nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒10‒15
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Central bank Independence in New Zealand: Public Knowledge About and Attitude Towards the Policy Target Agreement By Bernd Hayo; Florian Neumeier
  2. The monetary dimension of arbitrage. A brief note By Andrea Mantovi
  3. What core inflation indicators measure? By Aleksandra Hałka; Grzegorz Szafrański
  4. International spillovers of monetary policy: lessons from Chile, Korea, and Poland By Krzysztof Gajewski; Alejandro Jara; Yujin Kang; Junghwan Mok; David Moreno; Dobromił Serwa
  5. Macroprudential Policy with Leakages By Julien Bengui; Javier Bianchi
  6. "Unconventional Monetary Policies and Central Bank Profits: Seigniorage as Fiscal Revenue in the Aftermath of the Global Financial Crisis" By Joerg Bibow
  7. Bringing the helicopter to ground: a historical review of fiscal-monetary coordination to support economic growth in the 20th century By Josh Ryan-Collins; Frank van Lerven
  8. Imported Intermediate Goods and Incomplete Exchange Rate Pass-Through into Export Prices By Firanchuk, Alexander
  9. Non-Monetary News in Central Bank Communication By Anna Cieslak; Andreas Schrimpf
  10. Monetary transmission mechanism in Poland. What do we know in 2017? By Tomasz Chmielewski; Mariusz Kapuściński; Andrzej Kocięcki; Tomasz Łyziak; Jan Przystupa; Ewa Stanisławska; Ewa Wróbel
  11. Could mobile money applications improve farm productivity? Insights from rural Mozambique By Yao, Becatien H.; Shanoyan, Aleksan
  12. Macroprudential FX regulations: shifting the snowbanks of FX vulnerability? By Ahnert, Toni; Forbes, Kristin; Friedrich, Christian; Reinhardt, Dennis
  13. Structural conditions for currency internationalisation: International finance and the survival constraint By Angrick, Stefan
  14. Spillovers of monetary policy across borders: International lending of Dutch banks, insurers and pension funds By Jon Frost; Patty Duijm; Clemens Bonner; Leo de Haan; Jakob de Haan
  15. Monetary Policy across Space and Time By Liu, Laura; Matthes, Christian; Petrova, Katerina
  16. ARE CONSUMER INFLATION EXPECTATIONS AN INTERNATIONAL PHENOMENON? Results of spatial panel regressions models By Karolina Tura-Gawron; Maria Siranova; Karol Fisikowski
  17. The Causes of Asian Currency Crises By Kirrane, Christopher
  18. The effectiveness of Japan's Negative Interest rate policy By Yoshino, Naoyuki Yoshino; Hesary, Farhad Taghizadeh; Miyamoto, Hiroaki Miyamoto
  19. Exchange Rates, Local Currency Pricing and International Tax Policies By Sihao Chen; Michael B. Devereux; Jenny Xu; Kang Shi
  20. The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models By Martín Uribe
  21. Turnover Liquidity and the Transmission of Monetary Policy By Ricardo Lagos; Shengxing Zhang
  22. The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model By Eric Kam; John Smithin; Aqeela Tabassum
  23. Commodity Currencies and Monetary Policy By Michael B. Devereux; Gregor W. Smith
  24. QE: A User's Guide By Joseph E. Gagnon; Brian Sack
  25. The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates By Atsushi Inoue; Barbara Rossi
  26. Deviations in real exchange rate levels in the OECD countries and their structural determinants By Martin Berka; Daan Steenkamp

  1. By: Bernd Hayo (University of Marburg); Florian Neumeier (Ifo Institute–Leibniz Institute for Economic Research at the University of Munich)
    Abstract: Employing unique representative survey data from New Zealand collected in 2016, we study public knowledge about and attitude towards a specific monetary policy institution, the Policy Target Agreement (PTA). The PTA contains the inflation target for the Reserve Bank of New Zealand (RBNZ). First, we assess how much the population knows about the PTA, finding the level of knowledge to be low. Second, we ask whether our respondents support a clause in the PTA that allows the government to over-ride the RBNZ if it deems it necessary. We interpret responses to that question as attitudes towards central bank independence (CBI). The population does not appear to have a clear view on whether or not to expand CBI, as roughly one third supports the overriding clause in the PTA, one third is against it, and one third is unsure. Using logit regression, we study which characteristics make people favour more CBI. Subjective and objective knowledge about the RBNZ and monetary policy increases support for CBI, whereas voting for a national-oriented party and trusting the government reduces it. Policy implications are derived from our findings.
