscal data from the euro area. Our results, which are robust to a large number of sensitivity checks, suggest non-trivial implications for the conduct of monetary policy.
    Keywords: Climate change; monetary policy; new Keynesian model; Taylor rule
    JEL: E5 E1 Q5
    Date: 2017–05
  13. By: Jean-Pierre Allegret (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique); Audrey Allegret-Sallenave (LEAD - Laboratoire d'Économie Appliquée au Développement - UTLN - Université de Toulon)
    Abstract: An extended literature analyzes the accumulation foreign exchange holding observed in many developing and emerging countries since the 2000s. Empirical studies on the self-insurance motive suggest that high-reserves economies are more resilient to financial crises and to international capital inflows volatility. They show also that pre-crisis foreign reserve accumulation explains post-crisis growth. However, some papers suggest that the relationship between international reserves holding and reduced vulnerability is nonlinear, meaning that reserve holding is subject to diminishing returns. This paper devotes more attention to the potential nonlinear relationship between the foreign reserves holding and macroeconomic resilience to shocks. For a sample of 9 emerging economies, we assess to what extent the accumulation of international reserves allows to mitigate negative impacts of external shocks on the output gap. While a major part of the literature focuses on the global financial crisis, we investigate this question by considering two sub-periods: 1995-2003 and 2004-2013. We implement threshold VAR (TVAR) model in which the structure is allow to change if the threshold variable crosses a certain estimated threshold. We find that the effectiveness of reserve holding to improve the resilience of domestic economies to shocks has increased over time. Hence, the diminishing returns of foreign reserve holding stressed in the previous literature must be qualified.
    Keywords: Emerging countries,Reserve accumulation, Threshold VAR model, Output gap, External shocks
    Date: 2018
  14. By: Signe Rosenberg
    Abstract: This paper studies the impact of conventional and unconventional monetary policy on house prices in the Scandinavian countries, using sign and zero restrictions in a Bayesian structural vector autoregressive model, covering the central banks’ policy rate and balance sheet policies over a period of nearly 30 years. Expansionary shocks of the policy rate and the balance sheet both have a positive impact on house prices in the Scandinavian countries, but the effects vary greatly within each country. In all the three countries the effect of balance sheet shocks on house prices peaks higher and is more persistent than the response of policy rate shocks. In Sweden and Denmark the impact is more sluggish in case of balance sheet shocks while in Norway the speed of the reaction is similar in case of both types of monetary policy shocks.
    Date: 2018–06–07
  15. By: Tatjana Dahlhaus; Luca Gambetti
    Abstract: We introduce limited information in monetary policy. Agents receive signals from the central bank revealing new information (“news") about the future evolution of the policy rate before changes in the rate actually take place. However, the signal is disturbed by noise. We employ a non-standard vector autoregression procedure to disentangle the economic and financial effects of news and noise in US monetary policy since the mid-1990s. Using survey- and market-based data on federal funds rate expectations, we find that the noisy signal plays a relatively important role for macroeconomic dynamics. A signal reporting news about a future policy tightening shifts policy rate expectations upwards and decreases output and prices. A sizable part of the signal is noise surrounding future monetary policy actions. The noise decreases output and prices and can explain up to 16% and 13% of their variations, respectively. Furthermore, it significantly increases the excess bond premium, the corporate spread and financial market volatility, and decreases stock prices.
    Keywords: Business fluctuations and cycles, Econometric and statistical methods, Financial markets, Monetary policy implementation, Transmission of monetary policy
    JEL: E0 E02 E4 E43 E5 E52
    Date: 2018
  16. 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.
    JEL: C11 C32 E52
    Date: 2018–05
  17. By: Di Tella, Sebastian (Stanford University); Kurlat, Pablo (Stanford University)
    Abstract: We propose a model of banks' exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks' optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity mismatched balance sheet, and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks' maturity mismatch.
    JEL: E41 E43 E44 E51
    Date: 2017–11
  18. By: Milan Eliskovski (National Bank of the Republic of Macedonia)
    Abstract: Research subject of this paper is the credit transmission mechanism in the Republic of Macedonia or in other words this paper investigates the effects of the monetary signals by the National Bank of the Republic of Macedonia on banks' lending. The credit transmission is analyzed through its narrow nature or so called bank lending channel. In order to explain how the bank lending channel operates in Macedonia, two theoretical models are considered and econometrically tested. The first one is the traditional bank lending channel explained by Bernanke and Blinder model and the second one is the credit rationing model by Stiglitz and Weiss. The econometric technique employed is the vector error correction model or known as Johansen cointegration technique which is appropriate for empirical testing based on time series. The empirical results suggest that the Stiglitz and Weiss model better explains the banks' behavior in the Republic of Macedonia, that is the banking sector is risk averse and rations loans with an aim not to deteriorate its' profitability. Therefore, monetary tightening signals clearly affect the banks to restrict lending. On the other hand, the monetary expansionary signals have to be supported by favorable balance sheet structure of the banks as well as by favorable macroeconomic conditions in order to encourage lending.
