nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒12‒10
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Macroeconomic Effects of Quantitative and Qualitative Monetary Easing Measures By Junko Koeda
  2. Forward Guidance with Bayesian Learning and Estimation By Christopher J. Gust; Edward Herbst; J. David Lopez-Salido
  3. Money Markets, Collateral and Monetary Policy By De Fiore, Fiorella; Hoerova, Marie; Uhlig, Harald
  4. Does a big bazooka matter? Central bank balance-sheet policies and exchange rates By Dedola, Luca; Georgiadis, Georgios; Gräb, Johannes; Mehl, Arnaud
  5. Strategic Deviations in Optimal Monetary Policy By Fabio Canetg
  6. Alternative Specifications of Fisher Hypothesis: An Empirical Investigation By S, Surayya
  7. Bilan sur le consensus de Jackson Hole By Anne-Marie Rieu-Foucault
  8. Employment Effects of Unconventional Monetary Policy : Evidence from QE By Stephan Luck; Thomas Zimmermann
  9. The Long Run Stability of Money Demand in the Proposed West African Monetary Union By Simplice A. Asongu; Oludele E. Folarin; Nicholas Biekpe
  10. New VAR evidence on monetary transmission channels: temporary interest rate versus inflation target shocks By Lukmanova, Elizaveta; Rabitsch, Katrin
  11. The New Area-Wide Model II: an extended version of the ECB's micro-founded model for forecasting and policy analysis with a financial sector By Coenen, Günter; Karadi, Peter; Schmidt, Sebastian; Warne, Anders
  12. Optimal Monetary Policy in a DSGE Model with Attenuated Forward Guidance Effects By Hess Chung; Taisuke Nakata; Matthias Paustian
  13. Perceptions and Expectations of Inflation by U.S. Households By Sandor Axelrod; David E. Lebow; Ekaterina V. Peneva
  14. Credit supply and demand in unconventional times By Altavilla, Carlo; Boucinha, Miguel; Holton, Sarah; Ongena, Steven
  15. Reserves For All? Central Bank Digital Currency, Deposits and their (Non)-Equivalence By Dirk Niepelt
  16. The Risk-Taking Channel of Liquidity Regulations and Monetary Policy By Stephan Imhof, Cyril Monnet, Shengxing Zhang
  17. Cross-border spillovers of monetary policy: what changes during a financial crisis? By Barbosa, Luciana; Bonfim, Diana; Costa, Sónia; Everett, Mary
  18. The transmission of liquidity shocks via China's segmented money market: evidence from recent market events By Ruoxi Lu; David A. Bessler; David J. Leatham
  19. Dollarization and the “Unbundling†of Globalization in sub-Saharan Africa By Kazeem B. Ajide; Ibrahim D. Raheem; Simplice A. Asongu
  20. Monetray policy and asset price bubbles By Christophe Blot; Paul Hubert; Fabien Labondance
  21. The Effectiveness of Monetary and Fiscal Policy Shocks on U.S. Inequality: The Role of Uncertainty By Aye, G.C.; Clance, M.; Gupta, R.
  22. The Role of Loan Supply Shocks in Pacific Alliance Countries: A TVP-VAR-SV Approach By Gabriel Rodríguez; Carlos Guevara
  23. Inflation expectations, consumption and the lower bound: micro evidence from a large euro area survey By Duca, Ioana A.; Kenny, Geoff; Reuter, Andreas
  24. Managing Self-organization of Expectations through Monetary Policy: a Macro Experiment By Assenza, Tiziana; Heemeijer, P.; Hommes, C.H.; Massaro, D.
  25. Monetary policy and bank equity values in a time of low interest rates By Ampudia, Miguel; Heuvel, Skander Van den
  26. Neo-Fisherian Policies and Liquidity Traps By Bilbiie, Florin Ovidiu
  27. A new justification for full reserve banking? By Musgrave, Ralph S.
  28. Money and Credit: A Long-Term View By Luca Benati
  29. Monetary theory and policy: the debate revisited By Jean-Luc Gaffard
  30. Emergency Collateral Upgrades By Mark A. Carlson; Marco Macchiavelli

  1. By: Junko Koeda (School of Political Science and Economics, Waseda University (E-mail:
    Abstract: We estimate a structural vector autoregressive model with an effective lower bound of nominal interest rates (ELB) using Japanese macroeconomic and financial data from the mid-1990s to the end of 2016. The estimated results show that the Bank of Japan fs quantitative and qualitative easing (QQE) policy increased output via gpure h quantitative easing when the first-year fs QQE level effect was controlled, complemented by qualitative easing. Our nonlinear counter- factual analyses show that raising the ELB or lowering an inflation threshold in forward guidance is not necessarily contractionary.
