nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒08‒13
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Of Gold and Paper Money By Jagjit S. Chadha
  2. Monetary Policy Lessons from the Greenbook By Michael T. Belongia; Peter N. Ireland
  3. Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond By Kenneth N. Kuttner
  4. Unconventional monetary policies and central bank profits By Jörg Bibow
  5. Monetary Policy and Inflation Dynamics in ASEAN Economies By Geraldine Dany-Knedlik; Juan Angel Garcia
  6. The likelihood of effective lower bound events By Michal Franta
  7. Estimating a nonlinear new Keynesian model with the zero lower bound for Japan By Hirokuni Iiboshi; Mototsugu Shintani; Kozo Ueda
  8. The Rise and Fall of the Natural Interest Rate By Gabriele Fiorentini; Alessandro Galesi; Gabriel Pérez-Quirós; Enrique Sentana
  9. From Taylor's Rule to Bernanke's Temporary Price Level Targeting By James Hebden; J. David Lopez-Salido
  10. Banks’ Trading after the Lehman Crisis – The Role of Unconventional Monetary Policy By Isabel Schnabel; Johannes Tischer
  11. An Intermediation-Based Model of Exchange Rates By Semyon Malamud; Andreas Schrimpf
  12. Fiscal implications of the ECB's public sector purchase programme (PSPP) By Lehment, Harmen
  13. International spillovers of quantitative easing By Kolasa, Marcin; Wesołowski, Grzegorz
  14. Pushed Past the Limit? How Japanese Banks Reacted to Negative Interest Rates By Gee Hee Hong; John Kandrac
  15. Imperfect Credibility versus No Credibility of Optimal Monetary Policy By Jean-Bernard Chatelain; Kirsten Ralf
  16. An Improved LM Curve By Hiermeyer, Martin
  17. US monetary policy and fluctuations of international bank lending By Stefan Avdjiev; Galina Hale
  18. Quantitative or qualitative forward guidance: Does it matter? By Gunda-Alexandra Detmers; Özer Karagedikli; Richhild Moessner
  19. Short Term Inflation Determinants in Barbados By Gregorio Impavido
  20. Theory of catallactics, misapplication in monetary policy in developing economies and consequences By Tweneboah Senzu, Emmanuel
  21. Heterogeneous Effects of Unconventional Monetary Policy on Loan Demand and Supply. Insights from the Bank Lending Survey By Martin Guth
  22. Income Inequality, Financial Crises, and Monetary Policy By Isabel Cairo; Jae W. Sim
  23. Revisiting the central bank's lender of last resort function By Joost Bats; Jan Willem van den End; John Thoolen
  24. Working Paper – WP/18/04- Monetary Policy Credibility and Exchange Rate Pass-Through in South Africa By Alain Kabundi; Montfort Mlachila
  25. CAP and Monetary Policy By Carl Duisberg
  26. The ECB's monetary dialogue with the European Parliament:efficiency and accountability during the Euro crisis? By Collignon, Stefan; Diessner, Sebastian
  27. The International Transmission of Monetary Policy By Claudia M. Buch; Matthieu Bussière; Linda Goldberg; Robert Hills
  28. Identification with external instruments in structural VARs under partial invertibility By Silvia Miranda Agrippino; Giovanni Ricco