    Keywords: bank lending channel, monetary transmission, credit rationing, VECM analysis
    JEL: C22 E52 E58 G21
    Date: 2018
  19. By: Hamza Bennani
    Abstract: This paper aims to assess the impact of media perception of Fed chair's overconfidence on market expectations. We first use a media-based proxy to compute a measure of Fed chair's overconfidence for the period 1999M01-2017M07, the overconfidence indicator. The overconfidence indicator provides a measure of the perceived overconfidence of the Fed chair by the media, and thus, by financial market participants. We relate this variable to inflation and unemployment expectations of market participants. Our results show that an overconfident Fed chair is associated with higher inflation expectations and lower unemployment expectations. These findings are robust to (i) the macroeconomic forecasts used to extract the exogenous component of the media-based proxy reflecting Fed chair's overconfidence, (ii) different measures of the media-based proxy used to quantify Fed chair's overconfidence and (iii) different measures of inflation expectations. These findings shed some new light on the impact of central bankers' personality on market expectations, and thus, on the effectiveness of their monetary policy decisions.
    Keywords: Fed Chair, Overconfidence, Monetary Policy, Media
    JEL: E52 E58
    Date: 2018
  20. By: Sriya Anbil; Zeynep Senyuz
    Abstract: We examine the interaction of regulatory reforms and changes in monetary policy in the U.S. repo market. Using a proprietary data set of repo transactions, we find that differences in regional implementation of Basel III capital reforms intensified European dealers' window-dressing by 80%. Money funds eligible to use the Fed's reverse repo (RRP) facility cut their private lending almost by half and instead lent to the Fed when European dealers withdraw, contributing to smooth implementation of Basel III. In a difference-in-differences setting, we show that ineligible funds lent 15% less to European dealers as they find their withdrawal for reporting purposes inconvenient. We find that intermediation through the RRP led to quantity and not pricing adjustments in the market, which is consistent with the RRP facility anchoring market rates.
    Keywords: Basel III regulations ; Federal Reserve Board and Federal Reserve System ; Monetary policy ; Repo ; Reverse repo facility
    JEL: C32 E43 E52
    Date: 2018–04–17
  21. By: Lopez, Jose A; Mitchener, Kris James
    Abstract: Fiscal deficits, elevated debt-to-GDP ratios, and high inflation rates suggest hyperinflation could have potentially emerged in many European countries after World War I. We demonstrate that economic policy uncertainty was instrumental in pushing a subset of European countries into hyperinflation shortly after the end of the war. Germany, Austria, Poland, and Hungary (GAPH) suffered from frequent uncertainty shocks - and correspondingly high levels of uncertainty - caused by protracted political negotiations over reparations payments, the apportionment of the Austro-Hungarian debt, and border disputes. In contrast, other European countries exhibited lower levels of measured uncertainty between 1919 and 1925, allowing them more capacity with which to implement credible commitments to their fiscal and monetary policies. Impulse response functions show that increased uncertainty caused a rise in inflation contemporaneously and for a few months afterward in GAPH, but this effect was absent or much more limited for the other European countries in our sample. Our results suggest that elevated economic uncertainty directly affected inflation dynamics and the incidence of hyperinflation during the interwar period.
    Keywords: Exchange Rates; Hyperinflation; prices; reparations; uncertainty
    JEL: E31 E63 F31 F33 F41 F51 G15 N14
    Date: 2018–05
  22. By: Bhattarai, Saroj (Asian Development Bank Institute); Chatterjee, Arpita (Asian Development Bank Institute); Park, Woong Yong (Asian Development Bank Institute)
    Abstract: We estimate international spillover effects of the United States (US)’ Quantitative Easing (QE) on emerging market economies (EMEs). Using a Bayesian VAR on monthly US macroeconomic and financial data, we first identify the US QE shock. The identified US QE shock is then used in a monthly Bayesian panel VAR for EMEs to infer spillover effects on these countries. We find that an expansionary US QE shock has significant effects on financial variables in EMEs. It leads to an exchange rate appreciation, a reduction in long-term bond yields, a stock market boom, and an increase in capital inflows to these countries. These effects on financial variables are stronger for the “Fragile Five" countries compared to other EMEs.
