nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒11‒12
28 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The information content of inflation swap rates for the long-term inflation expectations of professionals: Evidence from a MIDAS analysis By Hanoma, Ahmed; Nautz, Dieter
  2. "Monitoring Money for Price Stability" By Constantino Hevia; Juan Pablo Nicolini
  3. Mortgage Prepayment and Path-Dependent Effects of Monetary Policy By David W. Berger; Konstantin Milbradt; Fabrice Tourre; Joseph Vavra
  4. Evaluating the Bank of Canada Staff Economic Projections Using a New Database of Real-Time Data and Forecasts By Julien Champagne; Guillaume Poulin-Bellisle; Rodrigo Sekkel
  5. Inflation Expectation Uncertainty, Inflation and the Outputgap By Schmidt, Torsten
  6. The Rise and Fall of the Natural Interest Rate By Gabriele Fiorentini; Alessandro Galesi; Gabriel Pérez-Quirós; Enrique Sentana
  7. Negative Interest Rate Policy and the Yield Curve By Jing Cynthia Wu; Fan Dora Xia
  8. An Empirical Test for the Effectiveness of Central Bank Interventions in Foreign Exchange Markets: An Application to the Canadian and Swiss Central Banks By ABBUY, Kwami Edem
  9. Price Points and Price Dynamics By Hahn, Volker; Marencak, Michal
  10. Unconventional Monetary Policy, Bank Lending, and Security Holdings: The Yield-Induced Portfolio Rebalancing Channel By Paludkiewicz, Karol
  11. Monetary Easing, Investment and Financial Instability By Viral Acharya; Guillaume Plantin
  12. Euro area unconventional monetary policy and bank resilience By Fernando Avalos; Emmanuel C Mamatzakis
  13. Resurrecting the New-Keynesian Model: (Un)conventional Policy and the Taylor rule By Posch, Olaf
  14. Time-Frequency Response Analysis of Monetary Policy Transmission By Lubos Hanus; Lukas Vacha
  15. The Link between the Current International Monetary Non-System, Financialization and the Washington Consensus By Luis Antonio Reyes Ortiz
  16. Fiscal and Monetary Regimes: A Strategic Approach By Guillaume Plantin; Jean Barthélemy
  17. Capital Flows in the Euro Area and TARGET2 Balances By Wollmershäuser, Timo
  18. Exchange Rates and Monetary Spillovers By Guillaume Plantin; Hyun Song Shin
  19. Slow Post-Financial Crisis Recovery and Monetary Policy By Ikeda, Daisuke; Kurozumi, Takushi
  20. What are the Consequences of Global Banking for the International Transmission of Shocks? A Quantitative Analysis By José L. Fillat; Stefania Garetto; Arthur V. Smith
  21. U.S. Monetary Policy and Emerging Market Credit Cycles By Falk Bräuning; Victoria Ivashina
  22. Exploring the Driving Forces of the Bitcoin Exchange Rate Dynamics: An EGARCH Approach By Zhou, Siwen
  23. A Behavioral Model of the Credit Cycle By Barbara Annicchiarico; Silvia Surricchio; Robert J. Waldmann
  24. Size of the banking sector: implications for financial stability By Jan Kakes; Rob Nijskens
  25. Monetary and Fiscal History of Peru 1960-2010: Radical Policy Experiments, Inflation and Stabilization By Cesar Martinelli; Marco Vega
  26. Global Investors, the Dollar, and U.S. Credit Conditions By Niepmann, Friederike; Schmidt-Eisenlohr, Tim
  27. Pro-rich Inflation in Europe: Implications for the Measurement of Inequality By Güner, Eren; Weichenrieder, Alfons
  28. The Neutral Rate of Interest By Kaplan, Robert S.

  1. By: Hanoma, Ahmed; Nautz, Dieter
    Abstract: Long-term inflation expectations taken from the Survey of Professional Forecasters are a major source of information for monetary policy. Unfortunately, they are published only on a quarterly basis. This paper investigates the daily information content of inflation-linked swap rates for the next survey outcome. Using a mixed data sampling approach, we find that professionals account for the daily dynamics of inflation swap rates when they submit their long-term inflation expectations. We propose a daily indicator of professionals' inflation expectations that outperforms alternative indicators that ignore the high-frequency dynamics of inflation swap rates. To illustrate the usefulness of the new indicator, we provide new evidence on the (re-)anchoring of U.S. inflation expectations.