  29. Conventional and unconventional monetary policy rules By Sheedy, Kevin D.
  30. Has inflation targeting become less credible? By Nathan Sussman; Osnat Zohar
  31. The Shocks Matter: Improving our Estimates of Exchange Rate Pass-Through By Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
  32. The truth on Target II By van Suntum, Ulrich
  33. Risk Management-Driven Policy Rate Gap By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  34. The rise and fall of the natural interest rate By Gabriele Fiorentini; Alessandro Galesi; Gabriel Pérez-Quirós; Enrique Sentana
  35. Central Bank Swap Lines By Saleem Bahaj; Ricardo Reis
  36. Stochastic discounting and the transmission of money supply shocks By Jaccard, Ivan
  37. Speed Limit Policy and Liquidity Traps By Taisuke Nakata; Sebastian Schmidt; Paul Yoo
  38. Attenuating the Forward Guidance Puzzle : Implications for Optimal Monetary Policy By Taisuke Nakata; Ryota Ogaki; Sebastian Schmidt; Paul Yoo

  1. By: Jagjit S. Chadha (Centre for Macroeconomics (CFM); National Institute of Economic and Social Research (NIESR))
    Abstract: We consider the role of money as a means of payment, store of value and medium of exchange. I outline a number of quantitative and qualitative experiences of monetary management. Successful regimes have sprung up in a variety of surprising places, and been sustained with state (centralised) interventions. Although the link between state and money, and its standard of identity and account may be clear, particularly in earlier stages of economic development, the extent to which the state is widely felt to hold responsibility for 'sound money' is less clear in modern democracies, where there are many other public responsibilities implying on going trade-offs.
    Keywords: Money, Gold standard, Paper money, Samuelson
    JEL: B22 E02 E31
    Date: 2018–07
  2. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: From 1987 through 2012, the Federal Open Market Committee appears to have set its federal funds rate target with reference to Greenbook forecasts of the output gap and inflation and to have made further adjustments to the funds rate as those forecasts were revised. If viewed in the context of the Taylor (1993) Rule, discretionary departures from the settings prescribed by a Greenbook forecast-based version of the rule consistently presage business cycle turning points. Similarly, estimates from an interest rate rule with time-varying parameters imply that, around such turning points, the FOMC responds less vigorously to information contained in Greenbook forecasts about the changing state of the economy. These results suggest possible gains from closer adherence to a rule with constant parameters. Other statistical properties of Greenbook forecasts also point to an overlooked role for monetary aggregates, particularly Divisia monetary aggregates, in the Federal Reserve's forecasting process and subsequent monetary policy decisions made by the FOMC.
    Keywords: Greenbook forecasts, Taylor Rule, Time-varying parameters, Divisia monetary aggregates
    JEL: E31 E32 E37 E43 E47 E51 E52 E58 E65
    Date: 2018–07–01
  3. By: Kenneth N. Kuttner (Williams College)
    Abstract: This paper provides an overview of unconventional monetary policy as implemented by the U.S. Federal Reserve after the global financial crisis. First, it reviews the key features of the Fed’s Quantitative Easing and Forward Guidance policies. Second, it discusses the mechanisms through which the two policies may have affected financial markets, institutions, and the overall economy. Third, it surveys the evidence on the policies’ financial and economic impacts. Fourth, it considers some of the policies’ unintended side effects. The paper concludes with some thoughts on how unconventional monetary policy might be used in the future.
    Date: 2018–08
  4. By: Jörg Bibow
    Abstract: This study investigates the evolution of central bank profits as fiscal revenue - or: seigniorage - before and in the aftermath of the global financial crisis of 2008/9. Focusing on a select group of central banks, namely: the Bank of England, United States Federal Reserve System, Bank of Japan, Swiss National Bank, European Central Bank and the Eurosystem (specifically: Deutsche Bundesbank, Banca d'Italia, and Banco de España), we research the impact of experimental monetary policies on central bank profits, profit distributions, and financial buffers, and the outlook for these measures going forward as monetary policies are seeing their gradual "normalization". Seigniorage exposes the connections between currency issuance and public finances, and between monetary and fiscal policies. Central banks' financial independence rests on seigniorage, and in normal times seigniorage largely derives from the note issue supplemented by "own" resources. Essentially, the central bank's income-earning assets represent fiscal wealth, a national treasure hoard that supports its central banking functionality. The analysis sheds new light on the interdependencies between monetary and fiscal policies.Just as the size and composition of central bank balance sheets experienced huge changes in the context of experimental monetary policies, the study's findings also indicate significant changes regarding central banks' profits, profit distributions, and financial buffers in the aftermath of the crisis, with considerable cross-country variation.