    Keywords: US quantitative easing; spillovers; emerging market economies; bayesian var; panel var; fragile five countries
    JEL: C31 E44 E52 E58 F32 F41 F42
    Date: 2018–01–30
  23. By: Sarah Chae; Robert F. Sarama; Cindy M. Vojtech; James Z. Wang
    Abstract: The new forward-looking credit loss provisioning standard, CECL, is intended to promote proactive provisioning as loan loss reserves can be conditioned on expectations of the economic cycle. We study the degree to which one modeling decision–expectations about the path of future house prices – affects the size and timing of provisions for first-lien residential mortgage portfolios. While we find that provisions are generally less pro-cyclical compared to the current incurred loss standard, CECL may complicate the comparability of provisions across banks and time. Market participants will need to disentangle the degree to which variation in provisions across firms is driven by underlying risk versus differences in modeling assumptions.
    Keywords: Accounting rule change ; CECL ; Mortgage loans ; Model risk
    JEL: G21 G28 M40 M48
    Date: 2018–03–09
  24. By: Hope, David
    Abstract: The European sovereign debt crisis wrought major political and economic damage on the European Monetary Union (EMU). This led to a reassessment of the pre-crisis period of economic growth and stability in the EMU, shifting attention to the macroeconomic imbalances that emerged between member states, especially those in current account balances. This paper uses macroeconomic data on OECD economies and a new statistical approach for causal inference in observational studies—the synthetic control method—to estimate the effect of the EMU on the current account balances of individual member states. This ‘counterfactuals’ approach provides strong evidence that the introduction of the EMU was responsible for the divergence in current account balances among member states in the run-up to the euro crisis. The results suggest that the EMU effect operated through multiple channels and that fundamental changes to the institutional framework of the EMU may be required to safeguard the currency union against a reemergence of dangerous external imbalances in the future.
    Keywords: common currency areas; EMU; current control method; synthetic control method; European sovereign debt crisis
    JEL: F3 G3
    Date: 2016–09–01
  25. By: Michiel De Pooter; Giovanni Favara; Michele Modugno; Jason J. Wu
    Abstract: In this note we find that after a given monetary policy surprise, primary dealers--key intermediaries in interest rate markets--tend to adjust their positions in the U.S. Treasury market and their exposures to interest rates more when the prevailing level of policy uncertainty is low than when it is high.
    Date: 2018–05–18
  26. By: Arikha, Dahlia
    Abstract: This research is a type of qualitative research with a study approach profound literature. The study discussed was the thought of M. Umer Chapra in the field of Islamic monetary policy. Chapra's extensive experience in teaching and research economic field as well as a good understanding of Islamic Shari'ah, bringing on the conclusion that Islam is only the most appropriate alternative system for creating the welfare of mankind. It was shown Chapra in the discussion about instruments in monetary policy, the urgency of changing the banking system and on finally realize the concept of Islamic-style welfare state.
    Keywords: Monetary Policy, Reconstruction Conventional Bank, Islamic Welfare State
    JEL: E00 E52 E58 O42
    Date: 2018–03–17
  27. By: Labrinidis, George
    Abstract: Indisputably, the euro has played a pivotal role in the development of Europe. Yet, the euro has also been very controversial, raising many discussions related to the nature, role and form of the “common currency”. This paper aims at contributing to this ongoing debate from a Marxist perspective, presenting the theoretical framework of quasi-world money and examining the evolution of the euro as such, from the 1950s when the idea appeared for the first time. In particular, the paper focuses on the processes that led to the emergence of the euro as quasi-world money. These processes comprised a series of political solutions to the contradiction between the necessity of all major European countries to impose their money on the European market on the one hand, and their incompetence in doing so, on the other. The analysis focuses on the post-war European monetary system up until the launch of the European Monetary Union. Its object is a historical monetary compromise that passed through many phases and managed to survive until the present day. The paper analyses the particular mechanisms through which the euro became a reality and points to the class interests that were satisfied in each phase. This discussion offers useful insights for the current debate that unfolds amidst a deep capitalist crisis internationally and a particular monetary crisis in the European Union.