    Keywords: Central Bank Independence, Public Attitude, Policy Target Agreement, Economic Literacy, New Zealand, Monetary Policy, Household Survey
    JEL: E42 E52 E58 Z1
    Date: 2018
  2. By: Andrea Mantovi (Dipartimento di Scienze Economiche e Aziendali, Università di Parma, Italy; Rimini Centre for Economic Analysis)
    Abstract: Financial frictions give rise to the value of money. According to DeAngelo and Stulz (2015), such a principle lies at the foundations of banking. It is the aim of this short note to deepen the reach of such a principle with respect to the role of arbitrageurs of interacting with financial frictions. The methodological relevance of such a perspective for the current macroeconomic debate is thoroughly discussed, building on the stylization of “friction setting”. Recent advances in the analysis of market-making and limits of arbitrage provide concrete empirical backing for our approach, which is meant to shed light on the analogy between the macro-role of money and the nature of arbitrage. Potential implications for the theoretical analysis of shadow banking are briefly sketched.
    Keywords: Macro-Finance, Financial Frictions, Liquidity Transformation, Arbitrage
    JEL: E32 E44 G23
    Date: 2018–10
  3. By: Aleksandra Hałka (Narodowy Bank Polski); Grzegorz Szafrański (Narodowy Bank Polski)
    Abstract: Whether excluding food and energy components from overall price indices produces a useful indicator for monetary policy purposes is widely debated. The proposals of model based measures of underlying inflation are scarce and the evidence on their performance is limited. In the paper the multidimensional performance of exclusion and model based core inflation indicators is compared in the period of persistently low inflation and interest rates. Providing new measures of underlying inflation we look for specific features of such indices as: tracking trend, appropriate smoothing, unbiasedness with respect to the cost-of-living index, good approximation of the demand pressure, and good short- to medium-term forecasting abilities. To this end, we extract permanent and transitory components of headline HICP and core inflation in the sample of 26 European Union countries for the period 2002-2016 using bivariate unobserved correlated components model and maximum likelihood estimator. We construct an aggregate performance measure, named Core Inflation Score, to capture different dimensions of underlying inflation indicators which could be of interest in monetary policy analysis.
    Keywords: core inflation, unobserved correlated components model, forecasting inflation.
    JEL: E31 E52
    Date: 2018
  4. By: Krzysztof Gajewski (Narodowy Bank Polski); Alejandro Jara (Banco Central de Chile); Yujin Kang (Bank of Korea); Junghwan Mok (Bank of Korea); David Moreno (Banco Central de Chile); Dobromił Serwa (Narodowy Bank Polski)
    Abstract: In this paper, we assess evidence on international monetary policy spillovers to domestic bank lending in Chile, Korea, and Poland, using confidential bank-level data and different measures of monetary policy shocks in relevant currency areas. These three emerging market economies are small and open, their banking systems do not have significant presence overseas, and they can be considered as price takers in the world economy. Such features allow for better identification of binding financial constraints and foreign monetary policy shocks. We find that the monetary policy shocks spill over into domestic bank lending, modifying the degree to which financial frictions tighten or relax, and this evidence is consistent with international bank lending and portfolio channels.
    Keywords: monetary policy spillovers, international bank lending channel.
    JEL: E32 F32 F34 G21 G15
    Date: 2018
  5. By: Julien Bengui; Javier Bianchi
    Abstract: The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages undermine the effectiveness of macruprudential taxes but do not necessarily call for weaker interventions. A quantitative analysis of the model suggests that aggregate welfare gains and reductions in the severity and frequency of financial crises remain, on average, largely unaffected by even significant leakages.