    Date: 2018
  5. By: Geraldine Dany-Knedlik; Juan Angel Garcia
    Abstract: This paper investigates the evolution of inflation dynamics in the five largest ASEAN countries between 1997 and 2017. To account for changes in the monetary policy frameworks since the Asian Financial Crisis (AFC), the analysis is based on country-specific Phillips curves allowing for time-varying parameters. The paper finds evidence of a higher degree of forward-looking dynamics and a better anchoring of inflation expectations, consistent with the improvements in monetary policy frameworks in the region. In contrast, the quantitative impact of cyclical fluctuations and import prices has gradually diminished over time.
    Date: 2018–06–21
  6. 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: E37 E52 C11
    Date: 2018–06
  7. By: Hirokuni Iiboshi; Mototsugu Shintani; Kozo Ueda
    Abstract: We estimate a small-scale nonlinear DSGE model with the zero lower bound (ZLB) of the nominal interest rate for Japan, where the ZLB has constrained the country’s monetary policy for a considerably long period. We employ the time iteration with linear interpolation method to solve equilibrium and then estimate the model by using the Sequential Monte Carlo Squared method. Results of estimation suggest that (1) the Bank of Japan has been conducting monetary policy that depends on the lagged notional interest rate rather than the lagged actual interest rate and that (2) the estimated series of the natural rate of interest moves very closely to those based on the model without the ZLB.
    Keywords: Bayesian inference, DSGE model, Particle filter, SMC
    JEL: C11 C13 C61 C63 E31 E43 E52
    Date: 2018–08
  8. By: Gabriele Fiorentini (Università di Firenze, Italy; Rimini Centre for Economic Analysis); Alessandro Galesi (Banco de España, Spain); Gabriel Pérez-Quirós (Banco de España, Spain); Enrique Sentana (CEMFI, Spain)
    Abstract: We document a rise and fall of the natural interest rate (r^*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r^* accurately when either the IS curve or the Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r^*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.
    Keywords: Natural rate of interest, Kalman filter, Observability, Demographics
    JEL: E43 E52 C32
    Date: 2018–07
  9. By: James Hebden; J. David Lopez-Salido
    Abstract: Bernanke's strategies for integrating forward guidance into conventional instrument rules anticipate that effective lower bound (ELB) episodes may become part a regular occurrence and that monetary policy should recognize this likelihood (Bernanke (2017a); Bernanke (2017b)). Bernanke's first proposal is a form of flexible temporary price level targeting (TPLT), in which a lower-for-longer policy path is prescribed through a “shadow rate”. This shadow rate accounts for cumulative shortfalls in inflation and output relative to exogenous trends, and the policy rate is kept at the ELB until the joint shortfall is made up. Bernanke's second proposal adds only the cumulative inflation shortfall since the beginning of an ELB episode directly to an otherwise standard Taylor rule. This cumulative shortfall in inflation from the 2 percent objective can be restated in terms of deviations of the price level from a price level target that increases at 2 percent annually. We evaluate the performance of these strategies, which we call Bernanke's TPLT rules, using a small version of the FRB/US model. We then optimize these rules, computing efficient policy frontiers that trace out the best (minimum) obtainable combinations of output and inflation volatility given the effective lower bound constraint on the policy rate. The results suggest that Bernanke's rules give better macroeconomic outcomes than most of the other rules considered in the literature (including Taylor (1993) and Taylor (1999)) by stabilizing inflation and unemployment during severe recessions. Under these TPLT strategies, when the policy rate is made more responsive to shortfalls in inflation, the the likelihood of below-target inflation occurring alongside high unemployment rates decreases. However, the probability of an overheated economy, with temporarily above-target inflation and low unemployment rate, increases.
    Keywords: Taylor rule ; History-dependent policy ; Price level targeting ; Zero lower bound
    JEL: E32 E52 E58
    Date: 2018–07–19
  10. By: Isabel Schnabel; Johannes Tischer
    Abstract: Based on a unique trade-level dataset, we analyze the proprietary trading reaction of German banks to the Lehman collapse and the subsequent unconventional monetary policy measures in 2008. After the Lehman collapse, we observe that market liquidity tightened. However, there is no evidence of broad-based fire sales in the German banking sector. Instead, we observe a flight to liquidity. The European Central Bank’s unconventional measures had a strong impact on banks’ trading behavior by inducing shifts towards eligible securities and reducing pressure on market liquidity. This suggests that the unconventional measures helped stabilizing the financial system after the Lehman collapse.
