nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒09‒10
forty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Boundaries of Central Bank Independence: Lessons from Unconventional Times By Athanasios Orphanides
  2. Output Hysteresis and Optimal Monetary Policy By Sanjay Singh
  3. Money as an Inflationary Phenomenon By Markus Pasche
  4. The Role of Money in Federal Reserve Policy By Qureshi, Irfan
  5. Disagreement and Monetary Policy By Elisabeth Falck; Mathias Hoffmann; Patrick Hürtgen
  6. Delphic and Odyssean monetary policy shocks: Evidence from the euro-area By Filippo Ferroni
  7. Should we care about central bank profits? By Francesco Chiacchio; Grégory Claeys; Francesco Papadia
  8. Commodity Currencies and Monetary Policy By Michael B. Devereux; Gregor W. Smith
  9. Monetary Transmission through Shadow Banks By Kairong Xiao
  10. There is an alternative: A two-tier European currency community By Scharpf, Fritz W.
  11. Monetary Policy Announcement and Algorithmic News Trading in the Foreign Exchange Market By Keiichi Goshima; Yusuke Kumano
  12. Unconventional monetary policy in a small open economy By MacDonald, Margaux; Popiel, Michal
  13. Inflation Targeting with Sovereign Default Risk By Cristina Arellano; Gabriel Mihalache; Yan Bai
  14. Monetary Easing, Investment and Financial Instability By Acharya, Viral V; Plantin, Guillaume
  15. Vehicle Currency Pricing and Exchange Rate Pass-Through By Chen, Natalie; Chung, Wanyu; Novy, Dennis
  16. International Capital Market Frictions and Spillovers from Quantitative Easing By MacDonald, Margaux
  17. Risk Management-Driven Policy Rate Gap By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  18. What to expect from the lower bound on interest rates: evidence from derivatives prices By Mertens, Thomas M.; Williams, John C.
  19. The Demand for Money at the Zero Interest Rate Bound By Tsutomu Watanabe; Tomoyoshi Yabu
  20. Monetary Policy Shifts and Central Bank Independence By Qureshi, Irfan
  21. The Monetary Policy Response to Uncertain Inflation Persistence By Robert J. Tetlow
  22. "Twenty Years of the German Euro Are More than Enough" By Joerg Bibow
  23. Super-inertial interest rate rules are not solutions of Ramsey optimal monetary policy By Jean-Bernard Chatelain; Kirsten Ralf
  24. Macroprudential Policy: Promise and Challenges By Enrique Mendoza
  25. Reserves for All? Central Bank Digital Currency, Deposits, and their (Non)-Equivalence By Dirk Niepelt
  26. Macroeconomic Independence and Optimum Currency Area in the Eurozone: An Alternative Assessment By Simeon Nanovsky
  27. Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission By Thomas Hintermaier; Winfried Koeniger
  28. The Formation of Consumer Inflation Expectations: New Evidence From Japan's Deflation Experience By Jess Diamond; Kota Watanabe; Tsutomu Watanabe
  29. Some Implications of Uncertainty and Misperception for Monetary Policy By Christopher J. Erceg; James Hebden; Michael T. Kiley; J. David Lopez-Salido; Robert J. Tetlow
  30. Private Money Creation, Liquidity Crises, and Government Intervention By Benigno, Pierpaolo; Robatto, Roberto
  31. The Transmission of Monetary Policy Shocks By Miranda-Agrippino, Silvia; Ricco, Giovanni
  32. The Economics of Cryptocurrencies - Bitcoin and Beyond By Chiu, Jonathan; Koeppl, Thorsten
  33. Reallocation Effects of Monetary Policy By OIKAWA Koki; UEDA Kozo
  34. Central Bank Balance Sheet Policies Without Rational Expectations By Iovino, Luigi; Sergeyev, Dmitriy
  35. Why is there so much Inertia in Inflation and Output? A Behavioral Explanation By Yuemei Ji
  36. Model simplification and variable selection: A Replication of the UK inflation model by Hendry (2001) By Blazejowski, Marcin; Kufel, Paweł; Kwiatkowski, Jacek
  37. Modelling Volatility of Cryptocurrencies Using Markov-Switching Garch Models By Guglielmo Maria Caporale; Timur Zekokh
  38. Central African Economic and Monetary Community; A New Medium-Term Approach for International Reserve Management By Mario de Zamaroczy; Vincent Fleuriet; Jose G Gijon
  39. Investigating Predictors of Inflation in Nigeria: BMA and WALS Techniques By Tumala, Mohammed M; Olubusoye, Olusanya E; Yaaba, Baba N; Yaya, OlaOluwa S; Akanbi, Olawale B
  40. Forecasting Nigerian Inflation using Model Averaging methods: Modelling Frameworks to Central Banks By Tumala, Mohammed M; Olubusoye, Olusanya E; Yaaba, Baba N; Yaya, OlaOluwa S; Akanbi, Olawale B

  1. By: Athanasios Orphanides (Professor of the Practice of Global Economics and Management at the MIT Sloan School of Management (E-mail:
    Abstract: What institutional arrangements for an independent central bank with a price stability mandate promote good policy outcomes when unconventional policies become necessary? Unconventional monetary policy poses challenges. The large scale asset purchases needed to counteract the zero lower bound on nominal interest rates have uncomfortable fiscal and distributional consequences and require central banks to assume greater risks on their balance sheets. Lack of clarity on the precise definition of price stability, coupled with concerns about the legitimacy of large balance sheet expansions, hinders policy: It encourages the central bank to eschew the decisive quantitative easing needed to reflate the economy and instead to accommodate too-low inflation. The experience of the Bank of Japan fs encounter with the zero lower bound suggests important benefits from a clear definition of price stability as a symmetric 2% goal for inflation, which the Bank of Japan adopted in 2013.
