nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒07‒09
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. State-Dependent Transmission of Monetary Policy in the Euro Area By Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel
  2. Cryptocurrencies and monetary policy By Grégory Claeys; Maria Demertzis; Konstantinos Efstathiou
  3. Central Bank Communication and the Yield Curve By Leombroni, Matteo; Vedolin, Andrea; Venter, Gyuri; Whelan, Paul
  4. Targeting financial stability: macroprudential or monetary policy? By Aikman, David; Giese, Julia; Kapadia, Sujit; McLeay, Michael
  5. The international transmission of monetary policy By Buch, Claudia; Bussiere, Matthieu; Goldberg, Linda; Hills, Robert
  6. International monetary policy spillovers through the bank funding channel By Lindner, Peter; Loeffler, Axel; Segalla, Esther; Valitova, Guzel; Vogel, Ursula
  7. Trade and currency weapons By Agnès Bénassy-Quéré; Matthieu Bussière; Pauline Wibaux
  8. Transmission of Monetary Policy with Heterogeneity in Household Portfolios By Ralph Luetticke
  9. Asymmetric monetary policy responses and the effects of a rise in the inflation target By Benjamín García
  10. Balance sheets, exchange rates, and international monetary spillovers By Akinci, Ozge; Queralto, Albert
  11. Inflation targeting in low-income countries: Does IT work? By Michael Bleaney; Atsuyoshi Morozumi; Zakari Mumuni
  12. Uncertainty and Hyperinflation: European Inflation Dynamics after World War I By Jose A. Lopez; Kris James Mitchener
  13. Inflation targeting and monetary policy in Ghana By Michael Bleaney; Atsuyoshi Morozumi; Zakari Mumuni
  14. Teori uang dan inflasi dalam analisis pemikiran Al Maqrizi By Hamidin, Dede
  15. Uncertainty about QE effects when an interest rate peg is anticipated By Gerke, Rafael; Giesen, Sebastian; Kienzler, Daniel
  16. An Empirical Evidence of Dynamic Interaction among price level, interest rate, money supply and real income: The case of the Indian Economy. By Rasool, Haroon; Adil, Masudul Hasan; Tarique, Md
  17. Uncertainty-dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation By Efrem Castelnuovo; Giovanni Pellegrino
  18. Sovereign Default in a Monetary Union By de Ferra, Sergio; Romei, Federica
  19. Financial Institutions’ Business Models and the Global Transmission of Monetary Policy By Isabel Argimon; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs
  20. Inference in structural vector auto regressions when the identifying assumptions are not fully believed : Re-evaluating the role of monetary policy in economic fluctuations By Baumeister, Christiane; Hamilton, James D.
  21. Maastricht and Monetary Cooperation By Chris Kirrane
  22. The Impact of Monetary and Tax Policy on Income Inequality in Japan By Taghizadeh-Hesary, Farhad; Yoshino, Naoyuki; Shimizu, Sayoko
  23. A Primer on the Canadian Bankers’ Acceptance Market By Kaetlynd McRae; Danny Auger
  24. Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s? By Qazi Haque; Nicolas Groshenny; Mark Weder
  25. Optimal Inflation and the Identification of the Phillips Curve By McLeay, Michael; Tenreyro, Silvana
  26. International Currencies and Capital Allocation By Maggiori, Matteo; Neiman, Brent; Schreger, Jesse
  27. The ECB's Fiscal Policy By Hans-Werner Sinn
  28. Market disequilibrium, monetary policy, and financial markets : insights from new tools By Jean-Luc Gaffard; Mauro Napoletano
  29. Internet Rising, Prices Falling: Measuring Inflation in a World of E-Commerce By Austan D. Goolsbee; Peter J. Klenow
  30. Impact of World Oil Prices on an Energy Exporting Economy Including Monetary Policy By Alekhina, Victoriia; Yoshino, Naoyuki
  31. Identification of interbank loans and interest rates from interbank payments – A reliability assessment By Q. Farooq Akram; Mats B. Fevolden; Lyndsie H. Smith
  32. Perceived FOMC: The Making of Hawks, Doves and Swingers By Michael D. Bordo; Klodiana Istrefi
  33. The Likelihood of Effective Lower Bound Events By Michal Franta
  34. The Triangle of ICOs, Bitcoin and Ethereum: A Time Series Analysis By Christian Masiak; Joern H. Block; Tobias Masiak; Matthias Neuenkirch; Katja N. Pielen
  35. The Determinants of Price Rigidity in the UK: Analysis of the CPI and PPI Microdata and Application to Macrodata Modelling By Zhou, Peng; Dixon, Huw David
  36. The Indian fiscal-monetary framework: Dominance or coordination? By Ashima Goyal
  37. Overcoming Euro Area fragility By Andrew Watt; Sebastian Watzka
  38. The Bretton Woods Experience and ERM By Chris Kirrane

  1. By: Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we estimate a logit mixture vector autoregressive (Logit-MVAR) model describing monetary policy transmission in the euro area over the period 1999-2015. MVARs allow us to differentiate between different states of the economy. In our model, the time-varying state weights are determined by an underlying logit model. In contrast to other classes of non-linear VARs, the regime affiliation is neither strictly binary, nor binary with a transition period, and based on multiple variables. We show that monetary policy transmission in the euro area can indeed be described as a mixture of two states. The first (second) state with an overall share of 84% (16%) can be interpreted as a “normal state” (“crisis state”). In both states, output and prices are found to decrease after monetary policy shocks. During “crisis times” the contraction is much stronger, as the peak effect is roughly one-and-a-half times as large when compared to “normal times.” In contrast, the effect of monetary policy shocks is less enduring in crisis times. Both findings provide a strong indication that the transmission mechanism is indeed different for the euro area during times of economic and financial distress.