    Keywords: Proprietary trading, fire sales, flight to liquidity, Lehman crisis, market liquidity, unconventional monetary policy
    JEL: E44 E50 G01 G11 G21
    Date: 2018–08
  11. By: Semyon Malamud (Ecole Polytechnique Federale de Lausanne, Centre for Economic Policy Research (CEPR), and Swiss Finance Institute); Andreas Schrimpf (Bank for International Settlements (BIS))
    Abstract: We develop a general equilibrium model of decentralized international financial markets. In our model, financial intermediaries bargain with their customers and extract endogenous rents for providing access to foreign claims. The behavior of intermediaries, by tilting state prices, generates a non-linear risk structure in exchange rates. We use this risk structure to explicitly derive (i) a link between monetary and stabilization policies and safe haven properties of exchange rates; (ii) the global monetary spillover matrix; and (iii) deviations from covered interest rate parity (CIP), and show how all these effects depend on expectations about future monetary and stabilization policies.
    Keywords: exchange rates, dollar, covered interest parity deviations, currency skew, currency crashes
    JEL: E44 E52 F31 F33 G13 G15 G23
    Date: 2018–03
  12. By: Lehment, Harmen
    Abstract: The large Public Sector Purchase Programme (PSPP) which the ECB started in 2015 on the basis of monetary policy purposes, had major side-effects on fiscal policy. One concerns the programme's uncommon seigniorage effects. We find that the PSPP not only led to partly negative seigniorage gains, but also produced super-seigniorage gains resulting from negative interest rates on the excess reserves which have been created by the programme. Another effect of the PSPP is its interference with fiscal debt management, thereby making fiscal budgets more vulnerable to changes in short-term interest rates. We also find that the experience with the PSPP suggests that fiscal policy should prepare for a greater role in fighting future recessions.
    Keywords: central bank asset purchases,seigniorage gains,debt management,monetary-fiscal cooperation
    JEL: E5 E6 H6
    Date: 2018
  13. By: Kolasa, Marcin; Wesołowski, Grzegorz
    Abstract: This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries’ response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets and an increase in international comovement of term premia. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting these spillovers might require policies that affect directly international capital flows, like imposing capital controls or mimicking quantitative easing abroad by purchasing local long-term bonds. JEL Classification: E44, E52, F41
    Keywords: bond market segmentation, international spillovers, quantitative easing, term premia
    Date: 2018–07
  14. By: Gee Hee Hong; John Kandrac
    Abstract: In this paper, we investigate how negative interest rate policy (NIRP) introduced in January 2016 by the Bank of Japan (BoJ) affected Japanese banks' lending and risk taking behavior. The BoJ's announcement was an unexpected surprise to the market and was followed by a sharp drop in equity prices of Japanese financial firms. We exploit the cross-sectional variation in the change of share prices on the day of the announcement to measure banks' differential exposure to NIRP. We show that more exposed banks increased their credit and took on more risk compared to banks that were less exposed to negative rates.
    Keywords: Bank lending rates;Central banks and their policies;Monetary transmission mechanism;Negative interest rates;Asia and Pacific;Economic conditions;Japan;monetary transmission, bank risk taking, lending channel, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–06–13
  15. By: Jean-Bernard Chatelain (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); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: When the probability of not reneging commitment of optimal monetary policy under quasi-commitment tends to zero, the limit of this equilibrium is qualitatively and quantitatively different from the discretion equilibrium assuming a zero probability of not reneging commitment for the classic example of the new-Keynesian Phillips curve. The impulse response functions and welfare are different. The policy rule parameter have opposite signs. The inflation auto-correlation parameter crosses a saddlenode bifurcation when to near-zero to zero probability of not reneging commitment. These results are obtained for all values of the elasticity of substitution between goods in monopolistic competition which enters in the welfare loss function and in the slope of the new-Keynesian Phillips curve.
