nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒09‒03
43 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Changes in Monetary Regimes and the Identification of Monetary Policy Shocks: Narrative Evidence from Canada By Julien Champagne; Rodrigo Sekkel
  2. Phillips Curve Relationship in India: Evidence from State-Level Analysis By Behera, Harendra; Wahi, Garima; Kapur, Muneesh
  3. The Dollar Ahead of FOMC Target Rate Changes By Karnaukh, Nina
  4. Global Effective Lower Bound and Unconventional Monetary Policy By Jing Cynthia Wu; Ji Zhang
  5. Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies By Julio Carrillo; Enrique G. Mendoza; Victoria Nuguer; Jessica Roldan-Pena
  6. Asset Price Learning and Optimal Monetary Policy By Colin Caines; Fabian Winkler
  7. Central Bank Communication and Monetary Policy Surprises in Chile By Andrea Pescatori
  8. Transmission of monetary policy through global banks: whose policy matters? By Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter
  9. Interest Rate Spreads and Forward Guidance By Christian Bredemeier; Andreas Schabert; Christoph Kaufmann
  10. Money as an Inflationary Phenomenon By Markus Pasche
  11. Inflation Expectations in India: Learning from Household Tendency Surveys By Abhiman Das; Kajal Lahiri; Yongchen Zhao
  12. Forward Guidance and Heterogeneous Beliefs By Andrade, Philippe; Gaballo, Gaetano; Mengus, Eric; Mojon, Benoît
  13. Russia’s Monetary Policy in 2017 By Bozhechkova Alexandra; Trunin Pavel; Knobel Alexander; Kiyutsevskaya Anna
  14. Forward Guidance By Marcus Hagedorn; Iourii Manovskii; Jinfeng Luo; Kurt Mitman
  15. On the Normality of Negative Interest Rates By Matheus R. Grasselli; Alexander Lipton
  16. Financial stability, monetary policy and the payment intermediary share By Moritz Lenel; Martin Schneider; Monika Piazzesi
  17. The quanto theory of exchange rates By Kremens, Lukas; Martin, Ian
  18. Rollover Risk and Bank Lending Behavior: Evidence from Unconventional Central Bank Liquidity By Martina Jasova; Caterina Mendicino; Dominik Supera
  19. Euro Area Policies; Financial Sector Assessment Program-Technical Note-Systemic Liquidity Management By International Monetary Fund
  20. Monetary Policy and Macroeconomic Stability Revisited By Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
  21. Enhancing central bank communications with behavioural insights By Bholat, David; Broughton, Nida; Parker, Alice; Ter Meer, Janna; Walczak, Eryk
  22. Sweden's Fiscal Framework and Monetary Policy By Eric M. Leeper
  23. Unconventional Monetary Policy and Risk-Taking: Evidence from Agency Mortgage REITs By Frame, W. Scott; Steiner, Eva
  24. Long-run determination of the nominal exchange rate in the presence of national debts: Evidence from the yen-dollar exchange rate By Pilbeam, K.; Litsios, I.
  25. The quest for global monetary policy coordination By Bruni, Franco; Siaba Serrate, José; Villafranca, Antonio
  26. Transmission of Monetary Policy in Times of High Household Debt By Youngju Kim; Hyunjoon Lim
  27. Trend Inflation and Inflation Compensation By Juan Angel Garcia; Aubrey Poon
  28. Understanding HANK: Insights from a PRANK By Sushant Acharya; Keshav Dogra
  29. Capital Flows and Financial Stability in Emerging Economies By Baum, Christopher F.; Pundit, Madhavi; Ramayandi, Arief
  30. International Spillovers of Monetary Policy : Conventional Policy vs. Quantitative Easing By Stephanie E. Curcuru; Steven B. Kamin; Canlin Li; Marius del Giudice Rodriguez
  31. A Shadow Rate or a Quadratic Policy Rule? The Best Way to Enforce the Zero Lower Bound in the United States By Martin M. Andreasen; Andrew C. Meldrum
  32. Systematic Monetary Policy and the Macroeconomic Effects of Shifts in Loan-to-Value Ratios By Ruediger Bachmann; Sebastian Rueth
  33. Currency Choices in Contracts By Andres Drenik; Diego Perez; Rishabh Kirpalani
  34. Capital Flows, Beliefs, and Capital Controls By Olena Rarytska; Viktor Tsyrennikov
  35. International Medium of Exchange: Privilege and Duty By Ryan Chahrour; Rosen Valchev
  36. EMU and ECB Conflicts By William Mackenzie
  37. The Welfare Cost of Inflation Revisited: The Role of Financial Innovation and Household Heterogeneity By Shutao Cao; Césaire A. Meh; José-Víctor Ríos-Rull; Yaz Terajima
  38. HEADING FOR LOW DOLLARIZATION By Lissovolik, Yaroslav; Kuznetsov, Aleksei; Berdigulova, Aigul
  39. The Phillips Curve: Price Levels or Real Exchange Rates? By Francois Geerolf
  40. Inflation News and Euro Area Inflation Expectations By Juan Angel Garcia; Sebastian Werner
  41. The Real Meaning of the real Bills Doctrine By Sproul, Michael
  42. Inequality, Business Cycles, and Monetary-Fiscal Policy By Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
  43. Nonlinear Policy Behavior, Multiple Equilibria and Debt-Deflation Attractors By Piergallini, Alessandro

  1. By: Julien Champagne (Bank of Canada); Rodrigo Sekkel (Bank of Canada)
    Abstract: We use narrative evidence along with a novel database of real-time data and forecasts from the Bank of Canada’s staff economic projections from 1974 to 2015 to construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada. We show that it is crucial to take into account the break in the conduct of monetary policy caused by the announcement of inflation targeting in 1991 when estimating the effects of monetary policy. For instance, we find that a 100-basis-point increase in our new shock series leads to a 1.0 per cent peak decrease in real GDP and a 0.5 per cent fall in the price level, while not accounting for the break leads to a very persistent decrease in real GDP and a price puzzle. Albeit the change in monetary policy regime, we find that the effects of monetary policy have not changed much before and after IT. Finally, we compare our results with narrative evidence for the U.S. and the U.K. and find slightly stronger effect of monetary policy on output and significantly smaller effects on the price level in Canada.