    Keywords: Inflation Expectations Dynamics,Expectations Anchoring,MIDAS
    JEL: E31 E52 C22
    Date: 2018
  2. By: Constantino Hevia; Juan Pablo Nicolini
    Abstract: In this paper, we use a simple model of money demand to characterize the behavior of monetary aggregates in the United States from 1960 to 2016. We argue that the demand for the currency component of the monetary base has been remarkably stable during this period. We use the model to make projections of the nominal quantity of cash in circulation under alternative future paths for the federal funds rate. Our calculations suggest that if the federal funds rate is lifted up as suggested by the survey of economic projections made by the members of the Federal Open Market Committee (FOMC), the fall in total currency demanded in the next two years ranges between 50 and 200 billion. Our discussion suggests that specific measures by the Federal Reserve to absorb that cash could be worth considering to make the future path of the price level consistent with the price stability mandate.
    Keywords: Inflation, Money Demand, Currency in Circulation
    JEL: E31 E41 E51
    Date: 2017–12
  3. By: David W. Berger; Konstantin Milbradt; Fabrice Tourre; Joseph Vavra
    Abstract: How much ability does the Fed have to stimulate the economy by cutting interest rates? We argue that the presence of substantial household debt in fixed-rate prepayable mortgages means that this question cannot be answered by looking only at how far current rates are from zero. Using a household model of mortgage prepayment with endogenous mortgage pricing, wealth distributions and consumption matched to detailed loan-level evidence on the relationship between prepayment and rate incentives, we argue that the ability to stimulate the economy by cutting rates depends not just on the level of current interest rates but also on their previous path: 1) Holding current rates constant, monetary policy is less effective if previous rates were low. 2) Monetary policy "reloads" stimulative power slowly after raising rates. 3) The strength of monetary policy via the mortgage prepayment channel has been amplified by the 30-year secular decline in mortgage rates. All three conclusions imply that even if the Fed raises rates substantially before the next recession arrives, it will likely have less ammunition available for stimulus than in recent recessions.
    JEL: E0 E2 E4 E43 E5 E52 E58
    Date: 2018–10
  4. By: Julien Champagne; Guillaume Poulin-Bellisle; Rodrigo Sekkel
    Abstract: We present a novel database of real-time data and forecasts from the Bank of Canada’s staff economic projections. We then provide a forecast evaluation for GDP growth and CPI inflation since 1982: we compare the staff forecasts with those from commonly used time-series models estimated with real-time data and with forecasts from other professional forecasters and provide standard bias tests. Finally, we study changes in the predictability of the Canadian economy following the announcement of the inflation-targeting regime in 1991. Our database is unprecedented outside the United States, and our evidence is particularly interesting, as it includes over 30 years of staff forecasts, two severe recessions and different monetary policy regimes. The database will be made available publicly and updated annually.
    Keywords: Econometric and statistical methods, Economic models, Inflation targets, Monetary Policy
    JEL: C32 E17 E37
    Date: 2018
  5. By: Schmidt, Torsten
    Abstract: This article examines the effect of inflation expectation uncertainty on inflation, inflation expectations and the output gap. For monetary policy, guiding inflation expectations provides an instrument to affect economic conditions. However, expectation uncertainty may undermine monetary policy's ability to stabilise the economy. Using a VAR model with stochastic volatility in mean, this paper shows that inflation expectation uncertainty has negative effects on the inflation rate and the output gap. This result is replicable with a model, in which uncertainty is approximated by a cross-sectional survey measure.
    JEL: E31 C32
    Date: 2018
  6. By: Gabriele Fiorentini (Università di Firenze); Alessandro Galesi (Banco de España); Gabriel Pérez-Quirós (Banco de España); Enrique Sentana (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We document a rise and fall of the natural interest rate (r*) for several advanced economies, which starts increasing in the 1960’s and peaks around the end of the 1980’s. We reach this conclusion after showing that the Laubach and Williams (2003) model cannot estimate r* accurately when either the IS curve or the Phillips curve is flat. In those empirically relevant situations, a local level specification for the observed interest rate can precisely estimate r*. An estimated Panel ECM suggests that the temporary demographic effect of the young baby-boomers mostly accounts for the rise and fall.
    Keywords: Natural rate of interest, Kalman filter, observability, demographics.
