nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒11‒26
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Estimated policy rules for different monetary regimes: Flexible inflation targeting versus a dual mandate By Jacob Punnoose; Amber Wadsworth
  2. The Foreign Exchange Interventions of the CNB as an Unconventional Instrument of Monetary Policy By Andrea Cecrdlova
  3. The Covered Interest Parity Puzzle and the Evolution of the Japan Premium By Alexis Stenfors
  4. The Economists and Monetary Thought in Interwar New Zealand: The Gradual Emergence of Monetary Policy Activism By Geoffrey Brooke; Anthony Endres; Alan Rogers
  5. Money Creation in Different Architectures By Faure, Salomon; Gersbach, Hans
  6. The Expansionary Lower Bound: Contractionary Monetary Easing and the Trilemma By Paolo Cavallino; Damiano Sandri
  7. Unconventional policies in a monetary union: a policy game approach By Manuela Mischitelli; Giovanni Di Bartolomeo
  8. Monetary policy regimes and the lower bound on interest rates By Corbisiero, Giuseppe
  9. The permanent-transitory confusion: Implications for tests of market efficiency and for expected inflation during turbulent and tranquil times By Cukierman, Alex; Lustenberger, Thomas; Meltzer, Allan H
  10. Understanding the Aspects of Federal Reserve Forward Guidance By Lunsford, Kurt Graden
  11. Dealer behaviour in the Euro money market during times of crisis By Fecht, Falko; Reitz, Stefan
  12. Monetary and Fiscal Policy in a Cash-in-advance Economy with Quasi-geometric Discounting By Daiki Maeda
  13. An Heterogeneous-Agent New-Monetarist Model with an Application to Unemployment By Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
  14. Home Ownership and Monetary Policy Transmission By Koeniger, Winfried; Ramelet, Marc-Antoine
  15. The Evolution of money debate: functionalism versus chartalism, Schumpeterian dynamics, Gresham's fallacy, and how history constrains public finance By Thomas Palley
  16. Spatial Approach to Heterogeneity of Inflation Expectations in the Euro Area By Karolina Tura-Gawron; Magdalena Szyszko
  17. A Factor Augmented Vector Autoregressive (FAVAR) approach for Monetary Policy: Replication of the empirical results in “Measuring the effects of Monetary Policy” By Luvsannyam, Davaajargal; Batmunkh, Khuslen
  18. Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? By Toni Ahnert; Kristin Forbes; Christian Friedrich; Dennis Reinhardt
  19. Forecasting the implications of foreign exchange reserve accumulation with an agent-based model By Ramis Khabibullin; Alexey Ponomarenko; Sergei Seleznev
  20. Forex intervention and reserve management in Switzerland and Israel since the financial crisis: Comparison and policy lessons By Cukierman, Alex
  21. Monetary and Macroprudential Policy Coordination Among Multiple Equilibria By Itai Agur
  22. Degree of indépendance and accountability within the monetary policy committee of the BCEAO By Régis Bokino; Moustapha Gano
  23. Central Bank Financial Strength and Inflation: A Meta-Analysis By Mojmir Hampl; Tomas Havranek
  24. The Impact of the ECB’s Quantitative Easing Policy on Capital Flows in the CESEE Region By Anita Angelovska–Bezhoska; Ana Mitreska; Sultanija Bojcheva-Terzijan
  25. Systemic illiquidity in the interbank network By Langfield, Sam; Liu, Zijun; Ota, Tomohiro; Ferrara, Gerardo
  26. Floating Rate Money? The Stability Premium in Treasury Floating Rate Notes By Matthias Fleckenstein; Francis A. Longstaff
  27. FX Trading and Exchange Rate Disconnect Puzzle By Martin D. D. Evans
  28. International Yield Curves and Currency Puzzles By Mikhail Chernov; Drew D. Creal
  29. An Intermediation-Based Model of Exchange Rates By Malamud, Semyon; Schrimpf, Andreas
  30. Global Investors, the Dollar, and U.S. Credit Conditions By Friederike Niepmann; Tim Schmidt-Eisenlohr
  31. Early Warning Indicator of financial crises for V4 Countries By Michal Mares; Martin Slany

  1. By: Jacob Punnoose; Amber Wadsworth (Reserve Bank of New Zealand)
    Abstract: The Reserve Bank of New Zealand (RBNZ) has had a single price-stability mandate for monetary policy since February 1990. This mandate is set to be extended due to the RBNZ (Monetary Policy) Amendment Bill that is currently before parliament and that seeks to add employment to the RBNZ’s mandate. The Federal Reserve System in the United States (Federal Reserve) also has a dual mandate for monetary policy. In this paper we compare the responses of monetary policy to inflation and economic activity in New Zealand and the United States. We estimate how monetary policy in New Zealand responded to inflation and economic activity using the data available to policy makers at each point in time