nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒11‒05
forty-five 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. Speculative Eurozone Attacks and Departure Strategies By Homburg, Stefan
  3. Of gold and paper money By Chadha, Jagjit S.
  5. Fixed-Rate Loans and the Effectiveness of Monetary Policy By Sung Ho Park
  6. E-money: Legal Restrictions Theory and Monetary Policy By Ohik Kwon; Jaevin Park
  7. The limits to robust monetary policy in a small open economy with learning agents By Marine Charlotte André; Meixing Dai
  8. Dissecting long-term Bund yields in the run-up to the ECB's Public Sector Purchase Programme By Lemke, Wolfgang; Werner, Thomas
  9. Three Quarter-Centuries of Central Banking in Ireland By Honohan, Patrick
  10. Differential effects of unconventional monetary policy on syndicated loan contracts By Takaoka, Sumiko; Takahashi, Koji
  11. A Monetary Model of Blockchain By Almosova, Anna
  12. Monetary Policy and Corporate Debt Structure By Stépahne Lhuissier; Urszula Szczerbowicz
  13. The dear old holy Roman realm. How does it hold together? Monetary policies, cross-cutting cleavages and political cohesion in the age of reformation By Volckart, Oliver
  14. Exchange Rate Pass-Through to Consumer Prices and the Role of Energy Prices By Kim, Hyeongwoo; Lin, Ying
  15. Fiscal Policy and Inflation: Understanding the Role of Expectations in Mexico By López-Martín Bernabé; Ramírez de Aguilar Alberto; Sámano Daniel
  16. New Facts about Firms' Inflation Expectations: Short- versus Long-Term Inflation Expectations By Yosuke Uno; Saori Naganuma; Naoko Hara
  17. Term structure modeling for multiple curves with stochastic discontinuities By Claudio Fontana; Zorana Grbac; Sandrine G\"umbel; Thorsten Schmidt
  18. The Monetary Model of CIP Deviations By Ibhagui, Oyakhilome
  19. Central Bank Capital as an Instrument of Monetary Policy By Mojmir Hampl; Tomas Havranek
  20. Exploring the implications of di erent loan-to-value macroprudential policy designs By Rita Basto; Sandra Gomes; Diana Lima
  21. The power of forward guidance and the fiscal theory of the price level By McClung, Nigel
  22. New Facts about Firms' Inflation Expectations: Simple Tests for a Sticky Information Model By Yosuke Uno; Saori Naganuma; Naoko Hara
  23. How does monetary policy affect income and wealth inequality? Evidence from quantitative easing in the euro area By Lenza, Michele; Slacalek, Jiri
  24. Central bank swap lines By Bahaj, Saleem; Reis, Ricardo
  25. Global Trends in Interest Rates By Del Negro, Marco; Giannone, Domenico; Giannoni, Marc; Tambalotti, Andrea
  26. Transmission of monetary policy with heterogeneity in household portfolios By Luetticke, Ralph
  27. David Kynaston's till time's last sand: a history of the Bank of England, 1694-2013: a review essay By Bean, Charles R.
  28. Post-FOMC Announcement Drift in U.S. Bond Markets By Jordan Brooks; Michael Katz; Hanno Lustig
  29. The Fiscal Theory of the Price Level in non-Ricardian Economy By Rym Aloui; Michel Guillard
  30. More Amazon Effects: Online Competition and Pricing Behaviors By Alberto Cavallo
  31. Central bank digital currencies: An assessment of their adoption in Latin America By Noelia Camara; Enestor Dos Santos; Francisco Grippa; Javier Sebastian; Fernando Soto; Cristina Varela
  32. Business Cycle Synchronisation in a Currency Union: Taking Stock of the Evidence By Fidrmuc, Jarko; Campos, Nauro F.; Korhonen, Iikka
  33. Deciphering Monetary Policy Committee Minutes with Text Mining Approach: A Case of South Korea By Youngjoon Lee; Soohyon Kim; Ki Young Park
  34. Speed limit policy and liquidity traps By Nakata, Taisuke; Schmidt, Sebastian; Yoo, Paul
  35. Optimal capital controls and real exchange rate policies: a pecuniary externality perspective By Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R.
  36. Optimal inflation and the identification of the Phillips Curve By McLeay, Michael; Tenreyro, Silvana
  37. The Effect of ECB Policy Announcements on Sovereign Yields: A Return to Normal Transmission? By Goodhead, Robert
  38. Dollarization and the “Unbundling” of Globalization in sub-Saharan Africa By Ajide, Kazeem; Raheem, Ibrahim; Asongu, Simplice
  39. Is Renminbi a (Truly) International Currency? An Evaluation Based on Offshore Foreign Exchange Market Trading Patterns By Cheng, Lian; Luo, Junru; Liu, Lin
  40. Monetary policy shocks, expectations and information rigidities By Czudaj, Robert; Beckmann, Joscha
  41. Disentangling the Information and Forward Guidance Effect of Monetary Policy Announcements on the Economy By Other, Lars
  42. News Shock Spillovers: How the Euro Area Responds to Expected Fed Policy By Paul Rudel; Peter Tillmann
  43. The Federal Reserve Is Not Very Constrained by the Lower Bound on Nominal Interest Rates By Eric T. Swanson
  44. The Implications of Central Bank Transparency for Uncertainty and Disagreement By Jitmaneeroj, Boonlert; Lamla, Michael J; Wood, Andrew
  45. Regime Changes in the Relationship between Stock Market Return and the Growth Rates of Output and Money Supply in Thailand By Jiranyakul, Komain

  1. By: Bernd Hayo; Florian Neumeier
    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
    Date: 2018
  2. By: Homburg, Stefan
    Abstract: This paper shows that the eurozone payment system does not effectively protect member states from speculative attacks. Suspicion of a departure from the common currency induces a terminal outflow of central bank money in weaker member states. TARGET2 cannot inhibit this drain but only protects central bank assets. Evidence presented here suggests that a run on Italy is already on the way. The paper also considers departure strategies of strong and weak member states and the distributive effects of an orderly eurozone dissolution.