    Keywords: Bank of Japan, Zero lower bound, Quantitative easing, Central bank independence, Price stability, Inflation target, Balance sheet risk
    JEL: E52 E58 E61 N15
    Date: 2018–08
  2. By: Sanjay Singh (University of California, Davis)
    Abstract: We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon termed as output hysteresis. We incorporate Schumpeterian endogenous growth into a business cycle model with nominal rigidities. In the model, incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing R&D and producing a permanent loss in output. Output hysteresis arises under a standard Taylor rule, but not under a strict inflation targeting rule when the nominal interest rate is away from the zero lower bound (ZLB). At the ZLB, a central bank unable to commit to future policy actions suffers from hysteresis bias: it does not offset past losses in potential output. A new policy rule that targets zero output hysteresis approximates the optimal policy by keeping output at the first-best level. Estimated structural impulse response functions for key variables align with predictions of the model. A quantitative model provides evidence of significant output hysteresis resulting from endogenous growth over the Great Recession.
    Date: 2018
  3. 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 targeting 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 transmission 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
  4. By: Qureshi, Irfan
    Abstract: Is the classic Taylor rule misspecified? I show that the inability of the Taylor rule to explain the federal funds rate using real-time data stems from the omission of a money growth objective. I highlight the significant role played by money in the policy discourse during the Volcker-Greenspan era using new FOMC data, benchmarking a novel characterization of “good” policy. An application of this framework offers a unified policy-based explanation of the Great Moderation and Recession. Welfare analysis based on the New-Keynesian model endorses the rule with money. The evidence raises significant concerns about relying on the simple Taylor rule as a policy benchmark and suggests why money may serve as a useful indicator in guiding future monetary policy decisions.
    Keywords: Financial Economics
    Date: 2016–11–11
  5. By: Elisabeth Falck (Goethe University Frankfurt); Mathias Hoffmann (Deutsche Bundesbank); Patrick Hürtgen (Deutsche Bundesbank)
    Abstract: Time-variation in disagreement about inflation expectations is a stylized fact in survey data, but little is known on how disagreement interacts with the efficacy of monetary policy. In times of high disagreement we estimate that a 100 bps increase in the U.S. policy rate leads to a significant short-term increase in inflation and in inflation expectations of up to 1.0 percentage point, whereas in times of low disagreement we find a significant decline of close to 1.0 percentage point. We reconcile these state-dependent effects with a dispersed information New Keynesian model, where we calibrate the level of disagreement to U.S. data.
    Date: 2018
  6. By: Filippo Ferroni (Chicago FED)
    Abstract: We use euro intraday data to identify monetary policy surprises in the euro area. We find that communication right after the Governing Council meetings convey information that moves the yield curve far out. Moreover, the nature of information revealed via this communication changed over time. Until 2013, unexpected variations in future interest rates were positively correlated with changes in market-based measure of inflation expectations consistent with news on future macroeconomic conditions. That negative correlation disappeared roughly when forward guidance on future rates started to be given by the Governing Council. We use sign restrictions on the joint reaction of expected interest rates and inflation rates to the announcements to disentangle two types of monetary policy surprises: one about the future state of the economy (Delphic); the other about the future stance of the monetary authority (Odyssean). We find that a surprise that lowers future interest rates does not engineer a boom. By contrast, a surprise that lowers future interest rates because it signals future accommodation does.