from 2000 through 2017. We then compare these estimates to similar estimates for the United States and assess how monetary policy settings have evolved over time. We find that, on average, monetary policy in New Zealand and the United States has responded to changes in economic activity and inflation in similar ways. Our findings show that the RBNZ has stabilised measures of economic activity, i.e. the output gap and output growth, to a similar extent to that of the Federal Reserve. This is despite the RBNZ not operating under a dual mandate. A potential explanation for this result is that the flexibility of the RBNZ’s inflation targeting strategy over history has allowed it to stabilise economic activity while maintaining the broader emphasis on price stability.
    Date: 2018–11
  2. By: Andrea Cecrdlova (University of Economics in Prague)
    Abstract: During the last crisis monetary authorities hit zero interest rates and as a result they began to use less standard instruments. However, they failed to meet the declared inflation target for a long time. The Czech National Bank (CNB) decided to use the unconventional instrument in November 2013 when the exchange rate commitment was introduced. The aim of the paper is to evaluate the decision to use the exchange rate commitment with regard to its potential side effects. The most significant side effect is the enormous amount of foreign exchange reserves, which, due to the appreciation of the domestic currency, can get the CNB into more cumulative negative values than it already is.
    Keywords: CNB, monetary policy, unconventional monetary instruments, foreign exchange interventions, foreign exchange reserves.
    JEL: E31 E52 E58
    Date: 2018–10
  3. By: Alexis Stenfors (University of Portsmouth)
    Abstract: A disturbance or breakdown of the first stage of the monetary transmission mechanism tends to be synonymous with high and volatile money market risk premia. Such market indicators include violations of the covered interest parity (CIP). This was not only evident during the financial crisis of 2007-08, but already during the Japanese banking crisis in the late 1990s, when it became referred to as the 'Japan Premium'. Despite extraordinary policy measures by central banks in recent years, however, deviations from the CIP indicate continuing or even elevated stress in the international monetary system. This paper examines a string of distinct, but closely interconnected, assumptions and perceptions regarding CIP arbitrage. By doing so, it not only sheds some fresh light on the recent 'CIP puzzle' but also on the era of the Japan Premium during the 1990s and its aftermath.
    Keywords: arbitrage, covered interest parity, financial crisis, FX swap market, Japan Premium, money market
    JEL: E4 E52 F3 G15
    Date: 2018–11–21
  4. By: Geoffrey Brooke (School of Economics, Auckland University of Technology); Anthony Endres (Department of Economics, University of Auckland); Alan Rogers (Department of Economics, University of Auckland)
    Abstract: In spite of the existence of several monetary and central bank histories, the emergence of monetary thought in New Zealand after 1914 has not been subject to extensive analysis. This paper remedies this deficit for the interwar period. The focus is upon the propagation of monetary ideas in New Zealand and their intellectual sources. We apply a heuristic in which different monetary doctrines are situated along a continuum between extreme monetary policy ‘activism’ and extreme ‘minimalism’. In the 1920s, New Zealand economists betrayed a minimalist bias across several dimensions: money supply regulation, the role of money and the international monetary transmission process in the business cycle, and the operation of bank-credit allocation mechanisms. Incipient activism in the work of Condliffe and Belshaw was countered by Niemeyer’s case for a minimalist central bank. Fisher adopted an anti-reflationist, forced savings approach to the 1930s crisis; he underscored the deleterious monetary and real consequences of Government exchange rate management after 1933. Copland, Tocker, Belshaw and Hight downplayed these consequences. Extended debate over the original Reserve Bank legislation and perennial amendments thereafter, generated new meanings for the phrase ‘monetary policy independence’; it also turned most economists against extreme activism (or the policy of monetary nationalism) that prevailed from 1938. Throughout the interwar period, New Zealand entertained a vigorous contest of monetary ideas; most of those ideas were inherited from the work of Keynes (as early as 1923), Hawtrey, Cannan, Robbins, and Hayek, though adapted to local conditions.