    Date: 2018
  2. By: Behera, Harendra; Wahi, Garima; Kapur, Muneesh
    Abstract: This paper revisits the issue of determinants of inflation in India in a Phillips curve framework and makes two key contributions in relation to existing studies. First, in the context of the Reserve Bank moving towards a flexible inflation targeting framework based on consumer price index (CPI) inflation, this paper attempts to model dynamics of the CPI inflation. Second, this paper explores the Phillips curve relationship using sub-national data in a panel-approach. The estimates in this paper confirm the presence of a conventional Phillips curve specification, both for core inflation and headline inflation. Excess demand conditions have the expected hardening effect on inflation, with the impact being more on core inflation. Exchange rate movements are also found to have a significant impact on inflation. Overall, the paper’s findings provide support for the role of a countercyclical monetary policy to stabilise inflation and inflation expectations.
    Keywords: Consumer Price Inflation, Exchange Rate Pass-through, Monetary Policy,Phillips Curve
    JEL: E31 E32 E52 E58
    Date: 2017–07–03
  3. By: Karnaukh, Nina (OH State U)
    Abstract: I find that the U.S. dollar appreciates over the two-day period before contractionary monetary policy decisions at scheduled Federal Open Market Committee (FOMC) meetings and depreciates over the two-day period before expansionary monetary policy decisions. The federal funds futures rate forecasts these dollar movements with a 22% R^{2}. A high federal funds futures spread three days in advance of an FOMC meeting not only predicts the target rate rise, but also predicts a rise in the dollar over the subsequent two-day period. A simple trading strategy, which exploits this predictability, exhibits a 0.93 Sharpe ratio. My findings imply that information about monetary policy changes is reflected first in the fixed income markets, and only later becomes reflected in currency markets.
    JEL: E52 F31 G12 G17
    Date: 2018–03
  4. By: Jing Cynthia Wu; Ji Zhang
    Abstract: In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. We introduce a tractable two-country model to accommodate for unconventional monetary policy. In our model, these anomalies disappear. We allow unconventional policy to be partially active and asymmetric between the countries. Empirically, we find the US, Euro area, and UK have implemented a considerable amount of unconventional monetary policy: the US follows the historical Taylor rule, whereas the others have done less compared to normal times.
    JEL: E52 F00
    Date: 2018–06
  5. By: Julio Carrillo (Banco de México); Enrique G. Mendoza (Department of Economics, University of Pennsylvania); Victoria Nuguer (IADB); Jessica Roldan-Pena (Banco de México)
    Abstract: Quantitative analysis of a New Keynesian model with the Bernanke-Gertler accelerator and risk shocks shows that violations of Tinbergen’s Rule and strategic interaction between policy-making authorities undermine significantly the effectiveness of monetary and financial policies. Separate monetary and financial policy rules, with the latter subsidizing lenders to encourage lending when credit spreads rise, produce higher welfare and smoother business cycles than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to adverse credit conditions. Reaction curves for the choice of policy-rule elasticity that minimizes each authority’s loss function given the other authority’s elasticity are nonlinear, reflecting shifts from strategic substitutes to complements in setting policy-rule parameters. The Nash equilibrium is significantly inferior to the Cooperative equilibrium, both are inferior to a first-best outcome that maximizes welfare, and both produce tight money-tight credit regimes.
    Keywords: Financial Frictions, Monetary Policy, Financial Policy
    JEL: E44 E52 E58
    Date: 2017–02–03
  6. By: Colin Caines; Fabian Winkler
    Abstract: We characterize optimal monetary policy when agents are learning about endogenous asset prices. Boundedly rational expectations induce inefficient equilibrium asset price fluctuations which translate into inefficient aggregate demand fluctuations. We find that the optimal policy raises interest rates when expected capital gains, and the level of current asset prices, is high. The optimal policy does not eliminate deviations of asset prices from their fundamental value. When monetary policymakers are information-constrained, optimal policy can be reasonably approximated by simple interest rate rules that respond to capital gains. Our results are robust to a wide range of belief specifications as well as to the inclusion of an investment channel.
    Keywords: Optimal monetary policy ; Natural real Interest rate ; Learning ; Asset price volatility ; Leaning against the wind
    JEL: E44 E52
    Date: 2018–08–21
  7. By: Andrea Pescatori
    Abstract: This paper assesses the quality of the CBC’s communication policy by looking at the predictability and effectiveness of monetary policy communications by the Central Bank of Chile (CBC). To do so, we construct indeces of monetary policy surprises for the three major communication channels of the CBC: the release of policy meetings’ statements, minutes, and monetary policy reports (IPoM). We assess monetary policy predictability and efficacy by looking at the size and time-evolution of monetary policy surprises associated with meeting statements and the impact of the above communication channels on asset markets. We find that, in general, the CBC’s has been effective in its forward guidance through its statements and IPoM. Policy actions are quite predictable, especially post the global financia crisis. The response of equity prices and the exchange rate to monetary policy surprises have the right sign but are not robust. We also find an asymmetric response of equity prices to minutes suggesting that market participants extract information on the status of the economy especially when minutes have a loosening effect. Finally, to look at the macroeconomic impact we find that a 100 bps monetary policy tightening shock implies a decline in economic activity (IMACEC) of about 2 pp. after one year, while the response of inflation is more muted.