    Keywords: effective lower bound of nominal interest rates, quantitative and qualitative monetary easing policy, forward guidance, structural vector autoregression, maximum likelihood
    JEL: E58 E52 C32
    Date: 2018–11
  2. By: Christopher J. Gust; Edward Herbst; J. David Lopez-Salido
    Abstract: Considerable attention has been devoted to evaluating the macroeconomic effectiveness of the Federal Reserve's communications about future policy rates (forward guidance) in light of the U.S. economy's long spell at the zero lower bound (ZLB). In this paper, we study whether forward guidance represented a shift in the systematic description of monetary policy by estimating a New Keynesian model using Bayesian techniques. In doing so, we take into account the uncertainty that agents have about policy regimes using an incomplete information setup in which they update their beliefs using Bayes rule (Bayesian learning). We document a systematic change in U.S. policymakers' reaction function during the ZLB episode (2009-2016) that called for a persistently lower policy rate than in other regimes (we call this the forward guidance regime). Our estimates suggest that private sector agents were slow to learn about this change in real time, which limited the effectiveness of t he forward guidance regime in stimulating economic activity and curbing disinflationary pressure. We also show that the incomplete information specification of the model fits economic outcomes over the economy's long spell at the ZLB better than the full information specification.
    Keywords: Bayesian estimation ; Bayesian learning ; forward guidance
    JEL: E32 C32 E52 C11
    Date: 2018–10–25
  3. By: De Fiore, Fiorella; Hoerova, Marie; Uhlig, Harald
    Abstract: Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline.
    Keywords: Eurozone; haircuts; money markets; unsecured interbank market
    JEL: E44 E58
    Date: 2018–11
  4. By: Dedola, Luca; Georgiadis, Georgios; Gräb, Johannes; Mehl, Arnaud
    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-à-vis the US dollar by a 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. JEL Classification: E5, F3
    Keywords: CIP deviations, interest rate parity condition, quantitiative easing
    Date: 2018–11
  5. By: Fabio Canetg
    Abstract: This paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research questions is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-o between a stable in ation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. My main result shows that the central bank is willing to implement past policy commitments if a sucient fraction of agents is not aware of the exact end date of the policy commitment. This nding challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality.
    Keywords: optimal monetary policy, strategic deviations, forward guidance
    JEL: E42 E52 E58
    Date: 2018–07
  6. By: S, Surayya
    Abstract: Fisher hypothesis provides theoretical framework for the study of relationship between nominal interest rate and inflation. It assumes one to one direct relationship between nominal interest rate and inflation. Modifications to this model are explained by Mundell effect, Phillips curve and Friedman effect , Levi and Makin effect, Darby effect and Carmichael and Stebbing effect (Inverted Fisher Hypothesis). The objective of this paper is to explore the Fisher hypothesis and its alternative specifications using IFS Panel data set and applying General to Specific Methodology .Findings of this paper show that Inverted Fisher hypothesis holds in above average money supply ̷ GDP countries. Full Fisher effect is present only when Phillips curve effect and Friedman effect are also present in below average money supply ̷ GDP countries.
    Keywords: Fisher Hypothesis, Interest Rate, Inflation, Panel Data, General to Specific Model.
    JEL: E4 E40 E43 E5 E52
    Date: 2018
  7. By: Anne-Marie Rieu-Foucault
    Abstract: Before the 2007 crisis, the monetary authorities agreed in Jackson Hole for independence between monetary policy and financial stability. They thus validated the mandate of central banks with the objective of price stability. This point, however, is debated. This paper takes the arguments that led to the Jackson Hole consensus before the crisis and then revisits them in the light of the 2007 crisis. Financial imbalances and the existence of a risk-taking channel need to be addressed by economic policy. After the crisis, the monetary authorities chose to implement macroprudential policies to address this concern but did not question the independence between monetary policy and financial stability, resulting in the separation of monetary policy and macro-prudential policies. The limitations of macroprudential tools may, however, lead to changes in the central bank's strategy or mandate for the integration of a financial stability objective into monetary policy.
