nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒08‒27
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Limited Commitment and the Implementation of Monetary Policy By Garth Baughman; Francesca Carapella
  2. With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound By Geiger, Felix; Schupp, Fabian
  3. Central Bank Reputation and Inflation-Unemployment Performance: Empirical Evidence from an Executive Survey of 62 Countries By In Do Hwang
  4. Central Bank Digital Currency and Monetary Policy By Mohammad Davoodalhosseini
  5. Modelling currency demand in a small open economy within a monetary union By António Rua
  6. Confidence in Central Banks and Inflation Expectations By Michael Lamla; Damjan Pfajfar; Lea Rendell
  7. Unconventional monetary policy, bank lending, and security holdings: The yield-induced portfolio rebalancing channel By Paludkiewicz, Karol
  8. The relevance of currency-denomination for the cross-border effects of monetary policy By Isabel Argimón
  9. Does Monetary Policy Impact Market Integration? Evidence from Developed and Emerging Markets By Massimiliano Caporin; Loriana Pelizzon; Alberto Plazzi
  10. The 100% money proposal and its implications for banking: the Currie–Fisher approach versus the Chicago Plan approach By Samuel Demeulemeester
  11. Econometric Analysis on Survey-data-based Anchoring of Inflation Expectations in Chile By Carlos Medel
  12. The Extensive Margin of Trade and Monetary Policy By Yuko Imura; Malik Shukayev
  13. Money's Causal Role in Exchange Rate: Do Divisia Monetary Aggregates Explain More? By Soumya Bhadury; Taniya Ghosh
  14. Monetary Momentum By Andreas Neuhierl; Michael Weber
  15. Supply of Private Safe Assets: Interplay of Shadow and Traditional Banks By Stefan Gissler; Borghan Narajabad
  16. Revisiting the Exchange Rate Pass Through: A General Equilibrium Perspective By Mariana García-Schmidt; Javier Garcia-Cicco
  17. Modeling and Forecasting Inflation in Zimbabwe: a Generalized Autoregressive Conditionally Heteroskedastic (GARCH) approach By NYONI, THABANI
  18. Demographics, monetary policy and the zero lower bound By Marcin Bielecki; Marcin Kolasa; Michał Brzoza-Brzezina
  19. International Spillovers of Monetary Policy: Evidence from France and Italy By Julia Schmidt; Marianna Caccavaio; Luisa Carpinelli; Giuseppe Marinelli
  20. Macroeconomic Effects of Mobile Money in Uganda By Mawejje, Joseph; Lakuma, E. C. Paul
  21. Monetary Policy with Imperfect Signals: The Target Problem in a New Monetarist Approach By Hannes Draack
  22. Of Gold and Paper Money By Chadha, J.
  23. Monetary Policy Analysis when Planning Horizons are Finite By Michael Woodford
  24. Central Bank Swap Lines By Bahaj, Saleem; Reis, Ricardo
  25. The Run on Repo and the Fed's Response By Gary Gorton; Toomas Laarits; Andrew Metrick
  26. Dynamic Inattention, the Phillips Curve, and Forward Guidance By Choongryul Yang; Hassan Afrouzi
  27. Taming macroeconomic instability : monetary and macoprudential policy interactions in an agent - based model By Mauro Napoletano; Lilit Popoyan; andrea Roventini,
  28. The True Size of the ECB: New Insights from National Central Bank Balance Sheets By Stephen Wright; Charmaine Portelli
  29. Changes in the Inflation Target and the Comovement between Inflation and the Nominal Interest Rate By Eo, Yunjong; Lie, Denny
  30. The internationalization of the Renminbi and the evolution of China’s monetary policy By Ramaa Vasudevan
  31. Time-Consistent Management of a Liquidity Trap with Government Debt By Dmitry Matveev
  32. Monetary Policy and Bond Risk Premia in the US and the UK By Wojciech Zurowski
  33. Corporate Bond Dealers' Inventory Risk and FOMC By Alessio Ruzza; Wojciech Zurowski
  34. Reserve Accumulation and Bank Lending: Evidence from Korea By Youngjin Yun
  35. Inflation Expectations: The Effect of Question Ordering on Forecast Inconsistencies By Maxime Phillot; Rina Rosenblatt-Wisch
  36. Would macroprudential regulation have prevented the last crisis? By Aikman, David; Bridges, Jonathan; Kashyap, Anil; Siergert, Caspar
  37. SOMA's Unrealized Loss : What does it mean? By Brian Bonis; Lauren Fiesthumel; Jamie Noonan
  38. Observed inflation-target adjustments in an estimated DSGE model for Indonesia: Do they matter for aggregate fluctuations? By Lie, Denny

  1. By: Garth Baughman (Federal Reserve Board); Francesca Carapella (Federal Reserve Board)
    Abstract: Trade volumes in the federal funds market have remained low since the recent financial crisis. While some argue that this derives from a flood of money in the system, we propose an alternate explanation based on the distinguishing characteristic of the fed funds market: unlike other markets, whose volumes have recovered, fed funds loans are unsecured. In a model of a money market with unsecured loans subject to endogenous borrowing constraints where the central bank pays interest on reserves (IOR), we show that high levels of IOR reduce trade by tightening credit limits. Friedman's dictum that the central bank should pay a market rate fails to deliver efficiency because IOR decreases the opportunity cost of money holdings relative to credit, so decreases both the profits from lending and the value of borrowing. This results in a tightening of the endogenous borrowing constraint. When IOR exceeds the growth rate of money, credit limits plummet to zero, and no borrowing occurs despite an extant need for funds. Alternate rate schedules besides constant IOR, such as the limited deposit regime employed by Norges Bank in response to dissatisfaction with the functioning of their floor system provide additional incentives to trade which relax credit constraints and improve welfare.
