nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒10‒29
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The effect of the Eurosystem expanded Asset Purchase Programme on inflation expectations: evidence from the ECB Survey of Professional Forecasters By Guido Bulligan
  2. Sovereign risk and cross-country heterogeneity in the transmission of monetary policy to bank lending in the euro area By Pietro Grandi
  3. What drives updates of inflation expectations? A Bayesian VAR analysis for the G-7 countries By Belke, Ansgar; Beckmann, Joscha; Dubova, Irina
  4. Crypto-currency: Implication for Regulatory Governance By Andy Cheng
  5. The portfolio balance channel: an analysis on the impact of quantitative easing on the US stock market By Imran Shah; Francesca Schmidt-Fischer; Issam Malki
  6. Interest rate spreads and forward guidance By Bredemeier, Christian; Kaufmann, Christoph; Schabert, Andreas
  7. Monetary policy transmission in systemically important economies and China’s impact By Domenico Lombardi; Pierre L. Siklos; Xiangyou Xie
  8. Competition and the pass-through of unconventional monetary policy: evidence from TLTROs By Matteo Benetton; Davide Fantino
  9. An Index for Transparency for Inflation-Targeting Central Banks: Application to the Czech National Bank By Rania A. Al-Mashat; Ales Bulir; N. Nergiz Dinçer; Tibor Hlédik; Tomás Holub; Asya Kostanyan; Douglas Laxton; Armen Nurbekyan; Rafael A Portillo; Hou Wang
  10. On the external validity of experimental inflation forecasts: A comparison with five categories of field expectations By Camille Cornand; Paul Hubert
  11. Exchange rate pass-through into euro area inflation. An estimated structural model By Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  12. The natural rate of interest from a monetary and financial perspective By Dennis Bonam; Peter van Els; Jan Willem van den End; Leo de Haan; Irma Hindrayanto
  13. Money, Inflation, and Unemployment in the Presence of Informality By Ait Lahcen, Mohammed
  14. Central banking through the centuries By Ivo Maes
  15. Inflation dynamics during the Financial Crisis in Europe: cross-sectional identification of long-run inflation expectations By Dany-Knedlik, Geraldine; Holtemöller, Oliver
  16. Successes and Drawbacks of the Federal Reserve and the Impact on Financial Markets. By Rashid, Muhammad Mustafa
  17. The Historical Evolution of Central Banking By Stefano Ugolini
  18. Is Cash Dead? Using Economic Concepts To Motivate Learning and Economic Thinking By Philip Gunby; Stephen Hickson
  19. Spread the Word: International Spillovers from Central Bank Communication By Armelius, Hanna; Bertsch, Christoph; Hull, Isaiah; Zhang, Xin
  20. The Fiscal Theory of the Price Level in non-Ricardian Economy By Rym Aloui; Michel Guillard
  21. The Broad Consequences of Narrow Banking By Matheus R Grasselli; Alexander Lipton
  22. The political economy of monetary solidarity: revisiting the Euro experiment By Schelkle, Waltraud
  23. ALICE: A new inflation monitoring tool By de Bondt, Gable J.; Hahn, Elke; Zekaite, Zivile
  24. The Nexus between Inflation and Inflation Uncertainty via Wavelet Approach: Some Lessons from Egyptian Case By Jamal Bouoiyour; Refk Selmi
  25. Life cycle assessment of cash payments By Randall Hanegraaf; Nicole Jonker; Steven Mandley; Jelle Miedema
  26. Monetary Policy and Income Inequality in Korea By Jongwook Park

  1. By: Guido Bulligan (Banca d’Italia)
    Abstract: This paper investigates the effect of ECB asset purchases on inflation expectations in the euro area, as measured by the ECB Survey of Professional Forecasters. To identify the effects on individual expectations we adopt a panel approach, where the Eurosystem Asset Purchase Programme (APP) shocks are used as covariates to explain the revisions in the individual inflation forecasts; controls for updates in macroeconomic and financial developments are also included. Our results indicate that the first APP announcement in January 2015 resulted in a statistically significant upwards revision of medium term inflation expectations and lowered the forecasters’ assessment of the probability of a low inflation regime. The average effect however masks significant differences among forecasters: forecasters that were relatively more accurate prior to the announcement were also those who revised their inflation forecasts more markedly.