    Keywords: Currency speculation; TARGET2; eurozone; Italexit; Dexit; trilemma
    JEL: E52 E58
    Date: 2018–10
  3. By: Chadha, Jagjit S.
    Abstract: We consider the role of money as a means of payment, store of value and medium of exchange. I outline a number of quantitative and qualitative experiences of monetary management. Successful regimes have sprung up in a variety of surprising places, and been sustained with state (centralised) interventions. Although the link between state and money, and its standard of identity and account may be clear, particularly in earlier stages of economic development, the extent to which the state is widely felt to hold responsibility for 'sound money' is less clear in modern democracies, where there are many other public responsibilities implying ongoing trade-offs.
    Keywords: money; gold standard; paper money; Samuelson.
    JEL: B22 E31
    Date: 2018–07–11
  4. By: Yeonho Lee (Chungbuk National University (Department of Economics)); Kwangsuk Han (Pusan National University (Department of International Trade))
    Abstract: There have been studies applying OCA criteria to East Asia and they have focused largely on evaluating the economic conditions for regional monetary integration in East Asia. Many of their studies find that at least some of the Asian countries meet major OCA criteria. This paper investigates the feasibility and desirability of a common currency arrangement in East Asia applying a structural VARs methodology to asymmetric shocks. We examine the issues of asymmetric responses to external shocks which is one of the most frequently used criteria for evaluating the costs and benefits of joining a common currency versus having an independent currency.The results suggest that a sub-group of East Asian countries are plausible candidates for adopting a single currency. Regarding asymmetry of supply shocks, we find that eight East Asian economies (Hong Kong, Indonesia, Japan, Korea, Malaysia, Singapore, Taiwan, and Thailand) are possible candidates for a currency union (EA 8), and EA 5 for demand shocks. Supply disturbances are highly and significantly correlated among these countries and correlations of real GDP growth rates corroborate the analysis of supply disturbances.
    Keywords: Optimum Currency Area (OCA), Monetary Union, East Asia, Structural VARs
    JEL: F41 F33 F36
    Date: 2018–07
  5. By: Sung Ho Park (Economic Research Institute, The Bank of Korea)
    Abstract: Fixed-rate loans may contribute to financial stability because they lower the volatility of interest rates. This reduced volatility of interest rates, however, may undermine the effectiveness of monetary policy. Fixed-rate loans, also, may change the steady-states of economy because fixed interest rates are usually higher than variable interest rates, which can alter incentives of borrowers for loans. This paper tests how fixed-rate loans affect the steady-states of economy and the effectiveness of monetary policy, using the DSGE model. The steady-states in the economy are shown to vary in the ratio of fixed-rate loans. When the ratio of fixed-rate loans rises, borrowers bear more burden of interests because fixed interest rates are higher than variable interest rates. Therefore, borrowers reduce their loans, which lead into decreased weight of financial sector in the economy. Total output, however, remains almost unchanged regardless of the ratio of fixed-rate loans because households increase labor supply to compensate for their financial losses. The similar phenomenon happens when the mark-up of fixed interest rates over variable interest rates increases. Effects of fixed-rate loans on monetary policy turn out to be different in financial economy and real economy. Financial economy variables, such as interest rates and loans, respond differently to monetary policy shocks when the ratio of fixed-rate loans increases. These differences, however, are offset by each other within financial economy and not transmitted to real economy. That is, real economy variables, such as output, consumption, and price, react virtually the same to monetary policy shocks regardless of the ratio of fixed-rate loans. The same results occur when I vary the mark-up of fixed interest rates or the stickiness of fixed interest rates.
    Keywords: Fixed-rate loans, Monetary policy, DSGE model, Financial stability, Interest rate stickiness
    JEL: E43 E44 E52 E58
    Date: 2018–07–26
  6. By: Ohik Kwon (Economic Research Institute, The Bank of Korea); Jaevin Park (Department of Economics, The University of Mississippi)
    Abstract: This paper studies the efficiency of electronic money system by focusing on the decentralized setting of issuance. In the model competitive money issuers can create small denominated money (or e-money) backed by large denominated government bonds. Under the decentralized environment the issuers can also produce counterfeit collateral at a proportional cost. This moral hazard incentive requires the more government bonds for the issuers to provide the same amount of money. In general equilibrium the individual money issuers do not internalize the aggregate effect of money supply. Thus the equilibrium allocation is constrained inefficient with the moral hazard incentives. We suggest a pigouvian tax on money supply to correct the externality in aggregate money supply.