    Date: 2018
  2. By: Geiger, Felix; Schupp, Fabian
    Abstract: The estimation of dynamic term structure models (DTSMs) turns out to be challenging in the presence of a small sample. It is exacerbated if the sample is characterized by a prolonged period of low interest rates near a time-varying effective lower bound. These challenges all weigh heavily when estimating a DTSM for the euro area OIS yield curve. Against this background, we propose a shadow-rate term structure model (SRTSM) that includes a time-varying effective lower bound and accounts for the spread between the policy and short-term OIS rate. It also allows for future changes in the effective lower bound and incorporates survey information. The model allows to adequately assess short-term monetary policy rate expectations and it generates far-distant rate expectations that are correlated with an estimated equilibrium nominal short rate derived from a macroeconomic model set-up. Our results also highlight the signaling channel of non-standard monetary policy shocks in the run-up to asset purchases identified based on a non-linear high-frequency external instrument approach. Our model outperforms DTSM specifications without above modeling features from a statistical and economic perspective. We confirm our findings employing a Monte Carlo simulation.
    Keywords: term structure modeling,short rate expectations,lower bound,survey information,yield curve decomposition,monetary policy,euro area
    JEL: E32 E43 E44 E52
    Date: 2018
  3. By: In Do Hwang (Economic Research Institute, The Bank of Korea)
    Abstract: Although there is a well-established theoretical literature that links central bank (CB) reputation with inflation performance following Barro and Gordon, there is little empirical work testing the relationship rigorously. This paper empirically tests the impact of reputation on inflation-unemployment performance using a novel set of data on CB reputation--an annual local business manager survey on central bank policy covering 62 countries during 1995-2016. This paper finds that CB reputation is a significant determinant of inflation: the results of an FE panel and Arellano-Bond difference GMM model show that high-reputation CBs have achieved better inflation performances over the past 20 years with lower levels of inflation than others, holding the output gap and unemployment rate constant. This result remains robust to various control variables including money growth, past inflation levels, exchange rates, and financial crisis dummies. This paper also finds that high CB reputation is associated with a tight anchoring of inflation expectations to inflation targets in inflation-targeting countries. The effects of reputation on the volatility of inflation and unemployment rates are found to be not robust. This paper offers evidence of the opposite-direction causality as well that goes from high inflation to decreased CB reputation.
    Keywords: Reputation, Credibility, Monetary policy, Anchoring of inflation expectation
    JEL: E31 E52 E58 N10
    Date: 2018–05–29
  4. By: Mohammad Davoodalhosseini
    Abstract: Many central banks are contemplating whether to issue a central bank digital currency (CDBC). CDBC has certain potential benefits, including the possibility that it can bear interest. However, using CBDC is costly for agents, perhaps because they lose their anonymity when using CBDC instead of cash. I study optimal monetary policy when only cash, only CBDC, or both cash and CBDC are available to agents. If the cost of using CBDC is not too high, more efficient allocations can be implemented by using CBDC than with cash, and the first best can be achieved. Having both cash and CBDC available may result in lower welfare than in cases where only cash or only CBDC is available. The welfare gains of introducing CBDC are estimated as up to 0.64% for Canada.
    Keywords: Digital currencies, Monetary policy
    JEL: E42 E50
    Date: 2018
  5. By: António Rua
    Abstract: Currency management is a core business function of a central bank. Understanding the factors driving cash demand and its denomination structure are vital for the smooth functioning of the economy. We pursue an analytical framework which allows to model the demand for each denomination individually as well as to capture the interactions between them, both over the short- and long-run. The approach builds on the DSUR estimator for the long-run relationships coupled with a SUR ECM for modelling the short-run dynamics. The focus is on a small open economy within the euro area monetary union. Such a context adds dimensions which go beyond the traditional drivers considered in the previous literature. In particular, the importance of currency migration through tourism ows is highlighted. Furthermore, the interconnections between demand for different denominations are found to be quite significant and the heterogeneous role of the determinants across denominations is documented.
