nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒06‒25
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Shadow Banks and the Risk-Taking Channel of Monetary Policy Transmission in the Euro Area By Arina Wischnewsky; Matthias Neuenkirch
  2. “Unconventional” Monetary Policy as Conventional Monetary Policy : A Perspective from the U.S. in the 1920s By Mark A. Carlson; Burcu Duygan-Bump
  3. The Micro-Foundations of an Open Economy Money Demand: An Application to the Central and Eastern European Countries By Claudiu Tiberiu Albulescu; Dominique Pépin; Stephen M. Miller
  4. Liquidity regulation, the central bank and the money market By Julia Körding; Beatrice Scheubel
  5. Lessons for Iceland from the Monetary Policy of Sweden By Andersson, Fredrik N. G.; Jonung, Lars
  6. Price Stickiness along the Income Distribution and the Effects of Monetary Policy By Javier Cravino; Ting Lan; Andrei A. Levchenko
  7. Justifying the Adoption and Relevance of Inflation Targeting Framework: A Time-Varying Evidence from Ghana By Nana Kwame Akosah; Francis W. Loloh; Maurice Omane-Adjepong
  8. Price stickiness along the income distribution and the effects of monetary policy By Cravino, Javier; Lan, Ting; Levchenko, Andrei A.
  9. ECB Policies Involving Government Bond Purchases: Impact and Channels By Krishnamurthy, Arvind; Nagel, Stefan; Vissing-Jorgensen, Annette
  10. Leaning Against Housing Prices as Robustly Optimal Monetary Policy By Klaus Adam; Michael Woodford
  11. Japan's Unconventional Monetary Policy and Income Distribution: Revisited By Ayako Saiki; Jon Frost
  12. A simple microeconomic model for the analysis of Vollgeld By Bofinger, Peter; Haas, Thomas
  13. Recent RMB policy and currency co-movements By Robert N McCauley; Chang Shu
  14. Computational evidence on the distributive properties of monetary policy By Chen, Siyan; Desiderio, Saul
  15. How effective is inflation targeting in emerging market economies? By Thanaset Chevapatrakul; Juan Paez-Farrell
  16. Quantitative easing, changes in global liquidity and financial instability By Esteban Ramon Perez Caldentey
  17. Les interventions de crise de la FED et de la BCE diffèrent-elles ? By Anne-Marie Rieu-Foucault
  18. Financial institutions' business models and the global transmission of monetary policy By Isabel Argimón; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs
  19. Taylor Rule and Financial Instability By Gianfranco Zampese
  20. International Currencies and Capital Allocation By Matteo Maggiori; Brent Neiman; Jesse Schreger
  21. The monetary dimension of arbitrage. A brief note By Andrea Mantovi
  22. The Bank Lending Channel A Time-Varying Approach By Richard Varghese; ;
  23. "Exchange rate risk" within the European Monetary Union? Analyzing the exchange rate exposure of German firm By Entrop, Oliver; Merkel, Matthias F.
  24. Monetary Reform, Central Banks and Digital Currencies By Sheila Dow
  25. Exchange Rate and External Trade Flows: Empirical Evidence of J-Curve Effect in Ghana By Kwame Akosah, Nana; Omane-Adjepong, Maurice
  26. Global financial cycles and risk premiums By Jordá, Óscar; Schularick, Moritz; Taylor, Alan M.; Ward, Felix
  27. Monetary Policy Analysis when Planning Horizons are Finite By Woodford, Michael
  28. The Missing Link: Monetary Policy and The Labor Share By Cristiano Cantore; Filippo Ferroni; Miguel A. Leon-Ledesma
  29. How Do Indirect Taxes on Tobacco Products Affect Inflation? By Cem Cakmakli; Selva Demiralp; Sevcan Yesiltas; Muhammed A. Yildirim
  30. Democratic Constraints and Adherence to the Classical Gold Standard By Kramer, Bert S.; Milionis, Petros
  31. Unemployment and Inflation: Evidence of a Nonlinear Phillips Curve in the Eurozone By Ho, Sin-Yu; Njindan Iyke, Bernard
  32. Danger to the Old Lady of Threadneedle Street? The Bank Restriction Act and the Regime Shift to Paper Money, 1797-1821 By Patrick K. O'Brien; Nuno Palma
  33. Climate change, financial stability and monetary policy By Yannis Dafermos; Maria Nikolaidi; Giorgos Galanis
  34. Explaining the Euro crisis: Current account imbalances, credit booms and economic policy in different economic paradigms By Engelbert Stockhammer; Collin Constantine; Severin Reissl
  35. The Fed's Asymmetric Forecast Errors By Andrew C. Chang

  1. By: Arina Wischnewsky; Matthias Neuenkirch
    Abstract: In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through an increase in shadow banks’ total asset growth and their risk assets ratio. Our dataset covers the period 2003Q1–2017Q3 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, the aforementioned two indicators for the shadow banking sector. Based on vector autoregressive models for the euro area as a whole, we find for conventional monetary policy shocks that a portfolio reallocation effect towards riskier assets is more pronounced, whereas for unconventional monetary policy shocks we detect stronger evidence for a general expansion of assets. Country-specific estimations confirm these findings for most of the euro area countries, but also reveal some heterogeneity in the shadow banks’ reaction.
