nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒10‒22
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. A Large Central Bank Balance Sheet? The Role of Interbank Market Frictions By Thaler, Dominik
  2. What inflation measure should a currency union target? By William Barnett; Chan Wang; Xue Wang; Liyuan Wu
  3. On the external validity of experimental inflation forecasts: A comparison with five categories of field expectations By Camille Cornand; Paul Hubert
  4. With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound By Schupp, Fabian; Geiger, Felix
  5. (Un)conventional policy and the effective lower bound By De Fiore, Fiorella; Tristani, Oreste
  6. Optimal Renminbi Exchange Rate Policy under Depreciation Anticipation By Mei Li
  7. The Political Economy of Exchange Rate Stability During the Gold Standard. Spain 1874—1914 By MARTÍNEZ-RUIZ, Elena; NOGUES-MARCO, Pilar
  8. Bank Regulation and Monetary Policy Transmission: Evidence from the U.S. States Liberalization By Lakdawala, Aeimit; Minetti, Raoul; Schaffer, Matthew
  9. 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
  10. Financial Frictions, the Phillips Curve and Monetary Policy By Lieberknecht, Philipp
  11. Monetary Policy with Negative Interest Rates: Decoupling Cash from Electronic Money By Katrin Assenmacher; Signe Krogstrup
  12. Neo-Fisherianism in a Small Open-Economy New Keynesian Model By Eurilton Araújo
  13. What drives household inflation expectations in South Africa? Demographics and anchoring under inflation targeting By Stan Du Plessis; Monique Reid; Pierre Siklos
  14. Exchange rates and prices: evidence from the 2015 Swiss franc appreciation By Raphael Auer; Ariel Burstein; Sarah M Lein
  15. All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy By Ashley, Richard; Tsang, Kwok Ping; Verbrugge, Randal
  16. On the Benefits of Currency Reform By Krishna, R. Vijay; Leukhina, Oksana
  17. Robust Macroprudential Policy Rules under Model Uncertainty By Binder, Michael; Lieberknecht, Philipp; Quintana, Jorge; Wieland, Volker
  18. Forward guidance and heterogeneous beliefs By Philippe Andrade; Gaetano Gaballo; Eric Mengus; Benoit Mojon
  19. Global Trends in Interest Rates By Marco Del Negro; Domenico Giannone; Marc P. Giannoni; Andrea Tambalotti
  20. Understanding Euro Area Inflation Dynamics: Why So Low for So Long? By Yasser Abdih; Li Lin; Anne-Charlotte Paret
  21. Whatever it takes. What's the impact of a major nonconventional monetary policy intervention? By Carlo Alcaraz; Stijn Claessens; Gabriel Cuadra; David Marques-Ibanez; Horacio Sapriza
  22. Understanding Lowflation By Andolfatto, David; Spewak, Andrew
  23. Forward Guidance at the Zero Lower Bound: Curse and Blessing of Time-Inconsistency By Böhl, Gregor; Strobel, Felix
  24. Transmission of Monetary Policy and Bank Heterogeneity in Colombia By Carolina Ortega Londoño
  25. A Thick ANN Model for Forecasting Inflation By Muhammad Nadim Hanif; Khurrum S. Mughal; Javed Iqbal
  26. Assessing the Impact of Central Bank Digital Currency on Private Banks By Andolfatto, David
  27. What is the EU-UK relation all about? Tracking the path from monetary integration to “ever closeness” By Corrado Macchiarelli
  28. Monetary Policy Volatility Shocks in Brazil By Angelo Marsiglia Fasolo
  29. Domestic and global output gaps as inflation drivers: what does the Phillips curve tell? By Martina Jašová; Richhild Moessner; Előd Takáts
  30. Reconciling Orthodox and Heterodox Views on Money and Banking By Andolfatto, David

  1. By: Thaler, Dominik
    Abstract: Recent quantitative easing (QE) policies implemented over the course of the Great Recession by the major central banks have had a profound impact on the working of money markets, giving rise to large excess reserves and pushing down key interbank rates against their floor .the interest rate on reserves. With macroeconomic fundamentals improving, central banks now face the dilemma as to whether to maintain this large balance sheet/floor system, or else to reduce balance sheet size towards pre-crisis trends and operate traditional corridor systems. We address this issue using a relatively simple New Keynesian model with two distinct features: heterogeneous banks that trade funds in an interbank market, and matching frictions in the latter market. We show that a large balance sheet allows for ampler .policy widening the average distance between the interest on reserves and its effective lower bound. Nonetheless, a lean-balance-sheet regime that resorts to temporary QE in response to recessions severe enough for the lower bound to bind achieves similar stabilization and welfare outcomes as a large-balance-sheet regime in which interest-rate policy is the primary adjustment margin thanks to the larger policy space. At the same time, the effectiveness of QE through the channel we model is limited. In line with the empirical evidence, the marginal effect vanishes as the balance sheet becomes very big.