    Keywords: Financial crises;Foreign banks;Monetary policy; monetary policy shocks; proxy VAR; central bank communication; central bank predictability; inflation forecast dispersion, Chile, Monetary policy, monetary policy shocks, proxy VAR, central bank communication, central bank predictability, inflation forecast dispersion, Credit Rationing, Relationship Lending
    Date: 2018–07–06
  8. By: Stefan Avdjiev; Catherine Koch; Patrick McGuire; Goetz von Peter
    Abstract: This paper explores the basic question of whose monetary policy matters for banks' international lending. In the international context, monetary policies from several countries could come into play: the lender's, the borrower's, and that of a third country, the issuer of the currency in which cross-border lending is denominated. Using the rich dimensionality of the BIS international banking statistics, we find significant effects for all three policies. US monetary easing fuels cross-border lending in US dollars, as befits a global funding currency. At the same time, a tightening in the lender or the borrower country reinforces international dollar lending as global banks turn to the greenback for cheaper funding and toward borrowers abroad. Our results also show that stronger capitalization and better access to funding sources mitigate the frictions underpinning the transmission channels. Analogous results for euro-denominated lending confirm that global funding currencies play a key role in international monetary policy transmission.
    Keywords: international banking, dollar lending, global funding currency, monetary policy transmission, international spillovers
    JEL: E59 F42 G21
    Date: 2018–08
  9. By: Christian Bredemeier (University of Cologne); Andreas Schabert (University of Cologne); Christoph Kaufmann (European Central Bank)
    Abstract: Announcements of future monetary policy rate changes have been found to be imperfectly passed through to various interest rates. We provide evidence for rates of return on less liquid assets to respond by less than, e.g., treasury rates to forward guidance announcements of the US Federal Reserve, suggesting that single-interest-rate models tend to overestimate their macroeconomics effects. We apply a macroeconomic model with interest rate spreads stemming from differential pledgeability of assets, implying that assets provide liquidity services to different extents. Consistent with empirical evidence, announcements of future reductions in the policy rate lead to an increase in liquidity premia. The output effects of forward guidance do not increase with length of the guidance period and are substantially less pronounced than they are predicted to be by a standard New Keynesian model. We thereby provide a solution to the so-called "forward guidance puzzle".
    Date: 2018
  10. By: Markus Pasche (FSU Jena)
    Abstract: Empirical tests of the quantity theory and particularly the neutrality of money are based on the idea that money growth "explains", to some extent, inflation. Modern macroeconomic theory, however, considers inflation target- ing central banks which use the interest rate as a policy tool, while money is seen as an endogenous outcome of financial intermediation, i.e. credit creation. A simple NKM model with fiat money demonstrates that money growth is tied to inflation, changes of output and interest rate changes. The latter are determined by inflation and output gap if we consider an inflation-targeting central bank. The quantity equation emerges from the macroeconomic trans- mission process but the economic causalities run from output and inflation to money creation. Hence, money growth does not explain inflation. Besides, the result does not require a sophisticated microfoundation of money demand but simply emerges from the transmission process.
    Keywords: quantity equation, endogenous money, New Keynesian Macroeconomics, inflation targeting, money demand
    JEL: E44 E51
    Date: 2018–08–29
  11. By: Abhiman Das (Indian Institute of Management Ahmedabad); Kajal Lahiri (Department of Economics, University at Albany, State University of New York); Yongchen Zhao (Department of Economics, Towson University)
    Abstract: Using a large household survey conducted by the Reserve Bank of India since 2005, we estimate the dynamics of aggregate inflation expectations over a volatile inflation regime. A simple average of the quantitative responses produces biased estimates of the official inflation data. We therefore estimate expectations by quantifying the reported directional responses. For quantification, we use the Hierarchical Ordered Probit model, in addition to the balance statistic. We find that the quantified expectations from qualitative forecasts track the actual inflation rate better than the averages of the quantitative forecasts, highlighting the filtering role of qualitative tendency surveys. We also report estimates of disagreement among households. The proposed approach is particularly suitable in emerging economies where inflation tends to be high and volatile.
    Keywords: Hierarchical ordered probit model, Quantification, Tendency survey, Disagreement, Indian inflation.
    JEL: C25 D84 E3
    Date: 2018–08
  12. By: Andrade, Philippe; Gaballo, Gaetano; Mengus, Eric; Mojon, Benoît
    Abstract: Central banks' announcements that future interest rates will remain low could signal either a weak future macroeconomic outlook - which is bad news - or a future expansionary monetary policy - which is good news. In this paper, we use the Survey of Professional Forecasters to show that these two interpretations coexisted when the Fed engaged into date-based forward guidance policy between 2011Q3 and 2012Q4. We then extend an otherwise standard New-Keynesian model to study the consequences of such heterogeneous interpretations. We show that it can strongly mitigate the effectiveness of forward guidance and that the presence of few pessimists may require keeping rates low for longer. However, when pessimists are sufficiently numerous forward guidance can even be detrimental.