    Date: 2018
  7. By: Francesco Chiacchio; Grégory Claeys; Francesco Papadia
    Abstract: Central banks are not profit-maximising institutions; their objectives are rather of macroeconomic nature. The European Central Bank’s overriding objective is price stability. Nevertheless, there are three good reasons to conclude that it is preferable for central banks to achieve profits rather than to record losses. First, taxpayers endow central banks with large amounts of resources and one should be worried if this amount of resources did not produce any income. In a way, the efficient use by the central bank of the financial resources with which it is endowed is as relevant as the efficient use of the human resources at its disposal. Second, financial strength could affect the ability of monetary authorities to fulfil their mandates. In particular there is the fear that a central bank incurring systematic losses and ending up with negative capital would find it difficult to effectively pursue its macroeconomic objective. Third, profitable operations might be an indication that central banks are implementing the right policies - to achieve profits the central bank must purchase assets when they are undervalued and sell when they are overvalued, thus stabilising their prices. Overall, the Eurosystem has so far respected the principle of it being better to realise profits than losses. The accounts of the ECB, indeed of the entire Eurosystem, show that it generates a fairly stable profit flow. Monetary operations, ie refinancing operations, and securities purchases contribute substantially to these profits. This conclusion is confirmed by measuring the financial results of past purchases of foreign exchange and more recent purchases of securities from a mark-to-market perspective, instead of an accounting perspective. In the specific case of the Public Sector Purchase Programme (PSPP) this was because the coupons on the securities more than offset the capital losses - overall the Eurosystem has bought securities under the PSPP programme at prices higher than current ones. The considerations that might justify purchase operations, like the PSPP or other similar interventions, are very complex and require careful judgement. Once their macroeconomic desirability is established, however, the ECB has the necessary financial strength to implement them safely.
    Date: 2018–08
  8. By: Michael B. Devereux (University of British Columbia); Gregor W. Smith (Queen's University)
    Abstract: Countries that specialize in commodity exports often exhibit a correlation between the relevant commodity price and the value of their currency. We explore a natural but little-studied explanation for this correlation. An increase in the commodity price leads to increases in the future values of the international differential in policy interest rates. The tightening of expected future monetary policy relative to the US then leads to an immediate appreciation. We show theoretically that this correlation depends on the stance of monetary policy. We then derive a statistical model that embodies this mechanism and test the over-identifying restrictions for Australia, Canada, and New Zealand. For all three countries, controlling for the effect of commodity prices in predicting current and future monetary policy leaves them no significant, remaining role in statistically explaining exchange rates.
    Keywords: commodity currency, exchange rate, monetary policy
    JEL: F31 F41 E52
    Date: 2018–08
  9. By: Kairong Xiao
    Abstract: This paper documents a new transmission channel of monetary policy: the shadow money channel. Analyzing U.S. money supply data from 1987 to 2012, I find that shadow money, namely liquid deposits created by shadow banks, expands significantly when the Federal Reserve tightens monetary policy. Using a structural model of bank competition, I show that this new channel is a result of imperfect competition between commercial and shadow banks in the deposit market with heterogeneous depositors. Due to a lack of a bank charter, shadow banks offer lower transaction convenience and hence must compete on yields. During periods of monetary tightening, shadow banks pass through more rate hikes to depositors, thereby poaching yield-sensitive deposits from commercial banks. Fitting my model to institution-level data from commercial banks and money market funds, I show that shadow money creation offsets 35 cents of each dollar in commercial bank deposit reductions, significantly dampening the impact of monetary tightening. My results suggest that monetary tightening may unintentionally drive more deposits into the uninsured shadow banking sector, thereby amplifying the risk of bank runs.
    Date: 2018
  10. By: Scharpf, Fritz W.
    Abstract: The performance of EMU member economies is shaped by different and structurally entrenched "growth models" whose success depends on specific macro-regimes - restrictive for export-led growth, accommodating for demand-led growth. These two types of models cannot be equally viable under a uniform macro regime, and their divergence threatens the stability of the EMU. The present attempt to enforce structural convergence in the euro¬zone appears economically ineffective and lacks democratic legitimacy on the national and the European level. Assuming that complete integration in a democratic federal state is presently unattainable, the paper presents the outline of a more flexible European Currency Community that would include a smaller and more coherent EMU and the member states of a revised "Exchange Rate Mechanism II" (ERM) whose currencies are flexibly linked to the euro. It would restore the external economic viability of autonomous domestic policy choices, and it would protect its members against speculative currency fluctuations.
    Keywords: autonomy,currency coordination,EMS,EMU,ERM,EU,legitimacy,Autonomie,EWS,EWU,Legitimität,Währungskoordination,WKM
    Date: 2018
  11. By: Keiichi Goshima (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Yusuke Kumano (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, Research and Statistics Department), Bank of Japan (E-mail:
    Abstract: We analyze the effects of algorithmic news trading (ANT) in the foreign exchange market around the time that the Bank of Japan makes public announcements of its policy decisions. To observe the activity level of ANT, we propose a novel measure based on a web access record to a central bank fs webpage. We find that our proposed measure appropriately captures the activity level of ANT. Employing an event study analysis and a VAR analysis, we find that ANT increases market volatility immediately after the monetary policy announcements, and that ANT activity indirectly decreases market liquidity through increasing volatility. In addition, we suggest that ANT trades based on changes of texts on monetary policy announcements.
