nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒12‒03
28 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Does a Big Bazooka Matter? Central Bank Balance-Sheet Policies and Exchange Rates By Dedola, Luca; Georgiadis, Georgios; Grab, Johannes; Mehl, Arnaud
  2. The Financial and Macroeconomic Effects of SMP, LTRO and OMT Announcements By Gifuni, Luigi
  3. Quantitative Easing By Wei Cui; Vincent Sterk
  4. Less bang for the buck? Assessing the role of inflation uncertainty for U.S. monetary policy transmission in a data rich environment By Herwartz, Helmut; Rohloff, Hannes
  5. The stabilizing role of forward guidance: A macro experiment By Ahrens, Steffen; Lustenhouwer, Joep; Tettamanzi, Michele
  6. The growing impact of US monetary policy on emerging financial markets: Evidence from India By Lakdawala, Aeimit
  7. Effects of monetary policy decisions on professional forecasters’ expectations and expectations uncertainty By Oinonen, Sami; Paloviita, Maritta; Viren, Matti
  8. The Long Run Stability of Money Demand in the Proposed West African Monetary Union By Simplice A. Asongu; Oludele E. Folarin; Nicholas Biekpe
  9. The missing link: monetary policy and the labor share By Cantore, Christiano; Ferroni, Filippo; León-Ledesma, Miguel A.
  10. Monetary Rules, Determinacy and Limited Enforcement By Jean Barthélemy; Eric Mengus
  11. Can Monetary Policy Lean against Housing Bubbles? By Christophe André; Petre Caraiani; Adrian Cantemir Čalin; Rangan Gupta
  12. Spillovers from US monetary policy: Evidence from a time-varying parameter GVAR model By Crespo Cuaresma, Jesus; Doppelhofer, Gernot; Feldkircher, Martin; Huber, Florian
  13. Model instability in predictive exchange rate regressions By Hauzenberger, Niko; Huber, Florian
  14. A monetary policy framework for the European Central Bank to deal with uncertainty By Grégory Claeys; Maria Demertzis; Jan Mazza
  15. Measuring the Natural Rates of Interest in Germany and Italy By Bystrov Victor
  16. Global inflation dynamics and inflation expectations By Martin Feldkircher; Pierre L. Siklos
  17. Modelling interest rate pass-through in Rwanda: is the interest rate dynamics symmetric or asymmetric ? By Rutayisire, Musoni J.
  18. Explaining Monetary Spillovers: The Matrix Reloaded By Jonathan Kearns; Andreas Schrimpf; Dora Xia
  19. Unravelling the secrets of euro area inflation: A frequency decomposition approach By Gerdesmeier, Dieter; Roffia, Barbara; Reimers, Hans-Eggert
  20. Lessons from the money mania for money creation By Guo, Yanling
  21. Bitcoin Fluctuations and the Frequency of Price Overreactions By Guglielmo Maria Caporale; Alex Plastun; Viktor Oliinyk
  22. Measuring Uncertainty of Optimal Simple Monetary Policy Rules in DSGE models By Górajski Mariusz; Kuchta Zbigniew
  23. The Yen Exchange Rate and the Hollowing-out of the Japanese Industry By Ansgar Belke; Ulrich Volz
  24. An aggregate welfare optimizing interest rate rule under heterogeneous expectations By Hagenhoff, Tim
  25. A Textual Analysis of the Bank of England Growth Forecasts By Jacob T. Jones; Tara M. Sinclair; Herman O. Stekler
  26. The dynamic impact of monetary policy on regional housing prices in the United States By Fischer, Manfred M.; Huber, Florian; Pfarrhofer, Michael; Staufer-Steinnocher, Petra
  27. Impact of the ECB Quantitative Easing on the French International Investment Position By Rafael Cezar; Maéva Silvestrini
  28. Presidential Cycles in the United States and the Dollar-Pound Exchange Rate: Evidence from over Two Centuries of Data By Rangan Gupta; Mark E. Wohar

  1. By: Dedola, Luca (European Central Bank); Georgiadis, Georgios (European Central Bank); Grab, Johannes (European Central Bank); Mehl, Arnaud (European Central Bank)
    Abstract: We estimate the effects of quantitative easing (QE) measures by the ECB and the Federal Reserve on the US dollar-euro exchange rate at frequencies and horizons relevant for policymakers. To do so, we derive a theoretically-consistent local projection regression equation from the standard asset pricing formulation of exchange rate determination. We then proxy unobserved QE shocks by future changes in the relative size of central banks’ balance sheets, which we instrument with QE announcements in two-stage least squares regressions in order to account for their endogeneity. We find that QE measures have large and persistent effects on the exchange rate. For example, our estimates imply that the ECB’s APP program which raised the ECB’s balance sheet relative to that of the Federal Reserve by 35 percentage points between September 2014 and the end of 2016 depreciated the euro vis-á-vis the US dollar by 12%. Regarding transmission channels, we find that a relative QE shock that expands the ECB’s balance sheet relative to that of the Federal Reserve depreciates the US dollar-euro exchange rate by reducing euro-dollar short-term money market rate differentials, by widening the cross-currency basis and by eliciting adjustments in currency risk premia. Changes in the expectations about the future monetary policy stance, reflecting the “signalling” channel of QE, also contribute to the exchange rate response to QE shocks.