    Keywords: central bank balance sheet,interbank market,search and matching frictions,reserves,zero lower bound
    JEL: E20 E30 G10 G20
    Date: 2018
  2. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Chan Wang (School of Finance, Central University of Finance and Economics, Beijing, China); Xue Wang (Department of Finance, Jinan University, Guangzhou, China); Liyuan Wu (Guanghua School of Management, Peking University, Beijing, China)
    Abstract: What is the appropriate inflation target for a currency union, when conducting monetary policy: core inflation or headline inflation? We answer the question in a two-country New Keynesian model with an energy sector. We derive the welfare loss function and find that optimal monetary policy should target output gaps, the terms of trade gap, the Prouder Price Index inflation rates, and the real marginal cost gaps. We use the welfare loss function to evaluate two alternative Taylor-type monetary policy rules. We find that the choice of preferred policy rule depends on the shocks. Specifically, when productivity shocks hit the economy, the policymaker should follow the headline inflation Taylor rule, while the core inflation Taylor rule should be followed when a negative energy endowment shock hits the economy.
    Keywords: Core inflation; Headline inflation; Optimal monetary policy; Currency union; Welfare.
    JEL: E5 F3 F4
    Date: 2018–05
  3. By: Camille Cornand (Univ Lyon, CNRS, GATE UMR 5824, F69130 Ecully, France); Paul Hubert (Sciences Po-OFCE, 10 place de Catalogne, 75014 Paris, France)
    Abstract: Establishing the external validity of laboratory experiments in terms of inflation forecasts is crucial for policy initiatives to be valid outside the laboratory. Our contribution is to document whether different measures of inflation expectations based on various categories of agents (participants to experiments, households, industry forecasters, professional forecasters, financial market participants and central bankers) share common patterns by analyzing: the forecasting performances of these different categories of data; the information rigidities to which they are subject; the determination of expectations. Overall, the different categories of forecasts exhibit common features: forecast errors are comparably large and autocorrelated, forecast errors and forecast revisions are predictable from past information, which suggests the presence of information frictions. Finally, the standard lagged inflation determinant of inflation expectations is robust to the data sets. There is nevertheless some heterogeneity among the six different sets. If experimental forecasts are relatively comparable to survey and financial market data, central bank forecasts seem to be superior.
    Keywords: inflation expectations, experimental forecasts, survey forecasts, market-based forecasts, central bank forecasts
    JEL: E3 E5
    Date: 2018
  4. By: Schupp, Fabian; Geiger, Felix
    Abstract: The estimation of dynamic term structure models (DTSMs) turns out to be challenging in the presence of a small sample. It is exacerbated if the sample is characterized by a prolonged period of low interest rates near a time-varying effective lower bound. These challenges all weigh heavily when estimating a DTSM for the euro area OIS yield curve sample. Against this background, we propose a shadow-rate term structure model (SRTSM) that includes a time-varying effective lower bound accounting for the spread between the policy and short-term OIS rate and it also allows for future changes in the effective lower bound. In addition, it incorporates survey information in order to pin down the level of longer-term rate expectations. The model allows to adequately assess short-term monetary policy rate expectations and it generates far-distant rate expectations that are correlated with an estimated equilibrium nominal short rate derived from a macroeconomic model set-up. Our results also highlight the signaling channel of non-standard monetary policy shocks in the run-up to asset purchases based on high frequency identification approach. Our model outperforms DTSM specifications without above modeling features from a statistical and economic perspective. We confirm our findings employing a Monte Carlo simulation.