    JEL: E43 E52 C32
    Date: 2018–07
  7. By: Jing Cynthia Wu; Fan Dora Xia
    Abstract: We evaluate the implications of the ECB's negative interest rate policy (NIRP) on the yield curve. To capture various shapes of the short end of the yield curve induced by the NIRP, we introduce two policy indicators, which summarize the immediate and longer-horizon future monetary policy stances. We find the four NIRP events lowered the short term interest rate by the same amount. The impact is dampened at longer maturities for the first two event dates due to lack of forward guidance. In contrast, in the last two dates, forward guidance drives the largest effects in two years.
    JEL: E43 E52
    Date: 2018–10
  8. By: ABBUY, Kwami Edem
    Abstract: This paper investigates the effectiveness of foreign exchange intervention of central banks of Canada and Switzerland. We examine the effectiveness of Canada and Switzerland interventions policies on Canadian dollar against US dollar and Swiss franc against US dollar exchange rates volatility over the 1980-2014 period. A behavioral exchange rate equation is estimated with instrumental variables methodology. The main results indicate that interventions generally reduce exchange rates volatility. However, the Swiss National Bank seems to be more efficient by stabilizing the Swiss franc than the Bank of Canada, whose interventions, despite its effectiveness, remains weak.
    Keywords: Keywords: Volatility, Exchange rate, Official international reserves.
    JEL: E58
    Date: 2018–10–22
  9. By: Hahn, Volker; Marencak, Michal
    Abstract: This paper proposes a macroeconomic model with positive trend inflation that involves an important role for price points as well as sticky information. We argue that, in particular, a variant of our model that allows for a general distribution of price points is more successful in explaining several stylized facts of individual price setting than a benchmark model that is based on Calvo price-setting. More specifically, it makes empirically reasonable predictions with regard to the duration of price spells, the sizes of price increases and decreases, the shape of the hazard function, the fraction of price changes that are price increases, and the relationship between price changes and inflation. Moreover, our model implies plausible aggregate effects of monetary policy in contrast with a model with a prominent role for price points but no information rigidities.
    Keywords: price stickiness,price point,sticky information
    JEL: E31 E37
    Date: 2018
  10. By: Paludkiewicz, Karol
    Keywords: Unconventional Monetary Policy,Quantitative Easing,Portfolio Rebalancing.
    JEL: E44 E51 E52 E58 G21
    Date: 2018
  11. By: Viral Acharya (Reserve Bank of India); Guillaume Plantin (Département d'économie)
    Abstract: This paper studies a model of the interest-rate channel of monetary policy in which a low policy rate lowers the cost of capital for firms thereby spurring investment, but also induces destabilizing “carry trades” against their assets. If the public sector does not have sufficient fiscal capacity to cope with the large resulting private borrowing, then carry trades and productive investment compete for scarce funds, and so the former crowd out the latter. Below an endogenous lower bound, monetary easing generates only limited investment at the cost of large and socially wasteful financial risk taking.
    Keywords: Monetary policy; Financial stability; Shadow banking; Carry trades
    JEL: E52 E58 G01 G21 G23 G28
    Date: 2018–07
  12. By: Fernando Avalos; Emmanuel C Mamatzakis
    Abstract: This paper examines whether euro area unconventional monetary policies have affected the loss-absorbing buffers (that is the resilience) of the banking industry. We employ various measures to capture the effect of the broad array of programmes used by the ECB to implement balance sheet policies, while we control for the effect of conventional and negative (or very low) interest rate policy. The results suggest that, above and away from the zero-lower bound, looser interest rate policy tends to weaken our measure of euro area banks' loss-absorbing buffers. On the contrary, further lowering interest rates near and below the zero lower bound seems to strengthen (or weaken less) such buffers, which points towards non-linearities arising in the vicinity of the lower bound. Moreover, balance sheet easing policies enhance bank level resilience overall. However, unconventional monetary policies seem to have increased the fragility of banks in the member states hardest hit by the 2011 sovereign debt crisis. In fact, the evidence presented in this paper suggest that the resilience gains of unconventional monetary policies have accrued mostly to banks headquartered in the so-called core euro area countries (Austria, Belgium, Finland, France, Germany, Luxembourg and Netherlands). Finally, unconventional monetary policies seem to have enhanced more the resilience of banks that were relatively stronger, i.e. that were in the higher deciles of the distribution of loss-absorbing buffers.
