nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒07‒16
twenty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Survey on Germans’ Attitudes Towards and Knowledge of Monetary Policy Issues: Documentation of Survey Methodology and Descriptive Results By Bernd Hayo; Edith Neuenkirch
  2. ECB vs Bundesbank: Diverging Tones and Policy E ectiveness By Peter Tillmann; Andreas Walter
  3. Leaning Against Housing Prices as Robustly Optimal Monetary Policy By Klaus Adam; Michael Woodford
  4. The international transmission of monetary policy By Buch, Claudia M.; Bussiere, Matthieu; Goldberg, Linda; Hills, Robert
  5. Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission By Thomas Hintermaier; Winfried Koeniger
  6. Montenegro’s Unilateral Euroization By Arslan Razmi
  7. German Public Attitudes Towards Asylum Seekers, Immigrants in the Workplace, Inflation, and Local Budgets: Evidence from a Representative Survey of the German Population By Bernd Hayo; Israel García; Pierre-Méon Guillaume; Florian Neumeier; Duncan Roth
  8. The empirical verification of money demand in case of India: Post-reform era By Adil, Masudul Hasan; Haider, Salman; Hatekar, Neeraj
  9. Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support By Julien Pinter
  10. Prospects for a Monetary Union in the East Africa Community: Some Empirical Evidence By Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana
  11. An Experimental Analysis Of The Effect Of Quantitative Easing By Adrian Penalver, Nobuyuki Hanaki, Eizo Akiyama, Yukihiko Funaki, Ryuichiro Ishikawa
  12. Optimal Dynamic Path during the Transition of Exchange Rate Regime: Analysis of the People’s Republic of China (PRC), Malaysia, and Singapore By Yoshino, Naoyuki; Asonuma, Tamon
  13. The economics of monetary unions By Kobielarz, Michal
  14. Swedish Riksbank Notes and Enskilda Bank Notes: Lessons for Digital Currencies By Ben Fung; Scott Hendry; Warren E. Weber
  15. Monetary Policy Announcements and Market Interest Rates Response: Evidence from China By Rongrong Sun
  16. Conventional and Unconventional Monetary Policy Reaction to Uncertainty in Advanced Economies: Evidence from Quantile Regressions By Christina Christou; Ruthira Naraidoo; Rangan Gupta
  17. What inflation measure should a currency union target? By Barnett, William A.; Wang, Chan; Wang, Xue; Wu, Liyuan
  18. Central Bank Swap Lines By Saleem Bahaj; Ricardo Reis
  19. Perceived FOMC: The Making of Hawks, Doves and Swingers By Michael Bordo, Klodiana Istrefi
  20. Asset price volatility in EU-6 economies: how large is the role played by the ECB? By Alessio Ciarlone; Andrea Colabella
  21. Extraction of inflation expectations from financial instruments in Latin America By Alberto Fuertes; Ricardo Gimeno; José Manuel Marqués

  1. By: Bernd Hayo (University of Marburg); Edith Neuenkirch
    Abstract: This paper provides background information, questionnaires, and basic descriptive statistics for a representative survey of the German population conducted on our behalf by GfK in 2011. Our aim is to discover the German public’s knowledge about the ECB specifically, and monetary policy in general. We also examine our respondents’ self-perception of their knowledge and how they use media relating to the topic. A detailed descriptive analysis reveals that the German public’s factual knowledge is far from perfect, and their self-perception of this knowledge is equally poor. The general public is reasonably interested in information about the ECB and mainly watches TV or reads newspapers to keep informed. We discover significant differences in knowledge and media use across socio-demographic subgroups. On average, male respondents and those with higher levels of education or income are more interested in the ECB, more knowledgeable about it, and more confident in their own knowledge.
    Keywords: Household survey, Germany, Monetary policy, European Central Bank, Public preferences, Economic literacy
    JEL: A20 E52 E58
    Date: 2018
  2. By: Peter Tillmann (Justus-Liebig-University Giessen); Andreas Walter (Justus-Liebig-University Giessen)
    Abstract: The present paper studies the consequences of con flicting narratives for the transmission of monetary policy shocks. We focus on con flict between the presidents of the ECB and the Bundesbank, the main protagonists of monetary policy in the euro area, who often disagreed on policy over the past two decades. This con flict received much attention on financial markets. We use over 900 speeches of both institutions' presidents since 1999 and quantify the tone conveyed in speeches and the divergence of tone among both both presidents. We find (i) a drop towards more negative tone in 2009 for both institutions and (ii) a large divergence of tone after 2009. The ECB communication becomes persistently more optimistic and less uncertain than the Bundesbank's after 2009, and this gap widens after the SMP, OMT and APP announcements. We show that long-term interest rates respond less strongly to a monetary policy shock if ECB-Bundesbank communication is more cacophonous than on average, in which case the ECB loses its ability to drive the slope of the yield curve. The weaker transmission under high divergence re ects a muted adjustment of the expectations component of long-term rates.