    Keywords: New Zealand, population policy, migration, history of thought
    Date: 2018–11
  5. By: Faure, Salomon; Gersbach, Hans
    Abstract: We examine monetary architectures in which money is solely created by the public and lent by the central bank to the private sector. We compare them to today's fractional-reserve system in which money is created mainly by commercial banks. We use a simple general equilibrium setting and determine under which conditions these architectures yield the same welfare and stability outcomes and under which conditions they do not. We show, in particular, that the decentralized sovereign money system yields the same level of money creation and allocation of commodities as the fractional-reserve monetary system if the central bank solely pursues interest-rate policy.
    Keywords: 100% reserve banking; Capital regulation; Chicago Plan; full-reserve banking; monetary architecture; monetary policy; monetary system; money creation; price rigidities; reserve requirement
    JEL: D50 E4 E5 G21
    Date: 2018–09
  6. By: Paolo Cavallino; Damiano Sandri
    Abstract: We provide a theory of the limits to monetary policy independence in open economies arising from the interaction between capital flows and domestic collateral constraints. The key feature of our theory is the existence of an “Expansionary Lower Bound” (ELB), defined as an interest rate threshold below which monetary easing becomes contractionary. The ELB can be positive, thus acting as a more stringent constraint than the Zero Lower Bound. Furthermore, the ELB is affected by global monetary and financial conditions, leading to novel international spillovers and crucial departures from Mundell’s trilemma. We present two models under which the ELB may arise, the first featuring carry-trade capital flows and the second highlighting the role of currency mismatches.
    Date: 2018–11–02
  7. By: Manuela Mischitelli (La Sapienza); Giovanni Di Bartolomeo (La Sapienza)
    Abstract: How does the availability of fiscal and unconventional monetary measures modify the composition of the optimal policy mix, in a monetary union, when ZLB is binding? In order to answer to this question, we have built a simply three-period generalized New Keynesian model, in which we have assumed that non-money assets are not perfect substitutes. Following Friedman (2013), private agents' choice is responsive to a sort of long run interest rate.We have proved that in a monetary union, greater is the number of member countries adopting autonomous fiscal policy, greater will be public spending and more moderate will be the use of unconventional policies measures by central bank. Anyway, deviations in output and inflation decrease with the enlargement of the monetary union.
    Keywords: Unconventional Monetary policies, ZLB, Fiscal policy, Quantitative Easing, Forward Guidance, Policy game
    JEL: C70 E52 E60
    Date: 2018–10
  8. By: Corbisiero, Giuseppe (Central Bank of Ireland)
    Abstract: This Letter analyses different monetary policy regimes from the New Keynesian perspective. In the presence of a lower bound on policy rates, adjusting the inflation target with past realisations of inflation strengthens monetary stimuli during recessions. However, amplified short-term fluctuations in inflation and output make such history-dependent regimes unappealing. Therefore, this Letter discusses a hybrid regime that incorporates their advantages without suffering from their drawbacks.