    Keywords: unconventional monetary policy, ECB, asset purchases, loss-absorbing buffer
    JEL: G21 E52 E43
    Date: 2018–11
  13. By: Posch, Olaf
    Abstract: This paper explores the ability of the New-Keynesian (NK) model to explain the recent periods of quiet and stable inflation at near-zero nominal interest rates. We show how (conventional and unconventional) monetary policy shocks enlarge the ability to explain the facts, such that the theory supports both a negative and a positive response of inflation. Central to our finding is that monetary policy shocks may have temporary and/or permanent components. We find that the NK model can explain the recent episodes, even if one considers an active role of monetary policy and restrict ourselves to the regions of (local) determinacy. We also show that a new global solution, capturing highly nonlinear dynamics, is necessary to generate a prolonged period of near-zero interest rates as a policy choice.
    Keywords: Continuous-time dynamic equilibrium models,Calvo price setting
    JEL: E32 E12 C61
    Date: 2018
  14. By: Lubos Hanus (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic); Lukas Vacha (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic)
    Abstract: In our study, we consider a new approach to quantify the effects of economic shocks on monetary transmission. We analyse the widely known phenomenon of price puzzle in a time-varying environment using the frequency decomposition. We use the frequency response function to measure the power of shocks transferred to different economic cycles. Considering both time and frequency domains, we quantify the dynamics of shocks implied by monetary policy within an economic system. While studying the monetary policy transmission of the U.S., the empirical evidence shows that low-frequency cycles of output are prevalent and have positive transfers. Examination of the inflation reveals that the frequency responses vary significantly in time and alter the direction of transmission for all cyclical lengths.
    Keywords: cyclicality, frequency, economic systems, monetary policy
    Date: 2018–10
  15. By: Luis Antonio Reyes Ortiz (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The main purpose of the present work is to build a bridge between three concepts: the current international monetary system, financialization and the Washington Consensus. Under this approach, the current international monetary non-system (that replaced the Bretton Woods system) imposed by Nixon in 1971 led to the oil shocks that in turn intensified the inflationary pressures of the rest of the decade. The bold resolution to end inflation in 1979 via high interest rates brought about a process of financialization that was cause and consequence of trade and financial liberalization. Interest rates eventually went back to levels comparable to those prevailing before the Volcker shock, which brought about a decline in firms' demand for credit that obliged banks to seek for other clients, i.e. the rest of the world and households. The ideas embedded in the Washington Consensus contributed to the development of this financialization/liberalization process, and these gained strength as the previous regime (characterized by low unemployment rates and high inflation) was being replaced by the current regime paradoxically called the 'Great Moderation'. The process of financialization can be explained by the analysis of the capital structure of U.S. firms.
    Date: 2017
  16. By: Guillaume Plantin (Département d'économie); Jean Barthélemy (Département d'économie)
    Abstract: This paper develops a full-fledged strategic analysis of Wallace’s “game of chicken”. A public sector facing legacy nominal liabilities is comprised of fiscal and monetary authorities that respectively set the primary surplus and the price level in a non-cooperative fashion. We find that the post 2008 feature of indefinitely postponed fiscal consolidation and rapid expansion of the Federal Reserve’s balance sheet is consistent with a strategic setting in which neither authority can commit to a policy beyond its current mandate, and the fiscal authority has more bargaining power than the monetary one at each date.
    Date: 2018–05
  17. By: Wollmershäuser, Timo
    Abstract: We estimate a panel VAR model for the euro area to quantitatively asses the contribution of the TARGET2 system to the propagation of different types of structural economic shocks as well as to the historical evolution of aggregate economic activity in euro area member countries. Our results suggest that TARGET2 has significantly affected the transmission of capital ow shocks while leaving the macroeconomic responses to other aggregate shocks virtually unaltered. Furthermore, on basis of counterfactual analyses, we find that TARGET2 has contributed substantially to avoid deeper recessions in distressed periphery member countries like Spain, Italy, Ireland and Portugal, while to a smaller degree depressing aggregate economic activity in core member states, such as Germany, the Netherlands and Finland.
    Keywords: euro area,TARGET2 balances,capital inflow shocks,panel vector autoregressive model.