    Keywords: economic and financial crisis, euro area, mixture VAR, monetary policy transmission, state-dependency
    JEL: C32 E52 E58
    Date: 2018
  2. By: Grégory Claeys; Maria Demertzis; Konstantinos Efstathiou
    Abstract: This policy contribution was prepared for the Committee on Economic and Monetary Affairs of the European Parliament (ECON) as an input for the Monetary Dialogue of 9 July 2018 between ECON and the President of the ECB. The original paper is available on the European Parliament’s webpage (here). Copyright remains with the European Parliament at all times. This Policy Contribution tries to answer two main questions - can cryptocurrencies acquire the role of money? And what are the implications for central banks and monetary policy? Money is a social institution that serves as a unit of account, a medium of exchange and a store of value. With the emergence of decentralised ledger technology (DLT), cryptocurrencies represent a new form of money - privately issued, digital and enabling peer-to-peer transactions. Historically, currencies fulfil their main functions successfully when their value is stable and their user network sufficiently large. So far, cryptocurrencies are arguably falling short against these criteria. They resemble speculative assets rather than money. Primarily this is because of their inherent volatility, which is the by-product of their inelastic supply, and which limits their widespread use as a medium of exchange. Cryptocurrency protocols could theoretically evolve to limit their volatility and correct their current deficiencies. If successful, this could lead to an increase in their popularity as an alternative to official currencies. A successful alternative to official currencies could put pressure on those who manage official currencies to provide better policies. But the widespread substitution of central bank currency for cryptocurrencies would effectively create parallel currencies. This by itself could create risks to the effectiveness of monetary policy, to financial stability and ultimately to growth. Nevertheless, the risks of cryptocurrencies becoming serious contenders remain small as long as fiat currencies issued by the world’s major central banks continue to deliver effectively the three traditional functions of money. It would take a deep crisis of trust in official currencies for their widespread substitution by cryptocurrencies to materialise. For cryptocurrencies to replace official currencies they would have to overcome a triple challenge. First, the supply of cryptocurrency would need to act as an instrument (or identify a different instrument) that affects the economy. Second, in the presence of fractional reserve banking, the supply would need to respond to liquidity crises and act as a lender of last resort in order to safeguard financial stability. Third, there would need to be a system of checks and balances to keep the agent, ie the cryptocurrency issuer, accountable to the principal, ie society, which is not possible because cryptocurrencies are automatically and privately-issued. For these reasons, official currencies controlled by inflation-targeting independent central banks still appear to be a far superior technology than cryptocurrencies to provide the money functions.
    Date: 2018–06
  3. By: Leombroni, Matteo; Vedolin, Andrea; Venter, Gyuri; Whelan, Paul
    Abstract: Using the institutional features of ECB monetary policy announcements, we provide direct evidence for the risk premium channel of central bank communication. We show that on days when the ECB announces its monetary policy almost all of the variation of bond yields is driven by communication. Moreover, while the effect of monetary policy is homogeneous across countries before the European debt crisis, we document dramatic differences post crisis and show that communication shocks drive a wedge between peripheral and core yields. We empirically link the periphery-core wedge to break-up and credit risk premia, and study this channel theoretically through the lens of an equilibrium model in which central bank communication reveals information about the state of the economy.