    Date: 2018–05
  9. By: Cukierman, Alex; Lustenberger, Thomas; Meltzer, Allan H
    Abstract: Even when all past and present information is known individuals usually remain uncertain about the permanence of observed variables. After reviewing the history and role of adaptive expectations and its statistical foundations in modeling this permanent-transitory confusion the paper investigates the consequences of this confusion for tests of market efficiency in the treasury bill and foreign exchange markets. A central result is that the detection of serial correlation in efficiency tests based on finite samples does not necessarily imply that markets are inefficient. The second part of the paper utilizes data on Israeli inflation expectations from the capital market to estimate the implicit speed of learning about changes in inflation and to examine the performance of adaptive expectations in tracking the evolution of those expectations during the 1985 Israeli shock stabilization as well as during the stable inflation targeting period.
    Keywords: behavior of inflationary expectations during stabilizations and tranquil times; Permanent-transitory confusion and rational expectations; tests of market efficiency in treasury bills and forex markets
    JEL: B16 B22 E31 G14
    Date: 2018–09
  10. By: Lunsford, Kurt Graden (Federal Reserve Bank of Cleveland)
    Abstract: This paper studies the effects of Federal Open Market Committee (FOMC) forward guidance language. I estimate two policy surprises at FOMC meetings: a change in the current federal funds rate and an orthogonal change in the expected path of the federal funds rate. From February 2000 to June 2003, the FOMC only gave forward guidance about risks to the economic outlook, and a surprise increase in the expected federal funds rate path had expansionary effects. This is consistent with models of central bank information effects, where a positive economic outlook causes private agents to revise up their expectations for the economy. From August 2003 to May 2006, the FOMC also gave forward guidance about policy inclinations, and a surprise increase in the federal funds rate path had contractionary effects. These results are consistent with standard macroeconomic models of forward guidance. Overall, the effects of forward guidance depend on the FOMC’s choice to use one or both of the economic-outlook and policy-inclination aspects of forward guidance.
    Keywords: Central Bank Communication; Event Study; Federal Funds Futures; Information Effects; Monetary Policy;
    JEL: E43 E44 E52 E58 G14
    Date: 2018–11–07
  11. By: Fecht, Falko; Reitz, Stefan
    Abstract: This article shows how the recent money market disruptions with elevated counterparty risks and uncertainty about the fundamental value of liquidity influenced the trading behaviour of a key dealer in the Euro money market. The complete trading record in the unsecured segment of the money market for 2007 and 2008 is used to estimate a stylized pricing model, which explicitly accounts for the over-the-counter structure. The empirical results suggest that the market maker learns from order flow, but this information aggregation was increasingly hampered as the crisis unfolded.
    Keywords: Euro money market,financial crisis,market microstructure,pricing behaviour
    JEL: E43 G15 C32
    Date: 2018
  12. By: Daiki Maeda (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we analyze monetary and fiscal policies in a dynamic general equilibrium model in which households have a preference of quasi-geometric discounting and face a cash- in-advance constraint. From this policy analysis, we obtain the following two outcomes. First, when the government can control only the money supply, the Friedman rule is optimal. Second, when the government can also control income tax rates, the Friedman rule may not be optimal.
    Keywords: Quasi-geometric discounting; Friedman rule
    JEL: E21 E40
    Date: 2018–11
  13. By: Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
    Abstract: We develop a New Monetarist model with expenditure and unemployment risks that generates equilibria with non-degenerate distribution of money holdings. Distributional effects can overturn key insights of the model with degenerate distributions such that, e.g., the value of money depends on the income distribution, a one-time money injection raises aggregate real balances in the short run – price adjustments look sluggish; anticipated inflation can raise output and welfare; there can be a long-run trade-off between inflation and unemployment. Our model features an aggregate demand channel through which transfers to workers can raise employment and a new amplification mechanism of productivity shocks.