    Keywords: Quantitative easing; interest rate parity condition; CIP deviations
    JEL: E5 F3
    Date: 2018–11–02
  2. By: Gifuni, Luigi
    Abstract: The term Non-Conventional Monetary Policies refers to the Central Banks and indicates the possibility that they may implement policies of extraordinary nature. The motivation behind such a move may lie in the fact that conventional policies have temporarily lost their effectiveness. The events of the financial crisis of 2007 – 2009 are a good example to explain the use of an unconventional approach by the Central Banks. Previously, the monetary policies of many countries seemed to follow the Taylor rule, according to which the Central Banks (in reference to an inflation target) varied the nominal interest rate in response to changes in inflation and GDP. The financial crisis of 2007 has led the Monetary Authorities of the major countries to no longer consider the conventional criteria on which they had always based their interventions, pushing them towards these exceptional measures. This study evaluates the macroeconomic effects of three different Non-Conventional Monetary Policies in the financial and bond markets. Securities Market Programme (SMP), Long Term Refinancing Operation (LTRO) and Outright Monetary Transaction (OMT) represent the announcements of the European Central Bank (ECB) that have been evaluated. This paper will argue that the markets examined (France, Germany, Spain and Italy) have shown significant growth in terms of real activity, credit and prices, for the SMP and OMT announcement, whereas LTRO has displayed relatively muted results.
    Keywords: Securities Market Programme, Long Term Refinancing Operation, Outright Monetary Transaction, event study.
    JEL: C12 E52 E58
    Date: 2017–11–05
  3. By: Wei Cui (University College London (UCL); Centre for Macroeconomics (CFM)); Vincent Sterk (University College London (UCL); Centre for Macroeconomics (CFM))
    Abstract: Is Quantitative Easing (QE) an effective substitute for conventional monetary policy? We study this question using a quantitative heterogeneous-agents model with nominal rigidities, as well as liquid and partially liquid wealth. The direct effect of QE on aggregate demand is determined by the difference in marginal propensities to consume out of the two types of wealth, which is large according to the model and empirical studies. A comparison of optimal QE and interest rate rules reveals that QE is indeed a very powerful instrument to anchor expectations and to stabilize output and inflation. However, QE interventions come with strong side effects on inequality, which can substantially lower social welfare. A very simple QE rule, which we refer to as Real Reserve Targeting, is approximately optimal from a welfare perspective when conventional policy is unavailable. We further estimate the model on U.S. data and find that QE interventions greatly mitigated the decline in output during the Great Recession.
    Keywords: Monetary policy, Large-scale asset purchases, HANK
    JEL: E21 E30 E50 E58
    Date: 2018–11
  4. By: Herwartz, Helmut; Rohloff, Hannes
    Abstract: We investigate the relationship between inflation uncertainty and monetary policy transmission in the U.S. economy. Monetary policy shocks are identified within the framework of nonlinear structural factor-augmented VARs which allow us to analyze several complementary hypotheses connecting IU with reduced monetary policy effectiveness. We find that the real effects of monetary policy shocks are markedly dampened conditional on high IU. This can be traced back to, inter alia, real-option and precautionary savings effects which distort the traditional interest rate channel. Moreover, policy transmission through the external finance premium and the term structure of interest rates appears strongly dependent on inflation uncertainty and contributes to the reduced policy effectiveness.