    Keywords: Monetary policy, Financial Stability, Central banks
    JEL: E52 E58 G01
    Date: 2018
  8. By: Stephan Luck; Thomas Zimmermann
    Abstract: This paper investigates the effect of the Federal Reserve's unconventional monetary policy on employment via a bank lending channel. We find that banks with higher mortgage-backed securities holdings issued relatively more loans after the first and third rounds of quantitative easing (QE1 and QE3). While additional volume is concentrated in refinanced mortgages after QE1, increases are driven by newly originated home purchase mortgages and additional commercial and industrial lending after QE3. Using spatial variation, we show that regions with a high share of affected banks experienced stronger employment growth after both, QE1 and QE3. While the ability of households to refinance mortgages after QE1 spurred local demand, the resulting additional employment growth was relatively weak and confined to the non-tradable goods sector. In contrast, the increase in overall employment after QE3 is sizable and can be attributed to the supply of additional credit to firms. To s upport this finding, we use new confidential loan-level data to show that firms with stronger ties to affected banks increased employment and capital investment more after QE3. Altogether, our findings suggest that unconventional monetary policy can, similar to conventional monetary policy, affect real economic outcomes.
    Keywords: Bank Lending ; Central Banking ; Employment ; Financial Crisis ; Quantitative Easing ; Real Effects ; Unconventional Monetary Policy
    JEL: E4 E00 E5 G00 G21
    Date: 2018–10–24
  9. 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
  10. By: Lukmanova, Elizaveta; Rabitsch, Katrin
    Abstract: We augment a standard monetary VAR on output growth, inflation and the nominal interest rate with the central bank's inflation target, which we estimate from a New Keynesian DSGE model. Inflation target shocks give rise to a simultaneous increase in inflation and the nominal interest rate in the short run, at no output expense, which stands at the center of an active current debate on the Neo-Fisher effect. In addition, accounting for persistent monetary policy changes reflected in inflation target changes improves identification of a standard temporary nominal interest rate shock in that it strongly alleviates the price puzzle.
    Keywords: Monetary policy, Neo-Fisher effect, Time-varying inflation target, DSGE, VAR
    Date: 2018–11
  11. By: Coenen, Günter; Karadi, Peter; Schmidt, Sebastian; Warne, Anders
    Abstract: This paper provides a detailed description of an extended version of the ECB’s New Area-Wide Model (NAWM) of the euro area (cf. Christoffel, Coenen, and Warne 2008). The extended model—called NAWM II—incorporates a rich financial sector with the threefold aim of (i) accounting for a genuine role of financial frictions in the propagation of economic shocks and policies and for the presence of shocks originating in the financial sector itself, (ii) capturing the prominent role of bank lending rates and the gradual interest-rate pass-through in the transmission of monetary policy in the euro area, and (iii) providing a structural framework useable for assessing the macroeconomic impact of the ECB’s large-scale asset purchases conducted in recent years. In addition, NAWM II includes a number of other extensions of the original model reflecting its practical uses in the policy process over the past ten years. JEL Classification: C11, C52, E30, E37, E58
    Keywords: Bayesian inference, DSGE modelling, euro area, financial frictions, forecasting, policy analysis
    Date: 2018–11
  12. By: Hess Chung; Taisuke Nakata; Matthias Paustian
    Abstract: In this article, we explore the implications of attenuating the power of forward guidance for the optimal conduct of forward guidance policy in a quantitative DSGE model of the U.S. economy.