    Keywords: European Central Bank, Macroprudential Policy, Monetary Policy Transmission, Risk-Taking Channel, Shadow Banks, Vector Autoregression
    JEL: E44 E52 E58 G11 G23 G28
    Date: 2018
  2. By: Mark A. Carlson; Burcu Duygan-Bump
    Abstract: To implement monetary policy in the 1920s, the Federal Reserve utilized administered interest rates and conducted open market operations in both government securities and private money market securities, sometimes in fairly considerable amounts. We show how the Fed was able to effectively use these tools to influence conditions in money markets, even those in which it was not an active participant. Moreover, our results suggest that the transmission of monetary policy to money markets occurred not just through changing the supply of reserves but importantly through financial market arbitrage and the rebalancing of investor portfolios. The tools used in the 1920s by the Federal Reserve resemble the extraordinary monetary policy tools used by central banks recently and provide further evidence on their effectiveness even in ordinary times.
    Keywords: Monetary policy ; Unconventional monetary policy ; Central banking ; Administered rates ; Money markets ; Quantitative easing
    JEL: E52 E58 N22
    Date: 2018–03–09
  3. By: Claudiu Tiberiu Albulescu (Politehnica University of Timisoara); Dominique Pépin (University of Poitiers); Stephen M. Miller (University of Nevada, Las Vegas)
    Abstract: This paper investigates and compares the effect of currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro on CEE money demand functions. In addition, we develop a model with microeconomic foundations, which identifies the difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to the money demand sensitivity to interest rate spreads between CEE countries and the euro area. Moreover, we show how the exchange rate affects money demand, even absent a currency substitution effect. This model applies to any country where an international currency offers liquidity services to domestic agents. The model generates empirical tests of long-run money demand using two complementary cointegrating equations. The opportunity cost of holding the money and the scale variable, either household consumption or output, explain the long-run money demand in CEE countries.
    Keywords: Money demand; Open-economy model; Currency substitution; Cointegration; CEE countries
    JEL: E41 E52 F41
    Date: 2018–06
  4. By: Julia Körding; Beatrice Scheubel
    Abstract: Money markets play a central role in monetary policy implementation. Money market functioning has changed since the financial crisis. This arguably reflects the interaction of two forces: Changes in monetary policy, and changes in regulation. This interaction is not yet well understood. We focus on the newly introduced Liquidity Coverage Ratio (LCR) and how it influences the behaviour of banks and the equilibrium on the money market. We develop a theoretical model to analyse how liquidity regulation may interfere with the central bank's implementation of monetary policy. We find that when the market equilibrium is suboptimal due to asymmetric information, both the central bank and the regulator can act to improve welfare. These actions can be complementary or conflicting, depending on the environment. The main insight from the central bank perspective is that the regulator can reach the welfare optimum, but at the expense of the central bank moving away from its optimum. The central bank will thus need to adjust its implementation of monetary policy accordingly, to address the effects of liquidity regulation.
    Keywords: regulation; Basel III; central bank; interbank lending; money market; asymmetric information
    JEL: E43 E58 G01 H12 L51
    Date: 2018–05
  5. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: The purpose of this report is to derive lessons from inflation targeting in Sweden for the choice of the future monetary policy regime of Iceland. Swedish inflation targeting has been a success in terms of reducing inflation and inflation volatility, but real economic volatility is not lower compared to previous periods. In addition, financial imbalances have grown rapidly. A key lesson is that the Riksbank has closely shadowed the policy of the European Central Bank due to financial integration. In other words, the Riksbank has behaved as if Sweden had a fixed exchange rate to the euro. Our analysis clearly indicates that a small economy cannot pursue an independent monetary policy from the rest of the world in a financially integrated world. Consequently, we suggest a fixed exchange rate arrangement for Iceland, preferably through a currency board. A currency board would provide exchange rate and price stability. A currency board would require domestic reforms to enhance price and wage flexibility as well as proper regulations on the financial system to minimize the risk of future banking crises.