    JEL: E0 F0 F3 F32 F34
    Date: 2018–09
  6. By: Joerg Bibow
    Abstract: This study investigates the evolution of central bank profits as fiscal revenue (or: seigniorage) before and in the aftermath of the global financial crisis of 2008-9, focusing on a select group of central banks--namely the Bank of England, the United States Federal Reserve System, the Bank of Japan, the Swiss National Bank, the European Central Bank, and the Eurosystem (specifically Deutsche Bundesbank, Banca d'Italia, and Banco de Espana)--and the impact of experimental monetary policies on central bank profits, profit distributions, and financial buffers, and the outlook for these measures going forward as monetary policies are seeing their gradual "normalization." Seigniorage exposes the connections between currency issuance and public finances, and between monetary and fiscal policies. Central banks' financial independence rests on seigniorage, and in normal times seigniorage largely derives from the note issue supplemented by "own" resources. Essentially, the central bank's income-earning assets represent fiscal wealth, a national treasure hoard that supports its central banking functionality. This analysis sheds new light on the interdependencies between monetary and fiscal policies. Just as the size and composition of central bank balance sheets experienced huge changes in the context of experimental monetary policies, this study's findings also indicate significant changes regarding central banks' profits, profit distributions, and financial buffers in the aftermath of the crisis, with considerable cross-country variation.
    Keywords: Central Bank Profits; Seigniorage; Financial Crisis; Unconventional Monetary Policy; Monetary and Fiscal Policy; Central Bank Capital; Helicopter Money; Cryptocurrencies; Bitcoin
    JEL: E41 E52 E58 E62 E65 G01
    Date: 2018–10
  7. By: Josh Ryan-Collins; Frank van Lerven (None)
    Abstract: In the face of the perceived high public and private debt levels and sluggish recovery that has followed the financial crisis of 2007-08, there have been calls for greater fiscal-monetary coordination to stimulate nominal demand. Policy debates have been focused upon the inflationary expectations that may be generated by monetary financing or related policies, consistent with New Consensus Macroeconomics theoretical frameworks. Historical examples of fiscal-monetary policy coordination have been largely neglected, along with alternative theoretical views, such as post-Keynesian perspectives that emphasise uncertainty and demand rather than rational expectations. This paper begins to address this omission. First, we provide an overview of the holdings of government debt by both central banks and commercial banks as an imperfect but still informative proxy for fiscal-monetary coordination in advanced economies in the 20th century. Second, we develop a new typology of forms of fiscal-monetary coordination that includes both direct and less direct forms of monetary financing, illustrating this with case-study examples. In particular, we focus on the 1930s-1970s period when central banks and ministries of finance cooperated closely, with less independence accorded to monetary policy and greater weight attached to fiscal policy. We find a number of cases where fiscal-monetary coordination proved useful in stimulating economic growth, supporting industrial policy objectives and managing public debt without excessive inflation.
    Keywords: monetary policy, monetary financing, inflation, central bank independence, fiscal policy, debt, credit creation
    JEL: B22 B25 E02 E12 E31 E42 E51 E52 E58 E63 N12 N22 O43
    Date: 2018–10
  8. By: Firanchuk, Alexander
    Abstract: This paper analyses the effect of imported inputs and the exporting country share on the degree of exchange rate pass-through (ERPT) into export prices. I present a model where firms set variable markups under oligopoly competition and imported inputs affect marginal cost. It makes two predictions: (i) the imported input share reduces ERPT (ii) the exporting country share in a destination market increases ERPT. Using industry-level data, I test the hypotheses for 57 countries over the period 2000-2015. For trade between advanced economies, imported inputs reduce ERPT, but only in the case of producer currency movements. Controlling for exporting country share, the pass-through elasticity is 39% when imported inputs are not used, but 11% when the share of imported inputs in gross exports rises to one half.
    Keywords: exchange rate pass-through,export prices,global value chains
    JEL: F12 F14 F31 F41
    Date: 2018
  9. By: Anna Cieslak; Andreas Schrimpf
    Abstract: We quantify the importance of non-monetary news in central bank communication. Using evidence from four major central banks and a comprehensive classification of events, we decompose news conveyed by central banks into news about monetary policy, economic growth, and separately, shocks to risk premia. Our approach exploits high-frequency comovement of stocks and interest rates combined with monotonicity restrictions across the yield curve. We find significant differences in news composition depending on the communication channel used by central banks. Non-monetary news prevails in about 40% of policy decision announcements by the Fed and the ECB, and this fraction is even higher for communications that provide context to policy decisions such as press conferences. We show that non-monetary news accounts for a significant part of financial markets' reaction during the financial crisis and in the early recovery, while monetary shocks gain importance since 2013.