    Keywords: monetary policy; forward guidance; communication; heterogeneous beliefs; disagreement
    JEL: A10
    Date: 2016–11–01
  13. By: Bozhechkova Alexandra (Gaidar Institute for Economic Policy); Trunin Pavel (Gaidar Institute for Economic Policy); Knobel Alexander (Gaidar Institute for Economic Policy); Kiyutsevskaya Anna (Gaidar Institute for Economic Policy)
    Abstract: The Bank of Russia eased at slow enough pace its monetary policy in 2017 despite substantial deceleration in inflation, holding that ongoing inflation risks were high, including a possible decline in crude oil prices and capital outflow, upturn in consumer demand, fiscal policy uncertainty, as well as a relatively high and unstable degree of inflation expectations. In 2017, the monetary policy rate was cut by 2.25 percentage points to 7.75 percent per annum as the inflation rate over the same period (same-month-year-ago comparison) was down 2.6 percentage points to 2.5 percent. The Russian central bank cut the key interest rate six times: by 0.25 percentage points on March 27, by 0.5 percentage points on May 2, by 0.25 percentage points on June 19, by 0.5 percentage points on September 18, by 0.25 percentage points on October 30, and by 0.5 percentage points on December 15.
    Keywords: Russian economy, monetary policy, money market, exchange rate, inflation, balance of payments
    JEL: E31 E43 E44 E51 E52 E58
    Date: 2018
  14. By: Marcus Hagedorn (University of Oslo); Iourii Manovskii (University of Pennsylvania); Jinfeng Luo (University of Pennsylvania); Kurt Mitman (Stockholm University)
    Abstract: We assess the power of forward guidance—promises about future interest rates—as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. Our results suggest the effects of forward guidance are negligible. A commitment to keep future nominal interest rates low for a few quarters—although macro indicators suggest otherwise—has only trivial effects on current output and employment. We explain theoretically why in complete markets models forward guidance is powerful—generating a “forward guidance puzzle”—and why this puzzle disappears in our model. We also clarify theoretically ambiguous conclusions from previous research about the effectiveness of forward guidance in incomplete and complete markets models.
    Date: 2018
  15. By: Matheus R. Grasselli; Alexander Lipton
    Abstract: We argue that a negative interest rate policy (NIRP) can be an effect tool for macroeconomic stabilization. We first discuss how implementing negative rates on reserves held at a central bank does not pose any theoretical difficulty, with a reduction in rates operating in exactly the same way when rates are positive or negative, and show that this is compatible with an endogenous money point of view. We then propose a simplified stock-flow consistent macroeconomic model where rates are allowed to become arbitrarily negative and present simulation evidence for their stabilizing effects. In practice, the existence of physical cash imposes a lower bound for interest rates, which in our view is the main reason for the lack of effectiveness of negative interest rates in the countries that adopted them as part of their monetary policy. We conclude by discussing alternative ways to overcome this lower bound , in particular the use of central bank digital currencies.
    Date: 2018–08
  16. By: Moritz Lenel (University of Chicago); Martin Schneider (Stanford University); Monika Piazzesi (Stanford University)
    Abstract: The payment intermediary share is the share of fixed income claims held by financial intermediaries with money-like liabilities. It is higher in times of higher risk premia, such as during the 1970s and in recent recessions. This paper proposes a model of a modern monetary economy that accounts for the valuation of fixed income claims as well as their allocation inside vs outside the payment intermediaries. While all assets are valued for their risk and return properties, those held inside payment intermediaries are also valued as collateral that backs inside money. The payment-intermediary share depends on the transactions demand for inside money as well as portfolio responses to uncertainty shocks. It determines the quantitative impact of monetary policy and macro-prudential regulation on asset prices.
    Date: 2018
  17. By: Kremens, Lukas; Martin, Ian
    Abstract: We present a new identity that relates expected exchange rate appreciation to a risk-neutral covariance term, and use it to motivate a currency forecasting variable based on the prices of quanto index contracts. We show via panel regressions that the quanto forecast variable is an economically and statistically significant predictor of currency appreciation and of excess returns on currency trades. Out of sample, the quanto variable outperforms predictions based on uncovered interest parity, on purchasing power parity, and on a random walk as a forecaster of differential (dollar-neutral) currency appreciation.
    JEL: F31 F37 F47 G12 G15
    Date: 2018–08–11
  18. By: Martina Jasova (Princeton University); Caterina Mendicino (European Central Bank); Dominik Supera (Wharton School, University of Pennsylvania)
    Abstract: How does a sudden extension of bank debt maturity affect bank lending in times of crisis? We use the provision of long-term funding by the 2011 European Central Bank's (ECB) very long-term refinancing operations (vLTRO) as a natural experiment to address this question. Our analysis employs a novel dataset that matches the ECB monetary policy and market operations data with the firm credit registry and banks' security holdings in Portugal. We show that lengthening of bank debt maturity in crisis times has a positive and economically sizable impact on bank lending to the real economy. The effects are stronger on the supply of credit to smaller, younger, riskier firms and firms with shorter lending relationships. We also find that loan-level results translate to real and credit effects at the rm level. Finally, we discuss policy side effects and show how the unrestricted liquidity provision provided incentives to banks to purchase more securities and partially substituted away from lending to the real economy.