    Keywords: Central bank communication, diverging tones, speeches, text analysis, monetary transmission
    JEL: E52 E43 E32
    Date: 2018
  3. By: Klaus Adam; Michael Woodford
    Abstract: We analytically characterize optimal monetary policy for an augmented New Keynesian model with a housing sector. In a setting where 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 to inflation and the output gap only is optimal, as in the standard model without a housing sector. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks to choose a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. In the empirically realistic case where housing is subsidized and where monopoly power causes output to fall short of its optimal level, the robustly optimal target criterion requires the central bank to ‘lean against’ housing prices: following unexpected housing price increases, policy should adopt a stance that is projected to undershoot its normal targets for inflation and the output gap, and similarly aim to overshoot those targets in the case of unexpected declines in housing prices. The robustly optimal target criterion does not require that policy distinguish between ‘fundamental’ and ‘non-fundamental’ movements in housing prices.
    Keywords: asset price bubbles, leaning against the wind, inflation targeting
    JEL: D81 D84 E52
    Date: 2018
  4. By: Buch, Claudia M.; Bussiere, Matthieu; Goldberg, Linda; Hills, Robert
    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 seventeen countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the U.S., 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 U.S. 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 nonbank lending generally are not large.
    Keywords: monetary policy,international spillovers,cross-border transmission,global bank,global financial cycle
    JEL: E52 F3 F4 G15 G21
    Date: 2018
  5. By: Thomas Hintermaier; Winfried Koeniger
    Abstract: This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a liquid financial asset and illiquid housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across the analyzed countries, and across age groups within these countries. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission within the euro area.
    Keywords: European household portfolios, consumption, monetary policy transmission, international comparative finance, housing
    JEL: D14 D31 E21 E43 G11
    Date: 2018
  6. By: Arslan Razmi (Department of Economics, University of Massachusetts Amherst)
    Abstract: Unilateral euroization is underexplored even in comparison to unilateral dollarization (taken to mean the adoption of the US dollar as legal tender). This paper attempts to partly fill this gap in the literature by investigating the case of Montenegro, which is one of the two countries that have unilaterally adopted the euro as the legal tender. Montenegro's limited monetary policy options make the nature of business cycles important. The evidence presented here suggests that Montenegro has a low degree of synchronization, limited structural similarity, and weak trade integration with the Eurozone. Moreover, there is limited evidence for endogenous structural assimilation following euroization. The case for currency union is weak for Montenegro and appears to be defensible only on grounds of policy credibility.
    Keywords: Montenegro, euroization, dollarization, currency union, optimal currency areas.
    JEL: F15 E32 E52
    Date: 2018
  7. By: Bernd Hayo (University of Marburg); Israel García (University of Marburg); Pierre-Méon Guillaume (Université Libre de Bruxelles); Florian Neumeier (Ifo-Institute Munich); Duncan Roth (IAB Nuremberg)
    Abstract: This paper provides background information and basic descriptive statistics for a representative survey of the German population conducted on our behalf by GfK in the first quarter of 2018. The survey covers various topics, including: 1) attitudes towards asylum seekers; 2) migrating workers in the workplace; 3) inflation and monetary policy; and 4) the role played by local budgets in local voting decisions. We also collect a broad range of socio-demographic and psychological indicators.
    Keywords: Survey evidence, Attitudes, Asylum seekers, Migrating workers, Inflation, Monetary policy, Local budgets, Germany
    JEL: D72 D90 E24 E31 E58 F22 H72 J61
    Date: 2018
  8. By: Adil, Masudul Hasan; Haider, Salman; Hatekar, Neeraj
    Abstract: In the evident of globalised world economy and changing economic structure, the traditional policies are required to be close examination. This is true particularly in case of developing countries, like India where new economic policies have had been changing visibly since 1990s. Therefore, in the new economic policy regime one of the important building block of policy is the money demand, which needs to be examined again. Present study examines the stability issues of money demand in case of India, using quarterly data from 1996:Q2 to 2016:Q3. With the help of autoregressive distributed lag model (ARDL) or bounds testing approach of cointegration, it has been concluded that there exists stable long run relationship among variables under consideration in the post reform period.