    Keywords: Ramsey optimal policy under imperfact commitment,zero-credibility policy,Impulse response function,Welfare,New-Keynesian Phillips curve, zero-,credibility policy, Impulse response function, Welfare, New-Keynesian Phillips,curve
    Date: 2018–07
  16. By: Hiermeyer, Martin
    Abstract: Over the last decades, the LM curve has largely disap-peared from research and, to some extent, also from teach-ing. Because of its well-known weaknesses, the LM curve is now frequently replaced with an interest rate rule. The paper suggests an improved LM curve which gets rid of the weaknesses of the LM curve, but retains the LM curve’s strength of including money, and even expands upon this strength.
    Keywords: Fiscal policy; monetary policy;
    JEL: E52 E62
    Date: 2018–06–28
  17. By: Stefan Avdjiev; Galina Hale
    Abstract: There is no consensus in the empirical literature on the direction in which U.S. monetary policy affects cross-border bank lending. We find robust evidence that the impact of the U.S. federal funds rate on cross-border bank lending in a given period depends on the prevailing international capital flows regime and on the level of the two main components of the federal funds rate: macroeconomic fundamentals and the monetary policy stance. During episodes in which bank lending from advanced to emerging economies is booming, the relationship between the federal funds rate and cross-border bank lending is positive and mostly driven by the macroeconomic fundamentals component, which is consistent with a search-for-yield behavior on the part of internationally-active banks. In contrast, during episodes of stagnant growth in bank lending from advanced to emerging economies, the relationship between the federal funds rate and bank lending is negative, mainly due to the monetary policy stance component of the federal funds rate. The latter set of results is most pronounced for lending to emerging markets, which is consistent with the international bank-lending channel and flight-to-quality behavior of internationally-active banks.
    Keywords: monetary policy spillovers, capital flows, bank lending
    JEL: F21 F32 F34
    Date: 2018–06
  18. By: Gunda-Alexandra Detmers; Özer Karagedikli; Richhild Moessner
    Abstract: Is publishing central bank projections of the policy rate a better way of managing market expectations than with written statements, and does it lead to overreactions by markets? To answer this, we use a quasi-experiment from the policy announcements of the Reserve Bank of New Zealand (RBNZ). Every monetary policy decision by the RBNZ is accompanied by a written statement about the state of the economy and the policy outlook, but only every second decision is accompanied by a published interest rate forecast. We exploit this difference in the information accompanying decisions to study the relative influences of qualitative and quantitative forward guidance. We find that the information releases have significant effects on asset prices regardless of the nature of the communication (quantitative or qualitative). Announcements that include an interest rate projection lead to very similar market reactions across the yield curve as announcements that only include written statements. This control-treatment approach suggests that earlier studies may overstate the effects of publishing interest rate forecasts on market prices: it is not only the interest rate forecasts that markets react to, as they seem to infer similar forward guidance from written statements. We interpret our results as implying that central bank communication is important, but that the exact form of that communication is less critical. Our results also suggest that market participants understand the conditional nature of the RBNZ interest rate forecasts, and that concerns that markets read these forecasts as binding promises are unwarranted.
    Keywords: Monetary policy, forward guidance, interest rate forecasts.
    JEL: E43 E44 E52 E58 G12
    Date: 2018–08
  19. By: Gregorio Impavido
    Abstract: Inflation in Barbados is mainly imported. But how are external shocks transmitted to the domestic economy? Shouldn’t there be also a domestic component, albeit very small, given the presence of capital controls? We focus on short term dynamics and contribute to the existing literature in three ways: (i) we identify the process with which inflation expectations are likely to be formed in Barbados; (ii) we add forward looking inflation expectations as one of the main channels through which external monetary shocks are transmitted to the economy; and (iii) we measure the importance of domestic shocks. We find that due to the peg, forward-looking inflation expectations in the reserve currency country are an important component of the inflation expectation process in Barbados and that they are a key channel in the international monetary transmission mechanism. Domestic factors, mainly monetary shocks, also matter given the limited degree of monetary autonomy provided by capital controls.