    Keywords: central bank communication; Eurozone; interest rates; monetary policy; risk premia
    JEL: E42 E58 G12
    Date: 2018–06
  4. By: Aikman, David (Bank of England); Giese, Julia (Bank of England); Kapadia, Sujit (European Central Bank); McLeay, Michael (Bank of England)
    Abstract: This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance and a risk-taking channel of monetary policy affect our results.
    Keywords: Macroprudential; monetary policy; financial stability; capital buffer; financial crises; credit boom
    JEL: E52 E58 G01 G28
    Date: 2018–06–08
  5. By: Buch, Claudia (Deutsche Bundesbank); Bussiere, Matthieu (Banque de France); Goldberg, Linda (Federal Reserve Bank of New York); Hills, Robert (Bank of England)
    Abstract: This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from 17 countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the US, euro area, Japan, and United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for US policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into non-bank lending generally are not large.
    Keywords: Monetary policy; international spillovers; cross-border transmission; global bank; global financial cycle
    JEL: E52 G15 G21
    Date: 2018–06–01
  6. By: Lindner, Peter; Loeffler, Axel; Segalla, Esther; Valitova, Guzel; Vogel, Ursula
    Abstract: In this paper, we examine the international transmission of monetary policies of major advanced economies (US, UK, euro area) through banks in Austria and Germany. In particular, we compare the role of banks' funding structure, broken down by country of origin as well as by currency denomination, in the international transmission of monetary policy changes to bank lending. We find weak evidence for inward spillovers. The more a bank is funded in US dollars, the more its domestic real sector lending is affected by monetary policy changes in the US. This effect is more pronounced in Germany than in Austria. We do not find evidence for outward spillovers of euro area monetary policy through a bank funding channel.
    Keywords: monetary policy spillover,global banks,bank funding channel
    JEL: E52 F33 G21
    Date: 2018
  7. By: Agnès Bénassy-Quéré (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Matthieu Bussière (Banque de France - Banque de France); Pauline Wibaux (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    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
    Date: 2018–06
  8. By: Ralph Luetticke (Centre for Macroeconomics (CFM); University College London (UCL))
    Abstract: Monetary policy affects both intertemporal consumption choices and portfolio choices between liquid and illiquid assets. The monetary transmission, in turn, depends on the distribution of marginal propensities to consume and invest. This paper assesses the importance of heterogeneity in these propensities for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different degrees of liquidity. Liquidity-constrained households have high propensities to consume but low propensities to invest, which makes consumption more and investment less responsive to monetary shocks compared to complete markets. Redistribution through earnings heterogeneity and the Fisher channel from unexpected inflation further amplifies the consumption response but dampens the investment response.
    Keywords: Monetary policy, Heterogeneous agents, General equilibrium
    JEL: E21 E32 E52
    Date: 2018–06
  9. By: Benjamín García
    Abstract: The effective lower bound (ELB) on interest rates introduces an explicit non-linearity for feasible monetary policy paths: interest rates cannot go below a certain rate. In a forward looking environment, the ELB can affect the monetary policy decisions not only when the bound is reached, but also when there is a possibility that the bound may be reached in the future. In this context, as a recommendation for monetary policy in a low-inflation environment, Reifschneider and Williams (2002 FOMC) propose an asymmetric Taylor Rule with a threshold level that automatically drives the interest rate to zero whenever they fall below one percent. I test the hypothesis that the Federal Reserve has behaved in a manner consistent with Reifschneider and Williams’ advice, finding evidence of a negative correlation between the level of the interest rate and the strength of the monetary policy response. Using an estimated nonlinear DSGE model, I show that a monetary policy which act symmetrically and asymmetrically can have significantly different consequences. In particular, I study the relevance of this behavior for the analysis of a permanent rise of the inflation target.
    Date: 2018–06
  10. By: Akinci, Ozge (Federal Reserve Bank of New York); Queralto, Albert (Federal Reserve Board)
    Abstract: We use a two-country New Keynesian model with balance sheet constraints to investigate the magnitude of international spillovers of U.S. monetary policy. Home borrowers obtain funds from domestic households in domestic currency, as well as from residents of the foreign economy (the United States) in dollars. We assume agency frictions are more severe for foreign debt than for domestic deposits. As a consequence, a deterioration in domestic borrowers’ balance sheets induces a rise in the home currency’s premium and an exchange rate depreciation. We use the model to investigate how international monetary spillovers are affected by the degree of currency mismatches in balance sheets, and whether the latter make it desirable for domestic policy to target the nominal exchange rate. We find that the magnitude of spillovers is significantly enhanced by the degree of currency mismatches. Our findings also suggest that using monetary policy to stabilize the exchange rate is not necessarily more desirable with greater balance sheet mismatches and may actually exacerbate short-run exchange rate volatility.