    Date: 2018–10–19
  13. By: Sandor Axelrod; David E. Lebow; Ekaterina V. Peneva
    Abstract: To better understand inflation expectations, we examine newly available data on U.S. households' inflation perceptions-what people think inflation has been in the past. The overarching summary is that inflation perceptions look similar to inflation expectations. The central tendencies of the responses for perceived inflation over the past five to ten years are similar to those of expected inflation for the next five to ten years, and all are a little above official estimates of inflation. Thus, survey respondents overall do not expect long-term inflation to change in the future relative to the recent past. Moreover, individuals who perceive higher inflation in the past tend to expect higher inflation in the future; people whose perceptions change tend to revise their expectations in the same direction; and perceptions and expectations vary similarly by gender and income. These results suggest that if inflation perceptions were to change, they could lead inflation e xpectations to change as well.
    Keywords: Consumer surveys ; Inflation dynamics ; Inflation expectations ; Inflation perceptions
    JEL: D84 E31
    Date: 2018–10–25
  14. By: Altavilla, Carlo; Boucinha, Miguel; Holton, Sarah; Ongena, Steven
    Abstract: Do borrowers demand less credit from banks with weak balance sheet positions? To answer this question we use novel bank-specific survey data matched with confidential balance sheet information on a large set of euro area banks. We find that, following a conventional monetary policy shock, bank balance sheet strength influences not only credit supply but also credit demand. The resilience of lenders plays an important role for firms when selecting whom to borrow from. We also assess the impact on credit origination of unconventional monetary policies using survey responses on the exposure of individual banks to quantitative easing and negative interest rate policies. We find that both policies do stimulate loan supply even after fully controlling for bank-specific demand, borrower quality, and balance sheet strength. JEL Classification: E51, G21
    Keywords: balance sheet strength, bank lending survey, credit demand and supply, non-standard monetary policy
    Date: 2018–11
  15. By: Dirk Niepelt
    Abstract: I o er a macroeconomic perspective on the \Reserves for All" (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not a ect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions.
    Keywords: Central bank digital currency, Fedcoin, CADcoin, e-krona, e-Peso, JCoin, reserves for all, deposits, narrow banking, cash, equivalence, central bank, lender of last resort, politico-economic equivalence
    JEL: E42 E51 E58 E61 E63 H63
    Date: 2018–07
  16. By: Stephan Imhof, Cyril Monnet, Shengxing Zhang
    Abstract: We study the implications of liquidity regulations and monetary policy on depositmaking and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.
    Date: 2018–07
  17. By: Barbosa, Luciana (Banco de Portugal); Bonfim, Diana (Banco de Portugal, Católica Lisbon School of Business & Economics); Costa, Sónia (Banco de Portugal); Everett, Mary (Central Bank of Ireland)
    Abstract: This paper analyses cross-border spillovers of monetary policy by examining two countries that were in the eye of the storm during the euro area sovereign debt crisis, namely Ireland and Portugal. The research provides insight as to how banking and sovereign stress aect the inward transmission of foreign monetary policy to two economies that share many characteristics, but that also have many distinct features. In particular, our research addresses the question of whether a banking system in distress reacts more or less to monetary policy changes in other major economies. The empirical analysis indicates that international spillovers are present for US and UK monetary policy for both Ireland and Portugal, but there is heterogeneity in the transmission mechanisms by which they aect credit growth in the two economies.
    Keywords: Cross-border banking, euro area sovereign crisis, unconventional monetary policy spillovers, credit supply.
    JEL: G15 G21
    Date: 2018–10
  18. By: Ruoxi Lu; David A. Bessler; David J. Leatham
    Abstract: This is the first study to explore the transmission paths for liquidity shocks in China's segmented money market. We examine how money market transactions create such pathways between China's closely-guarded banking sector and the rest of its financial system, and empirically capture the transmission of liquidity shocks through these pathways during two recent market events. We find strong indications that money market transactions allow liquidity shocks to circumvent certain regulatory restrictions and financial market segmentation in China. Our findings suggest that a widespread illiquidity contagion facilitated by money market transactions can happen in China and new policy measures are needed to prevent such contagion.