    JEL: E42 F32 F41
    Date: 2018
  18. By: Guillaume Plantin (Département d'économie); Hyun Song Shin (Princeton University)
    Abstract: When do flexible exchange rates prevent monetary and financial conditions from spilling over across currencies? We examine a model in which international investors strategically supply capital to a small inflation‐targeting economy with flexible exchange rates. For some combination of parameters, the unique equilibrium exhibits the observed empirical feature of prolonged episodes of capital inflows and appreciation of the domestic currency, followed by reversals where capital outflows go hand‐in‐hand with currency depreciation, a rise in domestic interest rates, and inflationary pressure. Arbitrarily small shocks to global financial conditions suffice to trigger these dynamics.
    Keywords: Currency appreciation; Capital flows; Global games
    JEL: C7 E5 F4
    Date: 2018–05
  19. By: Ikeda, Daisuke (Bank of Japan); Kurozumi, Takushi (Bank of Japan)
    Abstract: Post-financial crisis recoveries tend to be slow and be accompanied by slowdowns in TFP and permanent losses in GDP. To prevent them, how should monetary policy be conducted? We address this issue by developing a model with endogenous TFP growth in which an adverse financial shock can induce a slow recovery. In the model, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much larger than when TFP expands exogenously. Moreover, inflation stabilization results in a sizable welfare loss, while nominal GDP stabilization works well, albeit causing high interest-rate volatility.
    JEL: E52 O33
    Date: 2018–10–01
  20. By: José L. Fillat; Stefania Garetto; Arthur V. Smith
    Abstract: The global financial crisis of 2008 was followed by a wave of regulatory reforms that affected large banks, especially those with a global presence. These reforms were reactive to the crisis.In this paper we propose a structural model of global banking that can be used proactively to perform counterfactual analysis on the effects of alternative regulatory policies. The structure of the model mimics the US regulatory framework and highlights the rganizational choices that banks face when entering a foreign market: branching versus subsidiarization. When calibrated to match moments from a sample of European banks, the model is able to replicate the response of the US banking sector to the European sovereign debt crisis. Our counterfactual analysis suggests that pervasive subsidiarization, higher capital requirements, or ad hoc monetary policy interventions would have mitigated the effects of the crisis on US lending.
    JEL: F12 F23 F36 G21
    Date: 2018–10
  21. By: Falk Bräuning; Victoria Ivashina
    Abstract: Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated predominantly in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers experience a 32-percentage-point greater increase in the volume of loans issued by foreign banks than do borrowers from developed markets, followed by a fast credit contraction of a similar magnitude upon reversal of the U.S. monetary policy stance. This result is robust across different geographies and industries, and holds for U.S. and non-U.S. lenders, including those with little direct exposure to the U.S. economy. EME local lenders do not offset the foreign bank capital flows, and U.S. monetary policy affects credit conditions for EME firms, both at the extensive and intensive margin. Consistent with a risk-driven credit-supply adjustment, we show that the spillover is stronger for riskier EMEs, and, within countries, for higher-risk firms.
    JEL: E52 F34 F44 G21
    Date: 2018–10
  22. By: Zhou, Siwen
    Abstract: Bitcoin is a virtual currency scheme that is characterised by a decentralised network and cryptographic transfer verification which has been attracting much public attention due to its technological innovation and its high exchange rate volatility. In this paper, Bitcoin’s exchange rate movement from 2011 to 2018 and its relationship with the global financial markets are explored using an EGARCH framework. The results are as follows. First, fundamentals and Bitcoin-related events play a critical role in the exchange rate formation of Bitcoin. Second, the impact of regulation-related events on Bitcoin indicates that market sentiment is responding to market regulation statements. Third, news coverage is an essential factor in driving the volatility of Bitcoin. Fourth, Bitcoin may be a hedge in times of calm financial markets and a safe haven against uncertain economic policy but is likely to expose to flight-to-quality as global financial uncertainty increases. Lastly, the positive effect of the central bank’s announcements on Bitcoin is marginal enough to rule out the involvement of global expansionary monetary policy in inflating Bitcoin’s exchange rate over the past years, as it may have been the case with traditional asset prices after the great recession.
    Keywords: Bitcoin, EGARCH, event analysis, Reuters news, VIX, EPU, financial markets
    JEL: C22 C52 E52 F31 G12
    Date: 2018
  23. By: Barbara Annicchiarico (DEF & CEIS,University of Rome "Tor Vergata"); Silvia Surricchio (DEF,University of Rome "Tor Vergata"); Robert J. Waldmann (DEF & CEIS,University of Rome "Tor Vergata")
    Abstract: In a behavioral variant of a New Keynesian model, in which individuals use simple heuristic rules to forecast future in ation and output gap, if there are limits on the amount of debt that economic agents are allowed to bear, we observe occasionally severe downturns. Differences in beliefs combined with borrowing constraints tend to dampen expansions, but give rise to a chain reaction that exacerbates the recessions. The model is an example of endogenous credit cycles with expansions, severe recessions, and persistent inequality in the distribution of wealth. Monetary policy can both stabilize the economy and cause increased average output.