    Keywords: financial intermediation; U.S. monetary policy spillovers; currency premium; uncovered interest rate parity condition
    JEL: E32 E44 F41
    Date: 2018–06–01
  11. By: Michael Bleaney; Atsuyoshi Morozumi; Zakari Mumuni
    Abstract: Previous research on inflation targeting (IT) has focused on high-income countries (HICs) and emerging market economies (EMEs). Only recently has enough data accumulated for the performance of IT in low-income countries (LICs) to be assessed. We show that IT has not so far been effective in reducing in inflation in LICs, unlike in EMEs. Weak institutions, a typical feature in LICs, help explain this result, particularly under fl oating exchange rate regimes. Our interpretation is that poor institutions, leaving fiscal policy unconstrained, impair central banks' ability to conduct monetary policy in a way consistent with IT.
    Keywords: infl ation targeting, low-income countries, institutions
    Date: 2018
  12. 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.
    Keywords: hyperinflation, uncertainty, exchange rates, prices, reparations
    JEL: E31 E63 F31 F33 F41 F51 G15 N14
    Date: 2018
  13. By: Michael Bleaney; Atsuyoshi Morozumi; Zakari Mumuni
    Abstract: An inflation-targeting regime has been in place in Ghana since 2007, but compared to other inflation-targeting countries it has been conspicuously unsuccessful. Since 2013 inflation has persistently exceeded the announced target by four percentage points or more, despite the target never falling below a relatively unambitious 8% per annum. We investigate whether the poor conduct of monetary policy is responsible for this outcome, and find that is not. Monetary policy reaction functions are similar to those estimated for countries with successful monetary policies, and interest rates respond in the theoretically recommended way to inflation shocks.
    Keywords: expectations; inflation targeting; interest rates.
    Date: 2018
  14. By: Hamidin, Dede
    Abstract: This article describes the concept of monetary theory and inflation according to Al Maqrizi's thought. In simple terms, inflation means the rising prices of goods from the prevailing circumstances. Taqiyuddin Abul Abbas Al-Husaini from Maqarizah, Cairo. Or better known as Al-Maqrizi. He said in some parts of his book that inflation is generally divided into two, namely Natural Inflation and Human Error Inflation. This paper will try to compile some of his thoughts - more specifically the problem of monetary theory and inflation - with conventional positivistic opinions and concepts in the same field.
    Keywords: inflation, monetary, al Maqrizi
    JEL: A11
    Date: 2018–06–20
  15. By: Gerke, Rafael; Giesen, Sebastian; Kienzler, Daniel
    Abstract: After hitting the lower bound on interest rates, the Eurosystem engaged in a public sector purchase programme (PSPP) and forward guidance (FG). We use prior and posterior predictive analysis to evaluate the importance of parameter uncertainty in an analysis of these policies. We model FG as an anticipated temporary interest rate peg. The degree of parameter uncertainty is considerable and increasing in the length of FG. The probability of being able to reset prices and wages is the most important factor driving uncertainty about inflation. In contrast, variations in financial intermediaries' net worth adjustment costs have little impact on in ation outcomes.
    Keywords: prior/posterior predictive analysis,anticipated interest rate peg,parameter uncertainty,euro area,QE,PSPP,forward guidance puzzle
    JEL: C53 E32 E52
    Date: 2018
  16. By: Rasool, Haroon; Adil, Masudul Hasan; Tarique, Md
    Abstract: Monetary policy approaches in India has changed from simple monetary targeting framework in the mid-1980s to multiple indicator approach in the late 1990s and to the current flexible inflation targeting framework. The aim of this study is to investigate the relationship among selected macroeconomic variables such as, money supply, real income, price level and interest rate for period 1998 to 2014 in case of India; a period when the Multiple Indicator Approach (MIA) was implemented. The study employs vector autoregression (VAR) approach to examine the dynamics of the relationship between variables. The result shows that lags of all dependent variables are significant except real income. The Granger causality via VAR framework suggests that four pairs of Granger causality exist, in particular, bi-directional causality exists between money supply and price level. Interest rate Granger causes both income and price level, and lastly money supply causes the rate of interest. However, the study could not find any causal relationship between real income and money supply in either direction. The findings of Impulse response functions and Variance decomposition reinforce causality results. Finally, the estimated result supports the arguments which are made in favour of policy move from MIA to inflation targeting framework.