    Keywords: monetary policy announcements, event study, inflation expectations, unconventional monetary policy
    JEL: E31 E52 E58 E65 G14
    Date: 2018–10
  2. By: Pietro Grandi (Université Panthéon Assas (Paris 2), LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - UP2 - Université Panthéon-Assas - Sorbonne Universités)
    Abstract: Is the transmission of monetary policy to bank lending heterogeneous across euro area countries? This paper employs annual bank level data to test whether the bank lending channel of monetary policy was heterogeneous in the euro area over the period 2007-2016. To do so it follows a simple procedure that allows direct testing of how monetary policy affected similar banks located in different countries. Results indicate that the transmission of monetary policy to bank lending was heterogeneous across countries that were differently exposed to the sovereign debt crisis. On average, the same 1% cut in the policy rate led to a 1.6% increase in lending by banks located in non-stressed countries as opposed to a 0.4% increase for banks located in countries under severe sovereign stress. Unconventional monetary policy – as captured by the ECB shadow rate – was also unevenly transmitted to bank lending. Exposure to sovereign risk is identified as a key source of heterogeneity. Within stressed countries, banks with larger sovereign exposures reacted to monetary easing by expanding lending by less than banks with smaller exposures. As a result, monetary accommodation was smoothly transmitted to lending only by banks with limited exposure to sovereign risk. In response to the same 1% policy rate cut, the credit expansion of highly exposed stressed countries banks was instead 2.75% weaker than that of banks in non-stressed countries. These findings support existing evidence on sovereign risk having direct adverse consequences for bank lending and highlight the extent to which sovereign risk aggravated heterogeneities in the transmission on monetary policy to the real economy via the banking system during the euro area debt crisis.
    Keywords: Bank lending channel,Monetary policy transmission,Cross-country heterogeneity,Sovereign risk,Financial structures,Banking integration
    Date: 2018–09–21
  3. By: Belke, Ansgar; Beckmann, Joscha; Dubova, Irina
    Abstract: Inflation expectations play a crucial role for monetary policy transmission, having become even more important since the emergence of unconventional monetary policy. Based on survey data provided by Consensus Economics, we assess determinants of professional inflation expectations for the G7 economies. We emphasize the role of international spillovers in inflation expectations stemming from monetary policy decisions in the US. We also consider several possible determinants, such as changes in the path of monetary policy, oil price shocks and uncertainty measures. Based on a Bayesian VAR, we find significant evidence for international spillovers stemming from expectations about US monetary policy based on impulse-response functions and forecast error decompositions. We also provide similar evidence on spillovers from the dispersion across inflation forecasts.