    Date: 2018
  19. By: International Monetary Fund
    Abstract: The flexibility shown by the ECB/Eurosystem in adapting its framework, as required by circumstances, has helped improve funding and liquidity conditions. Compared to the situation pre-crisis, the ECB/Eurosystem has provided liquidity against a broader range of collateral and for as long as four years in terms of maturity; extended liquidity in foreign currency; conducted outright purchases of public and private sector assets (now tapering off); and reduced interest rates into negative territory. In these arrangements, policy is directed from the center, but is implemented mostly by the National Central Banks (NCBs); risks are largely shared. Market participants are complimentary about the role the ECB/Eurosystem has played in backstopping the financial system and its forward guidance on monetary policy.
    Date: 2018–07–19
  20. By: Yasuo Hirose (Keio University); Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Kansas City)
    Abstract: A large literature has established that the Fed's change from a passive to an active policy response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature's view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The estimated model shows an active policy response to inflation even during the Great Inflation. Moreover, a more active policy response to inflation alone does not suffice for explaining the macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. Our model empirically outperforms its canonical counterpart that is similar to models used in the literature, thus giving strong support to our view.
    Date: 2018
  21. By: Bholat, David (Bank of England); Broughton, Nida (Behavioural Insight Team); Parker, Alice (Bank of England); Ter Meer, Janna (Behavioural Insights Team); Walczak, Eryk (Bank of England)
    Abstract: In this joint Bank of England and Behavioural Insights Team study, we test the effectiveness of different approaches to central bank communications. Using an online experiment with a representative sample of the UK population, we measure how changes to the Bank of England’s summaries of the Inflation Report impact comprehension and trust in its policy messages. We find that the recently introduced Visual Summary of the Inflation Report improves comprehension of its main messages in a statistically significant way compared to the traditional executive summary. We also find that public comprehension and trust can be further improved by making the Visual Summary more relatable to people’s lives. Our findings thus shed light on how central banks can improve communication with the public at a time when trust in public institutions has fallen, while the responsibilities delegated to central banks have increased.
    Keywords: Central bank communications; central bank legitimacy; experimental economics; behavioural economics; Bank of England Vision 2020
    JEL: A12 A13 A29 C21 C83 C90 C91 C93 D83 D91 E52 E58 M38
    Date: 2018–08–15
  22. By: Eric M. Leeper
    Abstract: Basic economic reasoning tells us that monetary and fiscal policies always interact to jointly determine aggregate demand and the overall level of prices in the economy. This paper interprets Sweden's explicit monetary and fiscal frameworks in light of this reasoning, bringing recent Swedish inflation and interest-rate developments to bear on the interpretations. Theory and evidence raise the question of whether the two policy frameworks are mutually consistent.
    JEL: E31 E52 E62
    Date: 2018–06
  23. By: Frame, W. Scott (Federal Reserve Bank of Atlanta); Steiner, Eva (Cornell University)
    Abstract: We study how the Federal Reserve's quantitative easing (QE) influenced the behavior of Agency mortgage real estate investment trusts (REITs)—a set of institutions identified by the Financial Stability Oversight Council as posing systemic risk. We document that Agency mortgage REITs: [i] equity prices reacted to QE announcements and in a manner consistent with their business prospects; [ii] grew markedly during QE2 and receded during QE3 in relation to the Federal Reserve's Agency MBS purchase activity; and [iii] increased their leverage during QE3. Our findings are consistent with unconventional monetary policy actions crowding out private investment and "reaching for yield" behavior by financial institutions.
    Keywords: quantitative easing; risk-taking; REITs; GSEs; mortgages; securitization
    JEL: E58 G21 G23 G28
    Date: 2018–08–01
  24. By: Pilbeam, K.; Litsios, I.
    Abstract: This paper develops an intertemporal optimization model to examine the determinants of the nominal exchange rate in the long run. The model is tested empirically using data from the Japan and the USA. The proposed theoretical specification is well supported by the data and shows that relative national debts as well as monetary and financial factors may play a significant role in the determination of the long-run nominal exchange rate between the yen and the dollar.
    Keywords: Nominal exchange rate; intertemporal optimization; national debt; asset prices; co-integration
    Date: 2018
  25. By: Bruni, Franco; Siaba Serrate, José; Villafranca, Antonio
    Abstract: This paper puts forward a proposal to help monetary policies confront the challenge of the "normalisation" of money creation and interest rates. The difficult unwinding of years of unorthodox policies put financial stability at risk in major monetary centres and in EMEs. The authors argue that global coordination is crucial to facing this challenge. They propose to convene appropriate official meetings to coordinate in an explicit, formal, and well-communicated way the process of normalisation and the discussions on the needed long-term changes in the strategy and institutional setting of monetary policies.
    Keywords: monetary policy,central banks,global cooperation,financial stability,international institutions
    JEL: E51 E58 E61 E63 F33 F42
    Date: 2018
  26. By: Youngju Kim (Macroeconomics Team, Economic Research Institute, The Bank of Korea); Hyunjoon Lim (International Economics Team, Economic Research Institute, The Bank of Korea)
    Abstract: This paper explores whether the effectiveness of monetary policy can be affected by the degree of household indebtedness. We take an interacted panel VAR approach using a panel of 28 countries and thereby obtain several interesting findings. That is, the responses of consumption and investment to monetary shocks are stronger in the state of high household debts. Such responses furthermore become larger in a contractionary monetary policy stance rather than in an expansionary one. Finally, we find that the negative impact of contractionary monetary shocks on the real economy is stronger in the countries with a higher share of adjustable rate loans. We conjecture that these findings lend support for the presence of "cash flow channel" with respect to the transmission of contractionary monetary policy.