    Keywords: inflation uncertainty,SVAR,monetary policy,sign restrictions,asset prices,smoothtransition
    JEL: C32 E44 E52
    Date: 2018
  5. By: Ahrens, Steffen; Lustenhouwer, Joep; Tettamanzi, Michele
    Abstract: Expectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage market expectations by means of forward guidance in a New Keynesian learning-to-forecast experiment. Forward guidance takes the form of one-period ahead inflation projections that are published by the central bank in each period. Subjects in the experiment observe these projections along with the historic development of the economy and subsequently submit their own one-period ahead inflation forecasts. In this context, we find that the central bank can significantly manage market expectations through forward guidance and that this management strongly supports monetary policy in stabilizing the economy. Moreover, forward guidance drastically reduces the probability of a deflationary spiral after strong negative shocks to the economy.
    Keywords: learning-to-forecast experiment,forward guidance,heterogeneous expectations
    JEL: C92 E32 E37 E58
    Date: 2018
  6. By: Lakdawala, Aeimit (Michigan State University, Department of Economics)
    Abstract: Much research has been devoted to studying the international spillover effects of US monetary policy. However, a lot of the focus has been on the recent unconventional monetary policies undertaken by the Federal Reserve. Combining high frequency financial market data with a time-varying parameter approach we show that US monetary policy decisions have had significant effects on the Indian stock markets well before the use of unconventional policy tools and that these effects have gotten stronger over time. In addition to the conventional channel of surprise changes in the policy rate, we find that US monetary shocks are also transmitted through an uncertainty channel, which is especially important for announcements about large scale asset purchases (quantitative easing). Using firm level stock prices, we also show that the higher sensitivity of the aggregate response is uniform across the stock market and is not driven by the increased exposure of any specific industry to US monetary policy. Instead, our results suggest that it is driven by the portfolio decisions of foreign institutional investors and the exchange rate becoming more sensitive to US monetary policy.
    Keywords: Monetary Policy Shocks; Emerging Stock Markets; Foreign Institutional Investors; Quantitative Easing; Monetary Policy Uncertainty
    JEL: E52 F30 F36 G12 G14
    Date: 2018–10–01
  7. By: Oinonen, Sami; Paloviita, Maritta; Viren, Matti
    Abstract: In this paper, we examine how professional forecasters’ expectations and expectation uncertainty have reacted to the ECB’s interest rate decisions and non-conventional monetary policy measures during the period 1999-2017. The analysis makes use of a conventional dif-in-dif type set up with different time series tools. The results indicate that expectations have been sensitive to policy actions, but all forecasters’ reactions do not seem to follow the basic predictions of a standard New Keynesian model. Also the relationship between inflation and output forecasts does not seem to follow a Phillips curve type relationship. Moreover, short- and long term reactions to policy are often weakly related and of different sign. Interestingly, subjective forecast uncertainty measures are very sensitive to policy measures. Thus, there seems to be much heterogeneity in forecasters’ reactions to most policy decisions. All uncertainty measures, including long-term inflation uncertainty, have increased over time. This has to be taken into account when considering the anchoring of inflation expectations to the inflation target.
    JEL: E32 G02
    Date: 2018–11–20
  8. By: Simplice A. Asongu (Yaoundé/Cameroon); Oludele E. Folarin (University of Ibadan, Ibadan, Nigeria); Nicholas Biekpe (University of Cape Town, Cape Town, South Africa)
    Abstract: This study examines the stability of money demand in the proposed West African Monetary Union (WAMU). The study uses annual data for the period 1981 to 2015 from thirteen of the fifteen countries making-up the Economic Community of West African States (ECOWAS). A standard money demand function is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across ECOWAS member states in the stability of money demand. This divergence is informed by differences in cointegration, stability, short run and long term determinants, and error correction in event of a shock.