    Keywords: Bayesian VAR,expectations,inflation,survey data,updating
    JEL: C22 E31 E52
    Date: 2018
  4. By: Andy Cheng (Hang Seng Management College)
    Abstract: Crypto-currency trading and Fintech innovations unlocked by blockchain have caught global regulators? attention for the past few years. Crypto-currency or digital asset management and value exchange are growing fast in the virtual market spaces. Officials in charge of oversight for the marketplace are now at a crossroads where regulators need to decide whether to isolate, to regulate, or to integrate crypto-currency into the new financial ecosystem. This study looks at the implication of the development in crypto-currency for regulators.The term ?crypto-currency? refers to digital currencies which based on cryptographic technologies or encryption algorithms to monitor the generation of units and transmission verification. For some crypto-currencies, there are upper limit on the number of units can be issued. However, crypto-currencies can also be generated without such limit now. Therefore, it can mimic the money supply dynamic in fiat monetary systems. However, in order to be a new form of money, crypto-currencies have to demonstrate the three basic functions of money. In general, crypto-currencies can function as a store of value. However, in view of limited acceptance in daily transaction, their role serves as medium of exchange is also limited for the time being. Regarding unit of account, owing to their high degree of volatility, this prevents them to be a good unit of account at the moment too.According to a study in April 2018 by the International Monetary Fund (IMF), total current global crypto-assets represent a small share of the global financial system. Meanwhile, crypto-currencies may not impose a great challenge to fiat currencies or influence the implementation of national monetary policy. However, in view of the exponential growth on crypto-asset/currency which in term may affect the overall financial stability, the growth in blockchain based currencies starts catching the eye sight of global regulators. IMF reminded that with the growth in the sector, crypto-asset may pose risks to financial stability in the future, so it requires the close monitoring by regulators. In addition, the advancement of digital currency, symbolized by the invention of Bitcoin, makes central banks now go beyond the question of how to regulate crypto-asset. All the above leads to the increasing importance in crypto-currency governance since in the context of crypto-currency, the governance is borderless and decentralized. Anyone can join, maintain and update distributed ledger, which regulators should be vigilant to this blockchain based governance.
    Keywords: Crypto-currency; Distributed Ledger Technology; Blockchain Governance
    JEL: G18
    Date: 2018–07
  5. By: Imran Shah (University of Bath); Francesca Schmidt-Fischer; Issam Malki (University of Westminster)
    Abstract: This paper provides empirical evidence on the pass-through of quantitative easing (QE) on equity returns in the United States (US). The methodology mimics the programme’s impact on investors’ required returns for financial assets through the QE portfolio balance channel. This analysis of monetary policy involves using a VAR model, simulating a reduction in the share of sovereign bonds as part of central bank purchases. The findings suggest that QE caused a significant reduction in the equity risk premium (ERP) for the S&P 500. This equates to an increase in equity prices of 9.6% and acts as evidence for an active portfolio rebalancing of private sector individuals into risky assets following QE. The findings of the paper also suggest that the impact of a monetary policy expansion results in varying effects, while an expansionary policy has a stronger positive effect on equity prices with QE than without. Furthermore, we test for the presence of structural breaks in the VAR model. Firstly, using a multiple structural breaks approach, we find evidence of regime shifts and secondly accounting for the shifts in the conditional mean leads to similar conclusions as found earlier.
    Date: 2018–08–01
  6. By: Bredemeier, Christian; Kaufmann, Christoph; Schabert, Andreas
    Abstract: We provide evidence that liquidity premia on assets that are more relevant for private agents’ intertemporal choices than near-money assets increase in response to expansionary forward guidance announcements. We introduce a structural specification of liquidity premia based on assets’ differential pledgeability to a basic New Keynesian model to replicate this finding. This model predicts that output and inflation effects of forward guidance do not increase with the length of the guidance period and are substantially smaller than if liquidity premia were neglected. This indicates that there are no puzzling forward guidance effects when endogenous liquidity premia are taken into account. JEL Classification: E32, E42, E52
    Keywords: forward guidance, liquidity premium, unconventional monetary policy
    Date: 2018–10
  7. By: Domenico Lombardi; Pierre L. Siklos; Xiangyou Xie
    Abstract: This paper examines the monetary policy transmission mechanism in four systemically important economies. The impact of monetary policy is found to be broadly comparable for China, the US, the Eurozone, and Japan. Identifying a role for the financial sector is essential to unpacking various channels through which monetary policy operates. Global factors play a significant role and their impact is strongest for China and weakest for Japan. China’s impact is significant with the Eurozone displaying the most interdependence and Japan the least. Time-varying VARs suggest that contrasts in the responses to monetary policy shocks persist highlighting some of the remaining differences in the transmission mechanism. Finally, there is no apparent structural change in the estimated relationships around the time when the Fed intervened after 2008. It is conjectured that Quantitative Easing may well have prevented such a break.