    Keywords: Monetary policy; inflation targeting; financial stability; Riksbank; Sweden; Iceland; Central Bank of Iceland
    JEL: E42 E43 E44 E47 E52 E58 E62
    Date: 2018–06–18
  6. By: Javier Cravino; Ting Lan; Andrei A. Levchenko
    Abstract: We document that the prices of the goods consumed by high-income households are more sticky and less volatile than those of the goods consumed by middle-income households. This suggests that monetary shocks can have distributional consequences by affecting the relative prices of the goods consumed at different points on the income distribution. We use a Factor-Augmented VAR (FAVAR) model to show that, following a monetary policy shock, the estimated impulse responses of high-income households' consumer price indices are 22% lower than those of the middle-income households. We then evaluate the macroeconomic implications of our empirical findings in a quantitative New-Keynesian model featuring households that are heterogeneous in their income and consumption patterns, and sectors that are heterogeneous in their frequency of price changes. We find that: (i) the distributional consequences of monetary policy shocks are large and similar to those in the FAVAR model, and (ii) greater income inequality increases the effectiveness of monetary policy, although this effect is modest for realistic changes in inequality.
    JEL: E31 E52
    Date: 2018–05
  7. By: Nana Kwame Akosah; Francis W. Loloh; Maurice Omane-Adjepong
    Abstract: This paper scrutinizes the rationale for the adoption of inflation targeting (IT) by Bank of Ghana in 2002. In this case, we determine the stability or otherwise of the relationship between money supply and inflation in Ghana over the period 1970M1-2016M3 using battery of econometric methods. The empirical results show an unstable link between inflation and monetary growth in Ghana, while the final state coefficient of inflation elasticity to money growth is positive but statistically insignificant. We find that inflation elasticity to monetary growth has continued to decline since the 1970s, showing a waning impact of money growth on inflation in Ghana. Notably, there is also evidence of negative inflation elasticity to monetary growth between 2001 and 2004, lending support to the adoption of IT framework in Ghana in 2002. We emphasized that the unprecedented 31-months of single-digit inflation (June 2010-December 2012), despite the observed inflationary shocks in 2010 and 2012, reinforces the immense contribution of the IT framework in anchoring inflation expectations, with better inflation outcomes and inflation variability in Ghana. The paper therefore recommends the continuous pursuance and strengthening of the IT framework in Ghana, as it embodies a more eclectic approach to policy formulation and implementation.
    Date: 2018–05
  8. By: Cravino, Javier; Lan, Ting; Levchenko, Andrei A.
    Abstract: We document that the prices of the goods consumed by high-income households are more sticky and less volatile than those of the goods consumed by middle-income households. This implies that monetary shocks can have distributional consequences by affecting the relative prices of the goods consumed at different points on the income distribution. We use a Factor-Augmented VAR (FAVAR) model to show that, following a monetary policy shock, the estimated impulse responses of high-income households' consumer price indices are 22% lower than those of the middle-income households. We then evaluate the macroeconomic implications of our empirical findings in a quantitative New-Keynesian model featuring households that are heterogeneous in their income and consumption patterns, and sectors that are heterogeneous in their frequency of price changes. We find that: (i) the distributional consequences of monetary policy shocks are large and similar to those in the FAVAR model, and (ii) greater income inequality increases the effectiveness of monetary policy, although this effect is modest for realistic changes in inequality.
    Keywords: consumption baskets; Distributional Effects; inflation; monetary policy
    JEL: E31 E52
    Date: 2018–06
  9. By: Krishnamurthy, Arvind (Stanford University); Nagel, Stefan (University of Chicago); Vissing-Jorgensen, Annette (University of California, Berkeley)
    Abstract: We evaluate the effects of three ECB policies (the Securities Markets Programme, the Outright Monetary Transactions, and the Long-Term Refinancing Operations) on government bond yields. We use a novel Kalman-filter augmented event-study approach and yields on euro-denominated sovereign bonds, dollar-denominated sovereign bonds, corporate bonds, and corporate CDS rates to understand the channels through which policies reduced sovereign bond yields. On average across Italy, Spain and Portugal, considering both the Securities Markets Programme and the Outright Monetary Transactions, yields fall considerably. Decomposing this fall, default risk accounts for 37%, redenomination risk accounts for 13%, and market segmentation effects accounts for 50%. In Italy, Spain and Portugal, the default risk premium and market segmentation channel were the dominant policy channels. The redenomination risk premium channel also contributed for Spain and Portugal, but not Italy. Stock price increases in distressed and core countries suggest that these policies also had beneficial macro-spillovers.
    Date: 2017–09
  10. By: Klaus Adam; Michael Woodford
    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.