    Keywords: Stable; demand for money; bounds test
    JEL: E41 C22
    Date: 2018–01
  9. By: Cantore, Christiano; Ferroni, Filippo; León-Ledesma, Miguel A.
    Abstract: The textbook New-Keynesian (NK) model implies that the labor share is pro-cyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages and labor productivity during the Great Moderation period in the US, the Euro Area, the UK, Australia, and Canada. We show that this is inconsistent not only with the basic NK model, but with a wide variety of NK models commonly used for monetary policy analysis and where the direct link between the labor share and the markup can be broken down.
    Keywords: labor share; monetary policy shocks; DSGE models
    JEL: C52 E23 E32
    Date: 2018–11–16
  10. By: Jean Barthélemy; Eric Mengus
    Abstract: This paper investigates the ability of monetary policy rules to coordinate private agents' expectations when the enforcement of rules is limited. We show that limited enforcement precludes diverging inflation paths ensuring that nominal variables remain bounded in equilibrium. When applied to Taylor rules this makes the Taylor principle necessary and sufficient for price determinacy. However, limited enforcement also allows agents to rationally anticipate multiple policies and we show that, in general, there is no policy rule able to recoordinate any private agents' belief on that rule. We finally provide conditions under which such recoordination may take place.
    Keywords: Policy Rules, Determinacy, Limited Enforcement.
    JEL: E31 E52 E65
    Date: 2018
  11. By: Christophe André (Organisation for Economic Co-operation and Development (OECD)); Petre Caraiani (Institute for Economic Forecasting, Romanian Academy); Adrian Cantemir Čalin (Institute for Economic Forecasting, Romanian Academy); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: This paper investigates whether the counter-intuitive result of Gali and Gambetti (2015), where stock prices react positively to a monetary tightening, also holds for housing prices. Estimating a Bayesian VAR model based on an asset-pricing framework and allowing for rational bubbles for the United States, the United Kingdom and Canada, we find that housing prices respond negatively to a monetary policy shock, as common intuition would suggest. We also show, using a Markov Switching VAR model for the United States, that the response of housing prices to a monetary policy shock is not sensitive to the state of homebuyers sentiment. Hence, monetary policy can prove effective in fighting housing price bubbles. However, “leaning against the wind" has costs in terms of lost output while inflation becomes lower. Hence, before implementing such a policy, its relative efficiency and interactions with other policies, notably macro-prudential, need to be carefully considered.
    Keywords: housing, bubbles, VAR, monetary policy
    Date: 2018–11
  12. By: Crespo Cuaresma, Jesus (WU Wirtschaftsuniversität Wien); Doppelhofer, Gernot (Norwegian School of Economics); Feldkircher, Martin (Oesterreichische Nationalbank (Austrian Central Bank)); Huber, Florian (University of Salzburg)
    Abstract: This paper develops a global vector autoregressive (GVAR) model with time-varying parameters and stochastic volatility to analyze whether international spillovers of US monetary policy have changed over time. The proposed model allows assessing whether coefficients evolve gradually over time or are better characterized by infrequent, but large breaks. Our findings point towards pronounced changes in the international transmission of US monetary policy throughout the sample period, especially so for the reaction of international output, equity prices, and exchange rates against the US dollar. In general, the strength of spillovers has weakened in the aftermath of the global financial crisis. Using simple panel regressions, we link the variation in international responses to measures of trade and financial globalization. We find that a broad trade base and a high degree of financial integration with the world economy tend to cushion risks stemming from a foreign shock such as a US monetary policy tightening, whereas a reduction in trade barriers and/or a liberalization of the capital account increase these risks.
    Keywords: Spillovers; zero lower bound; globalization; mixture innovation models
    JEL: C30 E52 F41
    Date: 2018–11–16
  13. By: Hauzenberger, Niko (WU Wirtschaftsuniversität Wien); Huber, Florian (University of Salzburg)
    Abstract: In this paper we aim to improve existing empirical exchange rate models by accounting for uncertainty with respect to the underlying structural representation. Within a flexible Bayesian non-linear time series framework, our modeling approach assumes that different regimes are characterized by commonly used structural exchange rate models, with their evolution being driven by a Markov process. We assume a time-varying transition probability matrix with transition probabilities depending on a measure of the monetary policy stance of the central bank at the home and foreign country. We apply this model to a set of eight exchange rates against the US dollar. In a forecasting exercise, we show that model evidence varies over time and a model approach that takes this empirical evidence seriously yields improvements in accuracy of density forecasts for most currency pairs considered.