    JEL: C32 E41 E50
    Date: 2017
  6. By: Michael Lamla (ETH Zurich); Damjan Pfajfar (Federal Reserve Board); Lea Rendell (University of Maryland)
    Abstract: In this paper we explore the consequences of losing confidence in the price-stability objective of central banks. We propose a new model that shows that losing confidence can lead to both, an inflation as well as a deflationary bias, depending on the perception of the objective function of the central bank. Both biases emerge as a steady state outcomes and increase the burden of the central bank to achieve its mandate. We validate the predictions of the model using a comprehensive new dataset on 50,000 individual observations across 9 countries and can identify and quantify inflation and the deflationary bias as a consequence of losing confidence in central banks objectives. We can confirm the predictions of our model as we can show that inflation bias exists for expectations above the target and a deflationary bias exist for expectations below. As one would expect both inflationary and deflationary bias are more pronounced for medium-run than short-run inflation expectations. Furthermore, we also test the prediction of the model that conservative or inflation-targeting central banks reduces the the magnitude of inflation and deflationary bias and find supporting evidence in our dataset. Among the Eurozone countries in our sample we can document, despite the same experience with the ECB, significant differences in levels of confidence and responses to it.
    Date: 2018
  7. By: Paludkiewicz, Karol
    Abstract: Exploiting a granular dataset of banks' security holdings I assess the impact of unconventional monetary policy on bank lending and security holdings. Using a difference-in-differences regression setup and holding the security composition of each bank constant at its level in January 2014, well in advance of an anticipation of the ECB's asset purchase program (APP), this paper provides evidence for the presence of a yield-induced portfolio rebalancing channel: Banks experiencing a higher average yield decline of their securities portfolio - induced by unconventional expansionary monetary policy - increase their real sector lending more strongly relative to other banks. The effect is stronger for banks facing many reinvestment decisions. Moreover, I find that banks with a higher average yield decline reduce their overall investments in securities more intensely, especially in those securities that had larger valuation gains. These novel findings suggest that banks target a specific yield level and shift their investments from the securities to the (higher-yielding) credit portfolio. Making use of data on bank-specific TLTRO uptakes, my results do not seem to be driven by alternative, liquidity-driven transmission channels.
    Keywords: Unconventional Monetary Policy,Quantitative Easing,Portfolio Rebalancing
    JEL: E44 E51 E52 E58 G21
    Date: 2018
  8. By: Isabel Argimón (Banco de España)
    Abstract: We analyze how a change in ECB monetary policy affects lending of internationally active banks, depending on whether the currency of the claim is the one of the counterparty country, using Spanish individual bank data. We analyse the transmission from an outward perspective, exploring how banks adjust their foreign lending denominated in local and in foreign currency to changes in monetary policy, both cross-border and also through their affiliates located in other countries. We find that non-bank private claims in local currency respond much less to the ECB monetary policy stance than claims in foreign currency. We also find that the spillover effects on cross-border lending denominated in foreign currency depend on banks’ characteristics. When we broaden the analysis to include claims to the public and the financial sector, the transmission of monetary policy is mainly through foreign currency loans, but bank heterogeneity plays a role in the transmission to local currency loans. In general, a tightening of the ECB monetary policy results in an increase in lending abroad. Exchange rate changes only affect foreign currency-denominated lending.
    Keywords: monetary policy, international banking, bank credit, spillovers.
    JEL: F34 F42 G15 G21
    Date: 2018–08
  9. By: Massimiliano Caporin (University of Padua); Loriana Pelizzon (Goethe University Frankfurt, Goethe University Frankfurt, and Ca Foscari University of Venice); Alberto Plazzi (USI and Swiss Finance Institute)
    Abstract: We investigate the impact of monetary announcements of the ECB and the FED on integration in the equity and sovereign CDS markets for a large cross-section of 18 Developed and 21 Emerging countries over 2006 to 2015. The effect of both announcements is negative or muted in the pre-crisis period, while it turns strongly positive during the financial crisis of 2007-2009. ECB interventions lead to more integration in the equity market during 2010 to 2012, but dis-integration in the CDS market in the ECB Quantitative Easing period (2013 to 2015), especially for emerging countries. In contrast, FED announcements are perceived as global factors in the CDS emerging market and are accompanied with an increase in integration both when the FED implements and unwinds its unconventional measures. The relation between the global factor and the U.S. market increases during FED interventions, the same does hold for the European market during ECB announcements. The exposure of emerging markets to outside monetary policy shocks can be explained in terms of their degree of trade and financial openness.
    Keywords: unconventional monetary policy, integration, international equity markets, CDS
    JEL: E58 G15
    Date: 2017–05
  10. By: Samuel Demeulemeester (TRIANGLE - Triangle : action, discours, pensée politique et économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - IEP Lyon - Sciences Po Lyon - Institut d'études politiques de Lyon - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The literature on the 100% money proposal often reveals some confusion when it comes to its implications for the banking sphere. We argue that this can be partly explained by a failure to have distinguished between two divergent approaches to the proposal: the "Currie–Fisher" (or "transaction") approach, on the one hand, which would preserve banking; and the "Chicago Plan" (or "liquidity") approach, on the other hand, which would abolish banking. This division among 100% money proponents stemmed, in particular, from different definitions of money, and different explanations of monetary instability. The present paper attempts to clarify this divergence of views.