    Keywords: Central banks and their policies;Exchange rate pegs;Western Hemisphere;Inflation;Monetary transmission mechanism;Oil prices;Barbados;monetary transmission, pegged exchange rate, capital controls
    Date: 2018–06–13
  20. By: Tweneboah Senzu, Emmanuel
    Abstract: The paper strive to solve, a specific macroeconomic error that emerge in the dispensing of the monetary policy by the Central Banks of Africa. As a result unable to address the desired economic growth monetarily, when quality fiscal policy is consolidated. It therefore propound a model assumed to be effective in ensuring a realistic health status of an economy, very friendly to developing countries as a theoretical prospective.
    Keywords: monetary economics, monetary policy, fiscal policy, macroeconomics, development theory
    JEL: E2 E5 E52 E58
    Date: 2018–06–27
  21. By: Martin Guth
    Abstract: This paper analyzes the bank lending channel and the heterogeneous effects on the euro area, providing evidence that the channel is indeed working. The analysis of the transmission mechanism is based on structural impulse responses to an unconventional monetary policy shock on bank loans. The Bank Lending Survey (BLS) is exploited in order to get insights on developments of loan demand and supply. The contribution of this paper is to use country-specific data to analyze the consequences of unconventional monetary policy, instead of taking an aggregate stance by using euro area data. This approach provides a deeper understanding of the bank lending channel and its effects. That is, an expansionary monetary policy shock leads to an increase in loan demand, supply and output growth. A small north-south disparity between the countries can be observed.
    Date: 2018–07
  22. By: Isabel Cairo; Jae W. Sim
    Abstract: We construct a general equilibrium model in which income inequality results in insufficient aggregate demand, deflation pressure, and excessive credit growth by allocating income to agents featuring low marginal propensity to consume, and if excessive, can lead to an endogenous financial crisis. This economy generates distributions for equilibrium prices and quantities that are highly skewed to the downside due to financial crises and the liquidity trap. Consequently, symmetric monetary policy rules designed to minimize fluctuations around fixed means become inefficient. A simultaneous reduction in inflation volatility and mean unemployment rate is feasible when an asymmetric policy rule is adopted.
    Keywords: Monetary policy ; Credit ; Financial crises ; Income inequality
    JEL: E32 E44 E52 G01
    Date: 2018–07–19
  23. By: Joost Bats; Jan Willem van den End; John Thoolen
    Abstract: During the global financial crisis which started in 2007 (henceforth: crisis), central banks provided extended liquidity support, both to individual institutions and financial markets more broadly. These measures were taken as part of the lender of last resort (LOLR) function of the central bank, which can be activated in response to various kinds of liquidity risk. In times of systemic liquidity stress, when markets do not function properly and liquidity buffers fall short, a larger intermediary role of the central bank is warranted. Extended liquidity supply by the central bank can then underpin the intermediary function of the financial system to ensure the continuation of critical economic processes. In a systemic crisis, supporting financial stability is tantamount to safeguarding the monetary transmission process and thus, ultimately, also ensuring price stability.
    Date: 2018–07
  24. By: Alain Kabundi; Montfort Mlachila
    Abstract: This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two decades, which coincides with the adoption of the inflation-targeting regime. The paper conjectures, in line with the literature, that this outcome is largely due to improved monetary policy credibility. To do this, it first documents the factors that explain monetary policy credibility. Using the standard deviation of individual inflation forecasts as a measure of monetary policy credibility, its shows that the latter is negatively affected by the level of inflation itself, monetary policy uncertainty, and a measure of the unobserved stochastic volatility of inflation. The second phase proceeds by analyzing the determinants of the pass-through using the monetary policy credibility index derived from the first phase. The paper confirms the remarkable achievement that, despite the many shocks that the economy has witnessed, the declining pass-through is indeed explained by the improving monetary policy credibility.
    Date: 2018–08–01
  25. By: Carl Duisberg
    Abstract: Despite the importance of CAP-related agricultural market regulation mechanisms within Europe, the agricultural sectors in European countries retain a degree of sensitivity to macroeconomic activity and policies. This reality now raises the question of the effects to be expected from the implementation of the single monetary policy on these agricultural sectors within the Monetary Union.