    JEL: E43 E58 G12 G14
    Date: 2018–09
  10. By: Tomasz Chmielewski (Narodowy Bank Polski); Mariusz Kapuściński (Narodowy Bank Polski); Andrzej Kocięcki (Narodowy Bank Polski); Tomasz Łyziak (Narodowy Bank Polski); Jan Przystupa (Narodowy Bank Polski); Ewa Stanisławska (Narodowy Bank Polski); Ewa Wróbel (Narodowy Bank Polski)
    Abstract: The picture of the monetary policy transmission mechanism in Poland emerging from the latest report is consistent with the findings of the previous research. We confirm a greater role of bank credit in the monetary policy transmission mechanism than in the past as well as the currently small importance of the exchange rate for economic activity and markedly smaller impact of exchange rate fluctuations on inflation than in previous decades. From the point of view of the tasks of the central bank, the most important finding from the empirical research that was carried out is that we do not find evidence to believe that the period of historically low interest rates caused a decline in the effectiveness of the transmission of monetary policy impulses or led to banks taking on excessive risk, with negative consequences for financial stability that this would entail.
    Date: 2018
  11. By: Yao, Becatien H.; Shanoyan, Aleksan
    Keywords: International Development, Ag Finance and Farm Management, Productivity Analysis and Emerging Technologies
    Date: 2018–06–20
  12. By: Ahnert, Toni (Bank of Canada); Forbes, Kristin (MIT-Sloan School, NBER and CEPR); Friedrich, Christian (Bank of Canada); Reinhardt, Dennis (Bank of England)
    Abstract: Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.
    Keywords: Macroprudential policies; FX regulations; banking flows; international debt issuance
    JEL: F32 F34 G15 G21 G28
    Date: 2018–10–05
  13. By: Angrick, Stefan
    Abstract: This paper examines the relationship between currency internationalisation and economic structure. It argues that the hierarchical and asymmetric architecture of the international monetary system imposes a "survival constraint" upon non-centre countries that obliges them to generate net inflows of the international centre currency to finance their payment commitments. It outlines why management of this constraint has historically been associated with a development approach that prioritises exports and investment over domestic consumption. It is demonstrated how this development approach creates an economic structure that is subject to path dependence and network effects, which perpetuates the role of non-centre countries as users of the international currency and the role of centre countries as suppliers of the international currency. It is argued that currency internationalisation cannot be pursued in isolation of broader economic policy, but rather requires economic structural change, political mediation, and accommodative international economic structures. Specifically, raising the international profile of the Chinese renminbi requires rebalancing of the Chinese economy towards domestic demand, whereas the status of the US dollar is intimately intertwined with the international openness of the US economy.
    Keywords: international currency,international monetary system,economic structure,economic development,liquidity flows,survival constraint
    JEL: F02 F1 F33
    Date: 2018
  14. By: Jon Frost; Patty Duijm; Clemens Bonner; Leo de Haan; Jakob de Haan
    Abstract: We analyze the relationship between ECB monetary policy and international lending by Dutch financial institutions. Our results suggest that banks hardly change their foreign lending in response to policy changes. We find some evidence in support of the portfolio channel (in response to a contractionary shock, better capitalized banks increase their foreign lending less than banks with lower capital) and the bank lending channel (larger banks lend more after a contractionary shock than small banks). Insurers and pension funds do not respond to ECB monetary policy, but increase lending when banks in the host country are constrained by prudential regulation.
    Keywords: Monetary policy; international banking; pension funds; insurers; spillovers
    JEL: F42 F44 G15 G21
    Date: 2018–10
  15. By: Liu, Laura (Federal Reserve Board of Governors); Matthes, Christian (Federal Reserve Bank of Richmond); Petrova, Katerina (University of St. Andrews)
    Abstract: In this paper we ask two questions: (i) is the conduct of monetary policy stable across time and similar across major economies, and (ii) do policy decisions of major central banks have international spillover effects. To address these questions, we build on recent semi-parametric advances in time-varying parameter models that allow us to increase the VAR dimension and to jointly model three advanced economies (US, UK, and the Euro Area). In order to study policy spillovers, we jointly identify three economy-specific monetary policy shocks using a combination of sign and magnitude restrictions.