    Keywords: Irving Fisher,Chicago Plan,Lauchlin Currie,banking,100% money
    Date: 2018
  11. By: Carlos Medel
    Abstract: In this article, I conduct certain econometric estimations aiming at analysing to what extent inflation expectations from public agents are anchored to the Central Bank of Chile's inflation target. Expectations anchoring is an important feature for the monetary policy in a small-open economy under inflation targeting with a floating exchange rate. It is understood as another central bank instrument, as it promotes price stability through the ability of authorities to manage inflation expectations. I provide evidence suggesting that agents' expectations, based on survey data, are firmly anchored, because of Central Bank of Chile policy actions. Within the fully-fledged inflation targeting era—starting in 2000—three periods are detected. These are (i) the pre-Global Financial Crisis (GFC) period, (ii) the post-GFC period until mid-2015, and (iii) the low inflation period afterwards. Particularly for the last period, the anchoring effect is clearer and pronounced.
    Date: 2018–08
  12. By: Yuko Imura; Malik Shukayev
    Abstract: Many central banks are contemplating whether to issue a central bank digital currency (CDBC). CDBC has certain potential benefits, including the possibility that it can bear interest. However, using CBDC is costly for agents, perhaps because they lose their anonymity when using CBDC instead of cash. I study optimal monetary policy when only cash, only CBDC, or both cash and CBDC are available to agents. If the cost of using CBDC is not too high, more efficient allocations can be implemented by using CBDC than with cash, and the first best can be achieved. Having both cash and CBDC available may result in lower welfare than in cases where only cash or only CBDC is available. The welfare gains of introducing CBDC are estimated as up to 0.64% for Canada.
    Keywords: Business fluctuations and cycles, Economic models, Firm dynamics, International topics, Monetary policy
    JEL: F44 E52 F12
    Date: 2018
  13. By: Soumya Bhadury (National Council of Applied Economic Research); Taniya Ghosh (Indira Gandhi Institute of Development Research (IGIDR), Mumbai)
    Abstract: We investigate the predictive power of Divisia monetary aggregates in explaining exchange rate variations for India, Israel, Poland, UK and the US, in the years leading up to and following the 2007-08 recessions. One valid concern for the chosen sample period is that the interest rate has been stuck at or near the zero lower bound (ZLB) for some major economies. Consequently, the interest rate has become uninformative about the monetary policy stance. An important innovation in our research is to adopt the Divisia monetary aggregate as an alternative to the policy indicator variable. We apply bootstrap Granger causality method which is robust to the presence of non-stationarity in our data. Additionally, we use bootstrap rolling window estimates to account for the problems of parameter non-constancy and structural breaks in our sample covering the Great recession. We find strong causality from Divisia money to exchange rates. By capturing the time-varying link of Divisia money to exchange rate, the importance of Divisia is further established at ZLB.
    Keywords: Monetary Policy; Divisia Monetary Aggregates; Simple Sum; Nominal Exchange Rate; Real Effective Exchange Rate; Bootstrap Granger Causality
    JEL: C32 C43 E41 E51 E52 F31 F41
    Date: 2018–02
  14. By: Andreas Neuhierl; Michael Weber
    Abstract: We document a large return drift around monetary policy announcements by the Federal Open Market Committee (FOMC). Stock returns start drifting up 25 days before expansionary monetary policy surprises, whereas they decrease before contractionary surprises. The cumulative return difference across expansionary and contractionary policy decisions amounts to 2.5% until the day of the policy decision and continues to increase to more than 4.5% 15 days after the meeting. Standard returns factors and time-series momentum do not span the return drift around FOMC policy decisions. The return drift is a market-wide phenomenon and holds for all industries and many international equity markets. A simple trading strategy exploiting the drift around FOMC meetings increases Sharpe ratios relative to a buy-and-hold investment by a factor of 4.
    JEL: E31 E43 E44 E52 E58 G12
    Date: 2018–06
  15. By: Stefan Gissler (Federal Reserve Board); Borghan Narajabad (Federal Reserve Board)
    Abstract: We show that the creation of private safe assets by shadow banks can crowd out traditional banks' supply of safe assets. The 2014-2016 money market fund reform created a large demand shock for government- or government-like safe assets. Shadow banks responded and in particular, Federal Home Loans Banks (FHLBs) increased their issuance of short-term safe debt and their lending to banks. To manage their interest rate risk, FHLBs changed the terms of their lending; the new loans had a shorter maturity and reset the interest rate at a high frequency. Depending on their interest rate risk-management, banks differed in their borrowing from FHLBs. We use this differential borrowing in response to the money market reform to study the effect of increased supply of safe assets by FHLBs on banks' balance sheets. We find that banks use FHLB borrowing as a perfect substitute for deposit financing. The substitution of safe debt with FHLB borrowing does not go along with an overall increase in the balance sheet and therefore has no lending effect. This finding has important implications for the transmission of monetary policy as well as broader economic activities. If shadow banks create safe assets at the expense of traditional banks' deposits, then there will be a minimal effect on the total funding available for households and firms from banks and shadow banks.