    Keywords: Multiple Indicator Approach, VAR, Granger causality, IRF and VD.
    JEL: C5 E4 E5
    Date: 2018
  17. By: Efrem Castelnuovo (University of Padova); Giovanni Pellegrino (University of Melbourne)
    Abstract: We estimate a nonlinear VAR model to study the real effects of monetary policy shocks in regimes characterized by high vs. low macroeconomic uncertainty. We Â…find unexpected monetary policy moves to exert a substantially milder impact in presence of high uncertainty. We then exploit the set of impulse responses coming from the nonlinear VAR framework to estimate a medium-scale new-Keynesian DSGE model with a minimum-distance approach. The DSGE model is shown to be able to replicate the VAR evidence in both regimes thanks to different estimates of some crucial structural parameters. In particular, we identify a steeper new-Keynesian Phillips curve as the key factor behind the DSGE modelÂ’s ability to replicate the milder macroeconomic responses to a monetary policy shock estimated with our VAR in presence of high uncertainty. A version of the model featuring fiÂ…rm-speciÂ…c capital is shown to be associated to estimates of the price frequency which are in line with some recent evidence based on micro data.
    Keywords: Monetary policy shocks, uncertainty, Threshold VAR, medium scale DSGE framework, minimum-distance estimation
    JEL: C22 E32 E52
    Date: 2018–06
  18. By: de Ferra, Sergio; Romei, Federica
    Abstract: In the aftermath of the global fi nancial crisis, sovereign default risk and the zero lower bound have limited the ability of policy-makers in the European monetary union to achieve their stabilization objective. This paper investigates the interaction between sovereign default risk and the conduct of monetary policy, when borrowers can act strategically and they share with their lenders a single currency in a monetary union. We address this question in an endogenous sovereign default model of heterogeneous countries in a monetary union, where the monetary authority may be constrained by the zero lower bound. We uncover three main results. First, in normal times, debtors have a stronger incentive to default to induce more expansionary monetary policy. Second, the zero lower bound, or constraints on monetary policy, may act as a disciplining device to enforce repayment of sovereign debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance. These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates.
    Keywords: Heterogeneous Countries; monetary union; sovereign default; zero lower bound
    JEL: F34 F42 H63
    Date: 2018–06
  19. By: Isabel Argimon; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs
    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 home-country 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: 2018–05–29
  20. By: Baumeister, Christiane; Hamilton, James D.
    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: 2018–06–20
  21. By: Chris Kirrane
    Abstract: This paper describes the opportunities and also the difficulties of EMU with regard to international monetary cooperation. Even though the institutional and intellectual assistance to the coordination of monetary policy in the EU will probably be strengthened with the EMU, among the shortcomings of the Maastricht Treaty concerns the relationship between the founder members and those countries who wish to remain outside monetary union.
    Date: 2018–07
  22. By: Taghizadeh-Hesary, Farhad (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute); Shimizu, Sayoko (Asian Development Bank Institute)
    Abstract: We assess the effects of the most recent monetary policy behavior of the Bank of Japan (BOJ), in particular, zero interest rate policy and negative interest rate policy, and the Japanese tax policy on income inequality during the first quarter (Q1) of 2002 to Q3 2017. The vector error correction model developed in this research shows that increase in money stock through quantitative easing and the quantitative and qualitative easing policies of the BOJ significantly increases income inequality. On the contrary, Japanese tax policy was effective in reducing income inequality. Variance decomposition results show that after 10 periods almost 87.15% of the forecast error variance of the inequality is accounted for by its own innovations and 3.76% of the forecast error variance can be explained by exogenous shocks to monetary policy shock—the money stock. The short-term interest rate also accounts for the increase in inequality by 0.47%. On the other hand, the total tax and real gross domestic product contributed in reducing the inequality measure, respectively, by 6.65% and 1.96% after 10 periods.