    Keywords: Limited Commitment, Moral Hazard, Externality, Open-market Operations
    JEL: E4 E5
    Date: 2018–06–19
  7. By: Marine Charlotte André; Meixing Dai
    Abstract: We study in a small open economy New Keynesian model the consequences of adaptive learning for the design of optimal robust monetary policy. Compared to the rational expectations equilibrium, we find that the possiblity to conduct robust monetary policy is extremely limited in the open economy when private agents are learning. The misspecification that can be introduced into all equations of the model is very small and approaches zero at high speed as the learning gain rises.
    Keywords: Robust control, model uncertainty, adaptive learning, optimal monetary policy, small open economy.
    JEL: C62 D83 D84 E52 E58
    Date: 2018
  8. By: Lemke, Wolfgang; Werner, Thomas
    Abstract: Starting in summer 2014, markets began to build up expectations that the European Central Bank (ECB) would embark on large-scale sovereign bond purchases. The ECB's Public Sector Purchase Programme (PSPP) was eventually announced on 22 January 2015 and purchases started in March. Both during the run-up phase to the PSPP announcement day and for the day itself, German government bond yields declined significantly. Using an affine term structure model, we evidence that the yield declines are almost fully attributable to a decline in the term premium as opposed to the expectations component. This speaks in favour of the conjecture that the PSPP transmits to long-term yields mainly via a portfolio re-balancing channel rather than a (policy rate) signalling channel. The results prove robust against changing the number of factors in the model, the estimation sample and the estimation approach.
    Keywords: term structure of interest rates,large-scale asset purchases,term
    JEL: E43 E52
    Date: 2018
  9. By: Honohan, Patrick
    Abstract: The 75-year history of the Central Bank of Ireland falls neatly into three contrasting quartercenturies. For the first quarter-century (1943-68) Irish banking continued to operate as a kind of satellite of the British system, with the Central Bank maintaining the non-interventionist approach that had characterised the currency board regime in place from 1927. The second quarter century (1968-93) was a period of monetary instability with double-digit inflation and repeated devaluations. Hyper-globalisation has defined the most recent 25 years (1993-2018) of the Central Bank’s operations, with the Irish economy experiencing a damaging episode of over financialisation followed by a collapse, from which the Bank sought to navigate a recovery that would minimise economic damage. Evaluating national economic performance in each of the three periods on price stability and average job growth, the most recent quarter century outperforms the other two; but it has been more volatile.
    Date: 2018–04
  10. By: Takaoka, Sumiko; Takahashi, Koji
    Abstract: We investigate the effects of monetary policy on the financing policies of firms through the expected market interest rate channel at the firm level with Japanese syndicated loan contracts from 2000 to 2016, when monetary policy in Japan was almost stuck at the zero bound and the Bank of Japan introduced various unconventional monetary policy measures. To identify the interest rate channels of this monetary policy, we control for both observed and unobserved firm heterogeneity and unobserved time-varying bank heterogeneity in loan contracts. The evidence presented here demonstrates that both pricing (loan spread) and non-pricing (loan maturity) terms of loan contracts are affected by monetary policy shocks. In particular, monetary policy shocks have heterogeneous effects on loan maturity. The response to a monetary policy shock associated with a decrease in long-term interest rates is significant only for the borrower group with access to bonds, that is, less financially constrained firms.
    Keywords: Syndicated loans, Monetary policy, Loan maturity, Loan spread
    JEL: E43 E52 G21
    Date: 2018–10–04
  11. By: Almosova, Anna
    Abstract: The recent emergence of blockchain-based cryptocurrencies has received a considerable attention. The growing acceptance of cryptocurrencies has led many to speculate that the blockchain technology can surpass a traditional centralized monetary system. However, no monetary model has yet been developed to study the economics of the blockchain. This paper builds a model of the economy with a single generally acepted blockchain-based currency. In the spirit of the search and matching literature I use a matching function to model the operation of the blockchain. The formulation of the money demand is taken from a workhorse of monetary economics - Lagos and Wright (2005). I show that in a blockchain-based monetary system money demand features a precautionary motive which is absent in the standard Lagos-Wright model. Due to this precautionary money demand the monetary equilibrium can be stable for some calibrations. I also used the developed model to study how the equilibrium return on money is dependent on the blockchain parameters such as mining costs and rewards.
    Keywords: Blockchain,Miners,Cryptocurrency,Matching function
    JEL: E40 E41 E42
    Date: 2018
  12. By: Stépahne Lhuissier; Urszula Szczerbowicz
    Abstract: This paper evaluates and compares the effects of conventional and unconventional monetary policies on the corporate debt structure in the United States. It does so by using a vector autoregression in which policy shocks are identified through high-frequency external instruments. Our results show that conventional and unconventional expansionary monetary policies have similar positive effects on aggregate activity, but their impact on corporate debt structure goes in opposite directions: (i) conventional monetary easing increases loans to non-financial corporations and reduces corporate bond financing; (ii) unconventional monetary easing increases bond finance without affecting the loans.
    Keywords: Conventional and unconventional monetary policy, Vector autoregression, External instruments, Corporate debt structure, Bank lending, Bond issuance.