    JEL: E52
    Date: 2018–05
  11. By: Ayako Saiki; Jon Frost
    Abstract: This is a revaluation of our study which we published in 2014 (Saiki and Frost, 2014) The study found that Japan's unconventional monetary policy (UMP) had widened income inequality in Japan. Since then, the Bank of Japan (BOJ) has further increased the monetary base and inflation has been low (headline inflation is about 1% as of this writing) but positive. We revisit the relationship between Japan's quantitative and qualitative easing (QQE) and find further evidence for our conjecture. The impact of UMP on income distribution may differ in Japan and other countries for various reasons, including differences in household balance sheets and the flexibility of labor markets.
    Date: 2018–05
  12. By: Bofinger, Peter; Haas, Thomas
    Abstract: In June 2018 the"Vollgeld" initiative will be submitted to the Swiss people. We contribute to the ongoing discussion of a sovereign money system, by providing a price-theoretic model for the money supply under a "Vollgeld"-system. As banks would no longer have the ability to create money, they are merely intermediaries of funds. The central bank would be the only institution to create money. But the central bank is no longer the only supplier of monetary base for the banking sector on the money market. Banks could also lend from the public and private sector. As the analysis of our model shows,the degree of instability would increase under the "Vollgeld"-system and result in higher interest rate volatility.
    Keywords: money supply process,monetary theory,sovereign money
    JEL: E51 E52
    Date: 2018
  13. By: Robert N McCauley; Chang Shu
    Abstract: This study investigates how variation in the determinants of the renminbi's daily fixing since the August 2015 exchange rate reform maps on to variation in the co- movement of the renminbi with regional and other emerging market currencies. We first identify three post-reform periods of RMB management: transition, basket management and countercyclical management. The co-movement with regional and Latin American currencies peaked in the basket period, when the daily fixing was most predictable and multilateral. By contrast, the decline in co-movement in the countercyclical management period between May and July 2017 leaves it premature to speak of a renminbi zone. The dependence of the co-movements on renminbi management has important implications for renminbi internationalisation.
    Keywords: exchange-rate determination; renminbi (CNY) policy, renminbi zone, spillovers, renminbi internationalisation
    JEL: F31 F33
    Date: 2018–06
  14. By: Chen, Siyan; Desiderio, Saul
    Abstract: Empirical studies have pointed out that monetary policy may significantly affect income and wealth inequality. To investigate the distributive properties of monetary policy the authors resort to an agent-based macroeconomic model where firms, households and one bank interact on the basis of limited information and adaptive rules-of-thumb. Simulations show that the model can replicate fairly well a number of stylized facts, specially those relative to the business cycle. The authors address the issue using three types of computational experiments, including a global sensitivity analysis carried out through a novel methodology which greatly reduces the computational burden of simulations. The result emerges that a more restrictive monetary policy increases inequality, even though this effect may differ across groups of households. This may put into question the principle of the independence of central banks. In addition, this effect appears to be attenuated if the bank's willingness to lend is lower.
    Keywords: economic inequality,monetary policy,agent-based models,NK-DSGE models,stock-flow consistency,global sensitivity analysis
    JEL: C63 D31 D50 E52
    Date: 2018
  15. By: Thanaset Chevapatrakul (Nottingham University Business School); Juan Paez-Farrell (Department of Economics, University of Sheffield)
    Abstract: We re-assess the links between inflation targeting and economic performance in a sample of developing countries. We estimate the effects of inflation targeting (IT) using quantile regressions, thus enabling us to consider the whole distribution rather than focusing on the effects at the mean. Our findings indicate that following the implementation of IT, it is the least successful countries – those that have reduced inflation the least – that benefit the most. For the remainder there are no benefits to be had from IT. We also find no evidence that IT affects economic volatility. We provide a small model to account for this evidence.
    Keywords: Quantile regression; inflation targeting; emerging markets; monetary policy
    JEL: E52 E58
  16. By: Esteban Ramon Perez Caldentey (Universidad de Santiago de Chile (CL))
    Abstract: This paper argues that Quantitative Easing (QE) led to significant changes in the global financial system, which, are not conducive to greater financial stability. Through a policy of reserve accumulation, QE disconnected base money from the money supply and deposits from loans. Jointly with the deleveraging process of global banks, QE contributed to restrain the supply of bank credit growth throughout the world. Also global banks continued to expand their trading on the basis of opaque instruments such as derivatives. Moreover, by altering the relative profitability of investing in different assets, QE exerted a positive effect on the performance of the international bond market. This not only spilled into emerging market economies expanding the debt of both the financial sector and the non-financial corporate sector but also has reinforced the role of the asset management industry in financial markets. Due to its concentration and interconnectedness, illiquidity, and pro-cyclicality the asset management industry poses important risks to financial stability.