    Keywords: Credit cycle, heuristic rules, monetary policy
    JEL: E10 E32 D83
    Date: 2018–10–30
  24. By: Jan Kakes; Rob Nijskens
    Abstract: The recent global financial crisis has revived discussions about the optimal 7 size of financial systems, particularly the banking sector. Indeed, several economies with a large banking sector relative to GDP, such as Iceland and Ireland, were hit hard during the crisis. At the same time, however, countries with small, domestically oriented banking sectors, such as those in Greece, Italy and Portugal, also turned out to be vulnerable. These recent experiences suggest that the relationship between banking sector size and financial stability is not clear-cut. This study explores the nexus between banking sector size and financial stability for 38 advanced and emerging economies, by assessing the correlation between the size of the banking system and a number of systemic risk indicators. These indicators correspond to the intermediate objectives for financial stability policy, which have been developed by the European Systemic Risk Board (ESRB, 2013). In addition, we present case studies of Ireland and Greece, two economies with, respectively, a large and a small banking sector that were both hit hard after the global financial crisis.
    Date: 2018–10
  25. By: Cesar Martinelli (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University); Marco Vega (Banco Central de Reserva del Peru’ and Universidad Cat’olica del Peru Ì)
    Abstract: We show Peru’s chronic inflation through the 1970s and 1980s was a result of the need for inflationary taxation in a regime of fiscal dominance of monetary policy. Hyperinflation occurred when further debt accumulation became unavailable, and a populist administration engaged in a counterproductive policy of price controls and loose credit. We interpret the fiscal difficulties preceding the stabilization as a process of social learning to live within the realities of fiscal budget balance. The credibility of policy regime change in the 1990s may be linked ultimately to the change in public opinion giving proper incentives to politicians, after the traumatic consequences of the hyper stagflation of 1987-1990.
    Date: 2018–08
  26. By: Niepmann, Friederike; Schmidt-Eisenlohr, Tim
    Abstract: This paper documents that an appreciation of the U.S. dollar is associated with a reduction in the supply of commercial and industrial loans by U.S. banks. An increase in the broad dollar index by 2.5 points (one standard deviation) reduces U.S. banks' corporate loan originations by 10 percent. This decline is driven by a reduction in the demand for loans on the secondary market where prices fall and liquidity worsens when the dollar appreciates, with stronger effects for riskier loans. Today, the main buyers of U.S. corporate loans-and, hence, suppliers of funding for these loans-are institutional investors, in particular mutual funds, which experience outflows when the dollar appreciates. A shift of traditional financial intermediation to these relatively unregulated entities, which are more sensitive to global developments, has led to the emergence of this new channel through which the dollar affects the U.S. economy, which we term the secondary market channel.
    Keywords: commercial and industrial loans; credit standards; institutional investors; leveraged loan market; U.S. dollar exchange rate
    JEL: E44 F31 G15 G21 G23
    Date: 2018–10
  27. By: Güner, Eren; Weichenrieder, Alfons
    Abstract: This paper studies the distributional consequences of a systematic variation in expenditure shares and prices. By using European Union Household Budget Surveys and Harmonized Index of Consumer Prices data, we construct household-specific price indices and reveal the existence of a pro-rich inflation in Europe. Particularly, over the period 2001-15, the consumption bundles of the poorest deciles in 25 European countries have on average become 10.5 percentage points more expensive than those of the richest decile. We find that ignoring the differential inflation across the distribution underestimates the change in the Gini (based on consumption expenditure) by up to 0.03 points. Cross-country heterogeneity in this change is large enough to affect the ranking of the countries in inequality measures.
    Keywords: Inequality,Gini,EU countries,income dependent inflation
    JEL: D31
    Date: 2018
  28. By: Kaplan, Robert S. (Federal Reserve Bank of Dallas)
    Abstract: An essay by Dallas Fed President Robert S. Kaplan from October 24, 2018.
    Date: 2018–10–24

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