    JEL: E40 E50
    Date: 2018–11
  14. By: Koeniger, Winfried; Ramelet, Marc-Antoine
    Abstract: We present empirical evidence on the heterogeneity in monetary policy transmission across countries with different home ownership rates. We use household-level data together with shocks to the policy rate identified from high-frequency data. We find that housing tenure reacts more strongly to unexpected changes in the policy rate in Germany and Switzerland –the OECD countries with the lowest home ownership rates– compared with existing evidence for the U.S. An unexpected decrease in the policy rate by 25 basis points increases the home ownership rate by 0.8 percentage points in Germany and by 0.6 percentage points in Switzerland. The response of non-housing consumption in Switzerland is less heterogeneous across renters and mortgagors, and has a different pattern across age groups than in the U.S. We discuss economic explanations for these findings and implications for monetary policy.
    Keywords: Monetary policy transmission, Home ownership, Housing tenure, Consumption
    JEL: E21 E52 R21
    Date: 2018–11
  15. By: Thomas Palley
    Abstract: This paper discusses the evolution of money and the monetary system. The origins of money debate is framed in terms of functionalism versus chartalism. Endogenous Schumpeterian dynamics apply to the evolution of money and monetary systems, and those dynamics are supportive of the functionalist perspective. A functionalist Schumpeterian lens shows "Gresham's law" should be relabeled "Gresham's fallacy" because good money drives out bad. The Gresham dynamic is also supportive of the functionalist perspective. Lastly, the paper shows monetary history over the past millennium does not support chartalist public finance claims as represented by modern money theory (MMT).
    Keywords: Money, functionalism, chartalism, Gresham’s law, Schumpeterian dynamics, modern monetary theory
    JEL: E4 E44
    Date: 2018
  16. By: Karolina Tura-Gawron (Gdansk University of Technology); Magdalena Szyszko (WSB University in Poznan)
    Abstract: In this article, we examine the spatial heterogeneities in inflation expectations of the euro area consumers. We expect to find them heterogeneous in our research period of 2001-2016. Contrary to standard examination of heterogeneity, a spatial correlation analysis is applied by referring to global and local correlation measures. It is performed with the economic distance-based weights (the difference in HICP rates). Application of spatial analysis is the main contribution of our examination. Standard examinations ignore spatial relations and might be misleading. Our findings suggest that expectations are heterogeneous once the differences of inflation rates represent economic distance between the countries that we cover by our examination.
    Keywords: inflation expectations, expectations heterogeneity, euro area, spatial analysis
    JEL: E52 E61 C31
    Date: 2018–10
  17. By: Luvsannyam, Davaajargal; Batmunkh, Khuslen
    Abstract: In recent paper, Bernanke, Boivin and Eliasz’s (2005) study presented a model of how the monetary policy rate affects the large subset of the variables that the researcher and policy-maker care about. Several criticisms of the Vector autoregression (VAR) approach which is developed by the considerable literature of Bernanke and Blinder (1992) and Sims (1992) to monetary policy identification center around the relatively small amount of information used by low-dimensional VARs. In that case, FAVAR methodology leads to broadly plausible estimates for the responses of a wide variety of macroeconomic variables to monetary policy shocks. Bernanke, Boivin and Eliasz also provided empirical support for this model based on an analysis of the federal fund rate and other macroeconomic indicators of US economy between the early 1959s and late 2001. This paper replicates the main empirical findings of Bernanke, Boivin and Eliasz (2005).
    Keywords: FAVAR, 2 step principal component approach, likelihood based approach, monetary policy shock, gibbs sampling
    JEL: C32 E52
    Date: 2018–04–20
  18. By: Toni Ahnert; Kristin Forbes; Christian Friedrich; Dennis Reinhardt
    Abstract: Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich data set of macroprudential FX regulations. These empirical tests show that FX regulations (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements; but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.
    Keywords: Financial system regulation and policies, Exchange rates, Financial institutions, International financial markets
    JEL: F32 F34 G15 G21 G28
    Date: 2018
  19. By: Ramis Khabibullin (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation); Sergei Seleznev (Bank of Russia, Russian Federation)
    Abstract: We develop a stock-flow-consistent agent-based model that comprises a realistic mechanism of money creation and parametrize it to fit actual data. The model is used to make out-of-sample projections of broad money and credit developments under the commencement/termination of foreign reserve accumulation by the Bank of Russia. We use direct forecasts from the agent-based model as well as the two-step approach, which implies the use of artificial data to pre-train the Bayesian vector autoregression model. We conclude that the suggested approach is competitive in forecasting and yields promising results.