    Keywords: income inequality; monetary policy; tax policy; Japanese economy
    JEL: D63 E52 H24
    Date: 2018–04–27
  23. By: Kaetlynd McRae; Danny Auger
    Abstract: This paper discusses how the bankers’ acceptance (BA) market in Canada is organized and its essential link to the Canadian Dollar Offered Rate (CDOR). Globally, BAs are a niche product used only in a limited number of jurisdictions. In Canada, BAs provide a key source of funding for small and medium-sized corporate borrowers that may not otherwise have direct access to the primary funding market because of their size and credit ratings. More recently, BAs have also become an increasingly important funding source for large corporate borrowers because of credit-rating downgrades in certain sectors and industry consolidation. With the market’s continued growth, BAs account for the greatest portion of money market instruments issued by non-government entities and are the second-largest money market instrument overall in Canada, averaging just over 25 per cent of the total domestic money market in 2017. For the investment community in Canada, BAs provide a source of short-term income and liquidity because of their relatively attractive yield, liquidity and credit ratings. The BA market is intrinsically linked to CDOR, which was originally developed to establish a daily benchmark reference rate for BA borrowings. This rate is quite nuanced compared with rates in other jurisdictions in that it is not directly a bank borrowing rate. Instead, it is a committed lending rate at which banks are contractually willing to lend cash to corporate borrowers with existing BA facilities. CDOR is also used as the main interest rate benchmark for calculating the floating-rate component of both over-the-counter and exchange-traded Canadian-dollar derivative products. Another use of CDOR is to determine interest payments on floating-rate notes.
    Keywords: Financial Institutions; Financial markets; Financial system regulation and policies, Market structure and pricing
    JEL: G G1 G18 G2 G21 G23
    Date: 2018
  24. By: Qazi Haque (School of Economics, University of Adelaide); Nicolas Groshenny (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide)
    Abstract: In this paper we examine whether or not monetary policy was a source of instability during the Great Inflation. We focus on a number of attributes that we see relevant for any analysis of the 1970s: cost-push or oil price shocks, positive trend inflation as well as real wage rigidity. We turn our artificial sticky-price economy into a Bayesian model and find that the U.S. economy during the 1970s is best characterized by a high degree of real wage rigidity. Oil price shocks thus created a trade-off between inflation and output-gap stabilization. Faced with this dilemma, the Federal Reserve reacted aggressively to inflation but hardly at all to the output gap, thereby inducing stability, i.e. determinacy.
    Keywords: Monetary policy; Great Inflation; Cost-push shocks; Trend inflation; Sequential Monte Carlo algorithm
    JEL: E32 E52 E58
    Date: 2018–05
  25. By: McLeay, Michael; Tenreyro, Silvana
    Abstract: This paper explains why inflation follows a seemingly exogenous statistical process, unrelated to the output gap. In other words, it explains why it is difficult to empirically identify a Phillips curve. We show why this result need not imply that the Phillips curve does not hold – on the contrary, our conceptual framework is built under the assumption that the Phillips curve always holds. The reason is simple: if monetary policy is set with the goal of minimising welfare losses (measured as the sum of deviations of inflation from its target and output from its potential), subject to a Phillips curve, a central bank will seek to increase inflation when output is below potential. This targeting rule will impart a negative correlation between inflation and the output gap, blurring the identification of the (positively sloped) Phillips curve.
    Keywords: identification; Inflation targeting; Phillips curve
    Date: 2018–06
  26. By: Maggiori, Matteo; Neiman, Brent; Schreger, Jesse
    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 debt securities denominated in their own currency, even those issued by foreign borrowers in developed countries. 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 broadly across countries with the exception of countries, like the United States, that issue an international currency. The global willingness to hold the US dollar 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 starting with the 2008 financial crisis, further cementing the dollar's international role and potentially amplifying the benefit that its status brings to the US.
    Keywords: Capital Flows; Exorbitant Privilege; Home Bias; reserve currencies
    JEL: E42 E44 F3 F55 G11 G15 G23 G28
    Date: 2018–06
  27. By: Hans-Werner Sinn
    Abstract: While the ECB helped mitigate the euro crisis in the aftermath of Lehman, it has stretched its monetary mandate and moved into fiscal territory. This text describes and summarizes the crucial role played by the ECB in the intervention spiral resulting from its bid to manage the crisis. It also outlines ongoing competitiveness problems in southern Europe, discusses the so-called austerity policy of the Troika, comments on QE and presents two alternative paths for the future development of Europe.