    Date: 2018–11
  19. By: Kazeem B. Ajide (University of Lagos, Lagos, Nigeria); Ibrahim D. Raheem (University of Kent, Canterbury, UK); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: This study contributes to the dollarization literature by expanding its determinants to account for different dimensions of globalization, using the widely employed KOF index of globalization. Specifically, globalization is “unbundled†into three different layers namely: economic, social and political dimensions. The study focuses on 25 sub-Saharan African (SSA) countries for the period 2001-2012.Using the Tobit regression approach, the following findings are established. First, from both economic and statistical relevance, the social and political dimensions of globalization constitute the key dollarization amplifiers, while the explanatory power of the economic component is weaker on dollarization. Second, consistent with the theoretical underpinnings, macroeconomic instabilities (such as inflation and exchange rate volatilities) have the positive expected signs. Third, the positive association between the accumulation of international reserves and dollarization is also apparent. Policy implications are discussed.
    Keywords: Dollarization; Globalization; sub-Saharan Africa; Tobit regression
    JEL: E41 F41 C21
    Date: 2018–01
  20. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: This paper assesses the linear and non-linear dynamic effects of monetary policy on asset price bubbles. We use a Principal Component Analysis to estimate new bubble indicators for the stock and housing markets in the United States based on structural, econometric and statistical approaches. We find that the effects of monetary policy are asymmetric so the responses to restrictive and expansionary shocks must be differentiated. Restrictive monetary policy is not able to deflate asset price bubbles contrary to the “leaning against the wind” policy recommendations. Expansionary interest rate policies would inflate stock price bubbles whereas expansionary balance-sheet measures would not.
    Keywords: Booms and busts; Mispricing; Price deviations; Interest rate policy; Unconventional monetary policy
    JEL: E44 G12 E52
    Date: 2018–11
  21. By: Aye, G.C.; Clance, M.; Gupta, R.
    Abstract: The study examines the effect of monetary and fiscal policy on inequality conditioned on low and high uncertainty. We use U.S. quarterly time series data on different measures of income, labour earnings, consumption and total expenditure inequality as well as economic uncertainty. Our analysis is based on the impulse responses from the local projection methods that enable us to recover a smoothed average of the underlying impulse response functions. The results show that both contractionary monetary and fiscal policies increase inequality, and in the presence of relatively higher levels of uncertainty, the effectiveness of both policies is weakened. Thus, pointing to the need for policy-makers to be aware of the level of uncertainty while conducting economic policies in the U.S. Acknowledgement : I thank the anonymous Reviewers and conference organizers in advance.
    Keywords: Agricultural and Food Policy
    Date: 2018–07
  22. By: Gabriel Rodríguez (Departamento de Economía de la Pontificia Universidad Católica del Perú); Carlos Guevara (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: This paper analyzes the effect of loan supply shocks on the real economic activity of Pacific Alliance countries. The econometric approach is a Time-Varying Parameter VAR with Stochastic Volatility (TVP-VAR-SV), which is identified by sign restrictions. Results of a trace test, t-tests and the Kolmogorov-Smirnov test reveal the existence of significant changes in the distribution of parameters over time, which supports the use of time-varying parameters. The results indicate that loan supply shocks have an important impact on real economic activity in all Pacific Alliance countries: about 1% in Colombia, Mexico, and Peru, and about 0.5% in Chile. Moreover, loan supply shocks have a considerable role in driving business cycle fluctuations, not only in crisis periods, but also in stability periods. Their contribution to GDP growth is higher than that of aggregate supply shocks and as high as that of aggregate demand and monetary policy shocks. The evolution of the impact of loan supply shocks on real economic activity shows evidence of cross-country heterogeneity, reflecting different financial structures among Pacific Alliance countries. Furthermore, by assessing the effects on different measures of economic activity, it is estimated that loan supply shocks have a higher impact on domestic demand, while the impact is similar when the model is estimated for non-primary activities. Finally, the sensitivity analysis indicates that the results of the model are robust to different priors specifications, to different measures of external variables, and to multiple sets of sign restrictions. Moreover, by applying an agnostic identification, the results indicate that even letting the response of GDP unrestricted, its response to loan supply shocks remains positive and significant. With this multiple specification, the impact of loan supply shocks on GDP growth ranges between 0.8% and 1.2% in Peru and Colombia, and between 0.5% and 0.8% in Chile. These results are close to the baseline estimation and show robustness. Regarding Mexico, it is estimated that the impact of loan supply shocks varies between 0.8%-3.5%. JEL Classification-JEL: C32, E32, E51
    Keywords: Loan Supply Shocks, Variance Decomposition, Historical Decomposition, Time-Varying Parameter VAR with Stochastic Volatility, Sign Restrictions
    Date: 2018
  23. By: Duca, Ioana A.; Kenny, Geoff; Reuter, Andreas
    Abstract: This paper exploits a very large multi-country survey of consumers to investigate empirically the relationship between inflation expectations and consumer spending. We document that for the Euro Area and almost all of its constituent countries this relationship is generally positive: a higher expected change in inflation is associated with an increase in the probability that a given consumer will make major purchases. Moreover, in line with the predictions of macroeconomic theory, the impact is stronger when the lower bound on nominal interest rates is binding. Also, using the estimated spending probabilities from our micro-level analysis, we indirectly estimate the impact of a gradual increase in inflation expectations on aggregate private consumption. We find the effects to be economically relevant, especially when the lower bound is binding. JEL Classification: D12, D84, E21, E31, E52