    Keywords: monetary policy transmission, systemically important economies, QE, Factor VAR, time-varying Factor VAR
    JEL: E63 E52 E58 E32 E31
    Date: 2018–10
  8. By: Matteo Benetton (Berkeley); Davide Fantino (Bank of Italy)
    Abstract: We make use of an allocation rule by the ECB for Targeted Longer-Term Refinancing Operations (TLTROs) to provide causal evidence on the effect of unconventional monetary policy on the cost of loans to firms. Using transaction-level data from Italy’s Central Credit Register and a difference-in-difference identification strategy, we show that treated banks decrease loan rates to the same firm by approximately 20 basis points compared with control banks. We then study how the effects of the liquidity injection vary according to the competition in the banking sector, exploiting the local nature of bank-firm lending relationships and exogenous variations in the number of pawnshops across Italian cities during the Renaissance. Our results suggest that banks' market power can significantly impair the effectiveness of unconventional monetary policy, especially for safer and smaller firms.
    Keywords: Unconventional monetary policy, bank competition, pass-through.
    JEL: E51 E52 L11
    Date: 2018–07
  9. By: Rania A. Al-Mashat; Ales Bulir; N. Nergiz Dinçer; Tibor Hlédik; Tomás Holub; Asya Kostanyan; Douglas Laxton; Armen Nurbekyan; Rafael A Portillo; Hou Wang
    Abstract: This paper develops a new central bank transparency index for inflation-targeting central banks (CBT-IT index). It applies the CBT-IT index to the Czech National Bank (CNB), one of the most transparent inflation-targeting central banks. The CNB has invested heavily in developing a Forecasting and Policy Analysis System (FPAS) to implement a full-fledged inflation-forecast-targeting (IFT) regime. The components of CBT-IT index include measures of transparency about monetary policy objectives, the FPAS designed to support IFT, and the monetary policymaking process. For the CNB, all three components have shown substantial improvements over time but a few gaps remain. The CNB is currently working on eliminating some of these gaps.
    Keywords: Central banks;Inflation targeting;Transparency;Monetary policy;monetary policy, inflation targeting, transparency, central banks.
    Date: 2018–09–28
  10. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Paul Hubert (OFCE - OFCE - Sciences Po, IEP Paris - Sciences Po Paris - Institut d'études politiques de Paris)
    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
    Date: 2018
  11. By: Lorenzo Burlon; Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the exchange rate pass-through (ERPT) into euro area (EA) inflation by estimating an open economy New Keynesian model with Bayesian methods. In the model ERPT is incomplete because of local currency pricing and distribution services, with the latter allowing to distinguish between ERPT at the border and ERPT at the consumer level. Our main results are the following ones. First, ERPT into EA prices is, in general, high. Second, it is particularly high in correspondence of exchange rate and monetary policy shocks. Third, the EA monetary stance is relevant for ERPT; in particular, ERPT is higher if the stance is accommodative in correspondence of expansionary demand shocks.
    Keywords: exchange rate, import prices, pass-through, monetary policy, euro area.
    JEL: C11 E40 E47 E52 F41
    Date: 2018–09
  12. By: Dennis Bonam; Peter van Els; Jan Willem van den End; Leo de Haan; Irma Hindrayanto
    Abstract: The natural rate of interest (r*) is an important monetary policy variable in economic literature. It serves as a benchmark for the policy rate in an equilibrium. It also plays a role in the ongoing debate about unconventional monetary policy, for instance in the development of opinions on the lower bound of the policy rate and on the current low market interest rates. To illustrate: the 'secular stagnation' hypothesis posits that the low real market interest rates are an expression of a negative value of r*. This hypothesis argues that this has consequences for monetary policy, which - according to the predominant theory - stimulates the economy by lowering the policy rate (adjusted for inflation) to below r*. When r* is negative, however, this is not possible because of the lower bound set for the policy rate. This, it is argued, impedes the ability of monetary policy to stimulate the economy.