    JEL: E43 E44 E52
    Date: 2018
  13. By: Volckart, Oliver
    Abstract: Research has rejected Ranke’s hypothesis that the Reformation emasculated the Holy Roman Empire and thwarted the emergence of a German nation state for centuries. However, current explanations of the Empire’s cohesion that emphasise the effects of outside pressure or political rituals are not entirely satisfactory. This article contributes to a fuller explanation by examining a factor that so far has been overlooked: monetary policies. Monetary conditions within the Empire encouraged its members to cooperate with each other and the emperor. Moreover, cross-cutting cleavages – i.e. the fact that both Catholics and Protestants were split among themselves in monetary-policy questions – allowed actors on different sides of the confessional divide to find common ground. The paper analyses the extent to which cleavages affected the negotiations about the creation of a common currency between the 1520s and the 1550s, and whether monetary policies helped bridging the religious divide, thus increasing the Empire’s political cohesion.
    Keywords: Holy Roman Empire; reformation; political cohesion; monetary policies.
    JEL: H11 H77 N13 N43
    Date: 2018–10–01
  14. By: Kim, Hyeongwoo; Lin, Ying
    Abstract: A group of researchers has asserted that the rate of exchange rate pass-through (ERPT) to domestic prices has declined substantially over the last few decades. We revisit this claim of a downward trend in the rate of ERPT to the Consumer Price Index (CPI) by employing the vector autoregressive (VAR) model for the U.S. macroeconomic data under the current floating exchange rate regime. Our VAR approach that nests the conventional single equation method reveals very weak evidence of ERPT during the pre-1990 era. On the other hand, we observe statistically significant evidence of ERPT during the post-1990 era, which sharply contrasts with previous findings. After statistically confirming a structural break in ERPT to the total CPI via Hansen's (2001) test procedure, we seek the source of the structural break using the disaggregate level CPIs, which pinned down a key role of energy prices in explaining the emergence of the break. The dependency of the U.S. energy consumption on imports has increased since the 1990s. This change magnifies the effects of the exchange rate shock on domestic energy prices, resulting in greater responses of the total CPI via this energy price channel.
    Keywords: Exchange Rate Pass Through; Disaggregated CPI; Structural Break; Oil Price Shock
    JEL: E31 F31 F40
    Date: 2018–09
  15. By: López-Martín Bernabé; Ramírez de Aguilar Alberto; Sámano Daniel
    Abstract: This paper estimates a hidden Markov model where inflation is determined by government deficits financed through money creation and by expectations dynamics. The baseline model, proposed by Sargent et al. (2009) is able to distinguish between causes and remedies of hyperinflation, such as persistent or transitory shocks to fiscal deficits, and the de-anchoring of inflation expectations. The estimated sequence of monetized deficits provides an adequate account of inflation for the period 196994. The paper then extends the model to analyze the possibility that fiscal policy can affect inflation expectations in a context of Central Bank independence, as is the case of Mexico after 1994. Evidence is found that the exchange rate and sovereign interest rate spreads influence the evolution of inflation.
    Keywords: Inflation;Inflation Expectations;Fiscal Deficit
    JEL: E31 E42 E52 E63
    Date: 2018–10
  16. By: Yosuke Uno (Bank of Japan); Saori Naganuma (Bank of Japan); Naoko Hara (Bank of Japan)
    Abstract: In this paper, using large-scale firm-level micro-data from the Tankan survey we examine firms' inflation expectations at different time horizons. Our principle findings are twofold. First, with regard to long-term expectations, a number of firms offer no forecasts. Second, and more importantly, the frequency of forecast revisions is higher for longer time horizons.
    Keywords: long-term inflation expectations, frequency of forecast revisions
    JEL: E31 E58
    Date: 2018–10–29
  17. By: Claudio Fontana; Zorana Grbac; Sandrine G\"umbel; Thorsten Schmidt
    Abstract: The goal of the paper is twofold. On the one hand, we develop the first term structure framework which takes stochastic discontinuities explicitly into account. Stochastic discontinuities are a key feature in interest rate markets, as for example the jumps of the term structures in correspondence to monetary policy meetings of the ECB show. On the other hand, we provide a general analysis of multiple curve markets under minimal assumptions in an extended HJM framework. In this setting, we characterize absence of arbitrage by means of NAFLVR and provide a fundamental theorem of asset pricing for multiple curve markets. The approach with stochastic discontinuities permits to embed market models directly, thus unifying seemingly different modeling philosophies. We also develop a new tractable class of models, based on affine semimartingales, going beyond the classical requirement of stochastic continuity. Due to the generality of the setting, the existing approaches in the literature can be embedded as special cases.
    Date: 2018–10
  18. By: Ibhagui, Oyakhilome
    Abstract: A large amount of currencies has over time exhibited persistent deviations from covered interest rate parity, resulting in non-zero cross-currency basis swap spreads. The relationship between these deviations and standard macroeconomic variables, however, remains unknown. In this paper, we document a long-run relationship between cross-currency basis swap spreads and macroeconomic variables (relative money supply and relative real output). After presenting a simple model where we relax the no-arbitrage CIP assumption in a monetary model framework, we empirically show that, in the long run, tighter cross-currency basis swap spreads are associated with higher relative real output for non-European currencies, while a rise in relative money supply does not widen the cross-currency basis swap spreads associated with European currencies. Our main results are robust to different estimation techniques and the inclusion of control variables. We also perform an error-correction analysis which suggests that the mechanism governing the adjustment to equilibrium is not the same for European and non-European currencies. More generally, we show that, when there is a move away from equilibrium, it is mostly the cross-currency basis swap spreads that adjust to ensure a return to equilibrium, across all maturities and samples.