    Keywords: Monetary policy spillovers; time-varying parameters; changing volatility
    JEL: C54 E30 E58
    Date: 2018–08–13
  16. By: Karolina Tura-Gawron (Gdansk University of Technology, Gdansk, Poland); Maria Siranova (University of Economics in Bratislava, Bratislava, Slovak Republik); Karol Fisikowski (Gdansk University of Technology, Gdansk, Poland)
    Abstract: This study examines the potential drivers and their spatial components of inflation expectations of consumers in 22 European Union countries by using the spatial Durbin model. The potential determinants are drawn from the macrosphere (oil prices, food prices, house prices, industrial production), financial sphere (money market interest rates, nominal effective exchange rate, key policy rate), and economic favourable cognition variables (consumer confidence indicator, short-term inflation volatility, medium–term memory reversal of inflation expectations). The implemented binary spatial weight matrices are based on the geographical and economic distances. The economic distance weights define the European Union global trade partners as the most proximal neighbours. Our results confirm the existence of an inherent spatial component in short-term consumers’ inflation expectations even when excluding effect of inflation rate anchoring. This finding may provide a possible explanation for disruptions found in monetary policy transmission mechanism in small and open economies. From other perspective, the more interlinked consumers’ expectations may open the path to better business cycle synchronisation and strengthen the process of EA convergence, improving the conditions for efficient and effective monetary policy conduct.
    Keywords: consumers’ inflation expectations, spatial analysis, European Union
    JEL: E52 E61 C21
    Date: 2018–09
  17. By: Kirrane, Christopher
    Abstract: This paper attempts to answer three questions: (1) does international finance in general and national and international monetary and financial institutions cause financial and economic instability for countries?; (2) Is it possible to prevent the benefits of increased access to international capital markets from being diminished and even reversed by international and national monetary and financial crises, and, as a corollary, (3) are current national currencies outdated?
    Keywords: Currency crises
    JEL: F31
    Date: 2018–01
  18. By: Yoshino, Naoyuki Yoshino; Hesary, Farhad Taghizadeh; Miyamoto, Hiroaki Miyamoto
    Abstract: This paper investigates the effect of zero and negative interest rate policy of Japan on the inflation rate and the role of exchange rate in conducting the zero and negative interest rate policy. The disappointing economic performance thus seems primarily due to a series of adverse economic shocks rather than an extraordinary policy error. The empirical analysis is based on, primarily, a stylized VAR model of the Japanese economy with the innovation that the interest rate policy, and the exchange rate—two important parameters for assessing the stance of monetary policy—are allowed to vary over time. Secondly, the estimated VAR model investigates whether alternative interest-rate policy approaches proposed in the literature could have improved macroeconomic performance. Though, Granger causality method has been used in the earlier literature to measure the causation of interest rate on inflation rate and it also used to see the block and instantaneous causality between the systems of variables. Next, using an estimated structural model, I identified a number of adverse shocks occurring after the 1990s. It thus follows that int. rate policy was not solely responsible for the stimulation neither in inflation growth performance nor in increasing the output growth. Aiming for a low inflation level and responding to the economy according to a conventional policy rule provided insufficient insurance against the contractionary shocks that occurred over the 1990s.
    Keywords: VAR, Generalized and Orthogonalized impulse response, Granger causality, Unit root test
    JEL: E4 E44 E60 F41
    Date: 2018–05–16
  19. By: Sihao Chen; Michael B. Devereux; Jenny Xu; Kang Shi
    Abstract: Empirical evidence suggests that for many countries, retail prices of traded goods are sticky in national currencies. Movements in exchange rates then cause deviations from the law of one price, and exchange rate ëmisalignmentí, which cannot be corrected by monetary policy alone. This paper shows that a state contingent international tax policy can be combined with monetary policy to eliminate exchange rate misalignment and sustain a fully efficient welfare outcome. But this monetary-fiscal mix cannot be decentralized with non-cooperative determination of monetary and fiscal policy. Non-cooperative use of taxes and subsidies introduces strategic spillovers which opens up a fundamental conflict between the goals of output gap and inflation stabilization and those of terms of trade manipulation in an open economy. The implementation of an efficient monetary-fiscal mix requires effective cooperation in fiscal policy, while leaving monetary policy to be determined non-cooperatively. In addition, while an efficient outcome requires state contingent taxes and subsidies to eliminate exchange rate misalignment, it is still necessary to have flexible exchange rates and independent monetary policy.