    Date: 2018–06
  13. By: Ait Lahcen, Mohammed
    Abstract: This paper studies the impact of informality on the long-run relationship between inflation and unemployment in developing economies. I present a dynamic general equilibrium model with informality in both labor and goods markets and where money and credit coexist. An increase in inflation affects unemployment through two channels: the entry channel (size) and the hiring channel (composition). On one hand, higher inflation reduces the surplus of monetary trades thus lowering firms entry and increasing unemployment. On the other hand, it shifts firms hiring decision from high separation informal jobs to low separation formal jobs thus reducing unemployment. The net effect depends on the difference in separation rates and the availability of credit in formal transactions. The model is calibrated to match certain long-run statistics of the Brazilian economy. Numerical results indicate that inflation has a small negative effect on unemployment while producing a significant impact on labor allocation between formal and informal jobs. These results point to the importance of accounting for informality when considering the inflation-unemployment trade-off in the conduct of monetary policy.
    Keywords: informality,Phillips curve,money,labor,search and matching
    JEL: E26 E41 J64 H26 O17
    Date: 2018
  14. By: Ivo Maes (National Bank of Belgium and Robert Triffin Chair, Université catholique de Louvain and ICHEC Brussels Management School)
    Abstract: Anniversaries are occasions for remembrance and reflections on one’s history. Many central banks take the occasion of an anniversary to publish books on their history. In this essay we discuss five recent books on the history of central banking and monetary policy. In these volumes, the Great Financial Crisis and the way which it obliged central banks to reinvent themselves occupies an important place. Although this was certainly not the first time in the history of central banking, the magnitude of the modern episode is remarkable. As comes clearly to the fore in these volumes, there is now, also in the historiography of central banking, much more attention to the (shifting) balance between price stability and financial stability. The history of central banking is more perceived as one of an institution whose predominant concern varied between “normal” times and “extraordinary” times. So, central banks will have to remain vigilant, as one should expect financial crises to return. Moreover, the new world of central banking, with a greater responsibility of central banks for financial stability, will make life more complicated for central banks. It may have also consequences for central bank independence, as the modalities of the two mandates, price and financial stability, are not the same. Another aspect which comes to the fore in these volumes is the relationship between central banking and state formation. Historically, central banks have been embedded in processes of nation-building. By extending their network of branches across the country, or by being at a center of a system of liquidity provision, ultimately tied to the national currency, they played a key role in the shaping of “national economies”.
    Keywords: central banking, financial stability, price stability, Great Financial Crisis
    JEL: E42 E58 G28 N10
    Date: 2018–10
  15. By: Dany-Knedlik, Geraldine; Holtemöller, Oliver
    Abstract: We investigate drivers of Euro area inflation dynamics using a panel of regional Phillips curves and identify long-run inflation expectations by exploiting the cross-sectional dimension of the data. Our approach simultaneously allows for the inclusion of country-specific inflation and unemployment-gaps, as well as time-varying parameters. Our preferred panel specification outperforms various aggregate, uni- and multivariate unobserved component models in terms of forecast accuracy. We find that declining long-run trend inflation expectations and rising inflation persistence indicate an altered risk of inflation expectations de-anchoring. Lower trend inflation, and persistently negative unemployment-gaps, a slightly increasing Phillips curve slope and the downward pressure of low oil prices mainly explain the low inflation rate during the recent years.
    Keywords: inflation dynamics,inflation expectations,trend inflation,nonlinear state space model,panel UCSV model,Euro area
    JEL: C32 C33 E31 E5
    Date: 2018
  16. By: Rashid, Muhammad Mustafa
    Abstract: The purpose of this paper is to provide an outline of the success and draw backs of the Federal Reserve and the consequent impact on financial markets. A review of the relevant literature from Hubbard (2008) and Dowd & Hutchinson (2010) will provide insights into the success and failures of the Federal Reserve and the impact on financial markets. Further insights will be drawn from; Gorton & Metrick (2013) and their interpretation of the Federal Reserve’s actions since its formation, Romer & Romer (2013) on the pessimism of monetary policy and Dyugen-Bump (et. al 2013) on their assessment of the effectiveness of emergency liquidity measures.