    Keywords: Algorithmic trading, Monetary policy, High frequency data, Foreign exchange market, News trading, Market microstructure, Web access record
    JEL: E58 F31 G14
    Date: 2018–08
  12. By: MacDonald, Margaux; Popiel, Michal
    Abstract: This paper investigates the effects of unconventional monetary policy in Canada. We use recently proposed methods to construct a shadow interest rate that captures monetary policy at the zero lower bound (ZLB) and estimate a small open economy Bayesian structural vector autoregressive (B-SVAR) model. Controlling for the US macroeconomic and monetary policy variables, we find that Canadian unconventional monetary policy increased Canadian output by 0.23% per month on average between April 2009 and June 2010. Our empirical framework also allows us to quantify the effects of US unconventional monetary policy, which raised US and Canadian output by 1.21% and 1.94% per month, respectively, on average over the 2008-2015 period.
    Keywords: Financial Economics, Public Economics
    Date: 2016–09
  13. By: Cristina Arellano (Federal Reserve Bank of Minneapolis); Gabriel Mihalache (Stony Brook University); Yan Bai (University of Rochester)
    Abstract: During the 1980s and 1990s emerging markets experienced recurrent episodes of high inflation and debt crises with high sovereign default premia, and many default events. Since the 2000s, inflation has come down in many of these emerging markets and debt crises have been limited. These developments have occurred as central banks in emerging markets have become more independent and have adopted a monetary policy of setting interest rates to target inflation. In this paper we study the interplay of monetary policy and sovereign default risk and show that inflation target induce not only lower inflation rates but also lower default risk of sovereign debt.
    Date: 2018
  14. By: Acharya, Viral V; Plantin, Guillaume
    Abstract: This paper studies a model in which a low monetary policy rate lowers the cost of capital for firms, thereby spurring productive investment. Low interest rates however also induce firms to lever up so as to increase payouts to shareholders. Such leveraged share buybacks and productive investment compete for funds, so much so that the former may crowd out the latter. Below an endogenous lower bound, monetary easing generates only limited capital expenditures that come at the cost of large and destabilizing financial risk-taking.
    Date: 2018–07
  15. By: Chen, Natalie; Chung, Wanyu; Novy, Dennis
    Abstract: Using detailed firm-level transactions data for UK imports, this paper studies the relationship between invoicing currency choices and the response of import prices to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import prices are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Aggregate pass-through therefore substantially increases once we account for vehicle currencies. We also show how this translates into higher pass-through for UK consumer prices, in particular during the Great Recession and in the period following the Brexit referendum. Finally, we develop a theoretical framework to conceptualize exchange rate pass-through in the context of vehicle currency pricing. Overall, our results contribute to understanding the exchange rate disconnect puzzle, and have implications for the setting of monetary policy.
    Keywords: CPI; Dollar; Euro; Exchange Rate Pass-Through; Inflation; Invoicing; Sterling; UK; Vehicle Currency Pricing
    JEL: F14 F31 F41
    Date: 2018–07
  16. By: MacDonald, Margaux
    Abstract: This paper analyzes the impact of large-scale, unconventional asset purchases by advanced country central banks on emerging market economies (EMEs) from 2008 to 2014. I show that there was substantial heterogeneity in the way these purchases affected EME currency, equity, and long-term sovereign bond markets. Drawing on the gravity-in-international-finance literature, I show that the degree of capital market frictions between EMEs and advanced countries is significant in explaining the observed heterogeneity in how these asset prices were affected. This result is robust to considerations of domestic monetary policy, exchange rate regime, and capital control policies in EMEs. Furthermore, I show that the size and direction of asset price movements in EMEs depended both on the type of assets purchased and on whether it was the U.S. Federal Reserve or other advanced country central banks engaging in the purchases.
    Keywords: Financial Economics
    Date: 2018–03
  17. By: Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
    Abstract: We employ real-time data available to the US monetary policy makers to estimate a Taylor rule augmented with a measure of financial uncertainty over the period 1969-2008. We find evidence in favor of a systematic response to financial uncertainty over and above that to expected inflation, output gap, and output growth. However, this evidence regards the Greenspan-Bernanke period only. Focusing on this period, the “risk-management” approach is found to be responsible for monetary policy easings for up to 75 basis points of the federal funds rate.