    Keywords: Euro, quasi-world money, European monetary system
    JEL: B14 E42 F33
    Date: 2018–04–23
  28. By: Holtemöller, Oliver (Asian Development Bank Institute); Scherer, Jan-Christopher (Asian Development Bank Institute)
    Abstract: We investigate to what extent sovereign stress and banking stress have contributed to the increase in the level and in the heterogeneity of nonfinancial firms’ financing costs in the Euro area during the European debt crisis and how both have affected the monetary transmission mechanism. Employing a large firm-level data set containing 2 million observations, we are able to identify the effect of government bond yield spreads (sovereign stress) and the share of non-performing loans (banking stress) on firms' financing costs in a panel model by assuming that idiosyncratic shocks to individual firms are uncorrelated with country-specific variables. We find that the two sources of stress have increased firms’ financing costs controlling for country and firm-specific factors. Moreover, we estimate both to have significantly impaired the monetary transmission mechanism.
    Keywords: banking stress; firms’ financing conditions; government bond yields; interest rate channel; monetary policy transmission; sovereign stress
    JEL: E43 E44 E52
    Date: 2018–02–19
  29. By: Donato Masciandaro; Davide Romelli
    Abstract: This paper employs a new and comprehensive database of central bank institutional design to reassess the role of the independence of these public administrations in influencing the macroeconomic performance of countries, before and after the Global Financial Crisis. Using new dynamic indices, the empirical investigation takes into account the evolution of the level of independence in 65 countries over the period 1972-2014. Going beyond the standard correlation between central bank independence and inflation, we confirm the importance of the independence of these public administrations. Importantly we show that the degree of central bank independence is an endogenous variable and stress the relevance of economic and political drivers in shaping the incentives of governments to maintain or reform the governance of these public administrations.
    Keywords: Central Bank Independence, Global Financial Crisis, Macroeconomic Performance, Monetary Policy, Populism, Political Economy, Public Administration
    Date: 2018
  30. By: Zorzi, Michele Ca'; Rubaszek, Michał
    Abstract: This paper shows that there are two regularities in foreign exchange markets in advanced countries with flexible regimes. First, real exchange rates are mean-reverting, as implied by the Purchasing Power Parity model. Second, the adjustment takes place via nominal exchange rates. These features of the data can be exploited, even on the back of a napkin, to generate nominal exchange rate forecasts that outperform the random walk. The secret is to avoid estimating the pace of mean reversion and assume that relative prices are unchanged. Direct forecasting or panel data techniques are better than the random walk but fail to beat this simple calibrated model. JEL Classification: C32, F31, F37, F41
    Keywords: exchange rates, forecasting, mean reversion, panel data, Purchasing Power Parity
    Date: 2018–05
  31. By: Hintermaier, Thomas; Koeniger, Winfried
    Abstract: This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a liquid financial asset and illiquid housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across the analyzed countries, and across age groups within these countries. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission within the euro area.
    Keywords: European Household Portfolios, Consumption, Monetary Policy Transmission, International Comparative Finance, Housing
    JEL: D14 D31 E21 E43 G11
    Date: 2018–05
  32. By: Jiang, Zhengyang (Stanford University); Krishnamurthy, Arvind (Stanford University); Lustig, Hanno (Stanford University)
    Abstract: The convenience yield that foreign investors derive from holding U.S. Treasurys causes a failure of Covered Interest Rate Parity by driving a wedge between the yield on the foreign bonds and the currency-hedged yield on the U.S. Treasury bonds. Even before the 2007-2009 financial crisis, the Treasury-based dollar basis is negative and occasionally large. We use the Treasury basis as a measure of the foreign convenience yield. Consistent with the theory, an increase in the convenience yield that foreign investors impute to U.S. Treasurys coincides with an immediate appreciation of the dollar, but predicts future depreciation of the dollar. The Treasury basis variation accounts for up to 25% of the quarterly variation in the dollar between 1988 and 2017.
    Date: 2018–03
  33. By: Jean-Pierre Allegret (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique); Mohamed Benkhodja (ESSCA School of Management); Tovonony Razafindrabe (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)
    Date: 2018–05–19
  34. By: Van der Ghote, Alejandro
    Abstract: How to conduct macro-prudential regulation? How to coordinate monetary policy and macro-prudential policy? To address these questions, I develop a continuous-time New Keynesian economy in which a financial intermediary sector is subject to a leverage constraint. Coordination between monetary and macro-prudential policies helps to reduce the risk of entering into a financial crisis and speeds up exit from the crisis. The downside of coordination is variability in inflation and in the employment gap. JEL Classification: E31, E32, E44, E52, E61, G01
    Keywords: macro-prudential policy, monetary policy, policy coordination
    Date: 2018–06
  35. By: Oxana Babecka Kucharcukova; Renata Pasalicova
    Abstract: This project investigates the effect of financial constraints and monetary policy on firms' investment behaviour using Czech firm-level data. The empirical specification is based on the dynamic neoclassical investment model, which explains investment by sales and cash flow. In addition, it includes financial constraints and other factors. We differentiate firms according to their size and type of economic activity. We find that indebtedness and availability of liquidity have significant effects on investment. In the post-crisis period firms obtained less additional credit due to greater riskiness and tended to accumulate more liquidity. Expectations about future GDP growth and business sentiment are positively related to investment. At the same time, we observe considerable heterogeneity of the results across sectors. The impact of the short-term real interest rate is highly significant for firms of all sizes and in all important sectors of the Czech economy, reflecting monetary policy effectiveness.