    Keywords: Empirical exchange rate models; exchange rate fundamentals; Markov switching
    JEL: C30 E32 E52 F31
    Date: 2018–11–21
  14. By: Grégory Claeys; Maria Demertzis; Jan Mazza
    Abstract: This Policy Contribution was prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue of 26 November 2018 between ECON and the President of the European Central Bank. The original paper is available on the European Parliament’s webpage (here). Copyright remains with the European Parliament at all times. Central banks face new challenges. First, the potential long-term decline in neutral rates of interest in advanced economies could reduce the space for central banks to make policy-rate cuts. Second, the potential flattening of the Phillips curve (i.e. the weakening of the relationship between inflation and unemployment) in recent decades could reduce the ability of central banks to reach their inflation targets. Third, the discussion on whether central banks should also target financial stability has re-emerged as a result of the crisis. Fourth, the euro-area architectural framework remains incomplete. The problematic interaction between nineteen different fiscal policies and a common monetary policy, the lack of a stabilisation tool and differences in national macro-prudential frameworks would all suggest significant reforms are needed in these realms to strengthen the overall resilience of the system. However, the probability of seeing material changes before the next recession is relatively low, thus presumably leaving the European Central Bank’s pivotal role unchanged. More generally, fundamental uncertainty surrounding concepts at the core of the economy, and therefore demand management, has emerged. Monetary policy has to navigate without full knowledge of what the post-crisis ‘new normal’ is going to be. In light of these considerations, we recommend that the ECB should update its definition of price stability to target core inflation around two percent per year (allowing a tolerance band on either side of the two percent target), on average, over a longer time horizon. Compared to other proposals (such as increasing the targeted inflation level or price-level targeting), our recommendation has the advantage of not departing drastically from the current inflation target and is therefore easier to communicate. In our view, monetary policy should not target financial stability. Other more targeted (and country-specific) tools should be deployed to avoid the build-up of financial stability risks. Closer coordination with national macroprudential authorities and greater harmonisation in the use of macroprudential policies are however strongly recommended, as it is now acknowledged that financial and monetary policies are closely interlinked.
    Date: 2018–11
  15. By: Bystrov Victor (Faculty of Economics and Sociology, University of Lodz)
    Abstract: In this paper a semi-structural econometric model is implemented in order to estimate the natural rates of interest in two large economies of the Euro Area: Germany an Italy. The estimates suggest that after the financial crisis of 2007-2008 a decrease of the growth rate of potential output and the corresponding natural rate of interest was greater in Italy than in Germany which could have had important implications for the effectiveness of a common monetary policy. Unlike in other studies, it is found that the monetary policy stance was less expansionary in Italy as compared to Germany for the whole after-crisis period.
    Keywords: natural rate of interest, potential output, euro area, state-space model, Kalman filter
    JEL: C32 C51 E43 E52
    Date: 2018–10–22
  16. By: Martin Feldkircher; Pierre L. Siklos
    Abstract: In this paper we investigate dynamics of global inflation and short-run inflation expectations. We estimate a global vector autoregressive (GVAR) model estimated using Bayesian techniques. We then explore the effect of three source of inflationary pressure that could drive up inflation expectations: domestic aggregate demand and supply shocks as well as a global increase in oil price inflation. Our results indicate that inflation expectations tend to increase as inflation accelerates. However, the effects of the demand and supply shock are for most countries only short-lived. If domestic inflation accelerates due to a global acceleration of oil price inflation, however, effects are generally more pronounced and long-lasting. This implies that to assess the link between actual inflation and inflation expectations appropriately, it is important to disentangle the underlying sources of inflationary pressure. We also examine whether the relationship between actual inflation and inflation expectations has changed since the global financial crisis. We find that the transmission between inflation and inflation expectations was largely unaffected in response to domestic demand and supply shocks, while effects of an oil price shock on inflation expectations are smaller post-crisis.