    Keywords: Money supply, foreign exchange reserves, forecasting, agent-based model, Russia.
    JEL: C53 C63 E51 E58 F31 G21
    Date: 2018–11
  20. By: Cukierman, Alex
    Abstract: This paper compares the appreciation pressures on the currencies of the two countries, documents the similarities and differences between their methods of interventions and discusses their consequences for the size of forex reserve accumulation and their management. It is argued that the differences in methods of intervention and in the magnitude of reserve accumulation should be understood within the larger context of differences in the monetary policies of the Swiss National Bank (SNB) and of the Bank of Israel (BOI) including, in particular, the fact that the SNB hit the zero lower bound earlier than the BOI and has maintained a negative rate for some time. The paper discusses the structural differences in inflation, growth, openness, and safe haven considerations that are responsible for those difference in monetary policies. Following a comparison of the effectiveness of "strong" and discretionary interventions in the two countries the paper discusses the pros and cons of forex interventions by small open economies faced with large trading partners whose policy rates are at or below the ZLB and who engage in large scale asset purchases. Sustained periods of intervention lead to large reserve accumulations that ultimately raise questions about potential costs of large reserves. The paper critically examines conventional views about such costs, the related accounting methods used to quantify them and proposes institutional changes designed to ameliorate the tradeoff between leaning against appreciations and "excessive" reserve accumulation. In this context the experience of Switzerland and of the Norwegian sovereign wealth fund is particularly relevant for Israel.
    Keywords: financial crisis; Forex intervention; policy lessons; reserve management
    JEL: E4 E5 F3
    Date: 2018–09
  21. By: Itai Agur
    Abstract: The notion of a tradeoff between output and financial stabilization is based on monetary-macroprudential models with unique equilibria. Using a game theory setup, this paper shows that multiple equilibria lead to qualitatively different results. Monetary and macroprudential authorities have tools that impose externalities on each other's objectives. One of the tools (macroprudential) is coarse, while the other (monetary policy) is unconstrained. We find that this asymmetry always leads to multiple equilibria, and show that under economically relevant conditions the authorities prefer different equilibria. Giving the unconstrained authority a weight on "helping" the constrained authority ("leaning against the wind") now has unexpected effects. The relation between this weight and the difficulty of coordinating is hump-shaped, and therefore a small degree of leaning worsens outcomes on both authorities' objectives.
    Date: 2018–11–02
  22. By: Régis Bokino; Moustapha Gano
    Abstract: The organization of the monetary decision-making in central banks has changed internationally and for the Central Bank of West African States (BCEAO). The decisions are now taken by the Monetary Policy Committee (MPC). The arguments on the expected benefits of this procedure are provided by the economic literature and are linked to the recent wave of central bank independence. If the MPC is independent, it has an obligation to be accountable. However, independence and accountability are not identical in term of the MPC. This article examines the MPC of BCEAO established in 2010, which is independent in accordance with the recommendations of the credibility strategy of the new classical economics and collective accountability.
    Keywords: CPM, central bank independence, accountability, BCEAO monetary policy
    JEL: D71 E58 O55
    Date: 2018
  23. By: Mojmir Hampl; Tomas Havranek
    Abstract: Several empirical studies have reported that financially weak central banks tend to tolerate systematically higher inflation. If the effect were genuine, central banks would have to pay attention to their capital levels and could not treat them as a residuum. In this note, we take stock of this literature using the statistical techniques of meta-analysis. We collect 176 estimates of the effect of central bank financial strength on inflation and observe that 86% of them are negative, suggesting that low capital levels indeed lead to higher inflation. However, we show that the literature is plagued by publication bias, the preferential reporting of intuitive and significant results. When we correct the literature for this bias, we obtain no evidence for any interplay between central bank financial strength and inflation. The result is robust to employing various meta-regression and nonparametric selection models.