    Keywords: Monetary fundamentals, covered interest rate parity, cross-currency basis swap spreads
    JEL: F31
    Date: 2018–10–21
  19. By: Mojmir Hampl (Czech National Bank, Na prikope 28, 115 03 Prague 1, Czech Republic); Tomas Havranek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: We examine the use of central bank capital as an unconventional monetary policy tool. In this setting, a central bank employs digital currency to transfer digital cash to each household, thus supporting consumption directly when needed. The asset side of the central bank’s balance sheet remains unchanged, and the creation of new digital cash is offset by a decrease in central bank capital. The central bank thus incurs an immediate loss but does not take on any additional risks for its future income statements. We address several objections to this policy, paying particular attention to the claim that weakening the financial strength of the central bank endangers long-term price stability. Through a meta-analysis of 176 estimates reported previously in the literature, we find that central bank financial strength has not historically correlated with inflation performance.
    Keywords: Central bank capital, inflation, seigniorage, monetary policy, helicopter money, central bank digital currency
    JEL: E42 E52 E58
    Date: 2018–10
  20. By: Rita Basto (Banco de Portugal); Sandra Gomes (Banco de Portugal); Diana Lima (Banco de Portugal)
    Abstract: This paper evaluates the macroeconomic effects of macroprudential policy measures consisting of changes in loan-to-value ratios in the euro area. The analysis is carried out within a fully structural, multi-country model, that prominently includes nancial frictions and a banking sector. Our main findings suggest that a permanent LTV tightening in a small euro area economy leads to a long-run decline in lending to the private sector. The short-run impact depends crucially on the policy design, being less pronounced when the measure is phased-in. This is consistent with policy goals of curbing credit growth but avoiding an abrupt immediate contraction in lending. A policy measure introduced at the euro area level implies larger long-run e ects but the short-run recessionary impact is attenuated by the monetary policy response.
    Keywords: Macroprudential policy; loan-to-value ratio; financial frictions
    JEL: E58 E61 F42
    Date: 2018–10
  21. By: McClung, Nigel
    Abstract: Standard New Keynesian models predict implausibly large and favorable responses of inflation and output to expansionary forward guidance on interest rates. We find that the introduction of permanent or recurring active fiscal policy dampens the response of output and inflation to forward guidance in the New Keynesian model. Moreover, the presence of regime-switching policy introduces expectation e ects that cause forward guidance to be less stimulative in our regime-switching model's active money, passive fiscal policy regime. Finally, the introduction of long-term debt a ects the magnitude of the stimulus resulting from forward guidance in models with active fiscal policy.
    JEL: E63 D84 E50 E52 E58 E60
    Date: 2018–10–29
  22. By: Yosuke Uno (Bank of Japan); Saori Naganuma (Bank of Japan); Naoko Hara (Bank of Japan)
    Abstract: In this paper, we use a large dataset based on firm-level micro-data from the Tankan survey to examine firms' inflation expectations. We first present two basic findings: (i) firms' inflation expectations are downwardly rigid at zero, and (ii) differences in firms' inflation expectations are larger across firm sizes than across sectors. We then report three findings which are in line with predictions of the simple sticky information model proposed by Mankiw and Reis (2002). First, in each period, a number of firms do not revise their expectations. Second, the frequency of forecast revisions is constant over time. Third, our estimates of the frequency of forecast revisions based on the Tankan survey are much smaller than those in previous studies and are much closer to the value that Mankiw and Reis (2002) assumed in their simulation exercises.
    Keywords: inflation expectations; frequency of forecast revisions; sticky information model
    JEL: E31 E37
    Date: 2018–10–29
  23. By: Lenza, Michele; Slacalek, Jiri
    Abstract: This paper studies the effects of quantitative easing on income and wealth of individual euro area households. The aggregate effects of quantitative easing are estimated in a multi-country VAR model of the four largest euro area countries, in which key variables affecting household income and wealth are included, such as the unemployment rate, wages, interest rates, house prices and stock prices. The aggregate effects are distributed across the individual households by means of a reduced-form simulation on micro data from the Household Finance and Consumption Survey, capturing the income composition, the portfolio composition and the earnings heterogeneity channels of transmission. We find that the earnings heterogeneity channel plays a key role: quantitative easing compresses the income distribution since many households with lower incomes become employed. In contrast, monetary policy has only negligible effects on wealth inequality. JEL Classification: D14, D31, E44, E52, E58
    Keywords: Great Recession, household heterogeneity, income, inequality, monetary policy, quantitative easing, wealth
    Date: 2018–10
  24. By: Bahaj, Saleem; Reis, Ricardo
    Abstract: Swap lines between advanced-economy central banks are a new important part of the global financial architecture. This paper analyses their monetary policy effects from three perspectives. First, from the perspective of the central banks, it shows that the swap line mimics discount-window credit from the source central bank to the recipient-country banks using the recipient central bank as the bearer of the credit risk. Second, from the perspective of the transmission of monetary policy, it shows that the swap-line rate puts a ceiling on deviations from covered interest parity, and finds evidence for it in the data. Third, from the perspective of the macroeconomic effects of policy, it shows that the swap line ex ante encourages inflows from recipient-country banks into assets denominated in the source-country’s currency by reducing the ex post funding risk. We find support for these predictions using difference-in-difference empirical strategies that exploit the fact that only some currencies saw changes in the terms of their dollar swap line, only some bonds in banks’ investments are exposed to dollar funding risk, only some dollar bonds are significantly traded by foreign banks, and only some banks have a significant U.S. presence.