    Date: 2018–07
  26. By: Collignon, Stefan; Diessner, Sebastian
    Abstract: The monetary dialogue between the European Parliament and the ECB is a key component for the democratic accountability of the independent central bank. We provide new evidence for the efficiency of the dialogue and present the results of a survey conducted among the members of the parliament’s ECON committee. We find that while the monetary dialogue may have had little or even negative impact on financial markets, it plays a significant role in informing and involving members of parliament and their constituencies. Amidst an intensifying debate about the transparency of the ECB, these findings shed new light on the current state of affairs of ECB accountability and its alleged need for enhancement.
    Keywords: european central bank; accountability; eurozone crisis; european parliament; monetary dialogue
    JEL: L81
    Date: 2016–11–01
  27. By: Claudia M. Buch; Matthieu Bussière; Linda Goldberg; Robert Hills
    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 F30 F40 G15 G21
    Date: 2018
  28. By: Silvia Miranda Agrippino (Bank of England); Giovanni Ricco (Observatoire français des conjonctures économiques)
    Abstract: This paper discusses the conditions for indentification with external instruments in Structural VARs under partial invertibility. We observe that in this case the shocks of interest and their effects can be recovered using an external instrument, provided that a condition of limited lag exogeneity holds. This condition is weaker than that required for LP-IV, and allows for recoverability of impact effects also une VAR misspecification. We assess our claims in a simulated environment, and provide an emirical application to the relevant cas of identification of monetary policy shocks.
    Keywords: Identification with external instruments; Structural VAR; Invertibility; Monetary Policy Shocks
    JEL: C3 C32 E30 E52
    Date: 2018–07
  29. By: Sheedy, Kevin D.
    Abstract: This essay examines the challenges in devising rules for unconventional monetary policy suitable for a post-crisis world. It is argued that unconventional monetary policy instruments are a poor substitute for conventional interest-rate policy in stabilizing the economy and in insulating monetary policy from political pressures. Some suggestions for the reform of inflation targeting are made to reduce the need for unconventional policy instruments in the future.
    Keywords: unconventional monetary policy; monetary policy rules
    JEL: N0 F3 G3
    Date: 2017–12–01
  30. By: Nathan Sussman; Osnat Zohar
    Abstract: Beginning with the global financial crisis (2008) the correlation between crude oil prices and medium-term and forward inflation expectations increased leading to fears of their un-anchoring. Using the first principal component of commodity prices as a measure for global aggregate demand, we decompose nominal oil prices to a global demand factor and remaining factors. Using a Phillips Curve framework we find a structural change after the collapse of Lehman Brothers when inflation expectations reacted more strongly to global aggregate demand conditions embedded in oil prices. Within this framework we cannot reject the hypothesis that expectations remained anchored.
    Keywords: inflation targeting, inflation expectations, monetary policy, oil prices, anchoring, credibility
    JEL: E52 E58 E31 E32
    Date: 2018–06
  31. By: Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
    Abstract: A major challenge for monetary policy is predicting how exchange rate movements will impact inflation. We propose a new focus: directly incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations "pass through" to import and consumer prices. A standard open-economy model shows that the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. We build on this to develop a structural Vector Autoregression (SVAR) framework for a small open economy and apply it to the UK. We show that prices respond differently to exchange rate movements based on what caused the movements. For example, exchange rate pass-through is low in response to domestic demand shocks and relatively high in response to domestic monetary policy shocks. This framework can improve our ability to estimate how pass-through can change over short periods of time. For example, it can explain why sterling's post-crisis depreciation caused a sharper increase in prices than expected, while the effect of sterling's 2013-15 appreciation was more muted. We also apply this framework to forecast the extent of pass-through from sterling's sharp depreciation corresponding to the UK's vote to leave the European Union.