    JEL: F3 F4
    Date: 2018–09
  20. By: Martín Uribe
    Abstract: This paper investigates whether permanent monetary tightenings increase inflation in the short run. It estimates, using U.S. data, an empirical and a New-Keynesian model driven by transitory and permanent monetary and real shocks. Temporary increases in the nominal interest-rate lead, in accordance with conventional wisdom, to a decrease in inflation and output and an increase in real rates. The main result of the paper is that permanent increases in the nominal interest rate lead to an immediate increase in inflation and output and a decline in real rates. Permanent monetary shocks explain more than 40 percent of inflation changes.
    JEL: E52 E58
    Date: 2018–09
  21. By: Ricardo Lagos; Shengxing Zhang
    Abstract: We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence.
    JEL: D83 E52 G12
    Date: 2018–09
  22. By: Eric Kam (Department of Economics, Ryerson University, Toronto, Canada); John Smithin (Department of Economics, York University, Toronto, Canada); Aqeela Tabassum (The Business School, Humber College, Toronto, Canada)
    Abstract: This paper provides an explanation of the long-run neutrality of monetary policy in a dynamic general equilibrium model with micro-foundations. If the rate of time preference is endogenous there is no natural rate of interest. Therefore, if the central bank follows an interest rate rule this will affect the real rate of interest in financial markets and thereby the real economy. In principle, there is a negative relationship between the real rate of interest and the rate of inflation. This turns out to be nothing other than the historical “forced savings effect”, or the twentieth century Mundell-Tobin effect.
    Date: 2018–09
  23. By: Michael B. Devereux; Gregor W. Smith
    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.
    JEL: E52 F31 F41
    Date: 2018–09
  24. By: Joseph E. Gagnon (Peterson Institute for International Economics); Brian Sack (D. E. Shaw group)
    Abstract: This Policy Brief draws on the literature measuring the effects of quantitative easing (QE) as well as the historical experience in implementing QE to lay out a simple strategy for how to use QE. It makes a proposal that arguably transitions most effectively from the interest rate adjustment process that central banks have employed with their primary policy instrument and shares many of the desirable properties of traditional monetary policy. In particular, central banks should characterize QE in terms of the stock of long-term asset holdings and should announce purchases of assets in discrete increments that are designed to deliver macroeconomic stimulus equivalent to the policy rate cut that they would otherwise desire to implement. For the United States and some other countries, research suggests that a purchase of long-term bonds equivalent to 1.5 percent of GDP has a stimulative effect roughly equal to a cut in the policy rate of 0.25 percentage point. Moreover, central banks should convey that these adjustments will be made under a policy approach that responds routinely to economic developments and displays considerable inertia, as has typically been the case with the conventional policy interest rate.
    Date: 2018–10
  25. By: Atsushi Inoue; Barbara Rossi
    Abstract: What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy periods in the US by using a novel identification procedure that defines monetary policy shocks as changes in the whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substantial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents' expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis.
    JEL: C22 C53 F31 F37
    Date: 2018–09
  26. By: Martin Berka; Daan Steenkamp (Reserve Bank of New Zealand)
    Abstract: The most commonly used theoretical framework describing why prices in some countries are higher than in others (i.e. explaining deviations from purchasing power parity) is the Balassa-Samuelson model. The Balassa-Samuelson model implies that stronger productivity growth should tend to cause a country's real exchange rate to appreciate. This paper develops measures of productivity and real exchange rate levels across industries and countries to allow the Balassa-Samuelson hypothesis to be tested. We show that the model finds empirical support in 17 OECD economies: there is a link between real exchanges and sectoral productivity levels both across countries and over time. We then show theoretically and empirically that relaxing the model's assumptions about wage determination and the role of labour market differences across sectors and countries helps improve the performance of the model. However, there remains large unexplained deviations in real exchange rates across countries that the model cannot account for.
    Date: 2018–10

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