    Keywords: Quantitative easing, financial system, global banks, asset management industry
    JEL: E12 E42 E44 E51
    Date: 2017–02
  17. By: Anne-Marie Rieu-Foucault
    Abstract: In the context of the 2007-2009 financial crisis, central banks innovated in the form of multiple unconventional measures. Due to a different history, different mandates and monetary policy implementations, the first crisis measures, mainly for financial stability, differed between the Fed and the ECB, resulting in a balance sheet size and structure of the assets specific to each. After 2015, the ECB's large-scale asset purchase transactions marked a convergence of the unconventional policies of the two central banks, which resulted in the ECB renouncing the principle of separation between monetary policy and stability financial.In addition, the risk-taker of last resort function of the two central banks has increased, although differences persist in their risk management policies (scope of counterparties and securities eligible).
    Keywords: Central Banks, Unconventional measures
    JEL: E52 E58
    Date: 2018
  18. By: Isabel Argimón (Banco de España); Clemens Bonner (De Nederlandsche Bank and Vu University Amsterdam); Ricardo Correa (Federal Reserve Board); Patty Duijm (De Nederlandsche Bank); Jon Frost (De Nederlandsche Bank, Vu University Amsterdam and Financial Stability Board); Jakob de Haan (De Nederlandsche Bank, University of Groningen and CESifo); Leo de Haan (De Nederlandsche Bank); Viktors Stebunovs (Federal Reserve Board)
    Abstract: Global financial institutions play an important role in channeling funds across countries and, therefore, transmitting monetary policy from one country to another. In this paper, we study whether such international transmission depends on financial institutions’ business models. In particular, we use Dutch, Spanish, and U.S. confidential supervisory data to test whether the transmission operates differently through banks, insurance companies, and pension funds. We find marked heterogeneity in the transmission of monetary policy across the three types of institutions, across the three banking systems, and across banks within each banking system. While insurance companies and pension funds do not transmit homecountry monetary policy internationally, banks do, with the direction and strength of the transmission determined by their business models and balance sheet characteristics.
    Keywords: monetary policy transmission, global financial institutions, bank lending channel, portfolio channel, business models.
    JEL: E5 F3 F4 G2
    Date: 2018–06
  19. By: Gianfranco Zampese
    Abstract: This paper estimates an augmented/non-linear Taylor rule for the ECB and the Riksbank to include financial instability factors. The existence of nonlinearities will be explored and assessed through the estimation of a threshold regression model. The threshold model divides the sample in two distinct subsamples, each representative of a different regime. A composite indicator of systemic stress characterizes the two regimes into a low instability regime and a high instability regime. The results are quite clear. They show us that the classical Taylor rule performs well during Regime 1, or “normal administration times"; but it shows inherently weaknesses in describing the behavior of CBs during financial instability periods, when discretion may be necessary. Remarkably such a non-linear model is also successful in not crossing the ZLB.
    Date: 2017
  20. By: Matteo Maggiori; Brent Neiman; Jesse Schreger
    Abstract: We establish that global portfolios are driven by an often neglected aspect: the currency of denomination of assets. Using a dataset of $27 trillion in security-level investment positions, we demonstrate that investor holdings are biased toward their own currencies to such an extent that each country holds the bulk of all foreign debt securities denominated in their own currency. Surprisingly, currency is such a strong predictor of the nationality of a security's holder that the nationality of the issuer - to date, the most powerful predictor in a voluminous literature on cross-border portfolios - adds very little explanatory power. While large firms issue bonds in foreign currency and borrow from foreigners, the vast majority of firms issue only in local currency and do not directly access foreign capital. These patterns hold across countries with the exception of the US, which issues an international currency. The global willingness to hold US dollars means that even smaller US firms that borrow exclusively in dollars have little difficulty borrowing from abroad. Global portfolios shifted sharply away from the euro and toward the dollar after the 2008 financial crisis, further cementing the dollar's international role and potentially amplifying the benefit its status brings to the US.
    JEL: E4 F3 F5 G1 G2
    Date: 2018–05
  21. By: Andrea Mantovi (Dipartimento di Scienze Economiche e Aziendali, Università di Parma, Italy; Rimini Centre for Economic Analysis)
    Abstract: Financial frictions give rise to the value of money. According to DeAngelo and Stulz (2015), such a principle lies at the foundations of banking. It is the aim of this short note to deepen the reach of such a principle in connection with the role of arbitrageurs of interacting with financial frictions. The methodological relevance of such a perspective for the current macroeconomic debate is thoroughly discussed, building on the stylization of “friction-premium pairs”. Such an approach seems to shed new light on the analogy between the macro-role of money and the nature of arbitrage. Potential implications for the theoretical analysis of shadow banking are briefly sketched.