    JEL: E50 E58 G01 H63 H81
    Date: 2018–05
  28. By: Jean-Luc Gaffard (Observatoire français des conjonctures économiques); Mauro Napoletano (Observatoire français des conjonctures économiques)
    Abstract: We revisit the main building blocks of the theoretical models underlying the monetary policy consensus before the Great Recession. We highlight how the failure of these models to prevent the crisis and to provide guidance during the recession were due to the excessive confidence in the ability of markets to coordinate demand and supply, and to the neglect of the role of finance. Furthermore, we outline the main elements of an alternative approach to monetary policy that put emphasis on the processes driving coordination in markets, and on the externalities transmitted by financial inter-linkages. Many elements of this new approach are captured by new classes of models, namely, agent-based and financial network models. We discuss some insights from these models for the conduct of monetary policy, and for its interactions with fiscal and macroprudential policies.
    Keywords: Output-inflation dynamics; New keynesian models; Disequilibrium analysis; Agent based models; Fiscal monetary policy interactions; Quantitative easing policies
    JEL: E31 E32 E5 E61 E62
    Date: 2018–06
  29. By: Austan D. Goolsbee; Peter J. Klenow
    Abstract: We use Adobe Analytics data on online transactions for millions of products in many different categories from 2014 to 2017 to shed light on how online inflation compares to overall inflation, and to gauge the magnitude of new product bias online. The Adobe data contain transaction prices and quantities purchased. We estimate that online inflation was about 1 percentage point lower than in the CPI for the same categories from 2014--2017. In addition, the rising variety of products sold online, implies roughly 2 percentage points lower inflation than in a matched model/CPI-style index.
    JEL: E31 O47
    Date: 2018–05
  30. By: Alekhina, Victoriia (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute)
    Abstract: We investigate the interrelationship between the main macroeconomic indicators of an oil exporting country and world oil prices using a vector autoregressive approach. We focus on an oil exporter that is not a member of the Organization of the Petroleum Exporting Countries, and its oil revenues, which account for a significant proportion of the country’s total export and budget revenues. We explain the oil price transition mechanisms to this economy from the export side and through the fiscal channel, taking into account the monetary policy factor. The results suggest that oil price fluctuations have a significant impact on the oil exporting country’s real gross domestic product, consumer price index inflation rate, interest rate, and exchange rate. Moreover, to estimate monetary policy rule for this energy exporter, we test the Taylor equation and associated Taylor rule, including the oil prices gap, since the latter may have a significant impact on the key policy rate. The evidence suggests that the Taylor rule describes the post-financial crisis monetary policy of this economy relatively well. Finally, we discuss future research and lessons from this economy for monetary policy makers.
    Keywords: oil prices; energy exporters; macro-economy; VAR model
    JEL: Q41 Q43 Q48
    Date: 2018–03–23
  31. By: Q. Farooq Akram (Norges Bank); Mats B. Fevolden (Norges Bank); Lyndsie H. Smith (Norges Bank)
    Abstract: We investigate the reliability of the `Furfine filter' often used to identify interbank loans and interest rates from interbank payments settled at central banks. To this end, we have been granted access to records of all unsecured overnight interbank loans during a month from the banks that participated in Norges Bank’s real-time gross settlement system. The filter applied was able to identify each of these loans and correctly derive the associated interest rates. The filter's reliability is also supported by additional evidence based on the Norwegian Overnight Weighted Average (NOWA) interest rates beyond the survey month. Sensitivity analyses suggest the share of false or overlooked loans may remain small if the filter design largely incorporates interbank market conventions regarding loan size requests and interests rate quotes.
    Keywords: Overnight interbank market, Furfine-algorithm, RTGS
    JEL: C63 G21 E43 E58
    Date: 2018–06–29
  32. By: Michael D. Bordo; Klodiana Istrefi
    Abstract: Narrative records in US newspapers reveal that about 70 percent of Federal Open Market Committee (FOMC) members who served during the last 55 years are perceived to have had persistent policy preferences over time, as either inflation-fighting hawks or growth-promoting doves. The rest are perceived as swingers, switching between types, or remained an unknown quantity to markets. What makes a member a hawk or a dove? What moulds those who change their tune? We highlight ideology by education and early life economic experiences of members of the FOMC from 1960s to 2015. This research is based on an original dataset.
    JEL: E50 E61
    Date: 2018–05
  33. By: Michal Franta
    Abstract: This paper provides estimates of the probability of an economy hitting its effective lower bound (ELB) on the nominal interest rate and of the expected duration of such an event for eight advanced economies. To that end, a mean-adjusted panel vector autoregression with static interdependencies and the possibility of regime change is estimated. The simulation procedure produces ELB risk estimates for both the short term, where the current phase of the business cycle plays an important role, and the medium term, where the occurrence of an ELB situation is determined mainly by the equilibrium values of macroeconomic variables. The paper also discusses the ELB event probability estimates with respect to previous approaches used in the literature.