    Keywords: Term structure modeling,short rate expectations,lower bound,survey information,yield curve decomposition,monetary policy,euro area
    JEL: E32 E43 E44 E52
    Date: 2018
  5. By: De Fiore, Fiorella; Tristani, Oreste
    Abstract: We study the optimal combination of conventional (interest rates) and unconventional (credit easing) monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that unconventional measures can be a powerful substitute for interest rate policy in the face of certain financial shocks. Such measures help shield the real economy from the deterioration in financial conditions and warrant smaller reductions in interest rates. They therefore lower the likelihood of hitting the lower bound constraint. The alternative option to cut interest rates more deeply and avoid deploying unconventional measures is sub-optimal, as it would induce unnecessarily large changes in savers intertemporal consumption patterns. JEL Classification: E44, E52, E61
    Keywords: asymmetric information, optimal monetary policy, unconventional policies, zero-lower bound
    Date: 2018–10
  6. By: Mei Li (Department of Economics and Finance, University of Guelph, Guelph ON Canada)
    Abstract: We establish formal models to study optimal foreign exchange intervention policy for a currency under depreciation pressure when a central bank aims both to discourage speculative capital flows and to reduce exchange rate misalignment. In particular, we study two cases where speculators have complete and incomplete information about the central bank’s long-run equilibrium exchange rate target and arrive at the following results: (1) With complete information, the central bank is better off pre-committing to a specific exchange rate level than deciding it discretionarily. (2) With incomplete information, the central bank cannot credibly reveal its exchange rate target to speculators through “cheap talk”. (3) With incomplete information, any action taken by the central bank will send a signal to speculators about the central bank’s preferences, causing a change in the speculators’ beliefs and subsequently in capital flows.
    Keywords: foreign exchange intervention, depreciation anticipation, renminbi exchange rate
    JEL: F31 F32
    Date: 2018
    Abstract: This article contributes to the literature on central bank independence and monetary stability during the classical gold standard era. On the eve of the First World War, European periphery had not achieved stable adherence to gold despite the protection of central banks against political pressures to monetize debt. In the 19th century, most issuing institutions were private banks whose main objective was profit maximization. As a result, monetary stability depended on negotiations between monetary and fiscal authorities and not directly on central bank independence as is the case nowadays. Strong governments were needed to impose the objective of monetary stability on central banks in negotiation practices. To test our argument, we have constructed indicators of government strength and central bank independence to measure bargaining power for the case of Spain. Results confirm that a highly independent private central bank avoided the responsibility of defending gold adherence when negotiating with weak government, even in a stable macroeconomic environment. Our research suggests that the success of central bank independence in generating monetary stability during the gold standard period depended on sound political institutions.
    Keywords: gold standard, monetary stability, political economy, central bank independence, institutional design, Spain
    JEL: E02 E42 E58 F33 N13
    Date: 2018–09
  8. By: Lakdawala, Aeimit (Michigan State University, Department of Economics); Minetti, Raoul (Michigan State University, Department of Economics); Schaffer, Matthew (Department of Economics, University of North Carolina)
    Abstract: This paper studies the impact of geographic banking restrictions on monetary policy transmission. Exploiting the staggered deregulation of U.S. banking from the late 1970s to the early 1990s, we find that interstate deregulation significantly increased the responsiveness of bank lending to monetary shocks. This effect occurred primarily for small and illiquid banks, pointing to a strengthening of the bank lending channel. Changes in bank market structure and loan portfolio composition are unlikely to explain the effect of deregulation. This instead reflects a reduced propensity of small banks affiliated with complex bank holding companies to insulate borrowers from monetary contractions.
    Keywords: Bank regulation; Bank lending channel; Monetary policy
    JEL: E44 E52 G21
    Date: 2018–10–15
  9. 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
  10. By: Lieberknecht, Philipp
    Abstract: How does the presence of financial frictions alter the Phillips curve and the conduct of optimal monetary policy? I investigate this question in a tractable small-scale New Keynesian DSGE model with a financial accelerator. The accelerator amplifies shocks, decreases the slope of the Phillips curve and renders forward-looking behavior more relevant for current macroeconomic dynamics. I show analytically that these three factors imply an inflationary bias of discretionary monetary policy relative to the standard model and a stabilization bias relative to commitment policy. A conservative central banker who places a larger weight on inflation stabilization than society is able to reduce both biases and closely mimics the optimal policy under commitment. The required degree of inflation conservatism increases in the degree to which financial frictions are present.