    Keywords: Macro Finance, Financial Frictions, Liquidity Transformation, Arbitrage
    JEL: E32 E44 G23
    Date: 2018–06
  22. By: Richard Varghese (IHEID, Graduate Institute of International and Development Studies, Geneva); ;
    Abstract: Using a cross-country panel of 925 banks from 19 advanced economies, for the period 1981-2016, I examine how the bank lending channel of monetary policy has evolved over time. I find that the sensitivity of lending to bank balance sheet liquidity declines over time, with nearly all the reduction occurring between the early 1990s and the early 2000s. Contrary to normal times, during recessions, more liquid banks reinforce the impact of monetary policy shocks on lending relative to their less liquid counterparts. The sensitivity of non-interest income to lending increases sharply from the late 1990s till the global financial crisis of 2008, and declines in the post-crisis period, indicating pro-cyclicality. Moreover, the relative ability of banks with higher non-interest income to mitigate monetary policy shocks increases sharply towards the end of the sample period, capturing the impact of the prolonged low interest rate environment on transmission process. These findings suggest that the structural changes in the banking industry and the state of the economy have a significant impact on the strength of the bank lending channel.
    Keywords: bank lending channel, monetary policy, financial regulation
    JEL: E51 E52 E44
    Date: 2018–05
  23. By: Entrop, Oliver; Merkel, Matthias F.
    Abstract: In this paper we show that inflation differentials among the countries in the European Monetary Union (EMU) are an economically significant risk to German firms, which make up the largest economy in the EMU. This risk can be interpreted as real "exchange rate exposure" resulting from trade within the euro area. Actually, we find that this EMU exposure is nearly as high as the standard exchange rate exposure caused by trade with non-EMU countries. Moreover, our analysis shows that many of the conventional factors that drive firm-specific exchange rate risk, such as size, debt ratio, asset turnover and foreign business activity, also determine EMU exposure in an economically meaningful way. However, EMU exposure challenges firms' risk management, particularly as it cannot be reduced by standard financial hedging instruments, such as currency derivatives.
    Keywords: currency risk,inflation differentials,single-currency area
    JEL: F23 F31 G15
    Date: 2018
  24. By: Sheila Dow (Department of Economics, University of Victoria)
    Abstract: The modern debate about monetary reform has taken on a new twist with the development of distributed ledger payments technology employing private digital currencies. In order to consider the appropriate state response, we go back to first principles of money and finance and the case for financial regulation: to ensure provision of a safe money asset and a stable supply of credit within an inherently unstable financial system. We consider calls to privatise money or to restrict money issue to the state against the background of the increasing marketisation of the financial sector and money itself. Following an analysis of private digital currencies, we then consider proposals for state issue of digital currency. It is concluded that the focus of attention should instead be on updating of regulation, not only to encompass digital currencies, but also to address other innovations in the financial sector which generate credit and liquidity, in order to meet the needs of the real economy. JEL Classification: E3, E5, G1
    Keywords: Digital Currencies, Central Banks, Financial Instability, Financial Regulation
    Date: 2018–06–22
  25. By: Kwame Akosah, Nana; Omane-Adjepong, Maurice
    Abstract: Ghana’s external trade has remained in perpetual deficits over the three decades alongside depreciating domestic currency. This paper therefore examines the effect of real exchange rate (RER) movements on Ghana’s external trade performance, using a battery of times series models. The study particularly assesses the validity of Marshall-Lerner Condition, the J-Curve and Kulkarni Hypotheses in the case of Ghana. The empirical analysis reveals inelastic responses of both export and import demand to changes in RER. We found a steady long run link between RER movements and Ghana’s trade balance. However, the impact of RER on Ghana’s trade balance was found to be asymmetric. Periods of minimal real depreciation (a “tranquil” regime) lend support to Marshall-Lerner Condition (MLC), the J-Curve theory and Kulkarni Hypothesis in the context of Ghana. In contrast, we found less visible evidence of J-curve for periods of excessive real depreciation (an “intemperate” regime). It is therefore critical to sustain macroeconomic stability in order to engender low and stable inflation and stable foreign exchange rates. This however requires the adoption of appropriate and coordinated monetary and fiscal policies.
    Keywords: J-Curve Hypothesis; Kulkarni Hypothesis; Marshall-Lerner Condition; Trade Balance.
    JEL: F13 F14 F31
    Date: 2017–03
  26. By: Jordá, Óscar; Schularick, Moritz; Taylor, Alan M.; Ward, Felix
    Abstract: This paper studies the synchronization of financial cycles across 17 advanced economies over the past 150 years. The comovement in credit, house prices, and equity prices has reached historical highs in the past three decades. The sharp increase in the comovement of global equity markets is particularly notable. We demonstrate that fluctuations in risk premiums, and not risk-free rates and dividends, account for a large part of the observed equity price synchronization after 1990. We also show that U.S. monetary policy has come to play an important role as a source of fluctuations in risk appetite across global equity markets. These fluctuations are transmitted across both fixed and floating exchange rate regimes, but the effects are more muted in floating rate regimes.