    Keywords: risk management-driven policy rate gap, uncertainty, monetary policy, Taylor rules, real-time data
    JEL: C20 E40 E50
    Date: 2018
  18. By: Mertens, Thomas M. (Federal Reserve Bank of San Francisco); Williams, John C. (Federal Reserve Bank of New York)
    Abstract: This paper analyzes the effects of the lower bound for interest rates on the distributions of expectations for future inflation and interest rates. We study a stylized New Keynesian model where the policy instrument is subject to a lower bound to motivate the empirical analysis. Two equilibria emerge: In the “target equilibrium,” policy is unconstrained most or all of the time, whereas in the “liquidity trap equilibrium,” policy is mostly or always constrained. We use options data on future interest rates and inflation to study whether the decrease in the natural rate of interest leads to forecast densities consistent with the theoretical model. We develop a lower bound indicator that captures the effects of the lower bound on the distribution of interest rates. Qualitatively, we find that the evidence is largely consistent with the theoretical predictions in the target equilibrium and find no evidence in favor of the liquidity trap equilibrium. Quantitatively, while the lower bound has a sizable effect on the distribution of future interest rates, its impact on forecast densities for inflation is relatively modest.
    Keywords: zero lower bound; inflation expectations; monetary policy; multiple equilibria
    JEL: E43 E52 G12
    Date: 2018–08–01
  19. By: Tsutomu Watanabe (Graduate School of Economics,University of Tokyo); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University)
    Abstract: This paper estimates a money demand function using US data from 1980 onward, including the period of near-zero interest rates following the global financial crisis. We conduct cointegration tests to show that the substantial increase in the money-income ratio during the period of near-zero interest rates is captured well by the money demand function in log-log form, but not by that in semi-log form. Our result is the opposite of the result obtained by Ireland (2009), who, using data up until 2006, found that the semi-log specification performs better. The difference in the result from Ireland (2009) mainly stems from the difference in the observation period employed: our observation period contains 24 quarters with interest rates below 1 percent, while Ireland’s (2009) observation period contains only three quarters. We also compute the welfare cost of inflation based on the estimated money demand function to find that it is very small: the welfare cost of 2 percent inflation is only 0.04 percent of national income, which is of a similar magnitude as the estimate obtained by Ireland (2009) but much smaller than the estimate by Lucas (2000).
    Keywords: : money demand function; cointegration; zero lower bound; near-zero interest rates; welfare cost of inflation; log-log form; semi-log form; interest elasticity of money demand
    JEL: C22 C52 E31 E41 E43 E52
    Date: 2018–09
  20. By: Qureshi, Irfan
    Abstract: Why does low central bank independence generate high macroeconomic instability? A government may periodically appoint a subservient central bank chairman to exploit the inflation-output trade-off, which may generate instability. In a New Keynesian framework, time-varying monetary policy is connected with a “chairman effect.” To identify departures from full independence, I classify chairmen based on tenure (premature exits), and the type of successor (whether the replacement is a government ally). Bayesian estimation using cross-country data confirms the relationship between policy shifts and central bank independence, explaining approximately 25 (15) percent of inflation volatility in developing (advanced) economies. Theoretical analyses reveal a novel propagation mechanism of the policy shock.
    Keywords: Financial Economics
    Date: 2017–09–09
  21. By: Robert J. Tetlow
    Abstract: This FEDS Note considers the implications of uncertainty regarding the persistence of inflation for the conduct of monetary policy.
    Date: 2018–08–29
  22. By: Joerg Bibow
    Abstract: This paper reviews the performance of the euro area since the euro's launch 20 years ago. It argues that the euro crisis has exposed existential flaws in the euro regime. Intra-area divergences and the corresponding buildup of imbalances had remained unchecked prior to the crisis. As those imbalances eventually imploded, member states were found to be extremely vulnerable to systemic banking problems and abruptly deteriorating public finances. Debt legacies and high unemployment continue to plague euro crisis countries. Its huge current account surplus highlights that the euro currency union, toiling under the German euro and trying to emulate the German model, has become very vulnerable to global developments. The euro regime is flawed and dysfunctional. Europe has to overcome the German euro. Three reforms are essential to turn the euro into a viable European currency. First, divergences in competitiveness positions must be prevented in future. Second, market integration must go hand in hand with policy integration. Third, the euro is lacking a safe footing for as long as the ECB is missing a federal treasury partner. Therefore, establishing the vital treasury/central bank axis that stands at the center of power in sovereign states is essential.
    Keywords: Euro; Euro Crisis; Banking Crisis; Debt Crisis; Monetary Policy; Lender of Last Resort; Fiscal Policy
    JEL: E30 E44 E58 E61 E62 F34
    Date: 2018–08
  23. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (ESCE – International Business School)
    Abstract: Giannoni and Woodford (2003) found that the equilibrium determined by com- mitment to a super-inertial rule (where the sum of the parameters of lags of interest rate exceed ones and does not depend on the auto-correlation of shocks) corresponds to the unique bounded solution of Ramsey optimal policy for the new-Keynesian model. By contrast, this note demonstrates that commitment to an inertial rule (where the sum of the parameters of lags of interest rate is below one and depends on the auto-correlation of shocks) corresponds to the unique bounded solution.