    Keywords: inflation, inflation expectations, GVAR modelling, anchoring of inflation expectations
    JEL: E31 E52 E58 C32
    Date: 2018–11
  17. By: Rutayisire, Musoni J.
    Abstract: The main objective of this paper is to investigate the relationship between the policy-controlled interest rates (Repo and Treasury bill rates) and the bank interest rates (interbank, deposit and lending rates) in Rwanda with the view to empirically examine the size and speed of the interest rate pass-through in the long run and short run and determine whether the pass-through process is symmetric or asymmetric. The empirical results of the paper indicate that the lending rates are cointegrated with none of the selected policy rates; hence the interest rate pass-through has been estimated by means of a transformed ADL model. By contrast, a cointegration relationship has been established between the interbank, deposit and policy rates, hence a non-linear error correction model has been used to detect adjustment process to long-run equilibrium. The estimated long-run as well as the short run interest rate pass-through of the selected policy rates to deposit and lending rates is weak and sluggish. Regarding the adjustment process of the bank rates, empirical results provided evidence that depending on the policy rate, the interbank, deposit and lending rates react differently following a negative and a positive shock in the policy rates. These results have been obtained using cointegration and asymmetric error-correction models.
    Keywords: Interest rate pass-through, monetary transmission mechanism, asymmetric adjustment.; Interest rate pass-through, monetary transmission mechanism, asymmetric adjustment. JEL: E430, E520
    JEL: C1 E4 E52
    Date: 2017–12–03
  18. By: Jonathan Kearns; Andreas Schrimpf; Dora Xia
    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: monetary policy spillovers, high-frequency data, financial integration
    JEL: E44 F36 F42
    Date: 2018–11
  19. By: Gerdesmeier, Dieter; Roffia, Barbara; Reimers, Hans-Eggert
    Abstract: [Introduction] The role of money and credit for the economy, and especially for inflation, has always attracted a lot of attention in the economic literature (see, for instance, Friedman and Schwartz (1963), Bernanke (1993)) and, more recently, Nelson (2008), Benati (2009), Lucas and Nicolini (2015), Hevia and Nicolini (2017) as well as Anderson, Bordo and Duca (2017)). This paper addresses some key questions regarding the fundamental nature of the relationships among those variables and attempts to analyse them for the euro area by means of filter-design techniques. After decomposing the variables over different frequencies, regressions are carried out and the main drivers of inflation over different horizons are derived in a single-equation approach. Robustness checks are also carried out by choosing different combinations of explanatory variables, price measures (GDP deflator and house prices) and frequency horizons. The paper is structured as follows. After a review of the literature and methodology, the basic framework applied in the analysis as well as the relevant variables are illustrated in more details. Afterwards, the results at different frequencies for HICP, the GDP deflator and house prices are provided. The final section concludes.
    JEL: E31 E51 E52
    Date: 2018
  20. By: Guo, Yanling
    Abstract: The first attempt in the human history to consciously create money ended in a collapse in 1720, well-known as the money mania. This unfortunate start raises doubt on money creation as a whole such that today there are still voices questioning created money even though it is now indispensible for the world economy. But this misfortune also has the bright side in that it delivers an extensive example of risks which created money has to consider. In this paper, I review the central facts from the money mania and highlight lessons we can still learn from it.
    Keywords: money mania,money creation,convertible money,non-convertible money,John Law,risk
    JEL: B19 E40 E59 N23
    Date: 2018
  21. By: Guglielmo Maria Caporale; Alex Plastun; Viktor Oliinyk
    Abstract: This paper investigates the role of the frequency of price overreactions in the cryptocurrency market in the case of BitCoin over the period 2013-2018. Specifically, it uses a static approach to detect overreactions and then carries out hypothesis testing by means of a variety of statistical methods (both parametric and non-parametric) including ADF tests, Granger causality tests, correlation analysis, regression analysis with dummy variables, ARIMA and ARMAX models, neural net models, and VAR models. Specifically, the hypotheses tested are whether or not the frequency of overreactions (i) is informative about Bitcoin price movements (H1) and (ii) exhibits seasonality (H2). On the whole, the results suggest that it can provide useful information to predict price dynamics in the cryptocurrency market and for designing trading strategies (H1 cannot be rejected), whilst there is no evidence of seasonality (H2 is rejected).