    Date: 2018
  16. By: Mariana García-Schmidt; Javier Garcia-Cicco
    Abstract: A large literature estimates the exchange rate pass-through to prices (ERPT) using reducedform approaches, whose results are an important input for analyses at Central Banks. We study the usefulness of these empirical measures for actual monetary policy analysis and decision making, emphasizing two main problems that arise naturally from a general equilibrium perspective. First, while the literature describes a single ERPT measure, in a general equilibrium model the evolution of the exchange rate and prices will differ depending on the shock hitting the economy. Accordingly, we distinguish between conditional and unconditional ERPT measures, showing that they can lead to very different interpretations. Second, in a general equilibrium model the ERPT crucially depends on the expected behavior of monetary policy, but the empirical approaches in the literature cannot account for this and thus provide a misleading guide for policy makers. We first use a simple model of a small and open economy to qualitatively show the intuition behind these two critiques. We then highlight the quantitative relevance of these distinctions by means of a DSGE model of a small and open economy with sectoral distinctions, real and nominal rigidities, and a variety of driving forces; estimated using Chilean data.
    Date: 2018–08
    Abstract: Of uttermost importance is the fact that forecasting macroeconomic variables provides a clear picture of what the state of the economy will be in future (Sultana et al, 2013). Nothing is more important to the conduct of monetary policy than understanding and predicting inflation (Kohn, 2005). Inflation is the scourge of the modern economy and is feared by central bankers globally and forces the execution of unpopular monetary policies. Inflation usually makes some people unfairly rich and impoverishes others and therefore it is an economic pathology that stands in the way of any sustainable economic growth and development. Models that make use of GARCH, as highlighted by Ruzgar & Kale (2007); vary from predicting the spread of toxic gases in the atmosphere to simulating neural activity but Financial Econometrics remains the leading discipline and apparently dominates the research on GARCH. The main objective of this study is to model monthly inflation rate volatility in Zimbabwe over the period July 2009 to July 2018. Our diagnostic tests indicate that our sample has the characteristics of financial time series and therefore, we can employ a GARCH – type model to model and forecast conditional volatility. The results of the study indicate that the estimated model, the AR (1) – GARCH (1, 1) model; is indeed an AR (1) – IGARCH (1, 1) process and is not only appropriate but also the best. Since the study provides evidence of volatility persistence for Zimbabwe’s monthly inflation data; monetary authorities ought to take into cognisance the IGARCH behavioral phenomenon of monthly inflation rates in order to design an appropriate monetary policy.
    Keywords: ARCH, Forecasting, GARCH, IGARCH, Inflation Rate Volatility, Zimbabwe
    JEL: C1 C6 E52 G0
    Date: 2018–07–22
  18. By: Marcin Bielecki (University of Warsaw and Narodowy Bank Polski); Marcin Kolasa (Narodowy Bank Polski); Michał Brzoza-Brzezina (Narodowy Bank Polski)
    Abstract: The recent literature shows that demographic trends may affect the natural rate of interest (NRI), which is one of the key parameters affecting stabilization policies implemented by central banks. However, little is known about the quantitative impact of these processes on monetary policy, especially in the European context, despite persistently low fertility rates and an ongoing increase in longevity in many euro area economies. In this paper we develop a New Keynesian life-cycle model, and use it to assess the importance of population ageing for monetary policy. The model is fitted to euro area data and successfully matches the age profiles of consumption-savings decisions made by European households. It implies that demographic trends have contributed significantly to the decline in the NRI, lowering it by 2 percentage points between 1980 and 2030. Despite being spread over a long time, the impact of ageing on the NRI may lead to a sizable and persistent deflationary bias if the monetary authority fails to account for this slow moving process in real time. We also show that, with the current level of the inflation target, demographic trends have already exacerbated the risk of hitting the lower bound (ZLB) and that the pressure is expected to continue. Delays in updating the NRI estimates by the central bank elevate the ZLB risk even further.
    Date: 2018
  19. By: Julia Schmidt; Marianna Caccavaio; Luisa Carpinelli; Giuseppe Marinelli
    Abstract: In this paper we provide empirical evidence on the impact of US and UK monetary policy changes on credit supply of banks operating in Italy and France over the period 2000-2015, exploring the existence of an international bank lending channel. Exploiting bank balance sheet heterogeneity, we find that monetary policy tightening abroad leads to a reduction of credit supply at home, in particular for US monetary policy changes. Our results show that USD funding plays an important role in the transmission mechanism, especially for French banks which rely to a larger extent on USD funding. We also show that banks adjust their euro and foreign currency lending differently, thus implying that funding sources in different currencies are not perfect substitutes. This is especially the case when tensions in currency swap markets are high, thus resulting in costly cross-currency funding.
    Keywords: Spillovers, Monetary Policy, International Banking
    JEL: E52 F42 G21
    Date: 2018
  20. By: Mawejje, Joseph; Lakuma, E. C. Paul
    Abstract: This paper examines the effects of mobile money, a rather new innovation in Uganda’s financial sector landscape on aggregate economic activity and other macroeconomic variables. We first estimate the long-run effect of mobile money deposits and value of transactions on monetary aggregates using vector error correction (VEC) techniques. We then estimate the short-term effects of mobile money on selected macroeconomic variables using Structural Vector Autoregressive (SVAR) methods. Results show modest macroeconomic impacts: mobile money has moderate positive effects on monetary aggregates, the consumer price index, and private sector credit. Mobile money deposits do respond to changes in monetary policy instruments, signalling possible ameliorating effects for the conduct of monetary policy. These results provide evidence for policy makers to continue supporting the growth of mobile money platforms. In particular, policy makers should provide the policy and regulatory framework through which mobile money balances can become interest-bearing assets, as this will further strengthen the monetary policy transmission mechanism.