    Keywords: asset prices; equity return premium; financial centers; financial cycles; policy spillovers
    JEL: E50 F33 F42 F44 G12 N10 N20
    Date: 2018–06
  27. By: Woodford, Michael
    Abstract: It is common to analyze the effects of alternative monetary policy commitments under the assumption of fully model-consistent expectations. This implicitly assumes unrealistic cognitive abilities on the part of economic decision makers. The relevant question, however, is not whether the assumption can be literally correct, but how much it would matter to model decision making in a more realistic way. A model is proposed, based on the architecture of artificial intelligence programs for problems such as chess or go, in which decision makers look ahead only a finite distance into the future, and use a value function learned from experience to evaluate situations that may be reached after a finite sequence of actions by themselves and others. Conditions are discussed under which the predictions of a model with finite-horizon forward planning are similar to those of a rational expectations equilibrium, and under which they are instead quite different. The model is used to re-examine the consequences that should be expected from a central-bank commitment to maintain a fixed nominal interest rate for a substantial period of time. "Neo-Fisherian" predictions are shown to depend on using rational expectations equilibrium analysis under circumstances in which it should be expected to be unreliable.
    Keywords: bounded rationality; forward guidance; neo-Fisherianism
    JEL: E52
    Date: 2018–06
  28. By: Cristiano Cantore; Filippo Ferroni; Miguel A. Leon-Ledesma
    Abstract: The New-Keynesian transmission mechanism of monetary policy has clear implications for the behavior of the labor share. In the basic version of the model, the labor share is negatively related to the price markup and hence is pro-cyclical conditional on monetary policy shocks. However, little empirical evidence is available on the effect of monetary policy on the labor share and its components. We present a comprehensive cross country empirical analysis and find that the data are at odds with the theory. Cyclically, a monetary policy tightening increased the labor share and decreased real wages and labor productivity during the Great Moderation period in the US, the Euro Area, the UK, Australia and Canada. We then examine models allowing for a wide range of nominal and real rigidities that are important to separate the dynamics of the markup and the labor share. We show that models that do a good job at reproducing the responses of real variables to a monetary policy shock are unable to reproduce the responses of the labor share observed in the data.
    Keywords: Labor Share; Monetary Policy Shocks; DSGE models
    JEL: E23 E32 C52
    Date: 2018–06
  29. By: Cem Cakmakli (Department of Economics, Koç University); Selva Demiralp (Department of Economics, Koç University); Sevcan Yesiltas (Department of Economics, Koç University); Muhammed A. Yildirim (Department of Economics, Koç University)
    Abstract: This study examines the effects of price adjustments in the tobacco sector on inflation in Turkey. The findings show that the taxes on tobacco products increase inflation in the short-term. However, the effect is rather limited, a 16 basis points increase in inflation if the current 65.25% Special Consumption Tax (SCT) increases by 25 basis points. Factors that cause inflation in the long-run are cost and demand. The cost-driven impact of tobacco prices on inflation is rather limited due to the low weight of this product in the consumption basket. Nevertheless, the structure of the tax multiplier used in tobacco taxation increases cigarette prices in a non-linear fashion and, therefore, has the potential to disrupt inflationary expectations.
    Date: 2018–06
  30. By: Kramer, Bert S.; Milionis, Petros (Groningen University)
    Abstract: We study how domestic politics affected the decisions of countries to adhere to the classical gold standard. Using a variety of econometric techniques and controlling for a wide range of economic factors, we demonstrate that political constraints were important in the decision of countries to adopt the gold standard as well as in the decision to suspend it. Specifically we find that the probability of adherence to the gold standard was ceteris paribus lower for countries in which domestic politics were organized in a more open and democratic fashion. This effect appears to be driven largely by the extent of domestic political competition and was particularly relevant for peripheral countries.
    Date: 2018
  31. By: Ho, Sin-Yu; Njindan Iyke, Bernard
    Abstract: The classical Phillips curve shows a negative relationship between inflation and unemployment. However, various studies have documented temporal positive and negative relationships between inflation and unemployment, leading to strong criticisms against the Phillips curve. In particular, the triangle approach indicates that the nature of the inflation-unemployment nexus is contingent on the source of the shocks, the length of lagged responses, and the policy response. Similarly, the strong linearity assumption on which the Phillips curve rests may have led to its empirical failure. Prior studies have modelled the possibility of threshold effects in the Phillips curve but no study has established the thresholds of when the relationship switches from negative to positive in the eurozone. This paper addresses this limitation using 11 eurozone countries for the period of January 1999 to February 2017. The paper also estimates both short- and long-run Phillips curves for these countries. We found that, by assuming linearity, there exists a Phillips curve in the short and the long run. We also established that the linearity assumption in the classical Phillips curve might be too strong since there is evidence of threshold effects. The thresholds in unemployment were 5.00% and 6.54%. By estimating the Phillips curve using these thresholds, we found that the relationship between inflation and unemployment is only negative when unemployment is lower than 5.00%. The negative relationship turned positive when unemployment was between 5.00% and 6.54%. Inflation and unemployment are unrelated once a threshold of a 6.54% unemployment rate is surpassed. These findings do not only highlight the importance of threshold effects in the Phillips curve, they also shed light on the need to fight unemployment in the eurozone.