    Keywords: Central bank capital, inflation, monetary policy, publication bias, seigniorage
    JEL: C83 E58
    Date: 2017–10
  24. By: Anita Angelovska–Bezhoska (National Bank of Republic of Macedonia); Ana Mitreska (National Bank of Republic of Macedonia); Sultanija Bojcheva-Terzijan (National Bank of Republic of Macedonia)
    Abstract: This paper attempts to empirically assess the impact of the ECB’s quantitative easing policy on capital flows in the countries of the Central and South Eastern region. Given the tight trade and financial linkages of the region with the euro area, one should expect that the buoyant liquidity provided by the ECB might affect the size of the capital inflows. We test this hypothesis by employing panel estimation on a sample of 14 countries CESEE countries for the 2003-2015 period. Contrary to the expected outcome, the results reveal either negative or insignificant impact of the change in the ECB balance sheet on the different types of capital inflows. The results suggest that the magnitude of the crisis, to which the ECB responded to was immense, hence precluding any significant impact of the monetary easing on capital flows in the region. The inclusion of a dummy in the model, to control for the 2008 crisis confirms the findings from the first specification and also does not change the finding on the ECB quantitative easing impact on the capital flows. The impact of the crisis dummy on capital flows is negative and it holds for almost all types of capital inflows, except for the government debt flows, which is consistent with the countercyclical fiscal policies and rising public debt after the crisis.
    Keywords: quantitative easing polices, ECB, capital flows, CESEE countries, panel estimates, mean group estimator
    JEL: E43 F21 C33
    Date: 2018
  25. By: Langfield, Sam; Liu, Zijun; Ota, Tomohiro; Ferrara, Gerardo
    Abstract: We study systemic illiquidity using a unique dataset on banks’ daily cash flows, short-term interbank funding and liquid asset buffers. Failure to roll-over short-term funding or repay obligations when they fall due generates an externality in the form of systemic illiquidity. We simulate a model in which systemic illiquidity propagates in the interbank funding network over multiple days. In this setting, systemic illiquidity is minimised by a macroprudential policy that skews the distribution of liquid assets towards banks that are important in the network. JEL Classification: D85, E44, E58, G28
    Keywords: liquidity regulation, macroprudential policy, systemic risk
    Date: 2018–11
  26. By: Matthias Fleckenstein; Francis A. Longstaff
    Abstract: We identify a significant premium in the prices of Treasury floating rate notes (FRNs) relative to both Treasury bills and notes. This premium is directly related to the near-constant nature of FRN prices and differs from the liquidity and on-the-run premia in Treasury security prices previously documented in the literature. We find that the premium is related to measures reflecting investor demand for safe assets such as market volatility and flows into money market funds. Ironically, some of the variation in FRN prices may actually be due to changes in the premium for their price stability.
    JEL: G12 G18
    Date: 2018–11
  27. By: Martin D. D. Evans (Department of Economics, Georgetown University)
    Abstract: This paper examines how trading in the FX market carries the information that drives movements in currency prices over minutes, days and weeks; and now those movements are connected to interest rates. The paper first presents a model of FX trading in a Limit Order Book (LOB) that identifies how information from outside the market is reflected in FX prices and trading patterns. I then empirically examine this transmission process with the aid of a structural VAR estimated on 13 years of LOB trading data for the EURUSD, the world's most heavily traded currency pair. The VAR estimates reveal several new findings: first, they show that shocks from outside the LOB affect FX prices through both liquidity and information channel; and that the importance of these channels varies according to the source of the shock. Liquidity effects on FX prices are temporary, lasting between two and ten minutes, while information effects of shocks on prices are permanent. Second, the contemporaneous correlation between price changes and order flows varies across the shocks. Some shocks produce a positive correlation (as in standard trading models), while others produce a negative correlation. Third, the model estimates imply that intraday variations in FX prices are overwhelmingly driven by one type of shock, it accounts for 87% of hour-by-hour changes in the FX prices. The second part of the paper examines the connection between the shocks in the trading model and the macroeconomy. For this purpose, I use the VAR estimates to decompose intraday FX price changes and order flows into separate components driven by different shocks. I then aggregate these components into daily and weekly series. I find that one component of daily order flow is strongly correlated with changes in the long-term interest differentials between US and EUR rates. This suggests that the intraday shocks driving this order flow component carry news about future short-term interest rates which is embedded into FX prices. I find that intraday shocks carrying interest-rate information account for on average 56% of the variance in daily EURUSD depreciation rate between 2003 and 2015, but their variance contributions before 2007 and after 2011 are over 80%. These findings indicate that the EURUSD depreciation rate is relatively well-connected to macro fundamentals via a particular component of order flow. Finally, I show that flows embedding liquidity risk have forecasting power for daily and weekly EURUSD depreciation rates.