    Keywords: Financial frictions, financial accelerator, Phillips curve, missing disinflation, optimal monetary policy, discretion, commitment, inflation conservatism, inflation targeting
    JEL: E4 E42 E44 E5 E52 E58
    Date: 2018–10–09
  11. By: Katrin Assenmacher; Signe Krogstrup
    Abstract: Monetary policy space remains constrained by the lower bound in many countries, limiting the policy options available to address future deflationary shocks. The existence of cash prevents central banks from cutting interest rates much below zero. In this paper, we consider the practical feasibility of recent proposals for decoupling cash from electronic money to achieve a negative yield on cash which would remove the lower bound constraint on monetary policy. We discuss how central banks could design and operate such a system, and raise some unanswered questions.
    Keywords: Central banks and their policies;Monetary policy;Negative interest rates;Currencies;Zero lower bound; Monetary policy framework, Dual local currency regime, Legal tender, Zero lower bound, Monetary policy framework, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–08–27
  12. By: Eurilton Araújo
    Abstract: In this study, the Neo-Fisherian hypothesis denotes the positive short-run co-movement between the nominal interest rate and inflation conditional on a monetary policy shock. To investigate the situations in which this hypothesis may arise in a simple small open-economy New Keynesian model, I extend the analysis of Garín et al. (2018) to the framework in Galí and Monacelli (2005). This paper shows that, under relatively high substitutability between domestic and foreign goods, this hypothesis most likely emerges in economies that are more open. Furthermore, targeting CPI inflation accentuates the forces leading to a Neo-Fisherian behavior
    Date: 2018–08
  13. By: Stan Du Plessis; Monique Reid; Pierre Siklos
    Abstract: This paper examines the demographic determinants of inflation expectations in South Africa. Five surveys covering the period 2006-2016, and consisting of over 12000 observations were empirically examined using time series, cross-sectional, censored and quantile regressions. We assess whether factors such as gender, income, education, race and age, impact one year ahead inflation expectations. In doing so we uncover clear behavioural biases in how respondents view the inflation outlook. For example, education and income tend to be inversely related to inflation expectations. This is consistent with the literature although we observe significant changes over time that many other surveys are unable to uncover. In addition, it seems that inflation expectations respond to recently observed inflation. Unlike other studies, younger individuals have lower inflation expectations and we conjecture that the adoption of inflation targeting in South Africa played a role. Finally, we find that demographic characteristics interact with communication by the South African Reserve Bank, as well whether inflation is rising or falling. These are two additional novel features of the analysis.
    JEL: E65 E31
    Date: 2018–10
  14. By: Raphael Auer; Ariel Burstein; Sarah M Lein
    Abstract: The removal of the lower bound on the EUR/CHF exchange rate in January 2015 provides a unique setting to study the implications of a large and sudden appreciation in an otherwise stable macroeconomic environment. Using transaction-level data on non-durable goods purchases by Swiss consumers, we measure the response of border and consumer retail prices to the CHF appreciation and how household expenditures responded to these price changes. Consumer prices of imported goods and of competing Swiss-produced goods fell by more in product categories with larger reductions in border prices and a lower share of CHF-invoiced border prices. These price changes resulted in substantial expenditure switching between imported and Swiss-produced goods. While the frequency of import retail price reductions rose in the aftermath of the appreciation, the average size of these price reductions fell (and more so in product categories with larger border price declines and a lower share of CHF-invoiced border prices), contributing to low pass-through into import prices.
    Keywords: large exchange rate shocks, exchange rate pass-through, invoicing currency, expenditure switching, price-setting, nominal and real rigidities, monetary policy
    JEL: D4 E31 E50 F31 F41 L11
    Date: 2018–10
  15. By: Ashley, Richard (Virginia Tech); Tsang, Kwok Ping (Virginia Tech); Verbrugge, Randal (Federal Reserve Bank of Cleveland)
    Abstract: The historical analysis of FOMC behavior using estimated simple policy rules requires the specification of either an estimated natural rate of unemployment or an output gap. But in the 1970s, neither output gap nor natural rate estimates appear to guide FOMC deliberations. This paper uses the data to identify the particular implicit unemployment rate gap (if any) that is consistent with FOMC behavior. While its ability appears to have improved over time, our results indicate that, both before the Volcker period and through the Bernanke period, the FOMC distinguished persistent movements in the unemployment rate from other movements; implicitly such movements were treated as an intermediate target, one that departs substantially from conventional estimates of the natural rate. We further investigate historical FOMC responses to inflation fluctuations. In this regard, FOMC behavior changed in the Volcker-Greenspan-Bernanke period: its response to the inflation rate became much stronger, and it focused more intensely on very persistent movements in this variable. Our results shed light on the “Great Inflation” experience of the 1970s, and are consistent with the view that political pressures effectively limited the FOMC response to the buildup of inflation. They also suggest new directions for DSGE modeling.