    Keywords: liquidity facilities; currency basis; bond portfolio flows
    JEL: E44 F33 G15
    Date: 2018–06
  25. By: Del Negro, Marco (Federal Reserve Bank of New York); Giannone, Domenico (Federal Reserve Bank of New York); Giannoni, Marc (Federal Reserve Bank of Dallas); Tambalotti, Andrea (Federal Reserve Bank of New York)
    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.
    Keywords: World Interest Rate; Convenience Yield; Interest Rate Parity; VAR with Common Trends
    JEL: E43 E44 F31 G12
    Date: 2018–10–16
  26. By: Luetticke, Ralph
    Abstract: Monetary policy affects both intertemporal consumption choices and portfolio choices between liquid and illiquid assets. The monetary transmission, in turn, depends on the distribution of marginal propensities to consume and invest. This paper assesses the importance of heterogeneity in these propensities for the transmission of monetary policy in a New Keynesian business cycle model with uninsurable income risk and assets with different degrees of liquidity. Liquidity-constrained households have high propensities to consume but low propensities to invest, which makes consumption more and investment less responsive to monetary shocks compared to complete markets. Redistribution through earnings heterogeneity and the Fisher channel from unexpected inflation further amplifies the consumption response but dampens the investment response.
    Keywords: monetary policy; heterogeneous agents; general equilibrium
    JEL: E21 E32 E52
    Date: 2018–06–21
  27. By: Bean, Charles R.
    Abstract: This essay reviews Till Time's Last Sand, David Kynaston's history of the Bank of England from its foundation in 1694 to the present day. I focus on three themes running through his narrative. First, for much of that time the Bank was a private company playing a public role; how did it manage to do this and why was it eventually brought into public ownership? Second, I examine the various attempts to constrain the Bank's monetary policy to follow a simple rule; these almost invariably proved unsustainable unless the rule provided enough room for discretion. Finally, I cover the Bank's journey to becoming the lender of last resort, together with its evolving attitude to the associated risk of moral hazard.
    JEL: E52 E58 G1 N13 N14 N23 N24
    Date: 2018–09–13
  28. By: Jordan Brooks; Michael Katz; Hanno Lustig
    Abstract: The sensitivity of long-term rates to short-term rates represents a puzzle for standard macro-finance models. Post-FOMC announcement drift in Treasury markets after Fed Funds target changes contributes to the excess sensitivity of long rates. Mutual fund investors respond to the salience of Fed Funds target rate increases by selling short and intermediate duration bond funds, thus gradually increasing the effective supply to be absorbed by arbitrageurs. Using FOMC-induced variation in bond fund flows, we estimate short-run demand for Treasurys to be inelastic, especially for longer maturities. The gradual increase in supply, combined with the low demand elasticity, generate post-announcement drift in Treasurys, which spills over to other bond markets. Our findings shed new light on the causes of time-series-momentum in Treasury markets.
    JEL: E43 G12
    Date: 2018–10
  29. By: Rym Aloui (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); Michel Guillard (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne)
    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: Public Debt,Wealth Effects,Liquidity Trap,Deflation,Zero Lower Bound,Fiscal Theory of the Price Level,Monetary and Fiscal Rules
    Date: 2018
  30. By: Alberto Cavallo
    Abstract: I study how online competition, with its algorithmic pricing technologies and the transparency of the Internet, can change the pricing behavior of large retailers and affect aggregate inflation dynamics. In particular, I show that online competition has raised both the frequency of price changes and the degree of uniform pricing across locations in the U.S. over the past 10 years. These changes make retail prices more sensitive to aggregate ``nationwide" shocks, increasing the pass-through of both gas prices and nominal exchange rate fluctuations.
    JEL: E31 E5
    Date: 2018–10
  31. By: Noelia Camara; Enestor Dos Santos; Francisco Grippa; Javier Sebastian; Fernando Soto; Cristina Varela
    Abstract: This document focuses on identifying factors affecting the implementation of a Central Bank digital currency (CBDC) in Latin American countries. The adoption of a CBDC (non-universal) for the interbank and wholesale payment system would lead to a relatively minor level of disruption in the economy. In this case, the implementation costs is an important issue.