    Keywords: Effective lower bound, ELB risk, mean adjustment, panel VAR, regime change
    JEL: C11 E37 E52
  34. By: Christian Masiak; Joern H. Block; Tobias Masiak; Matthias Neuenkirch; Katja N. Pielen
    Abstract: We analyse the triangle of Initial Coin Offerings (ICO) and cryptocurrencies, namely Bitcoin and Ethereum. So far, little is known about the relationship between ICOs, bitcoin and Ether prices. Hence, we employ both bitcoin and Ether prices but also the ICO amount to measure the future development of raised capital in ICOs. First, our results indicate that an ICO has an influence on the subsequent ICO. Second, not only bitcoin prices but also Ether prices play a considerable role with regard to the output of ICO campaigns. However, the effect of Ethereum is of shorter duration on ICO compared to Bitcoin on ICO. A further finding is that the cryptocurrency Bitcoin positively influences Ether. The implications of these findings for investors and entrepreneurial firms are discussed.
    Keywords: Blockchain, cryptocurrency, entrepreneurial finance, initial coin offering, ICO
    JEL: G11 E22 M13 O16
    Date: 2018
  35. By: Zhou, Peng (Cardiff Business School); Dixon, Huw David (Cardiff Business School)
    Abstract: This paper systematically integrates microdata and macrodata analysis of price rigidity in mon-etary economics. We explore the mechanism of price-setting using survival based approaches in order to see what factors drive the observed price rigidity. We find significant effects of macroeconomic variables such as inflation and output, which should be purged off before cal-ibrating any macroeconomic models. The microdata findings are then used to estimate and simulate a heterogeneous price-setting model with a generalised Calvo goods sector and a gen-eralised Taylor service sector, which improves the performance in matching macrodata persistence.
    Keywords: Price Rigidity, Price Setting Behaviour, Microdata, Survival Analysis, Heterogeneous Agent Model, Persistence Puzzle
    JEL: C41 D21 E31 E32
    Date: 2018–06
  36. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: The worldwide move to constrain monetary and fiscal policy using rules is creating a switch from fiscal towards monetary dominance. India also implemented flexible inflation targeting and fiscal responsibility legislation. The theoretical arguments, openness to capital flows, and historical experience with the adverse effects of fiscal dominance that led to these changes are discussed. When output is demand determined, with a relatively greater impact of monetary policy on demand, while fiscal policy affects supply-side costs and therefore inflation, as in India, monetary dominance also has adverse effects. Since each policy acts more effectively on the other's objective, co-ordination is essential to achieve optimal outcomes. Under adverse movements in revenues and high interest rates public investment is the first to be cut. Growth can fall below potential while supply-side inflation persists. The paper examines one way of achieving better outcomes. Rules alone could be interpreted too strictly. Delegation to a more conservative fiscal and less conservative monetary authority, by removing the fears of non-cooperation, makes coordination with higher payoffs for both self-enforcing. Such constrained discretion gives the required long-term perspective, yet retains flexibility.
    Keywords: Monetary and fiscal rules; Monetary versus fiscal dominance; delegation; Coordination
    JEL: E63 E65 C72
    Date: 2018–03
  37. By: Andrew Watt; Sebastian Watzka
    Abstract: Some important progress has been made since the crisis, belatedly and often imperfectly, in reforming the institutional framework of the Euro Area. However, the existential weaknesses - redenomination risk given doubts about the effectiveness of the Lender-of-Last-Resort function and the inadequacy of measures to address inherent divergence trends between member countries - have not been resolved. For as long as that is so, the euro area will remain on shaky ground. This report reviews proposals to strengthen the institutional setup of the euro area. A package is proposed that would rectify the over-reliance on the ECB as a firefighter, and put euro area institutions and member states - with the involvement of governments, parliaments and social partners - in charge of dealing with intra-euro area imbalances and keeping growth close to potential. The more a preventive approach can be reinforced, the less recourse is needed to euro-level emergency measures, the greater will be the confidence that such measures can be introduced without risking "moral hazard".
    Date: 2018
  38. By: Chris Kirrane
    Abstract: Historical examination of the Bretton Woods system allows comparisons to be made with the current evolution of the EMS.
    Date: 2018–07

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