    Keywords: Financial constraints, firms, indebtedness, investment, liquidity, monetary policy
    JEL: D22 E5 E22 G3 G32
    Date: 2017–12
  36. By: Brooks, Jordan (AQR Capital Management); Katz, Michael (AQR Capital Management); Lustig, Hanno (Stanford University)
    Abstract: There is post-FOMC announcement drift in Treasury markets after Fed Funds target changes. The expectations hypothesis holds on FOMC announcement days, but fails thereafter. The same-day response of 10-year Treasury yields to a 10 bps. surprise in the Fed Funds rate is only 1.7 bps, but, after 50 days, 10-year yields have increased by 14 bps. Mutual fund investors respond to Fed Funds target rate increases by selling short and intermediate duration bond funds, thus gradually increasing the effective supply of these bonds. Using FOMC-induced variation in bond fund flows, we estimate short-run demand for Treasurys to be inelastic, especially for longer maturities. The gradual increase in supply, and the low demand elasticity, account for the post-announcement drift. Mutual fund investors help the Fed control long-term interest rates.
    Date: 2017–12
  37. By: Giovanni Di Bartolomeo (University La Sapienza); Carolina Serpieri (European Commission - JRC)
    Abstract: This paper introduces model uncertainty into a behavioral New Keynesian DSGE framework and derives robust optimal monetary policies. We build a heterogeneous agents DSGE model, where a fraction of agents behave according to some forms of bounded rationality (boundedly rational agents), while the reminder operate on the basis of expectations that are corrected on average (rational agents). We consider two potential mechanisms of expectations formation to generate beliefs. The central bank observes the aggregate economic dynamics, but it ignores the fraction of boundedly rational agents and/or the mechanism they use to form their expectations. Non-Bayesian robust control techniques are then adopted to minimize a welfare loss derived from the second-order approximation of agents’ utilities. We account of model uncertainty considering both commitment and discretion regime.
    Keywords: robust techniques, optimal policy, New Keynesian DSGE models, bounded rationality.
    Date: 2018–04
  38. By: Goodhart, Charles
    JEL: F3 G3
    Date: 2018
  39. By: Jose A. Lopez; Kris James Mitchener
    Abstract: Fiscal deficits, elevated debt-to-GDP ratios, and high inflation rates suggest hyperinflation could have potentially emerged in many European countries after World War I. We demonstrate that economic policy uncertainty was instrumental in pushing a subset of European countries into hyperinflation shortly after the end of the war. Germany, Austria, Poland, and Hungary (GAPH) suffered from frequent uncertainty shocks – and correspondingly high levels of uncertainty – caused by protracted political negotiations over reparations payments, the apportionment of the Austro-Hungarian debt, and border disputes. In contrast, other European countries exhibited lower levels of measured uncertainty between 1919 and 1925, allowing them more capacity with which to implement credible commitments to their fiscal and monetary policies. Impulse response functions show that increased uncertainty caused a rise in inflation contemporaneously and for a few months afterward in GAPH, but this effect was absent or much more limited for the other European countries in our sample. Our results suggest that elevated economic uncertainty directly affected inflation dynamics and the incidence of hyperinflation during the interwar period.
    JEL: E3 E31 E4 E52 E62 N14
    Date: 2018–05
  40. By: Laura Alessandretti; Abeer ElBahrawy; Luca Maria Aiello; Andrea Baronchelli
    Abstract: Machine learning and AI-assisted trading have attracted growing interest for the past few years. Here, we use this approach to test the hypothesis that the inefficiency of the cryptocurrency market can be exploited to generate abnormal profits. We analyse daily data for $1,681$ cryptocurrencies for the period between Nov. 2015 and Apr. 2018. We show that simple trading strategies assisted by state-of-the-art machine learning algorithms outperform standard benchmarks. Our results show that non-trivial, but ultimately simple, algorithmic mechanisms can help anticipate the short-term evolution of the cryptocurrency market.
    Date: 2018–05

This nep-mon issue is ©2018 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.