    Keywords: cryptocurrency, Bitcoin, anomalies, overreactions, abnormal returns, frequency of overreactions
    JEL: G12 G17 C63
    Date: 2018
  22. By: Górajski Mariusz (Faculty of Economics and Sociology, University of Lodz); Kuchta Zbigniew (Faculty of Economics and Sociology, University of Lodz)
    Abstract: This paper presents a new approach to measure the parameter uncertainty for optimal simple monetary policy rules in the New Keynesian dynamic stochastic general equilibrium models. More precisely, we propose a new algorithm which enables to directly introduce parameter uncertainty into the optimal simple precommitment rule problem. As a result we find distributions of the optimal monetary policy reactions and the minimized welfare losses. To compare the distributions of the monetary policy parameters and the welfare losses we apply the first order stochastic dominance ordering (SD1). The SD1 inequality between the probability distribution is verified by means of the Kolmogorov-Smirnov test. The proposed algorithms are applied to the Erceg, Henderson and Levine (2000) small-scale closed economy model estimated for the Polish economy. For the welfare-loss-minimizing central bank, we examine three types of the dynamic specification of its policy rule: backward-, current- and forward-looking. Finally, for a given set of optimal and implementable monetary policy rules, we show that the fully specified forward-looking monetary policy rule with interest rate smoothing mechanism minimizes the welfare-loss in the sense of the stochastic ordering SD1.
    Keywords: optimal monetary policy, DSGE, uncertainty
    JEL: E47 E52
    Date: 2018–10–15
  23. By: Ansgar Belke (University of Duisburg-Essen); Ulrich Volz (SOAS, University of London)
    Abstract: Since the demise of the Bretton Woods system, the Yen has seen several episodes of strong appreciation, including in the late 1970s, after the 1985 Plaza Agreement, the early and late 1990s and after 2008. These appreciations have not only been associated with "expensive Yen recessions" resulting from negative effects on exports; since the late 1980s, the strong Yen has also raised concerns about a de-industrialisation of the Japanese economy. Against this backdrop, the paper investigates the effects of changes to the Yen exchange rate on the hollowing out of the Japanese industrial sector. To this end, the paper uses both aggregate and industry-specific data to gauge the effects of Yen fluctuations on the output and exports of different Japanese industries, exploiting new data for industry-specific real effective exchange rates. Our findings support the view that the periods of yen appreciation had more than just transitory effects on Japanese manufacturing. The results also provide indication of hysteresis effects on manufacturing. While there are certainly also other factors that have contributed to a hollowing out of Japanese industry, a strong Yen played a role, too.
    Keywords: Yen appreciation,exchange rates,Japanese manufacturing,hollowing out,Hysteresis
    Date: 2018–11
  24. By: Hagenhoff, Tim
    Abstract: In this paper, I propose an optimal interest rate rule under heterogeneous expectations derived from a welfare criterion that is a second-order approximation of heterogeneous household utility following Di Bartolomeo et al. (2016). Additionally, I explore the agent level of the Branch and McGough (2009) framework in a more detailed fashion which is important as the central bank's welfare criterion depends on consumption inequality. I find that the consumption decision of "rational" agents in Di Bartolomeo et al. (2016) is inconsistent with the higher-order beliefs assumption of Branch and McGough (2009). Hence, consumption rules are derived that are consistent with the micro-foundations of Branch and McGough (2009) including a possible specification of agent's long-run beliefs. Further, the welfare analysis shows that the optimal interest rate rule yields welfare gains that range between 0.1 and 7.1 percent under the considered parameter values relative to a rule that is optimized under a conventional inflation-targeting objective as in Gasteiger (2014). Welfare gains are high when the underlying economy features a high degree of heterogeneity.