    Keywords: Taylor rule; Great Inflation; intermediate target; natural rate; persistence; dependence;
    JEL: C22 C32 E52
    Date: 2018–10–12
  16. By: Krishna, R. Vijay (Florida State University); Leukhina, Oksana (Federal Reserve Bank of St. Louis)
    Abstract: Money allows agents to achieve allocations that are not possible without it. How- ever, currency in most economies is a uniform object, and there may be incentive compatible allocations that cannot be implemented with a uniform currency. We show that currency reform, ie, changing the monetary base by replacing one currency with another, is a powerful tool that can enable a planner to achieve his desired allocation. Our monetary mechanism with currency reform is anonymous and features nonlinear pricing of consumption goods and future assets, as observed in practice. Our result suggests that currency reform is rarely seen in practice precisely because it is such a powerful tool and none but the most benevolent planner can be trusted to use it wisely.
    Date: 2018–05–08
  17. By: Binder, Michael; Lieberknecht, Philipp; Quintana, Jorge; Wieland, Volker
    Abstract: Against the backdrop of elevated model uncertainty in DSGE models with a detailed modeling of financial intermediaries, we investigate the performance of optimized macroprudential policy rules within and across models. Using three canonical banking DSGE models as a representative sample, we show that model-specific optimized macroprudential policy rules are highly heterogeneous across models and not robust to model uncertainty, implying large losses in other models. This is particularly the case for a perfect-coordination regime between monetary and macroprudential policy. A Stackelberg regime with the central bank as leader operating according to the rule by Orphanides and Wieland (2013) implies smaller potential costs due to model uncertainty. An even more effective approach for policymakers to insure against model uncertainty is to design Bayesian model-averaged optimized macroprudential rules. These prove to be more robust to model uncertainty by performing better across models than model-specific optimized rules, regardless of the regime of interaction between the two authorities.
    Keywords: Macroprudential Policy,Optimized Policy Rules,Model Uncertainty,Bayesian Model-Averaging,Robust Policy Rules
    JEL: E44 E52 E58 E61 G28
    Date: 2018
  18. By: Philippe Andrade; Gaetano Gaballo; Eric Mengus; Benoit Mojon
    Abstract: Central banks' announcements that rates are expected to remain low could signal either a weak macroeconomic outlook, which would slow expenditure, or a more accommodative stance, which may stimulate economic activity. We use the Survey of Professional Forecasters to show that, when the Fed gave guidance between Q3 2011 and Q4 2012, these two interpretations co-existed despite a consensus on low expected rates. We rationalise these facts in a New-Keynesian model where heterogeneous beliefs introduce a trade-off in forward guidance policy: leveraging on the optimism of those who believe in monetary easing comes at the cost of inducing excessive pessimism in non-believers.
    Keywords: signaling channel, disagreement, optimal policy, zero lower bound, survey forecasts
    JEL: E31 E52 E65
    Date: 2018–10
  19. By: Marco Del Negro; Domenico Giannone; Marc P. Giannoni; Andrea Tambalotti
    Abstract: The trend in the world real interest rate for safe and liquid assets fluctuated close to 2 percent for more than a century, but has dropped significantly over the past three decades. This decline has been common among advanced economies, as trends in real interest rates across countries have converged over this period. It was driven by an increase in the convenience yield for safety and liquidity and by lower global economic growth.
    JEL: E43 E44 F31 G12
    Date: 2018–09
  20. By: Yasser Abdih; Li Lin; Anne-Charlotte Paret
    Abstract: Despite closing output gaps and tightening labor markets, inflation has remained low in the euro area. Based on an augmented Phillips Curve framework, we find that this phenomenon—sometimes attributed to low global inflation—has been primarily caused by a remarkable persistence of inflation, keeping it low despite the reduction in slack. This feature is shown to be specific to the euro area (in comparison with the United States). Monetary policy needs to stay accommodative to help guide inflation back to target.