    Keywords: Ramsey optimal policy,Interest rate smoothing,Super-inertial rule,Inertial rule,New-Keynesian model
    Date: 2018–08
  24. By: Enrique Mendoza (Department of Economics, University of Pennsylvania)
    Abstract: Macroprudential policy holds the promise of becoming a powerful tool for preventing financial crises. Financial amplification in response to domestic shocks or global spillovers and pecuniary externalities caused by Fisherian collateral constraints provide a sound theoretical foundation for this policy. Quantitative studies show that models with these constraints replicate key stylized facts of financial crises, and that the optimal financial policy of an ideal constrained-efficient social planner reduces sharply the magnitude and frequency of crises. Research also shows, however, that implementing effective macroprudential policy still faces serious hurdles. This paper highlights three of them: (i) complexity, because the optimal policy responds widely and non-linearly to movements in both domestic factors and global spillovers due to regime shifts in global liquidity, news about global fundamentals, and recurrent innovation and regulatory changes in world markets, (ii) lack of credibility, because of time-inconsistency of the optimal policy under commitment, and (iii) coordination failure, because a careful balance with monetary policy is needed to avoid quantitatively large inefficiencies resulting from violations of Tinbergen’s rule or strategic interaction between monetary and financial authorities.
    JEL: E0 F0 G0
    Date: 2016–10–24
  25. By: Dirk Niepelt
    Abstract: I offer a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not affect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions.
    Keywords: central bank digital currency, Fedcoin, CADcoin, e-krona, e-Peso, J Coin, reserves for all, deposits, narrow banking, cash, equivalence, central bank, lender of last resort, politico-economic equivalence
    JEL: E42 E51 E58 E61 E63 H63
    Date: 2018
  26. By: Simeon Nanovsky (Nazarbayev University)
    Abstract: This paper attempts to investigate the degree of macroeconomic autonomy among the 12 original members of the eurozone. We develop a new measure of macroeconomic independence based on the concept of the desired policy interest rate each country would have chosen if it had retained its own currency and independent monetary policy. If it is detached from the centrally imposed policy rate and the two behave differently, we take it as an indication that the country should be constrained by the common central bank and has low degree of macroeconomic independence (MAI).We find that the original twelve members have indeed enjoyed varying degrees of MAI. Austria, France, Germany, Italy, and Luxembourg retain highest degree of MAI while Ireland, Greece, and Spain seem to have suffered from the lowest degree of MAI. The newly proposed MAI performs well as an OCA index, if not better than existing indices. On the one hand, so called the ?core? countries show up as those that have maintained high MAI. On the one hand, the ?periphery? countries have retained low MAI in the currency union.
    Keywords: eurozone, optimum currency area, monetary independence
    JEL: F00 E40 E52
    Date: 2018–07
  27. By: Thomas Hintermaier (Economics, Univ Bonn); Winfried Koeniger (University of St.Gallen)
    Abstract: This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and relative house prices in the four largest economies in the euro area: France, Germany, Italy and Spain. We first calibrate a life-cycle incomplete-markets model with a liquid financial asset and illiquid housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of non-housing consumption to changes in the real interest rate and in house prices differ substantially across the analyzed countries, and across age groups within these countries. The different consumption responses to changes in the real interest rate point towards important heterogeneity in monetary-policy transmission within the euro area.
    Date: 2018
  28. By: Jess Diamond (Department of Economics, Hosei University); Kota Watanabe (Canon Institute for Global Studies (GIGS) and University of Tokyo); Tsutomu Watanabe (Graduate School of Economics, University of Tokyo)
    Abstract: Using a new micro-level dataset we investigate the relationship between the inflation experience and inflation expectations of households in Japan. We focus on the period after 1995, when Japan began its era of deflation. Our key findings are fourfold. Firstly, we find that inflation expectations tend to increase with age. Secondly, we find that measured inflation rates of items purchased also increase with age. However, we find that age and inflation expectations continue to have a positive correlation even after controlling for the household-level rate of inflation. Further analysis suggests that the positive correlation between age and inflation expectations is driven to a significant degree by the correlation between cohort and inflation expectations, which we interpret to represent the effect of historical inflation experience on expectations of future inflation rates.