    Keywords: new economic policy; money demand; autoregressive distributed lag model; India
    JEL: E02 E4 E41 E5 E58
    Date: 2018–06–03
  9. By: Julien Pinter (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UvA - University of Amsterdam [Amsterdam])
    Abstract: This paper re-examines whether weak central bank finances affect inflation by scrutinizing the key rationale for such a relationship: that the absence of Treasury support makes central bank finances relevant for price stability. Specifically, I ask whether central banks which are not likely to enjoy fiscal support when needed experience higher inflation as their inflation as their financial situation deteriorates. I find this to be true among a large sample of 82 countries between 1998 and 2008. De facto potential fiscal support appears relevant, while de jure fiscal support, which I survey analyzing 82 central bank laws, does not appear to matter. No link is found in a general context. The results bring forward an explanation for the conflicting results of the previous empirical studies, which neglected this key component.
    Keywords: Central bank financial strength,Central bank capital,Central bank balance sheet,Inflation,Fiscal space,Central bank law
    Date: 2017–10
  10. By: Guglielmo Maria Caporale; Hector Carcel; Luis A. Gil-Alana
    Abstract: This paper examines G-PPP and business cycle synchronization in the East Africa Community with the aim of assessing the prospects for a monetary union. The univariate fractional integration analysis shows that the individual series exhibit unit roots and are highly persistent. The fractional bivariate cointegration tests (see Marinucci and Robinson, 2001) suggest that there exist bivariate fractional cointegrating relationships between the exchange rate of the Tanzanian shilling and those of the other EAC countries, and also between the exchange rates of the Rwandan franc, the Burundian franc and the Ugandan shilling. The FCVAR results (see Johansen and Nielsen, 2012) imply the existence of a single cointegrating relationship between the exchange rates of the EAC countries. On the whole, there is evidence in favour of G-PPP. In addition, there appears to be a high degree of business cycle synchronization between these economies. On both grounds, one can argue that a monetary union should be feasible.
    Keywords: East Africa Community, monetary union, optimal currency areas, fractional integration and cointegration, business cycle synchronization, Hodrick-Prescott filter
    JEL: C22 C32 F33
    Date: 2018
  11. By: Adrian Penalver, Nobuyuki Hanaki, Eizo Akiyama, Yukihiko Funaki, Ryuichiro Ishikawa
    Abstract: In this paper we report the results of a repeated experiment in which a central bank buys bonds for cash in a quantitative easing (QE) operation in an otherwise standard asset market setting. The experiment is designed so that bonds have a constant fundamental value which is not affected by QE under rational expectations. By repeating the same experience three times, we investigate whether participants learn that prices should not rise above the fundamental price in the presence of QE (as found in (Penalver et al., 2017)). We find that some groups do learn this but most do not, instead becoming more convinced that QE boosts bond prices. These claims are based on significantly different behaviour of two treatment groups relative to a control group that doesn't have QE.
    Keywords: Quantitative Easing, Experimental Asset Markets
    JEL: C90 D84 G21
    Date: 2018
  12. By: Yoshino, Naoyuki (Asian Development Bank Institute); Asonuma, Tamon (Asian Development Bank Institute)
    Abstract: We consider the optimal exchange rate regime transition policy for three East Asian countries: the People’s Republic of China (PRC), Malaysia, and Singapore. In contrast to two traditional approaches to exchange rate regimes in East Asia, we conduct a dynamic transition analysis. Based on a small, open-economy dynamic stochastic general equilibrium model applied to these three countries, we define transition policies from a dollar peg regime to either a basket peg or a floating regime and compare the welfare gains of these policies relative to maintaining the current dollar peg regime. The quantitative analysis using PRC, Malaysian, and Singaporean data shows that the PRC would be better off shifting gradually from a dollar peg to a basket peg. In response to the PRC’s shift, both Malaysia and Singapore would opt to shift gradually to a basket peg regime.