    Keywords: Federal Reserve, Financial Markets, Financial Crises, Financial Regulations
    JEL: G0 G01 G18 G21 G28 G3 G38
    Date: 2018–08–19
  17. By: Stefano Ugolini (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)
    Abstract: "Central banking" is what a central bank does, but the definition of "central bank" is less straightforward than it may appear at first sight. Following Ugolini (2017), this chapter defines central banking as the provision of public policies aimed at fostering monetary and financial stability, and surveys the historical evolution of such policies in the West from the Middle Ages to today. It shows that institutional equilibria mattered a lot in shaping the way stabilization policies were implemented: central banking evolved in markedly distinct ways in city states (like Venice, Amsterdam, Hamburg, Barcelona, or Genoa), centralized territorial polities (like Naples, Sweden, England, Austria, or France), or decentralized territorial polities (like the United States or the European Union). As a result, the historical evolution of central banking does not appear to have been driven by the "survival of the fittest", but rather by the constant adaptation of policymaking to changing political economy equilibria.
    Keywords: Central banking,Monetary institutions,Public policy,Political economy
    Date: 2018–05–18
  18. By: Philip Gunby (University of Canterbury); Stephen Hickson (University of Canterbury)
    Abstract: Simple but neglected concepts such as the velocity of circulation are ideal to open up discussions in macroeconomics classes, in this case about why the demand for money may rise or fall and about the likelihood of a cashless society. First, we review the history of the velocity of circulation. Next, we provide details of a research exercise in an undergraduate macroeconomics course. This exercise includes students searching for data on financial and monetary systems and national accounts. Data sources and links are provided for different countries. We also explain how such an exercise can be used to further Excel skills of students. Finally, we discuss our experiences from this exercise, including student feedback about the exercise from a survey we conducted.
    Keywords: Teaching Macroeconomics, Velocity of Circulation, Cashless Society, Undergraduate Research.
    JEL: A22
    Date: 2018–09–01
  19. By: Armelius, Hanna (Payments Department); Bertsch, Christoph (Research Department, Central Bank of Sweden); Hull, Isaiah (Research Department, Central Bank of Sweden); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: We use text analysis and a novel dataset to measure the sentiment component of central bank communications in 23 countries over the 2002-2017 period. Our analysis yields three key results. First, using directed networks, we show that comovement in sentiment across central banks is not reducible to trade or financial ow exposure. Second, we find that geographic distance is a robust and economically significant determinant of comovement in central bank sentiment, while shared language and colonial ties are economically significant, but less robust. Third, we use structural VARs to show that sentiment shocks generate cross-country spillovers in sentiment, policy rates, and macroeconomic variables. We also find that the Fed plays a uniquely in uential role in generating such sentiment spillovers, while the ECB is primarily in uenced by other central banks. Overall, our results suggest that central bank communication contains systematic biases that could lead to suboptimal policy outcomes.
    Keywords: communication; monetary policy; international policy transmission
    JEL: E52 E58 F42
    Date: 2018–09–01
  20. By: Rym Aloui (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824. 93, Chemin des Mouilles, F-69130 Ecully, France); Michel Guillard (EPEE and TEPP (FR CNRS 3126), Université d'Evry Val d' Essonne, Boulevard François Mitterrand, 91025, Evry, France.)
    Abstract: The Fiscal Theory of the Price Level (FTPL) is an important theory that recognizes the interaction between monetary and fiscal policy. In its simplest form, the FTPL assumes that the government commits to a fixed and exogenous present value of primary surpluses implying the adjustment of the price level to equate the real government debt to the present value of primary surpluses. The FTPL relies on the presence of primary surpluses to work. We show that this condition is not necessary in a non-Ricardian economy. The FTPL still hold even when exogenous primary surpluses are null. We consider an overlapping generations of infinitely-lived dynasties model with simple fiscal and monetary policies, where the effective lower bound on nominal interest rates is taken into account. A bubble-like component of government debt appears inducing the determination of the price level by the fiscal policy, when the effective lower bound on nominal interest rates is binding and even when the government primary surpluses equal zero.