    Date: 2018–08
  29. By: Christopher J. Erceg; James Hebden; Michael T. Kiley; J. David Lopez-Salido; Robert J. Tetlow
    Abstract: When choosing a strategy for monetary policy, policymakers must grapple with mismeasurement of labor market slack, and of the responsiveness of price inflation to that slack. Using stochastic simulations of a small-scale version of the Federal Reserve Board’s principal New Keynesian macroeconomic model, we evaluate representative rule-based policy strategies, paying particular attention to how those strategies interact with initial conditions in the U.S. as they are seen today and with the current outlook. To do this, we construct a current relevant baseline forecast, one that is loosely constructed based on a recent FOMC forecast, and conduct our experiments around that baseline. We find the initial conditions and forecast that policymakers face affects decisions in a material way. The standard advice from the literature, that in the presence of mismeasurement of resource slack policymakers should substantially reduce the weight attached to those measures in setting the policy rate, and substitute toward a more forceful response to inflation, is overstated. We find that a notable response to the unemployment gap is typically beneficial, even if that gap is mismeasured. Even when the dynamics of inflation are governed by a 1970s-style Phillips curve, meaningful response to resource utilization is likely to turn out to be worthwhile, particularly in environments where resource utilization is thought to be tight to begin with and inflation is close to its target level.
    Keywords: Stochastic simulation ; Mismeasurement ; Monetary policy ; Policy analysis ; Uncertainty
    JEL: E31 E32 E52 C63
    Date: 2018–08–23
  30. By: Benigno, Pierpaolo; Robatto, Roberto
    Abstract: We study the joint supply of public and private liquidity when financial intermediaries issue both riskless and risky debt and the economy is vulnerable to liquidity crises. Government interventions in the form of asset purchases and deposit insurance are equivalent (in the sense that they sustain the same equilibrium allocations), increase welfare, and, if fiscal capacity is sufficiently large, eliminate liquidity crises. In contrast, restricting intermediaries to invest in low-risk projects always eliminates liquidity crises but reduces welfare. Under some conditions, deposit insurance gives rise to an equilibrium in which intermediaries that issue insured debt (i.e., traditional banks) coexist with others that issue uninsured debt (i.e., shadow banks), despite the two being ex ante identical.
    Date: 2018–07
  31. By: Miranda-Agrippino, Silvia; Ricco, Giovanni
    Abstract: Despite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identification that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections. We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely misspecified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles.
    Keywords: Financial Economics
    Date: 2017–02–28
  32. By: Chiu, Jonathan; Koeppl, Thorsten
    Abstract: How well can a cryptocurrency serve as a means of payment? We study the optimal design of cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade. The challenge for cryptocurrencies is to overcome double-spending by relying on competition to update the blockchain (costly mining) and by delaying settlement. We estimate that the current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and relies exclusively on money growth rather than transaction fees to nance mining rewards. We also point out that cryptocurrencies can potentially challenge retail payment systems provided scaling limitations can be addressed.
    Keywords: Demand and Price Analysis, Financial Economics
    Date: 2017–09
  33. By: OIKAWA Koki; UEDA Kozo
    Abstract: Central banks across the globe are paying increasing attention to the distributional aspects of monetary policy. In this study, we focus on reallocation among heterogeneous firms triggered by nominal growth. Japanese firm-level data show that large firms tend to grow faster than small firms under higher inflation. We then construct a model that introduces nominal rigidity into endogenous growth with heterogeneous firms. The model shows that, under a high nominal growth rate, firms of inferior quality bear a heavier burden of menu cost payments than do firms of superior quality. This outcome increases the market share of superior firms, while some inferior firms exit the market. This reallocation effect, if strong, yields a positive effect of monetary expansion on both real growth and welfare. The optimal nominal growth can be strictly positive even under nominal rigidity, whereas standard New Keynesian models often conclude that zero nominal growth is optimal. Moreover, the presence of menu costs can improve welfare.
    Date: 2018–08
  34. By: Iovino, Luigi; Sergeyev, Dmitriy
    Abstract: We study the effects of central bank balance sheet policies-namely, quantitative easing and foreign exchange interventions-in a model where people form expectations through the level-k thinking process, which is consistent with experimental evidence on the behavior of people in strategic environments. We emphasize two main theoretical results. First, under a broad set of conditions, central bank interventions are effective under level-k thinking, while they are neutral in the rational expectations equilibrium. Second, forecast errors about future endogenous variables are predictable by balance sheet interventions. We confirm these predictions using data on mortgage purchases by US government sponsored enterprises.
    Date: 2018–08
  35. By: Yuemei Ji
    Abstract: Serial correlation in macroeconomics is pervasive. Macroeconomic modellers find it impossible to model this feature without relying on serially correlated shocks. Using a behavioral macroeconomic model, I show that serial correlation in inflation and output can easily be explained in the context that agents do not have rational expectation. This important feature is missing in the standard New Keynesian rational expectations models. The rational expectation models need serially correlated exogenous shocks to account for the high serial correlation in inflation and output while the behavioral model produces serial correlation in these variables endogenously. I also show that inertia in the beliefs about the future is a strong force in producing the serial correlation in inflation and output.