    Keywords: consumer inflation expectations, consumption, lower bound, micro data
    Date: 2018–11
  24. By: Assenza, Tiziana; Heemeijer, P.; Hommes, C.H.; Massaro, D.
    Abstract: The New Keynesian theory of inflation determination is tested in this paper by means of laboratory experiments. We find that the Taylor principle is a necessary condition to ensure convergence to the inflation target, but it is not sufficient. Using a behavioral model of expectation formation, we show how heterogeneous expectations tend to self-organize on different forecasting strategies depending on monetary policy. Finally, we link the central bank ability to control inflation to the impact that monetary policy has on the type of feedback {positive or negative{ between expectations and realizations of aggregate variables and in turn on the composition of subjects with respect to the type of forecasting rules they use.
    Keywords: Laboratory Experiments; Monetary Policy; Expectations; Taylor principle
    JEL: C91 C92 D84 E52
    Date: 2018–11
  25. By: Ampudia, Miguel; Heuvel, Skander Van den
    Abstract: This paper examines the effects of monetary policy on the equity values of European banks. We identify monetary policy shocks by looking at changes in the EONIA one-month and two-year swap contract rates during narrow windows around the press statements and press conferences announcing monetary policy actions taken by the ECB. We find that an unexpected decrease of 25 basis points on the short-term policy rate increases banks’ stock prices by about 1% on average. These effects vary substantially over time; in particular, they were stronger during the crisis period and reversed during the recent period with low and even negative interest rates. That is, with rates close to or below zero, further interest rate cuts became detrimental for banks’ equity values. The composition of banks’ balance sheets is important in order to understand these effects. In particular, the change in sensitivity to interest rate surprises as rates drop to low and negative levels is much more pronounced for banks with a high reliance on deposit funding, compared to other banks. We argue that this pattern can be explained by a reluctance of banks to pay negative interest rates on retail deposits. JEL Classification: E52, E58, G21
    Keywords: bank profitability, ECB, monetary policy, negative rates
    Date: 2018–11
  26. By: Bilbiie, Florin Ovidiu
    Abstract: Liquidity traps can be either fundamental, or confidence-driven. In a simple unified New-Keynesian framework, I provide the analytical condition for the latter's prevalence: enough shock persistence and endogenous intertemporal amplification of future ("news") shocks, making income effects dominate substitution effects. The same condition governs Neo-Fisherian effects (expansionary-inflationary interest-rate increases) which are thus inherent in confidence traps. Several monetary-fiscal policies (forward guidance, interest rate increases, public spending, labor-tax cuts) have diametrically opposed effects according to the trap variety. This duality provides testable implications to disentangle between trap types; that is essential, for optimal policies are likewise diametrically opposite.