    Keywords: Community/Rural/Urban Development, Demand and Price Analysis, Financial Economics, Public Economics, Resource /Energy Economics and Policy, Risk and Uncertainty
    Date: 2017–06–30
  21. By: Hannes Draack
    Abstract: The target problem considers the central bank's use of optimal tools and targets for purposes of stabilization and welfare optimization. In this study, this question is answered anew in a microfounded approach. By adding imperfect information to the model of [Berentsen and Waller, 2011], a divide between an interest rate policy and a money stock policy emerges. Given this, the usefulness of each policy is analyzed, with the ultimate result being the dominance of a pro-cyclical interest rate-based policy. This finding stands in contrast to the well-known macrofounded answer of [Poole, 1970]. The inconsistency is resolved by an examination of some of the axioms underlying New Keynesian and New Monetarist models.
    Keywords: Money, search, stabilization, monetary policy
    JEL: E41 E52
    Date: 2018–08
  22. By: Chadha, J.
    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 ongoing trade-offs.
    Keywords: money, gold standard, paper money, Samuelson
    JEL: B22 E02 E31
    Date: 2018–08–02
  23. By: Michael Woodford
    Abstract: It is common to analyze the effects of alternative monetary policy commitments under the assumption of fully model-consistent expectations. This implicitly assumes unrealistic cognitive abilities on the part of economic decision makers. The relevant question, however, is not whether the assumption can be literally correct, but how much it would matter to model decision making in a more realistic way. A model is proposed, based on the architecture of artificial intelligence programs for problems such as chess or go, in which decision makers look ahead only a finite distance into the future, and use a value function learned from experience to evaluate situations that may be reached after a finite sequence of actions by themselves and others. Conditions are discussed under which the predictions of a model with finite-horizon forward planning are similar to those of a rational expectations equilibrium, and under which they are instead quite different. The model is used to re-examine the consequences that should be expected from a central-bank commitment to maintain a fixed nominal interest rate for a substantial period of time. “Neo-Fisherian” predictions are shown to depend on using rational expectations equilibrium analysis under circumstances in which it should be expected to be unreliable.
    JEL: E52
    Date: 2018–06
  24. By: Bahaj, Saleem (Bank of England); Reis, Ricardo (London School of Economics)
    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 US presence.
    Keywords: Liquidity facilities; currency basis; bond portfolio flows
    JEL: E44 F33 G15
    Date: 2018–07–27
  25. By: Gary Gorton; Toomas Laarits; Andrew Metrick
    Abstract: The Financial Crisis began and accelerated in short-term money markets. One such market is the multi-trillion dollar sale-and-repurchase (“repo”) market, where prices show strong reactions during the crisis. The academic literature and policy community remain unsettled about the role of repo runs, because detailed data on repo quantities is not available. We provide quantity evidence of the run on repo through an examination of the collateral brought to emergency liquidity facilities of the Federal Reserve. We show that the magnitude of repo discounts (“haircuts”) on specific collateral is related to the likelihood of that collateral being brought to Fed facilities.
    JEL: E32 E44 E58 G01
    Date: 2018–07
  26. By: Choongryul Yang (University of Texas at Austin); Hassan Afrouzi (Columbia University)
    Abstract: We show that rationally inattentive firms are forward-looking in their information acquisition and study the implications of these incentives for inflation dynamics by deriving a new microfounded Phillips curve. The Phillips curve is forward looking and relates current inflation to the forecast errors of firms about future inflation and the growth rate of the output gap in the economy -- a feature that is absent in sticky and noisy information models. Unlike the forward-looking Phillips curves derived under nominal rigidities, we show inflation is not necessarily increasing in expected inflation, and it decreases with the forecast errors of firms about future inflation and output gap growth. We test this Phillips curve using the Survey of Professional Forecasters as a proxy for firms’ expectations and show that forecast errors about future significantly affect current inflation in the direction that is predicted by the model. We apply our findings to examine the effectiveness of forward guidance policies in a general equilibrium model. News about future interest rates affects inflation more if firms are more rationally inattentive or if they discount future profits less. The model also survives the forward guidance puzzle as the initial response of inflation decreases with the horizon of forward guidance.
    Date: 2018
  27. By: Mauro Napoletano (Observatoire français des conjonctures économiques); Lilit Popoyan (Laboratory of Economics and Management); andrea Roventini, (Observatoire français des conjonctures économiques)
    Abstract: We develop an agent-based model to study the macroeconomic impact of alternative macro-prudential regulations and their possible interactions with different monetary policy rules. The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple-mandate Taylor rule,focused onoutput gap, inflationand credit growth, and a BaselIII prudential regulationis the bestpolicymix to improve the stability ofthe banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplified regulatory framework. Finally, the components of Basel III are non-additive: the inclusion of an additional lever does not always improve the performance of the macro-prudential regulation.