    Keywords: behavioral macroeconomics, serial correlation, inflation, output gap, inertia in belief, endogenous business cycle
    JEL: E00
    Date: 2018
  36. By: Blazejowski, Marcin; Kufel, Paweł; Kwiatkowski, Jacek
    Abstract: In this paper, we revisit the well-known UK inflation model by Hendry (Journal of Applied Econometrics 2001, 16:255-275. doi: 10.1002/jae.615). We replicate the results in a narrow sense using the gretl and PcGive programs. In a wide sense, we extend the study of model uncertainty using the Bayesian averaging of classical estimates (BACE) approach to compare model reduction strategies. Allowing for the investigation of other specifications, we confirm the same set of significant determinants but find that Hendrys' model is not the most probable.
    Keywords: BACE, gretl, model uncertainty, reduction strategy
    JEL: C11 C52 E31
    Date: 2018–08–30
  37. By: Guglielmo Maria Caporale; Timur Zekokh
    Abstract: This paper aims to select the best model or set of models for modelling volatility of the four most popular cryptocurrencies, i.e. Bitcoin, Ethereum, Ripple and Litecoin. More than 1,000 GARCH models are fitted to the log returns of the exchange rates of each of these cryptocurrencies to estimate a one-step ahead prediction of Value-at-Risk (VaR) and Expected Shortfall (ES) on a rolling window basis. The best model or superior set of models is then chosen by backtesting VaR and ES as well as using a Model Confidence Set (MCS) procedure for their loss functions. The results imply that using standard GARCH models may yield incorrect VaR and ES predictions, and hence result in ineffective risk-management, portfolio optimisation, pricing of derivative securities etc. These could be improved by using instead the model specifications allowing for asymmetries and regime switching suggested by our analysis, from which both investors and regulators can benefit.
    Keywords: cryptocurrencies, volatility, Markov-switching, GARCH
    JEL: C22 G12
    Date: 2018
  38. By: Mario de Zamaroczy; Vincent Fleuriet; Jose G Gijon
    Abstract: This paper discusses possible reserve management approaches in the Central African Economic and Monetary Community (CEMAC). The paper looks beyond the region’s current oil crisis and proposes a new approach to international reserve management in the medium term.
    Keywords: Central African Economic and Monetary Community (CEMAC);Reserve management guidelines;
    Date: 2018–08–03
  39. By: Tumala, Mohammed M; Olubusoye, Olusanya E; Yaaba, Baba N; Yaya, OlaOluwa S; Akanbi, Olawale B
    Abstract: The recent economic conundrum arising from the fall in the international oil price has threatened the maintenance of price stability, a key function of the central bank, therefore the need to investigate predictors of inflationary measures arises. The model averaging method considers uncertainty as part of the model selection, and include information from all candidate models. We analysed a wide spectrum of inflation predictors and all the possible models for Nigeria CPI inflation using the Bayesian Model Averaging and Weighted Average Least Squares. The study uses fifty-nine (59) predictor variables cutting across all sectors of the Nigerian economy and three (3) measures of inflation, namely; all items consumer price index, core consumer price index and food consumer price index. The results from both model averaging techniques showed that maximum lending rate, world food price index and Bureau de change exchange rate are the significant drivers of inflationary measures among focus variables, while foreign assets, credit to private sectors, net credit to government and real effective exchange rate are the drivers of inflationary measures, for the auxiliary variables, strongly supporting the monetarist and open economy views on inflation. The structuralist view is reported to be relatively weaker because government expenditure is only significant at 10.0 per cent..
    Keywords: Bayesian estimation; BMA; Frequentist approach; Inflation rate
    JEL: C20 C4
    Date: 2017
  40. By: Tumala, Mohammed M; Olubusoye, Olusanya E; Yaaba, Baba N; Yaya, OlaOluwa S; Akanbi, Olawale B
    Abstract: As a result of the adverse macroeconomic effect of inflation on welfare, fiscal budgeting, trade performance, international competitiveness and the whole economy, inflation still remains a subject of utmost concern and interest to policy makers. The traditional Philips curve as well as other methodologies have been criticized for their inability to track correctly the pattern of inflation, particularly, these models do not allow for enough variables to be included as part of the regressors, and judgment is often made by a single model. In this work, model averaging techniques via Bayesian and frequentist approach were considered. Specifically, we considered the Bayesian model averaging (BMA) and Frequentist model averaging (FMA) techniques to model and forecast future path of CPI inflation in Nigeria using a wide range of variables. The results indicated that both in-sample and out-of-sample forecasts were highly reliable, judging from the various forecast performance criteria. Various policy scenarios conducted were highly fascinating both from the theoretical perspective and the prevailing economic situation in the country.
    Keywords: Bayesian model averaging; Forecasting; Frequentist approach; Inflation rate; Nigeria
    JEL: C30 C32 C5
    Date: 2017–12

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