    Keywords: Inflation; Unemployment; Nonlinearity; Phillips Curve; Eurozone.
    JEL: E24 E31
    Date: 2018
  32. By: Patrick K. O'Brien; Nuno Palma
    Date: 2018
  33. By: Yannis Dafermos; Maria Nikolaidi (University of Greenwich); Giorgos Galanis
    Abstract: Using a stock-flow-fund ecological macroeconomic model, we analyse (i) the effects of climate change on financial stability and (ii) the financial and global warming implications of a green QE programme. Emphasis is placed on the impact of climate change damages on the price of financial assets and the financial position of firms and banks. The model is estimated and calibrated using global data and simulations are conducted for the period 2015-2115. Four key results arise. First, by destroying the capital of firms and reducing their profitability, climate change is likely to gradually deteriorate the liquidity of firms, leading to a higher rate of default that could harm both the financial and the non-financial corporate sector. Second, climate change damages can lead to a portfolio reallocation that can cause a gradual decline in the price of corporate bonds. Third, financial instability might adversely affect credit expansion and the investment in green capital, with adverse feedback effects on climate change. Fourth, the implementation of a green QE programme can reduce climate-induced financial instability and restrict global warming. The effectiveness of this programme depends positively on the responsiveness of green investment to changes in bond yields.
    Keywords: ecological macroeconomics, stock-flow consistent modelling, climate change, financial stability, green quantitative easing
    JEL: E12 E44 E52 Q54
    Date: 2017–09
  34. By: Engelbert Stockhammer (Kingston University); Collin Constantine; Severin Reissl
    Abstract: The paper proposes a post-Keynesian analysis of the Eurozone crisis and contrasts interpretations inspired by New Keynesian, New Classical, and Marxist theories. The origin of the crisis is the emergence of a debt-driven and an export-driven growth model, which resulted in a rapid increase in private debt ratios and current account imbalances. The reason the crisis escalated in southern Europe, but not in other parts of the world, lies in the unique dysfunctional economic policy regime of the Euro area. European fiscal rules and the Troika impose fiscal austerity on countries in crisis and the separation of fiscal and monetary spaces has made countries vulnerable to sovereign debt crises and forced them to comply. We analyse the role different paradigms attribute to current account imbalances, fiscal policy and monetary policy. Remarkably, opposing views on the relative importance of cost and demand developments in explaining current account imbalances can be found in both heterodox and orthodox economics. Regarding the assessment of fiscal and monetary policy there is a clearer polarisation, with heterodox analysis regarding austerity as unhelpful and large parts of orthodox economics endorsing it. We conclude that there is a weak mapping between post-Keynesian, New Classical, New Keynesian and Marxist theories and different economic policy strategies for the Euro area, which we label Keynesian New Deal, European Orthodoxy, Moderate Reform and Progressive Exit respectively.
    Keywords: Euro crisis, European economic policy, sovereign debt crisis, current account balance, fiscal policy, quantitative easing
    JEL: B00 E00 E50 E63 F53 G01
    Date: 2016–11
  35. By: Andrew C. Chang
    Abstract: I show that the probability that the Board of Governors of the Federal Reserve System staff's forecasts (the "Greenbooks'") overpredicted quarterly real gross domestic product (GDP) growth depends on both the forecast horizon and also whether the forecasted quarter was above or below trend real GDP growth. For forecasted quarters that grew below trend, Greenbooks were much more likely to overpredict real GDP growth, with one-quarter ahead forecasts overpredicting real GDP growth more than 75% of the time, and this rate of overprediction was higher for further ahead forecasts. For forecasted quarters that grew above trend, Greenbooks were slightly more likely to underpredict real GDP growth, with one-quarter ahead forecasts underpredicting growth about 60% of the time. Unconditionally, on average, Greenbooks overpredicted real GDP growth.
    Keywords: Asymmetric forecast errors ; Federal open market committee ; Forecast accuracy ; Greenbook ; Monetary policy ; Real-time data
    JEL: C53 D23 E00 E17
    Date: 2018–04–16

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