    Keywords: exchange rate; exchange rate regime; dynamic transition analysis; basket peg; dollar peg; floating regime; DSGE model
    JEL: F33 F41 F42
    Date: 2017–07–17
  13. By: Kobielarz, Michal (Tilburg University, School of Economics and Management)
    Abstract: The dissertation consists of three chapters in International Macroeconomics devoted to studying the dynamic behavior of a small open economy within a monetary union. The first two chapters explore the role of expectations and informational frictions for a member country of a monetary union. The first chapter addresses the question of sovereign debt crisis contagion in a model where sovereign default and an exit from a monetary union are separate but interrelated decisions. The second chapter investigates instability driven by inflation expectations, and suggests heterogeneous inflation histories as one of the factors responsible for the large macroeconomic imbalances within the Eurozone. The study of issues related to monetary unions and economic crises involves the use of models where non-linearities and uncertainty matter, but those features pose computational challenges to the modeler. Therefore, the last chapter proposes a novel method for solving dynamic stochastic models, that preserves the original non-linearity of the model, takes into account uncertainty, but at the same time allows approximating the model locally and, hence, avoiding the curse of dimensionality.
    Date: 2018
  14. By: Ben Fung; Scott Hendry; Warren E. Weber
    Abstract: This paper examines the experience of Sweden with government notes and private bank notes to determine how well the Swedish experience corresponds to that of Canada and the United States. Sweden is important to study because it has had government notes in circulation for more than 350 years, and it had government notes before private bank notes. Several differences between the experience of Sweden and that of Canada and the U.S. emerge. (i) Swedish bank notes were safe; in some cases, those of Canada and the U.S. were not. (ii) At certain times, Swedish government notes were not safe; government notes in Canada and the U.S. always were. (iii) Swedish private bank notes were a uniform currency without government intervention. Uniformity required government intervention in Canada and the U.S. (iv) Private notes and government notes coexisted in all three countries until governments took actions to drive private bank notes out of circulation. Using the experience of the three countries, the paper concludes that fiduciary digital currencies will likewise not be perfectly safe without government intervention. Further, the introduction of government digital currency will not drive out existing private digital currencies nor will it preclude private digital currencies from entering the market. Government intervention likely will be required for private and government digital currencies to be a uniform currency.
    Keywords: Bank notes, Digital Currencies, Financial services
    JEL: E41 E42 E58
    Date: 2018
  15. By: Rongrong Sun (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: This paper uses the event study to estimate the impact of various monetary policy announcements on market interest rates in China over the 2002-2017 period. I find that financial markets understand the quantitative signals better: the market response to an announced adjustment of the regulated retail interest rate and the required reserve ratio is positive and significant at all maturities of bond rates, but smaller at the long end of the yield curve. However, the market barely responds to announced changes in the qualitative policy stance index, which contains limited vague information and is easily anticipated. Two newly introduced central bank lending rates do not appear to be sufficient to replace the retail interest rate and the reserve ratio in guiding market rates in the post-deregulation era. My results suggest that the PBC adopts a publicly announced short-term interest-rate operating target regime, similar to the Fed’s federal funds rate target. Length: 26 pages
    Keywords: announcement effect, event study, monetary policy, monetary transmission, China
    JEL: E52 E58
  16. By: Christina Christou (Open University of Cyprus, School of Economics and Finance. Cyprus); Ruthira Naraidoo (Department of Economics, University of Pretoria, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: This paper offers new insight on how the Federal Reserve (Fed) and other monetary policy makers (Bank of England, Bank of Japan and the European Central Bank), reacted in the aftermath of the financial crisis. To this end, the paper makes use of a quantile-based approach that estimates the response of interest rates to inflation and the output gap at various points of the conditional distribution of interest rates. Furthermore to gauge the importance of monetary policy making at the zero lower bound, and to test the propositions that policy shows greater aggression in expansionary measures as interest rates reach low levels, and increasing aggression as the lower bound is approached, we make use of the shadow short rate of interest and a measure of uncertainty to capture this fact. While the results show no detectable evidence of increasing aggression to inflation as the zero lower bound is approached, yet the decreased reaction of the Fed and other monetary policy makers towards uncertainty particularly at lower quantiles of interest rates lends support to expansionary mechanism in place during this time.