    Keywords: Working Paper , Digital Regulation , Central Banks , Digital economy , Financial Markets , Financial Inclusion , Latin America
    JEL: O33 E43 E58
    Date: 2018–10
  32. By: Fidrmuc, Jarko; Campos, Nauro F.; Korhonen, Iikka
    Abstract: This paper offers a first systematic evaluation of the evidence on the effects of currency unions on the synchronisation of economic activity. Focusing on Europe, we construct a database of about 3,000 business cycles synchronisation coefficients and their design and estimation characteristics. We find that: (1) synchronisation increased from about 0.4 before the introduction of the euro in 1999 to 0.6 afterwards; (2) this increase occurred in both euro and non-euro countries (larger in former); (3) there is evidence of country-specific publication bias; (4) our differences-in-differences estimates suggest the euro accounted for approximately half of the observed increase in synchronisation.
    Keywords: business cycles synchronisation,optimum currency areas,EMU,euro,meta-analys
    JEL: E32 F42
    Date: 2018
  33. By: Youngjoon Lee (Yonsei University); Soohyon Kim (Bank of Korea); Ki Young Park (Yonsei University)
    Abstract: We quantify the Monetary Policy Committee (MPC) minutes of the Bank of Korea (BOK) using text mining approach. We propose a novel approach using a field-specific Korean dictionary and contiguous sequence of words (n-grams) to better capture the subtlety of central bank communication. We find that our lexicon-based indicators help explain the current and future BOK monetary policy decisions when considering an augmented Taylor rule, suggesting that they contain additional information beyond the currently available macroeconomic variables. Our indicators remarkably outper- form English-based textual classifications, a media-based measure of economic policy uncertainty, and a data-based measure of macroeconomic uncertainty. Our empirical re- sults also emphasize the importance of using a field-specific dictionary and the original Korean text.
    Keywords: monetary policy; text mining; central banking; Bank of Korea; Taylor rule
    JEL: E43 E52 E58
    Date: 2018–10
  34. By: Nakata, Taisuke; Schmidt, Sebastian; Yoo, Paul
    Abstract: The zero lower bound (ZLB) constraint on interest rates makes speed limit policies (SLPs) — policies aimed at stabilizing output growth — less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding. JEL Classification: E52, E61
    Keywords: liquidity traps, Markov-perfect equilibrium, speed limit policy, zero lower bound
    Date: 2018–10
  35. By: Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R.
    Abstract: A new literature studies the use of capital controls to prevent financial crises. Within this new framework, we show that when exchange rate policy is costless, there is no need for capital controls. However, if exchange rate policy entails efficiency costs, capital controls become part of the optimal policy mix. When exchange rate policy is costly, the optimal mix combines prudential capital controls in tranquil times with policies that limit exchange rate depreciation in crisis times. The optimal mix yields more borrowing, fewer and less severe financial crises, and much higher welfare than with capital controls alone.
    Keywords: capital controls; exchange rate policy; financial frictions; financial crises; financial stability; optimal taxation; macro-prudential policies
    JEL: N0 F3 G3
    Date: 2016–12–01
  36. By: McLeay, Michael; Tenreyro, Silvana
    Abstract: This note explains why inflation follows a seemingly exogenous statistical process, unrelated to the output gap. In other words, it explains why it is difficult to empirically identify a Phillips curve. We show why this result need not imply that the Phillips curve does not hold – on the contrary, our conceptual framework is built under the assumption that the Phillips curve always holds. The reason is simple: if monetary policy is set with the goal of minimising welfare losses (measured as the sum of deviations of inflation from its target and output from its potential), subject to a Phillips curve, a central bank will seek to increase inflation when output is below potential. This targeting rule will impart a negative correlation between inflation and the output gap, blurring the identification of the (positively sloped) Phillips curve.
    JEL: J1
    Date: 2018–04–26
  37. By: Goodhead, Robert (Central Bank of Ireland)
    Abstract: This letter quanties the eects of ECB policy announcements on sovereign yields by studying movements in forward contracts on meeting days of the Governing Council. The pre-crisis, crisis, and post-crisis periods are studied. The analysis focuses on the cases of Germany, France, Italy and Spain. A breakdown of the transmission of ECB policy to sovereign yields for the Italian and Spanish cases is documented during the crisis period, with transmission to the German and French bonds largely unaected. Transmission for the two stressed economy cases is found to have reverted to that of “normal” times in the post-crisis data.
    Date: 2018–05
  38. By: Ajide, Kazeem; Raheem, Ibrahim; Asongu, Simplice
    Abstract: This study contributes to the dollarization literature by expanding its determinants to account for different dimensions of globalization, using the widely employed KOF index of globalization. Specifically, globalization is “unbundled” into three different layers namely: economic, social and political dimensions. The study focuses on 25 sub-Saharan African (SSA) countries for the period 2001-2012.Using the Tobit regression approach, the following findings are established. First, from both economic and statistical relevance, the social and political dimensions of globalization constitute the key dollarization amplifiers, while the explanatory power of the economic component is weaker on dollarization. Second, consistent with the theoretical underpinnings, macroeconomic instabilities (such as inflation and exchange rate volatilities) have the positive expected signs. Third, the positive association between the accumulation of international reserves and dollarization is also apparent. Policy implications are discussed.