    Keywords: Wealth Effects, Liquidity Trap, Deflation, Zero Lower Bound, Fiscal Theory of the Price Level, Monetary and Fiscal Rules, Public Debt
    JEL: E63 E52
    Date: 2018
  21. By: Matheus R Grasselli; Alexander Lipton
    Abstract: We investigate the macroeconomic consequences of narrow banking in the context of stock-flow consistent models. We begin with an extension of the Goodwin-Keen model incorporating time deposits, government bills, cash, and central bank reserves to the base model with loans and demand deposits and use it to describe a fractional reserve banking system. We then characterize narrow banking by a full reserve requirement on demand deposits and describe the resulting separation between the payment system and lending functions of the resulting banking sector. By way of numerical examples, we explore the properties of fractional and full reserve versions of the model and compare their asymptotic properties. We find that narrow banking does not lead to any loss in economic growth when the models converge to a finite equilibrium, while allowing for more direct monitoring and prevention of financial breakdowns in the case of explosive asymptotic behaviour.
    Date: 2018–10
  22. By: Schelkle, Waltraud
    Abstract: The euro is a unique experiment in monetary history: a group of rather different countries adopted voluntarily a common currency, and the supranational central bank is deliberately separated from national fiscal institutions. Every member state had good reasons to take the risk of joining this experiment of a monetary pool of diverse countries. However, the experiment has so far been rather disappointing. A political-economic paradox can explain why the member states could agree only on a dangerously limited form of fiscal risk sharing. These limitations materialised in the recent financial and euro area crisis, in which the rescue of insolvent banks remained a task for each member state even though financial market integration had contributed to making domestic banking systems too big for most of them. But the elements of insurance that have been institutionalised in the monetary union also came to the fore in the crisis: notably the cross-border payments system TARGET sustained the euro area as a trade and payments area. The banking union has made risk sharing in the common currency area more robust. But the risk of fiscal overstretch is still real and calls for further reforms.
    JEL: J1
    Date: 2018–09–11
  23. By: de Bondt, Gable J.; Hahn, Elke; Zekaite, Zivile
    Abstract: This paper develops Area-wide Leading Inflation CyclE (ALICE) indicators for euro area headline and core inflation with an aim to provide early signals about turning points in the respective inflation cycle. The series included in the two composite leading indicators are carefully selected from around 160 candidate leading series using a general-to-specific selection process. The headline ALICE includes nine leading series and has a lead time of 3 months while the core ALICE consists of seven series and leads the reference cycle by 4 months. The lead times of the indicators increase to 5 and 9 months, respectively, based on a subset of the selected leading series with longer leading properties. Both indicators identify main turning points in the inflation cycle ex post and perform well in a simulated real-time exercise over the period from 2010 to the beginning of 2018. They also have performed well in forecasting the direction of inflation. In terms of the quantitative forecast accurracy, the headline ALICE has on average performed broadly similarly to the Euro Zone Barometer survey, slightly worse than the Eurosystem/ECB Staff macroeconomic projections and better than the Random Walk model, albeit this is not the case for the core ALICE. JEL Classification: C32, C52, C53, E31, E37
    Keywords: band pass filter, euro area inflation, forecasting, leading indicators, trend-cycle decomposition
    Date: 2018–09
  24. By: Jamal Bouoiyour (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Refk Selmi (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)
    Abstract: The nexus between inflation and its uncertainty has been a topic of wide dispute. Using wavelet decomposition and with special reference to Egypt for the period 1960:M06-2013:M12, we find that the focal relationship varies substantially among the different frequencies involved. In the short-run, inflation expands inflation uncertainty and vice versa. In the medium term, higher inflation leads to greater volatility, while there is no evidence of significant link in the long-run. The main causes of these mixed outcomes have been organized into demand pull factors, cost push ones and the possible reflect of the conflicting underlying objectives pursued to avoid political pitfalls and the great instability that unfolded since 25th January 2011.