    Keywords: Foreign Exchange Trading, Microstructure, Order Flow, Exchange-Rate Determination
    JEL: F31 F32 F34
    Date: 2018–11–05
  28. By: Mikhail Chernov; Drew D. Creal
    Abstract: The depreciation rate is often computed as the ratio of foreign and domestic pricing kernels. Using bond prices alone to estimate these kernels leads to currency puzzles: the inability of models to match violations of uncovered interest parity and the volatility of exchange rates. One cannot use information in bonds alone because exchange rates are not spanned by bonds. This view of the puzzles is distinct from market incompleteness. Incorporating exchange rates into estimation of yield curve models helps with resolving the puzzles. It also allows us to connect the differences between international yield curves to characteristics of exchange rates.
    JEL: F31 G12 G15
    Date: 2018–11
  29. By: Malamud, Semyon; Schrimpf, Andreas
    Abstract: We develop a general equilibrium model with intermediaries at the heart of international financial markets. In our model, intermediaries bargain with their customers and extract rents for providing access to foreign claims. The behavior of intermediaries, by tilting state prices, generates an explicit, non-linear risk structure in exchange rates. We show how this endogenous risk structure helps explain a number of anomalies in foreign exchange and international capital markets, including the safe haven properties of exchange rates and the breakdown of covered interest parity.
    Keywords: covered interest parity deviations; Exchange Rates; Financial Intermediation; safe haven
    JEL: E44 E52 F31 F33 G13 G15 G23
    Date: 2018–09
  30. By: Friederike Niepmann; Tim Schmidt-Eisenlohr
    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: leveraged loan market, commercial and industrial loans, U.S. dollar exchange rate, credit standards, institutional investors
    JEL: E44 F31 G15 G21 G23
    Date: 2018
  31. By: Michal Mares (University of Economics, Prague); Martin Slany (University of Economics, Prague)
    Abstract: This paper represents an early warning indicator of financial crises applied to the data of the Czech Republic, Poland, Hungary and Slovakia (V4 counties) between 2005 and 2018. Based on the previous research, 16 indicators were selected to build up the composite indicator of cyclical components ? so. Composite Index of Financial Instability (CIFI), and discussed its development. The relevance of the presented indicator, especially in the context of the Euro-American financial crisis of 2008-2009, is demonstrated in both graphical and econometric analysis using panel logistic regression. The conclusion implies that all V4 countries had experienced a high instability in connection with the global financial crisis 2008/2009 and implies different developments in financial conditions in recent years. The output of econometric model confirms positive relation between the value of CIFI and probability of financial crises occurrence. An increase in the CIFI per unit indicates an increase in probability of occurrence crisis approximately by 7 %. In spite of all its limitations, the usefulness of the composite index in the context of economic policymaking is proven by the analysis.
    Keywords: financial crises, early warning indicator, composite index, Visegrad countries,panel regression
    JEL: C53 E47 G01
    Date: 2018–10

This nep-mon issue is ©2018 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.