    Keywords: Macro-prudential policy; Basel III regulation; Financial stability; Monetary policy; Agent based computational economics
    JEL: C63 E52 E6 G1 G21 G28
    Date: 2017–02
  28. By: Stephen Wright (Birkbeck, University of London); Charmaine Portelli (University of Malta)
    Abstract: The balance sheet of the European Central Bank (ECB) represents a very small fraction (onetenth) of the reported balance sheet of the Euro Area system as a whole. This paper presents evidence that the effective size of the ECB’s balance sheet is massively higher than this, and indeed is significantly higher even than the reported balance sheet of the Eurosystem as a whole. We point to strong evidence that most NCBs (especially those of the larger countries) effectively act on autopilot, as branches of a near-monolithic institution which we term the “Mega-ECB”. The lending behaviour of the “Mega-ECB” appears to have been driven primarily by the borrowing needs of the distressed countries of the EU’s southern periphery.
    Keywords: central bank balance sheet, capital key, ECB, Eurosystem, national central canks, Target2.
    JEL: E52 E58 F36
    Date: 2018–05
  29. By: Eo, Yunjong; Lie, Denny
    Abstract: Does raising an inflation target require increasing the nominal interest rate in the short run? We answer this question using a New Keynesian model calibrated to the U.S. economy in which firms explicitly take into account changes in the inflation target in their price setting behavior. We find that the short-run comovement between the nominal rates and inflation conditional on the change in the inflation target is most likely positive. While this so-called Neo-Fisherism is less likely to hold the more backward-looking elements are incorporated into the model, two features play an important role in generating the positive comovement in spite of rich backward-looking elements in our model. First, a Taylor-type rule mitigates the impact of the backward-looking elements on forming inflation expectations compared to strict inflation targeting. Second, the additional forward-looking effect driven by firms' explicit consideration of inflation target adjustment in setting their prices enlarges the region of the parameter space exhibiting Neo-Fisherism. Our results are robust to empirically plausible parameterizations of the model.
    Keywords: Neo-Fisherism, inflation expectations, a Taylor-type rule, strict inflation targeting, hybrid NKPC, inflation target adjustment.
    Date: 2018–07
  30. By: Ramaa Vasudevan (Colorado State University)
    Abstract: This paper explores the evolution of monetary policy in the context of the distinct path China and the PBoC have adopted in fostering the international role of the renminbi. Instead of focusing on the PBoC’s negotiation of the impossible trinity of flexible exchange rates, capital mobility and independent monetary policy, the paper highlights the challenges the PBoC faces as it promotes the use renminbi, in international lending in particular, while simultaneously seeking to contain and discipline the inherent instability and potentially disruptive logic of finance.
    Keywords: China, monetary policy, internationalization of renminbi, impossible trinity
    JEL: F33 F36 G28
    Date: 2018–08
  31. By: Dmitry Matveev
    Abstract: This paper studies optimal discretionary monetary and fiscal policy when the lower bound on nominal interest rates is occasionally binding in a model with nominal rigidities and long-term government debt. At the lower bound it is optimal for the government to temporarily reduce debt. This decline stimulates output, which is inefficiently low during liquidity traps, by lowering expected real interest rates following the lift-off of the nominal rate from the lower bound. Away from the lower bound, the long-run level of government debt increases with the risk of reaching the lower bound. The accumulation of debt pushes up inflation expectations so as to offset the opposite effect due to the lower bound risk.
    Keywords: Fiscal Policy, Monetary Policy
    JEL: E52 E62 E63
    Date: 2018
  32. By: Wojciech Zurowski (University of Lugano and Swiss Finance Institute)
    Abstract: I filter expected inflation, unemployment and log GDP Hodrick-Prescott filtered series in order to extrapolate different frequencies of shocks. These shocks are then regressed on contemporaneous yields to assess the impact of monetary policy ingredients on the current state of the economy. Furthermore, I obtain a single factor which contains information from the Taylor like monetary policy rule about the future state of the economy. This factor can predict between 32% and 74% of the variation of excess bond risk premia in the sample. Additionally, the factor unveils differences between monetary policy in the US and the UK through a variation in predictability across maturities. It also provides further evidence of importance of the macroeconomic variables and their predictive value for the term premia. This factor is highly correlated with other factors from previous studies yet it provides additional information to what is already captured by them. The out of sample results demonstrate that the factor can be a good predictor only if it is constructed under time variability assumption and the central bank's policy is not affected by additional tools such as quantitative easing.