    Keywords: Inflation,Inflation uncertainty,Wavelet approach,Egypt
    Date: 2018–09–24
  25. By: Randall Hanegraaf; Nicole Jonker; Steven Mandley; Jelle Miedema
    Abstract: Purpose: This study quantifies the impact of the Dutch cash payment system on the environment and on climate change using a life cycle assessment (LCA). It examines both the impact of coins and of banknotes. In addition, it identifies areas within the cash payment system where the impact on the environment and on the climate can be reduced. Methods: The ReCiPe endpoint (H) impact method was used for this LCA. The cash payment system has been divided into five subsystems: the production of banknotes, the production of coins, the operation phase, the end of life of banknotes and the end of life of coins. Two functional units were used: 1) cumulative cash payments in the Netherlands in 2015 and 2) the average single cash payment in the Netherlands in 2015. Input data for all processes within each subsystem was collected through interviews and literature study. Ten key companies and authorities in the cash payment chain contributed data, i.e. the Dutch central bank, the Royal Dutch Mint, a commercial bank, a cash logistic service provider, two cash-in-transit companies, two printing works, an ATM manufacturer and a municipal waste incinerator. Results and discussion: The environmental impact of the Dutch cash payment system in 2015 was 2.35 MPt (expressed in eco points) and its global warming potential (GWP) was 17 million kg CO2 equivalents (CO2e). For an average single cash transaction the environmental impact was 637 µPt and the GWP was 4.6 g CO2e. The operation phase (e.g. energy use of ATMs, transport of banknotes and coins) (64%) and coin production phase (32%) had the largest impact on the environment, while the operation phase also had the largest impact on climate change (88%). Finally, scenario analysis shows that reductions of the environmental impact (51%) and the impact on climate change (55%) could be achieved by implementing a number of measures, namely: reducing the number of ATMs, stimulating the use of renewable energy in ATMs, introducing hybrid trucks for cash transport and matching coins with other countries in the euro area. Conclusions: This is the first study that investigates the environmental impact and GWP of the cash payment system in the Netherlands, by taking both the impact of banknotes and coins into account. The total environmental impact of cash payments in 2015 was 2.35 MPt and their GWP was 17 million kg CO2e.
    Keywords: Cash payment system; coins; banknotes; LCA; environmental impact; GWP
    JEL: E42 Q54 Q56
    Date: 2018–10
  26. By: Jongwook Park (Economic Research Institute, The Bank of Korea)
    Abstract: This paper analyzes the relationships between monetary policy and income inequality in Korea. We calculate Gini coefficient for various income range using data from the Household Income and Expenditure Survey and then estimate a block-exogeneity VAR representing Korean and US economies to examine the effects of monetary policies on income inequality. The results show that following a one-standard deviation contractionary (expansionary) monetary policy shock, market income Gini coefficient increases (decreases) significantly after one year, reaching its peak to 0.0014 (0.14%p) while GDP and CPI decrease (increase) significantly by 0.48% and 0.15%, respectively. The contributions of monetary policy shocks to income inequality are found to be small as shown by forecast error variance and historical decompositions. In addition, earnings heterogeneity channel is most important among various channels through which monetary policy affects income inequality. Finally, a counterfactual analysis implies that if Bank of Korea held the call rate constant at 5.13% from 2008:Q3 and thereafter, the average of market income Gini coefficient would be higher by 0.009 (0.9%p) during 2008:Q4 - 2015:Q1 under the assumption of static expectations.
    Keywords: Monetary Policy, Income Inequality, Block-exogeneity, VAR
    JEL: E5 E4 C1
    Date: 2018–09–07

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