    Keywords: confidence and fundamental liquidity traps; Fiscal multipliers; forward guidance; monetary policy; neo-Fisherian; optimal policy
    JEL: E3 E4 E5 E6
    Date: 2018–11
  27. By: Musgrave, Ralph S.
    Abstract: Most of the money in circulation is created by commercial banks, and it is precisely that form of money creation that explains most bank failures. In contrast, full reserve banking is a system under which that form of money is banned: all money is created by the central bank. There is a very simple reason for such a ban which most if not all advocates of full reserve seem to have missed, which is as follows. Under the existing bank system, those who deposit money at banks with a view to their bank lending on their money so as to earn interest are into commerce, in just the same way as where they deposit money with a stock-broker, mutual fund, private pension scheme or similar with a view to their money being loaned on or invested. And it is a widely accepted principle that taxpayers should not rescue commercial ventures which fail. Yet taxpayer backed deposit insurance is provided for those bank depositors. Thus if the latter principle were adhered to consistently, then there would be no deposit insurance for “interest earning” deposits, while of course totally safe non-interest earning deposits would be available for those who want them. And that “two types of deposit” system is what full reserve has always consisted of. The above point about commercial and non-commercial depositors is similar to, but not quite the same as the more conventional argument for full reserve, which is along the lines that governments cannot allow a series of major bank failures, which inevitably means banks are featherbedded or subsidised (a non-commercial activity) thus some way must be found of removing that subsidy, and one way is full reserve. The first 1,300 or so words below briefly introduce full reserve. The basic argument put in this paper then starts under the heading “Taxpayers should not back commerce.”
    Keywords: full reserve banking; sovereign money; vollgeld; deposit insurance
    JEL: G01 G21 G28
    Date: 2018–11–15
  28. By: Luca Benati
    Abstract: Schularick and Taylor (2012) documented a sizeable increase in the ratio between credit and broad money since the end ofWWII, which they interpreted in terms of a progressive disconnect between the two aggregates. I show that this interpretation is incorrect, since, as I demonstrate mathematically, this evidence is uninformative for the issue at hand. In fact, Jordà, Schularick and Taylor’s (JST) data show that, since the XIX century, fluctuations in broad money and credit have exhibited an extraordinarily strong correlation within each single country in the dataset, to the point that (e.g.) either Shin’s (1994) or Wright’s (2000) test consistently detects cointegration between the multipliers of the two aggregates. I also show that, after WWII, there has been no change in the relative prediction power of credit and broad money for financial crises compared to the pre-WWII period, and that the change in the multiplier of either aggregate has been more powerful than credit growth, the variable considered by Schularick and Taylor. My results imply that (1) for the ‘traditional’ banking sector there has been no change, since WWI, in the relationship between its monetary liabilities, and the amount of credit it extends to the private non-financial sector; and (2) only the comparatively recent ascent of the ‘shadow’ banking sector–which is not covered by either JST’s, or the Bank for International Settlements’ data– introduced a ‘wedge’ between broad money and credit. Contrary to Schularick and Taylor’s interpretation, the ascent of ‘shadow banking’ is the only reason why, today, we live in the ‘Age of Credit’.
    Date: 2018–06
  29. By: Jean-Luc Gaffard
    Abstract: This paper is aimed at revisiting monetary analysis in order to better understand erroneous choices in the conduct of monetary policy. According to the prevailing consensus, the market economy is intrinsically stable and is upset only by poor behaviour by government or the banking system. We maintain on the contrary that the economy is unstable and that achieving stability requires a discretionary economic policy. This position relies upon an analytical approach in which monetary and financial organisations are devices that help markets to function. In this perspective, which focuses on the heterogeneity of markets and agents, and, consequently, on the role of institutions in determining overall performance, it turns out that nominal rigidities and financial commitment offer the means to achieve economic stability. This is because they prevent successive, unavoidable disequilibria from becoming explosive.
    Keywords: inflation, market, money, stability
    Date: 2018–11–28
  30. By: Mark A. Carlson; Marco Macchiavelli
    Abstract: During the 2008-09 financial crisis, the Federal Reserve established two emergency facilities for broker-dealers. One provided collateralized loans. The other lent securities against a pledge of other securities, effectively providing collateral upgrades, an operation similar to activities traditionally undertaken by broker-dealers. We find that these facilities alleviated dealers' funding pressures when access to repos backed by illiquid collateral deteriorated. We also find that dealers used the facilities, especially the ability to upgrade collateral, to continue funding their own illiquid inventories (avoiding potential fire-sales), and to extend funding to their clients. Exogenous variation in collateral policies at one facility allows a causal interpretation of these stabilizing effects.
    Keywords: Financial crisis ; Lender of last resort ; Collateral ; Dealers ; Repo
    JEL: G24 G01 E58
    Date: 2018–11–15

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