    Keywords: optimal monetary policy,policy implementation,heterogeneous expectations,inequality
    JEL: E52 D84
    Date: 2018
  25. By: Jacob T. Jones (The George Washington University); Tara M. Sinclair (The George Washington University); Herman O. Stekler (The George Washington University)
    Abstract: The Bank of England publishes a quarterly Inflation Report (IR) that provides numerical forecasts and text discussion of their assessment of the UK economy. Previous research has evaluated the quantitative forecasts included in the IR, but we focus on the qualitative discussion of output growth. We use a textual analysis procedure to convert the qualitative assessments made by the Bank into quantitative scores. We compare these scores to real-time output growth data as well as to the corresponding quantitative projections published by the Bank. We find that overall developments in the UK economy were accurately represented in the text of the IR. Although the Bank failed to forecast the onset of the Great Recession ahead of time, they did perceive underlying weakness in the economy prior to the downturn, which was more clearly communicated in the text than in the quantitative forecasts.
    Keywords: Macroeconomic Forecast Evaluation, Qualitative Forecasting, Great Recession
    JEL: C53 E37 E58
    Date: 2018–11
  26. By: Fischer, Manfred M. (WU Wirtschaftsuniversität Wien); Huber, Florian (University of Salzburg); Pfarrhofer, Michael (University of Salzburg); Staufer-Steinnocher, Petra (WU Wirtschaftsuniversität Wien)
    Abstract: This paper uses a factor-augmented vector autoregressive model to examine the impact of monetary policy shocks on housing prices across metropolitan and micropolitan regions. To simultaneously estimate the model parameters and unobserved factors we rely on Bayesian estimation and inference. Policy shocks are identified using high-frequency suprises around policy announcements as an external instrument. Impulse reponse functions reveal differences in regional housing price responses, which in some cases are substantial. The heterogeneity in policy responses is found to be significantly related to local regulatory environments and housing supply elasticities. Moreover, housing prices responses tend to be similar within states and adjacent regions in neighboring states.
    Keywords: Regional housing prices; metropolitan and micropolitan regions; factor-augmented vector autoregressive model; Bayesian estimation; high-frequency identification
    JEL: C11 C32 E52 R31
    Date: 2018–11–16
  27. By: Rafael Cezar; Maéva Silvestrini
    Abstract: This paper aims at estimating the impact of the recent Asset Purchase Programs implemented by the ECB - known as Quantitative easing (QE) - on external assets and liabilities recorded in one economy’s International Investment Position (IIP). Our analysis focused on the case of France. We start by describing the recent evolution of the four main items constituting the French IIP; namely Portfolio Investments, Other Investments, Derivatives and Direct Investments. We observe ample, albeit temporary, variations of these items surrounding QE programs. This analysis is complemented by an econometric approach in which we consider as QE variables both the announcements of the programs and their actual implementation. QE measures do impact all the items of the French IIP. Announcements –and particularly the one of January 2015– play a stronger role compared to the amounts purchased. We also decompose changes in the IIP into flows and valuation effects and show that the latter is the most reactive to QE measures. Finally, we establish counterfactual scenarios to quantify what France’s IIP would have been in the absence of QE. The strong impact observed following the announcement of January 2015 is rapidly counterbalanced; which suggests an over-adjustment phenomenon at the beginning of the program. This analysis allows estimating the outcome of the policy on the net IIP and thus on international wealth transfer. Consistently with our previous findings, we observe a robust impact at the beginning of the program which is then partly offset.
    Keywords: Monetary policy, Quantitative Easing, Balance of payments, International investment position.
    JEL: E52 F32 G15
    Date: 2018
  28. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, Omaha, USA, and School of Business and Economics, Loughborough University, Leicestershire, UK.)
    Abstract: In this paper, we analyze the impact of the U.S. presidential cycles on the dollar relative to the British pound over the longest possible monthly period of 1791:01 to 2018:10, based on an Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model. The usage of over two centuries of data controls for sample selection bias, while an EGARCH model accommodates for omitted variable bias. We find that over the entire sample period, the Democratic regime does indeed depreciate the dollar relative to the pound. However, when we identify structural breaks based on formal statistical analysis, we find that the full-sample result is primarily driven by the period covering 1827:01 to 1932:09, but in the recent period of 1932:10 to 2018:10, when Democrats have been in power, the dollar has in fact appreciated relative to the pound.
    Keywords: Exchange Rate, U.S. Presidential Cycles
    JEL: C32 D72 F31
    Date: 2018–11

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.