    Keywords: Inflation;Inflation expectations;Inflation persistence;Monetary policy;Econometric models;Euro Area;Phillips curve, inflation persistence and expectations, General, Forecasting and Simulation, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–08–22
  21. By: Carlo Alcaraz; Stijn Claessens; Gabriel Cuadra; David Marques-Ibanez; Horacio Sapriza
    Abstract: We assess how a major, unconventional central bank intervention, Draghi's "whatever it takes" speech, affected lending conditions. Similar to other large interventions, it responded to adverse financial and macroeconomic developments that also influenced the supply and demand for credit. We avoid such endogeneity concerns by comparing credit granted and its conditions by individual banks to the same borrower in a third country. We show that the intervention reversed prior risk-taking - in volume, price, and risk ratings - by subsidiaries of euro area banks relative to other local and foreign banks. Our results document a new effect of interventions and are robust along many dimensions.
    Keywords: unconventional monetary policy, credit conditions, spillovers
    JEL: E51 F34 G21
    Date: 2018–09
  22. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Spewak, Andrew (Federal Reserve Bank of St. Louis)
    Abstract: Central banks are viewed as having a demonstrated ability to lower long-run inflation. Since the financial crisis, however, the central banks in some jurisdictions seem almost powerless to accomplish the opposite. In this article, we offer an explanation for why this may be the case. Because central banks have limited instruments, long-run inflation is ultimately determined by fiscal policy. Central bank control of long-run inflation therefore ultimately hinges on its ability to gain fiscal compliance with its objectives. This ability is shown to be inherently easier for a central bank determined to lower inflation than for a central bank determined to accomplish the opposite. Among other things, the analysis here suggests that for the central banks of advanced economies, any stated inflation target is more credibly viewed as a ceiling.
    Keywords: Inflation; Inflation targeting; Fiscal policy
    JEL: E31 E52 E58 E62 E63
    Date: 2018–09–01
  23. By: Böhl, Gregor; Strobel, Felix
    Abstract: Forward guidance as a tool of unconventional monetary policy can be highly efficient to support aggregate demand and to steer the economy out of the zero lower bound (ZLB). However, the effect that stimulates the economy can give rise to a time-inconsistency problem: if the central bank promises to keep interest rates at the ZLB for long, the sub-sequent increase in inflation and economic activity may create a motive for the central bank to forego its promise and to exit the ZLB earlier than announced. We illustrate the time-inconsistency problem in a New Keynesian model with hand-to-mouth consumers. Using a novel and analytically tractable method for handling occasionally binding constraints, we contrast the case of commitment to forward guidance with the case in which monetary policy allows for an early exit of the ZLB. Our method is able to provide results on uniqueness and existence of (ZLB) equilibria. We study the equilibrium selection given different scenarios and conclude that central bankers should be careful when choosing the number of periods with low interest rates in order to avoid the inconsistency problem. Furthermore, we calculate government spending multipliers and argue that the multiplier is even larger if combined with forward guidance.
    Keywords: Forward Guidance,zero lower bound,occasionally binding constraints,government spending multiplier
    JEL: E63 C63 E58 E32 C62
    Date: 2018
  24. By: Carolina Ortega Londoño
    Abstract: This study provides evidence of bank heterogeneity in Colombiafor the period 2002-2014 and analyzes how bank-specific character-istics determine the bank-lending channel for monetary policy. Toanalyze bank heterogeneity, this study estimates technical (cost) effi-ciency using Stochastic Frontier Analysis, which also allows for themeasurement of Returns to Scale and a Lerner Index to proxy mar-ket power in the loans market. This study also provides measuresof capitalization, liquidity, and the commonly used ratios of financialand operational efficiency with bank’s balance-sheet data. Further-more, using a long and unbalanced panel, this study finds evidence ofthe existence of a bank-lending channel and finds that this transmis-sion mechanism is determined by bank-specific characteristics. Theresults suggest higher technical and operational efficiency, capitaliza-tion, liquidity and market power, increase the sensitivity of loans dis-bursements to monetary policy shocks, while higher returns to scalelowers this sensitivity.
    Keywords: monetary policy transmission; bank lending channel; bank heterogeneity; bank efficiency
    JEL: G21 E52 E59
    Date: 2018–06–01
  25. By: Muhammad Nadim Hanif (State Bank of Pakistan); Khurrum S. Mughal (State Bank of Pakistan); Javed Iqbal (State Bank of Pakistan)
    Abstract: Inflation forecasting is an essential activity at central banks to formulate forward looking monetary policy stance. Like in other fields, machine learning is finding its way to forecasting; inflation forecasting is not any exception. In machine learning, most popular tool for forecasting is artificial neural network (ANN). Researchers have used different performance measures (including RMSE) to optimize set of characteristics - architecture, training algorithm and activation function - of an ANN model. However, any chosen ‘optimal’ set may not remain reliable on realization of new data. We suggest use of ‘mode’ or most appearing set from a simulation based distribution of optimum ‘set of characteristics of ANN model’; selected from a large number of different sets. Here again, we may have a different trained network in case we re-run this ‘modal’ optimal set since initial weights in training process are assigned randomly. To overcome this issue, we suggest use of ‘thickness’ to produce stable and reliable forecasts using modal optimal set. Using January 1958 to December 2017 year on year (YoY) inflation data of Pakistan, we found that our YoY inflation forecasts (based on aforementioned multistage forecasting scheme) outperform those from a number of inflation forecasting models of Pakistan economy.