    Keywords: Household debt, Monetary policy, Interacted panel VAR, Adjustable-rate loans
    JEL: E52 E62 R38
    Date: 2017–12–29
  27. By: Juan Angel Garcia; Aubrey Poon
    Abstract: This paper incorporates market-based inflation expectations to the growing literature on trend inflation estimation, and finds that there has been a significant decline in euro area trend inflation since 2013. This finding is robust to using different measures of long-term inflation expectations in the estimation, both market-based and surveys. That evidence: (i) supports the expansion of ECB’s UMP measures since 2015; (ii) provides a metric to monitor long-term inflation expectations following their introduction, and the likelihood of a sustained return of inflation towards levels below, but close to, 2% over the medium term
    Keywords: Inflation;Inflation expectations;Stochastic analysis;Econometric models;Euro Area;trend inflation, market-based inflation expectations, state space model, stochastic volatility
    Date: 2018–07–06
  28. By: Sushant Acharya (Federal Reserve Bank of New York); Keshav Dogra (Federal Reserve Bank of New York)
    Abstract: Does market incompleteness radically transform the properties of monetary economies? Using an analytically tractable heterogeneous agent New Keynesian (NK) model, we show that whether incomplete markets resolve `policy paradoxes' in the representative agent NK model (RANK) depends primarily on the cyclicality of income risk, rather than incomplete markets per se. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only if risk is procyclical. Acyclical or countercyclical risk amplifies these puzzles relative to RANK. Cyclicality of risk also affects determinacy: procyclical risk permits determinacy even under a peg, while countercyclical income risk generates indeterminacy even if the Taylor principle holds. Finally, we uncover a new dimension of monetary-fiscal interaction. Since fiscal policy affects the cyclicality of income risk, it influences the effects of monetary policy even when `passive'.
    Date: 2018
  29. By: Baum, Christopher F. (Boston College); Pundit, Madhavi (Asian Development Bank); Ramayandi, Arief (Asian Development Bank)
    Abstract: There is mixed evidence for the impact of international capital flows on financial sector's stability. This paper investigates the relationship between components of gross capital flows and various financial stability indicators for 16 emerging and newly industrialized economies. Departing from panel data methods, for each financial stability proxy, we employ systems of seemingly unrelated regression estimators to allow variation in the estimated relationship across countries, while permitting crossequation restrictions to be imposed within a country. The findings suggest that, after controlling for macroeconomic factors, there are significant effects of different gross capital flow measures on the financial stability proxies. However, the effects are not homogeneous across our sample economies and across flows. Country-specific financial and macroeconomic characteristics help to explain some of these differences.
    Keywords: emerging economies; financial stability; international capital flows
    JEL: E44 F41
    Date: 2017–10–20
  30. By: Stephanie E. Curcuru; Steven B. Kamin; Canlin Li; Marius del Giudice Rodriguez
    Abstract: This paper evaluates the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies. We employ a novel approach to compare the international spillovers of conventional and balance sheet policies undertaken by the Federal Reserve. In principle, conventional monetary policy affects bond yields and financial conditions by affecting the expected path of short rates, while balance-sheet policy is believed act through the term premium. To distinguish the effects of these two types of policies we use a term structure model to decompose longer-term bond yields into expected short-term interest rates and term premiums. We then examine the relative effects of changes in these two components of yields on changes in exchange rates and foreign bond yields. We find that the dollar is more sensitive to expected short-term interest rates than to term premia; moreover, the rise in the sensitivity of the dollar to monetary policy announcements since the GFC owes more to an increased sensitivity of the dollar to expected interest rates than to term premiums. We also find that changes in short rates and term premiums have similar effects on foreign yields. All told, our findings contradict the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies.
    Keywords: Monetary policy ; International spillovers ; Term premium
    JEL: E5 F3
    Date: 2018–08–21
  31. By: Martin M. Andreasen; Andrew C. Meldrum
    Abstract: We study whether it is better to enforce the zero lower bound (ZLB) in models of U.S. Treasury yields using a shadow rate model or a quadratic term structure model. We show that the models achieve a similar in-sample fit and perform comparably in matching conditional expectations of future yields. However, when the recent ZLB period is included in the sample, the models ' ability to match conditional expectations away from the ZLB deteriorates because the time-series{{p}}dynamics of the pricing factors change. In addition, neither model provides a reasonable description of conditional volatilities when yields are away from the ZLB.
    Keywords: Quadratic term structure models ; Sequential regression approach ; Shadow rate models ; Zero lower bound
    JEL: E43 E47 G12
    Date: 2018–08–13
  32. By: Ruediger Bachmann (University of Notre Dame); Sebastian Rueth (Ghent University)
    Abstract: What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? Using a structural VAR, we find that GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls, a result that depends on the systematic reaction of monetary policy. We show that, in our sample, the Fed tended to respond directly to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increase and residential investment declines. The monetary policy reaction function in the US appears to include lending standards in residential markets, a finding we confirm in Taylor rule estimations. Without the endogenous monetary policy reaction residential investment increases. House prices and household (mortgage) debt behave in a similar way. This suggests that an exogenous loosening of LTV ratios is unlikely to explain booms in residential investment and house prices, or run ups in household leverage, at least in times of conventional monetary policy.