    Keywords: Dollarization; Globalization; sub-Saharan Africa; Tobit regression
    JEL: C21 E41 F41
    Date: 2018–01
  39. By: Cheng, Lian; Luo, Junru; Liu, Lin
    Abstract: This article provides a new framework to evaluate the status of Renminbi internationalization. It proposes that the trading patterns of a currency in global foreign exchange market embody the currency’s position in the international monetary system. Based on foreign exchange trading data provided by CLS Group, the article constructs a ranking of major international currencies including Renminbi. It finds that Renminbi shares more similarities in foreign exchange trading patterns with the established global currencies like US dollar and Euro than with those regional currencies. The article also explores the policy implications that the new evaluation approach provides.
    Keywords: RMB; Foreign Exchange Market; Trading Pattern; Network
    JEL: F31 F33 F37 G15
    Date: 2018–10–03
  40. By: Czudaj, Robert; Beckmann, Joscha
    Abstract: This paper contributes to the literature by assessing expectation effects from monetary policy for the G7 economies. We consider a sample period running from 1995M1 to 2016M6 based on a panel VAR framework, which accounts for international spillovers and time-variation. Relying on a broad set of expectation data from Consensus Economics, we start by analyzing whether monetary policy has changed the degree of information rigidity after the emergence of the subprime crisis. We proceed by estimating potential effects of interest rate changes on expectations, disagreements and forecast errors. We find strong evidence for information rigidities and identify higher forecast errors by professionals after monetary policy shocks. Our results suggest that the international transmission of monetary policy shocks introduces noisy information and partly increases disagreement among forecasters.
    Keywords: Bayesian econometrics,expectations,information rigidity,monetary policy,panel VAR
    JEL: E31 E52
    Date: 2018
  41. By: Other, Lars
    Abstract: When monetary policy announcements not only induce market participants to update their expectations about the future path of monetary policy but also about economic prospects, the identification of exogenous monetary policy shocks becomes challenging. Taking into account an information effect regarding economic prospects, this paper presents a novel strategy to decompose the information content of central bank announcements. Based on a formally derived prediction of the standard New Keynesian model, the identifying assumption reads that the information effect should be correlated with movements in 5-Year, 5-Year breakeven inflation rates on announcement days. Separating distinct dimensions of monetary policy with a clear structural interpretation, the effects of monetary policy announcements on the macroeconomy are investigated using a vector autoregression identified with external instruments. My results highlight the effectiveness of forward guidance in influencing output.
    Keywords: Monetary Policy Shocks,High-Frequency Identification,Forward Guidance,Central Bank Information,Proxy VAR
    JEL: E44 E52 E58
    Date: 2018
  42. By: Paul Rudel (Justus-Liebig-University Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: Monetary policy increasingly relies on steering market expectations about future policy. This paper identifies a monetary policy news shock based on a VAR model. A monetary news shock is equivalent to new information about the Fed's future monetary policy becoming available today. One example of a monetary news shock is a Forward Guidance announcement, where the Fed unveils its prospectively (binding) monetary policy, today. In this paper, we study the spillover effects of news shocks. We estimate the response of the euro area to an expected future policy tightening of the Fed. The U.S. news shock improves sentiment and business cycle expectations in the euro area, which is consistent with the notion of the Fed revealing favorable news by a tightening announcement. We also distinguish the news shock from a conventional U.S. policy surprise and find that they lead to diverging responses in the euro area.
    Keywords: News shock, spillovers, forward guidance, monetary policy, interest rates, expectations
    JEL: E43 E58 F42
    Date: 2018
  43. By: Eric T. Swanson
    Abstract: I survey the literature on monetary policy at the zero lower bound (ZLB) and effective lower bound (ELB) to make three main points: First, the Federal Reserve’s forward guidance and large-scale asset purchases are effective monetary policy tools at the Z/ELB. Second, during the 2008–15 U.S. ZLB period, the Fed was not very constrained in its ability to influence medium- and longer-term interest rates and the economy. Third, the risks of the Fed being significantly constrained by the ELB in the future are typically greatly overstated. I conclude that the Federal Reserve is not very constrained by the lower bound on nominal interest rates.
    JEL: E43 E52 E58
    Date: 2018–10
  44. By: Jitmaneeroj, Boonlert; Lamla, Michael J; Wood, Andrew
    Abstract: Using survey data from 25 economies we provide evidence that greater transparency surrounding monetary policy reduces uncertainty of interest rates and inflation, primarily by reducing uncertainty that is common to agents rather than disagreement between agents. This suggests that studies that focus on disagreement as a proxy for uncertainty understate the benefits of monetary policy transparency. The adoption of inflation targets and forward guidance are both associated with lower uncertainty, although inflation targets have a stronger impact on reducing uncertainty than forward guidance. Moreover, there are diminishing benefits from ever higher levels of transparency. Taken as a whole, our results support the contention that clarity of communication is as important as the magnitude of transparency.
    Date: 2018–10–29
  45. By: Jiranyakul, Komain
    Abstract: This paper examines the relationship between stock market return and two main macroeconomic variables (output growth and money growth) in Thailand during 1997Q3 and 2017Q4. The results from Markov switching vector autoregressive model reveal that there is regime switching between the bull market and the bear market. The positive impact of output growth on stock market return is significant in the bear market while the impact of money growth on stock market return is positive and significant in the bull market. This implies that monetary policy is effective only during the bull market period. For the bear market period, measures that stimulate economic growth should be necessary.
    Keywords: stock return, regime changes, economic growth, monetary policy stance
    JEL: E32 E52 G10
    Date: 2018–09

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