    Keywords: Artificial Neural Networks, Inflation Forecasting
    JEL: C45 E31 E37
    Date: 2018–10
  26. By: Andolfatto, David (Federal Reserve Bank of St. Louis)
    Abstract: In this paper, I investigate the impact of central bank digital currency (CBDC) on banks in a model where the banking sector that is not perfectly competitive. The theoretical framework combines the Diamond (1965) model of government debt with the Klein (1971) and Monti (1972) model of a monopoly bank. There are two main results. First, the introduction of interest-bearing CBDC increases financial inclusion and diminishes the demand for cash. Second, the introduction of interest-bearing CBDC need not disintermediate banks in any way and may, in fact, expand their depositor base if the added competition compels banks to raise their deposit rates.
    Keywords: Digital Currency; Central Banks; Monopoly; Markups
    JEL: E4 E5
    Date: 2018–10–05
  27. By: Corrado Macchiarelli
    Abstract: The history of European integration has been characterized by several ‘stops-and-goes’ with considerable support on political grounds. In this paper, we discuss the role of European integration for the future of the EU-UK relations. Integration, consistent with the idea of ‘completing’ the European Monetary Union (hence, a ‘Genuine Economic and Monetary Union’- GEMU), will have the obvious consequence of affecting the UK as well and the future of its negotiations with the EU. Provided that European integration worked in the past, the net benefits of staying out of the EU exante may be different from the same benefits ex-post, particularly in the likely scenario that the Union will have to ‘comprehensively’ move towards a GEMU to safeguard its integrity.
    Keywords: EMU, European integration, Brexit
    Date: 2018–09
  28. By: Angelo Marsiglia Fasolo
    Abstract: This paper provides empirical evidence for the impact of changes in volatility of monetary policy in Brazil using a SVAR where the time-varying volatility of shocks directly affects the level of observed variables. Contrary to the literature, an increase in monetary policy volatility results in higher in inflation, combined with reduction in output. The qualitative differences of impulse responses functions, compared to the literature for developed economies, are explained using a calibrated small-scale DSGE model with habit persistence in consumption and stochastic volatility shocks in the Taylor rule. The DSGE model is capable of explaining the increase of inflation in the medium term after a monetary policy volatility shock
    Date: 2018–08
  29. By: Martina Jašová; Richhild Moessner; Előd Takáts
    Abstract: We study how domestic and global output gaps affect CPI inflation. We use a New Keynesian Phillips curve framework, which controls for non-linear exchange rate movements for a panel of 26 advanced and 22 emerging economies covering the 1994Q1-2017Q4 period. We find broadly that both global and domestic output gaps are significant drivers of inflation both in the pre-crisis (1994-2008) and post-crisis (2008-2017) periods. Furthermore, after the crisis, in advanced economies the effect of the domestic output gap declines, while in emerging economies the effect of the global output gap declines. The paper demonstrates the usefulness of the New Keynesian Phillips curve in identifying the impact of global and domestic output gaps on inflation.
    Keywords: output gaps, global factors, inflation
    JEL: E31 E58
    Date: 2018–09
  30. By: Andolfatto, David (Federal Reserve Bank of St. Louis)
    Abstract: A wide range of heterodox theories claim that banks are special because they create money in the act of lending. Put another way, banks can create the funding they need ex nihilo, whereas all other agencies must first acquire the funding they need from other parties. Mainstream economic theory largely agrees with this assessment, but questions its theoretical and empirical relevance, preferring to view banks as one of many potentially important actors in the financial market. In this paper, I develop a formal economic model in an attempt to make these ideas precise. The model lends some support to both views on banking.
    Keywords: Heterodox view; Money; Banking
    JEL: E4 E5
    Date: 2018–10–09

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