    Date: 2018
  33. By: Andres Drenik (Columbia University); Diego Perez (New York University); Rishabh Kirpalani (The Pennsylvania State University)
    Abstract: We study the optimal currency choice in contracts in an economy with credit chains and endogenous government-policy risk. Denominating contracts in local currency helps mitigate real exchange rate risk while denominating in a foreign currency (dollar) minimizes risks due to government policy, for example inflation. In the aggregate, the equilibrium currency denomination calls for a coordination of currencies in bilateral contracts within a chain to avoid costly default due to currency mismatch. This implies that the incentives to denominate in a foreign currency might persist even after government/political risk has been significantly reduced. Our model can help explain the observed hysteresis of dollarization that occurred in several Latin American countries. We also show that the socially optimal allocation would call for even more dollarization than is privately optimal in order to constrain the government’s choices ex-post.
    Date: 2018
  34. By: Olena Rarytska (Cornell University); Viktor Tsyrennikov (IMF)
    Abstract: Addressing policy-makers concerns that the post-GFC international capital flows to merging economies were speculative, we build a model with information frictions and use it to analyze different forms of capital controls. We show theoretically that survival forces proliferate in multi-good economies and that limiting financial trades offers welfare gains despite inhibiting insurance possibilities. Capital controls tame speculation motives, limit movements of the net foreign asset positions, and thus reduce consumption volatility. Our numerical analysis indicates that A) welfare gains from imposing capital controls can be substantial, equivalent to a permanent consumption increase of up to 4%, or 80 times the cost of business cycles. B) Controls that activate only during large inflows or outflows are preferred to those constantly active, e.g. a transaction tax used by some emerging market economies. C) Despite improving macroeconomic stability capital controls may unintentionally lead to increased volatility in the domestic financial markets.
    Date: 2018
  35. By: Ryan Chahrour (Boston College); Rosen Valchev (Boston College)
    Abstract: The United States enjoys an “exorbitant privilege” that allows it to borrow at especially low interest rates. Meanwhile, the dollarization of world trade appears to shield the U.S. from international disturbances. We provide a new theory that links dollarization and exorbitant privilege through the need for an international medium of exchange. We consider a two-country world where international trade happens in decentralized matching markets, and must be collateralized by safe assets — a.k.a. currencies — issued by one of the two countries. Traders have an incentive to coordinate their currency choices and a single dominant currency arises in equilibrium. With small heterogeneity in traders’ information, the model delivers a unique mapping from economic conditions to the dominant currency. Nevertheless, the model delivers a dynamic multiplicity: in steady-state either currency can serve as the international medium of exchange. The economy with the dominant currency enjoys lower interest rates and the ability to run current account deficits indefinitely. Currency regimes are stable, but sufficiently large shocks or policy changes can lead to transitions, with large welfare implications.
    Date: 2018
  36. By: William Mackenzie
    Abstract: In dynamical framework the conflict between government and the central bank according to the exchange Rate of payment of fixed rates and fixed rates of fixed income (EMU) convergence criteria such that the public debt / GDP ratio The method consists of calculating private public debt management in a public debt management system purpose there is no mechanism to allow naturally for this adjustment.
    Date: 2018–07
  37. By: Shutao Cao; Césaire A. Meh; José-Víctor Ríos-Rull; Yaz Terajima
    Abstract: We document that, across households, the money consumption ratio increases with age and decreases with consumption, and that there has been a large increase in the money consumption ratio during the recent era of very low interest rates. We construct an overlapping generations (OLG) model of money holdings for transaction purposes subject to age (older households use more money), cohort (younger generations are exposed to better transaction technology), and time effects (nominal interest rates affect money holdings). We use the model to measure the role of these different mechanisms in shaping money holdings in recent times. We use our measurements to assess the interest rate elasticity of money demand and to revisit the question of what the welfare cost of inflation is (which depends on how the government uses the windfall gains from the inflation tax). We find that cohort effects are quite important, accounting for half of the increase in money holdings with age. This in turn implies that our measure of the interest rate elasticity of money is -0.6, on the high end of those in the literature. The cost of inflation is lower by one-third in the model and, as a result, lower than previously estimated in the literature that does not account for the secular financial innovation.
    Keywords: Inflation: costs and benefits
    JEL: E21 E41
    Date: 2018
  38. By: Lissovolik, Yaroslav (Eurasian Development Bank); Kuznetsov, Aleksei (Eurasian Development Bank); Berdigulova, Aigul (Eurasian Development Bank)
    Abstract: The global background for the economic recovery of EDB member states has improved this year, in many ways due to rising oil prices and an improved economic growth outlook in the major centers of the global economy. Against the backdrop of improving regional trends in economic growth and mutual trade, we have revised our GDP growth forecasts for the EDB member states in 2017-2019. The appreciable acceleration of GDP growth in Russia beginning in the 2nd quarter of 2017 along with improvements in both foreign and domestic macroeconomic conditions have prompted an upgrade of our GDP growth forecast for 2017, from 1.4% to 1.7%. The preservation and continued improvement of external conditions for the Russian economy is shifting the balance of risks toward higher growth rates. Improvements in the Russian economic performance have delivered a boost to the economies of other EDB countries: the GDP growth forecasts for 2017 have been upgraded for Belarus, from 1.4% to 1.8%, Kyrgyzstan, from 3.7% to 4.0%, Tajikistan, from 6.2% to 7.2%, and Kazakhstan, from 3.4% to 3.7%. In the longer term, the biggest challenge for the global economy consists of the lingering imbalances that have contributed to crises over the past decade. They primarily include the high levels of inequality both within and among countries. The continuing paradox in the global economy is that the majority of countries that most need economic integration (such as the poorest nations or developing countries without access to the sea) are the most disadvantaged in terms of participation in regional or global economic unions or “clubs”. We focus particular attention on the dedollarization of the economies of EDB member states as yet another factor contributing to improvements in the regional economic environment. The level of dollarization has been declining this year in all EDB member states, in many ways due to the stabilization of exchange rates, lower inflation, improved economic activity and regained trust in the national currencies. Among the EDB member states, the most noticeable reductions in the level of dollarization (measured as the share of foreign currency deposits within the structure of the broad money supply) have been recorded in Belarus, Kazakhstan, and Kyrgyzstan (the level of dollarization was close to 30% by mid-2017 in Kyrgyzstan, Kazakhstan, and Russia). Such positive trends will contribute to a more effective monetary policy in the regional economies, more conducive conditions to support lower inflation, as well as conditions aiding stronger financial stability.