    Keywords: bond risk premia, monetary policy, Haar filter
    JEL: G12 E44
    Date: 2017–01
  33. By: Alessio Ruzza (University of Lugano and Swiss Finance Institute); Wojciech Zurowski (University of Lugano and Swiss Finance Institute)
    Abstract: Macroeconomic announcements increase trading activity, with potential consequences for liquidity. This paper studies the effect of FOMC announcements on the US corporate bond market liquidity. The releases do not seem to create adverse selection. We obtain the probability distribution of monetary policy outcomes from 30 day Fed funds Futures. Despite the low toxicity of the order flow, dealers increase the price for liquidity provision in the presence of monetary policy uncertainty and unexpected Fed rate changes. Trading costs decomposition reveals that inventory risk aversion drives the dealers' behaviour. We conclude that a dealership market falls short around macroeconomic announcements, even when adverse selection may be absent.
    Keywords: corporate bond market, inventory risk, FOMC, Fed funds futures
    JEL: G12 G14
    Date: 2017–05
  34. By: Youngjin Yun (Economic Research Institute, The Bank of Korea)
    Abstract: Reserve accumulation is funded by the central bank's domestic borrowing as it always sterilizes reserve purchases by increasing domestic liabilities. The central bank borrowing could crowd out firms' borrowing under imperfect international capital mobility. I present a model that illustrates the mechanism and examine monthly balance sheets of Korean banks from September 2003 to August 2008 to find that bank lending to firms did decline after reserve accumulation. Controlling for individual effects and time effects, it is estimated that bank lending declined by 50 cents after one additional dollar of reserve accumulation. A causal relationship is verified by differences-in-differences identification. After one standard deviation reserve accumulation shock, primary dealer banks and foreign bank branches cut lending growth by 0.4 and 1.6 percentage points more than non-primary dealer banks and domestic banks, respectively.
    Keywords: Foreign exchange reserves, Sterilization, Crowding-out, Bank loans
    JEL: E22 E58 F31
    Date: 2018–06–01
  35. By: Maxime Phillot; Rina Rosenblatt-Wisch
    Abstract: Expectations are key in modern macroeconomics. However, due to their scant measurability, policymakers often rely on survey data. It is thus of critical importance to know the limits of survey data use. We look at inflation expectations as measured through the Deloitte CFO Survey Switzerland and respondents' sensitivity to question ordering thereof. In particular, we investigate whether forecast inconsistencies - the discrepancies between point forecasts and measures of central tendency derived from density forecasts - change significantly depending on whether the point forecast or the density forecast is asked first. We find that a) forecast inconsistencies are sizeable in the data and b) question ordering matters. Specifically, both parametric and non-parametric evaluations of consistency show that c) point forecasts tend to be significantly higher than density forecasts only for those respondents who give a density forecast first. In addition, d) characteristics such as uncertainty, firm size and economic sector relate to inconsistencies.
    Keywords: Question effects, question ordering, inflation expectations, consistency of forecasts, point forecast, density forecast
    JEL: E31 E37 E58
    Date: 2018
  36. By: Aikman, David (Bank of England); Bridges, Jonathan (Bank of England); Kashyap, Anil (University of Chicargo Booth School of Business); Siergert, Caspar (Bank of England)
    Abstract: How well equipped are today’s macroprudential regimes to deal with a re-run of the factors that led to the global financial crisis? We argue that a large proportion of the fall in US GDP associated with the crisis can be explained by two factors: the fragility of financial sector — represented by the increase in leverage and reliance on short-term funding at non-bank financial intermediaries — and the build-up in indebtedness in the household sector. We describe and calibrate the policy interventions a macroprudential regulator would wish to make to address these vulnerabilities. And we compare and contrast how well placed two prominent macroprudential regulators — the US Financial Stability Oversight Council and the UK’s Financial Policy Committee — are to implement these policy actions.
    Keywords: Financial crises; macroprudential policy; leverage; short-term wholesale funding; credit crunch; household debt; aggregate demand externality; countercyclical capital buffer; loan to value ratio; loan to income ratio
    JEL: G01 G21 G23 G28
    Date: 2018–08–03
  37. By: Brian Bonis; Lauren Fiesthumel; Jamie Noonan
    Abstract: This note discusses the various valuation measures of the Fed’s securities holdings, what these values mean, and the expected evolution of the value of the SOMA portfolio.
    Date: 2018–08–13
  38. By: Lie, Denny
    Abstract: This paper investigates the role of observed offcial inflation-target adjustments in aggregate macroeconomic fluctuations in Indonesia, using an estimated Dynamic Sto- chastic General Equilibrium (DSGE) model. The paper finds that these adjustments or shocks play a non-trivial role in the fluctuations of inflation and nominal interest rate in Indonesia. Output fluctuations, however, are virtually unaffected. A counter- factual exercise shows that a gradual reduction in Bank Indonesia's inflation target may have not been optimal. The paper also provides additional insights on the con- tribution of various shocks in driving aggregate fluctuations in Indonesia. Technology and monetary-policy shocks are found to be the main driving factor for both output and inflation fluctuations. Movements in the nominal interest rate are mostly driven by preference and risk-premium shocks, with inflation-target shocks playing a larger role in the longer run. The inclusion of inflation-target shocks in the model is also shown to improve the model's fit and out-of-sample predictive performance..
    Keywords: Inflation target, inflation-target adjustments or shocks, DSGE model for Indonesia, source of aggregate fluctuations, Bank Indonesia
    Date: 2018–06

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