    Keywords: Interest rate rule, zero lower bound, shadow rate of interest, uncertainty, advanced economies
    JEL: C22 E52
    Date: 2018–06
  17. By: Barnett, William A.; Wang, Chan; Wang, Xue; Wu, Liyuan
    Abstract: What is the appropriate inflation target for a currency union, when conducting monetary policy: core inflation or headline inflation? We answer the question in a two-country New Keynesian model with an energy sector. We derive the welfare loss function and find that optimal monetary policy should target output gaps, the terms of trade gap, the Prouder Price Index inflation rates, and the real marginal cost gaps. We use the welfare loss function to evaluate two alternative Taylor-type monetary policy rules. We find that the choice of preferred policy rule depends on the shocks. Specifically, when productivity shocks hit the economy, the policymaker should follow the headline inflation Taylor rule, while the core inflation Taylor rule should be followed when a negative energy endowment shock hits the economy.
    Keywords: Core inflation; Headline inflation; Optimal monetary policy; Currency union; Welfare.
    JEL: E5 F3 F4
    Date: 2018–05–25
  18. By: Saleem Bahaj (Bank of England; Centre for Macroeconomics (CFM)); Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: Swap lines between advanced-economy central banks are a new important part of the global financial architecture. This paper analyses their monetary policy effects from three perspectives. First, from the perspective of the central banks, it shows that the swap line mimics discount-window credit from the source central bank to the recipient-country banks using the recipient central bank as the bearer of the credit risk. Second, from the perspective of the transmission of monetary policy, it shows that the swap-line rate puts a ceiling on deviations from covered interest parity, and finds evidence for it in the data. Third, from the perspective of the macroeconomic effects of policy, it shows that the swap line ex ante encourages inflows from recipient-country banks into assets denominated in the source-country’s currency by reducing the ex post funding risk. We find support for these predictions using difference-in-difference empirical strategies that exploit the fact that only some currencies saw changes in the terms of their dollar swap line, only some bonds in banks’ investments are exposed to dollar funding risk, only some dollar bonds are significantly traded by foreign banks, and only some banks have a significant U.S. presence.
    Keywords: Liquidity facilities, Currency basis, Bond portfolio flows
    JEL: E44 F33 G15
    Date: 2018–06
  19. By: Michael 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.
    Keywords: Monetary Policy Committees; Federal Reserve; Policy Preferences
    JEL: E50 E61
    Date: 2018
  20. By: Alessio Ciarlone (Banca d'Italia); Andrea Colabella (Banca d'Italia)
    Abstract: In this paper we provide evidence that the effects of the different waves of asset purchase programmes implemented by the ECB from 2009 onwards have spilled over into asset price volatility developments of a group of six Central and Eastern European economies belonging to the EU but not to the euro area. This has partly shielded their financial markets from the negative shocks that have influenced international investors’ degree of risk aversion in recent years. By means of a dynamic conditional correlation multivariate GARCH model, and by resorting to three different proxies to describe the functioning and measure the impact of the ECB’s asset purchase programmes, we show that such non-standard monetary measures have played a significant role in dampening volatility spikes in the financial markets of the countries at stake. This probably reflects how both a ‘risk taking’ and a ‘liquidity’ channel of transmission actually work. The results are generally robust to an extensive series of tests, and to changes made in the estimation methodology.
    Keywords: unconventional monetary policy, ECB, Central and Eastern Europe, international spillovers, asset prices, volatility, GARCH models
    JEL: C32 E52 E58 F3 F4 F16 F37 G1 G11 G14
    Date: 2018–06
  21. By: Alberto Fuertes (Banco de España); Ricardo Gimeno (Banco de España); José Manuel Marqués (Banco de España)
    Abstract: In this paper we estimate inflation expectations for several Latin American countries using an affine model that takes as factors the observed inflation and the parameters generated from zero-coupon yield curves of nominal bonds. By implementing this approach, we avoid the use of inflation-linked securities, which are scarce in many of these markets, and obtain market measures of inflation expectations free of any risk premium, eliminating potential biases included in other measures such as breakeven rates. Our method provides several advantages, as we can compute inflation expectations at any horizon and forward rates such as the expected inflation over the five year period that begins five years from today. We find that inflation expectations in the long-run are fairly anchored in Chile and Mexico, while those in Brazil and Colombia are more volatile and less anchored. We also find that expected inflation increases at longer horizons in Brazil and Chile, while it is decreasing in Colombia and Mexico.
    Keywords: inflation expectations, affine model, real interest rate, risk premium
    JEL: G12 E43 E44 C54
    Date: 2018–07

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