    Keywords: Macroeconomy; Forecasting; Eurasia; EAEU Countries; Economic Growth; Monetary Policy
    JEL: E17 E52 E66 O11
    Date: 2017–12–07
  39. By: Francois Geerolf (University of California, Los Angeles)
    Abstract: This paper argues that the Phillips Curve is driven by a correlation between real exchange rates and economic activity, which implies a correlation between inflation and economic activity in fixed exchange rate regimes. According to this interpretation, the Phillips Curve is a correlation between relative prices and economic activity, and does not result from a monetary phenomenon. Three new facts are put forward to support that hypothesis. First, the original Phillips relation is valid in fixed exchange rate regimes, including across regions of the same country, and becomes flatter as the exchange rate regime moves continuously from fixed to floating. Second, when nominal or real exchange rates are used in place of inflation, the Phillips relation is restored in floating exchange rate regimes. Third, identified aggregate demand shocks (such as tax cuts) drive a positive relation between real exchange rates and economic activity in the reduced form. A textbook international finance model is developed to help rationalize these findings. This hypothesis implies that the US Phillips Curve broke down in the 1970s following the collapse of the Bretton Woods system.
    Date: 2018
  40. By: Juan Angel Garcia; Sebastian Werner
    Abstract: Do euro area inflation expectations remain well-anchored? This paper finds that the protracted period of low (and below-target) inflation in the euro area since 2013 has weakened their anchoring. Testing their sensitivity to inflation and macroeconomic news, this paper expands existing results in two key dimensions. First, by analyzing all available (advanced) inflation releases. Second, the reactions of expectations are investigated at daily, time-varying and intraday frequency regressions to add robustness to our conclusions. Results point to a significant impact of inflation news over recent years that had not been observed before in the euro area.
    Keywords: Inflation;Inflation expectations;Monetary policy;Econometric models;Euro Area;inflation, market-based inflation expectations, macroeconomic news, monetary policy
    Date: 2018–07–19
  41. By: Sproul, Michael
    Abstract: The real bills doctrine asserts that money should be issued in exchange for short-term real bills of adequate value. Critics of this doctrine have thought of it as a means to make the money supply move in step with the production of goods, a task at which it supposedly fails. In this essay I explain that the real bills doctrine is actually a means to make the money supply move in step with the money-issuer’s assets. When viewed this way, I find that the real bills doctrine is an effective means to prevent inflation. More importantly, the real bills doctrine is a means to make the quantity of money grow and shrink with the needs of business, thus preventing money shortages and the resulting recessions.
    Keywords: real bills, money, inflation
    JEL: E50
    Date: 2018–06–26
  42. By: Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
    Abstract: We study optimal monetary and fiscal policy in a model with heterogeneous agents, incomplete markets, and nominal rigidities. We develop numerical techniques to approximate Ramsey plans and apply them to a calibrated economy to compute optimal responses of nominal interest rates and labor tax rates to aggregate shocks. Responses differ qualitatively from those in a representative agent economy and are an order of magnitude larger. Taylor rules poorly approximate the Ramsey optimal nominal interest rate. Conventional price stabilization motives are swamped by an across person insurance motive that arises from heterogeneity and incomplete markets.
    JEL: C63 E52 E63
    Date: 2018–06
  43. By: Piergallini, Alessandro
    Abstract: This paper analyzes global dynamics in a macroeconomic model where both monetary and fiscal policies are nonlinear, consistent with empirical evidence. Nonlinear monetary policy, in which the nominal interest rate features an increasing marginal reaction to inflation, interacting with nonlinear fiscal policy, in which the primary budget surplus features an increasing marginal reaction to debt, gives rise to four steady-state equilibria. Each steady state exhibits in its neighborhood a pair of 'active'/'passive' monetary/fiscal policies à la Leeper-Woodford, and is typically investigated in isolation within linearized monetary models. We show that, when global nonlinear dynamics are taken into account, such steady states are endogenously connected. In particular, the global dynamics reveals the existence of infinite self-fulfilling paths that originate around the steady states locally displaying either monetary or fiscal 'dominance' — and thus locally delivering equilibrium determinacy — as well as around the unstable steady state with active monetary-fiscal policies, and that converge into an unintended high-debt/low-inflation (possibly deflation) attractor. Such global trajectories — bounded by two heteroclinic orbits connecting the three out-of-the-trap steady states — are, however, obscured if the four monetary-fiscal policy mixes are studied locally and disjointly.
    Keywords: Nonlinear Monetary and Fiscal Policy Behavior; Evolutionary Macroeconomic Modelling; Multiple Equilibria; Global Nonlinear Dynamics; Debt-Deflation Traps.
    JEL: C61 C62 D91 E52 E62 E63
    Date: 2018–02–26

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