    Keywords: consumer prices; exchange rate pass-through; import prices; inflation; vector autoregressions
    JEL: E31 F3 F41
    Date: 2018–07
  32. By: van Suntum, Ulrich
    Abstract: I use my "Viking Village" macroeconomic model for examining the economic meaning of the so-called Target-balances in the EMU. While some authors like H.W. Sinn and Thomas Mayer interpret them as liabilities that must be redeemed and paid interest on, others like Marcel Fratzscher, Martin Hellwig and the Bundesbank assess them as economically meaningless account entries only. While I myself tended to Sinn's view until recently, I have now changed my mind: According to the model results, neither Sinn nor his critics are right. In contrast, the economic meaning of Target balances depends critically on the rules on distributing seignorage in the EMU. In particular, under the existing rules, the Target balances are already burdened with interest implicitly, even without an explicit interest payment on them (which would indeed be inappropriate). On the other hand, because the common share of seignorage ends in case of a member country leaving the EMU, the Target balances would then immediately get relevant and must then be either redeemed or be paid explicit interest on. The counterargument that the interest rate is near to zero anyway is very weak, as the low interest policy itself creates huge redistributions that benefit the high indebted member states at the cost of the more solid ones. However, these redistributions are not directly related to the Target balances. Nevertheless, they should be paid more attention in the public.
    Date: 2018
  33. By: Giovanni Caggiano (University of Padova); Efrem Castelnuovo (University of Padova); Gabriela Nodari (Reserve Bank of Australia)
    Abstract: We employ real-time data available to the US monetary policy makers to estimate a Taylor rule augmented with a measure of financial uncertainty over the period 1969-2008. We find evidence in favor of a systematic response to financial uncertainty over and above that to expected inflation, output gap, and output growth. However, this evidence regards the Greenspan-Bernanke period only. Focusing on this period, the "risk-management" approach is found to be responsible for monetary policy easings for up to 75 basis points of the federal funds rate.
    Keywords: Risk management-driven policy rate gap, uncertainty, monetary policy, Taylor rules, real-time data
    JEL: C2 E4 E5
    Date: 2018–07
  34. By: Gabriele Fiorentini (Università di Firenze); Alessandro Galesi (Banco de España); Gabriel Pérez-Quirós (Banco de España); Enrique Sentana (CEMFI)
    Abstract: We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is fl at. In those empirically relevant situations, a local level specifi cation for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.
    Keywords: natural rate of interest, Kalman fi lter, observability, demographics.
    JEL: E43 E52 C32
    Date: 2018–07
  35. By: Saleem Bahaj; Ricardo Reis
    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
  36. By: Jaccard, Ivan
    Abstract: This paper studies the effects of money supply shocks in a general equilibrium model that reproduces a term premium of the magnitude observed in the data. In an environment where financial frictions are the main source of monetary non-neutrality, I find that money supply shocks are less effective at stimulating inflation in recessions than in expansions. In terms of quantitative magnitude, the impact effect on inflation of a money supply shock is about half as large during recessions than during booms. This state dependence is essentially due to the time-variation in stochastic discounting that is needed to match the data. JEL Classification: E31, E44, E58
    Keywords: bond premium puzzle, euro zone economy, financial frictions, time-varying risk aversion
    Date: 2018–08
  37. By: Taisuke Nakata; Sebastian Schmidt; Paul Yoo
    Abstract: The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs)---policies aimed at stabilizing the output growth---less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding.
    Keywords: Liquidity traps ; Markov-perfect equilibrium ; Speed limit policy ; Zero lower bound
    JEL: E52 E61
    Date: 2018–07–19
  38. By: Taisuke Nakata; Ryota Ogaki; Sebastian Schmidt; Paul Yoo
    Abstract: We examine the implications of less powerful forward guidance for optimal policy using a sticky-price model with an effective lower bound (ELB) on nominal interest rates as well as a discounted Euler equation and Phillips curve. When the private-sector agents discount future economic conditions more in making their decisions today, an announced cut in future interest rates becomes less effective in stimulating current economic activity. While the implication of such discounting for optimal policy depends on its degree, we find that, under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the ELB for longer.
    Keywords: Discounted euler equation ; Discounted phillips curve ; Effective lower bound ; Forward guidance ; Optimal policy
    JEL: E52 E58 E61
    Date: 2018–07–19

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