nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒12‒17
twenty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Casting Light on Central Bank Digital Currencies By Tommaso Mancini Griffoli; Maria Soledad Martinez Peria; Itai Agur; Anil Ari; John Kiff; Adina Popescu; Celine Rochon
  2. The dollar during the global recession: US monetary policy and the exorbitant duty By Stavrakeva, Vania; Tang, Jenny
  3. Quantitative or Qualitative Forward Guidance: Does it Matter? By Gunda-Alexandra Detmers; Özer Karagedikli; Richhild Moessner
  4. Unvealing Monetary Policy Transmission on Inflation Targeting Economies: The Wealth-Consumption Channel By Juan Andres Espinosa Torres; Sebastian Sanin Restrepo; Sebastian Sanin-Restrepo
  5. Assessing inflation expectations anchoring for heterogeneous agents: analysts, businesses and trade unions By Ken Miyajima; James Yetman
  6. Forward Guidance and the Role of Central Bank Credibility By Gavin Goy; Cars Homme; Kostas Mavromatis
  7. International Food Commodity Prices and Missing (Dis)Inflation in the Euro Area By Gert Peersman
  8. Monetary policy communication shocks and the macroeconomy By Goodhead, Robert; Kolb, Benedikt
  9. Lost Inflation? By Rod Tyers; Yixiao Zhou
  10. Should the Fed regularly evaluate its monetary policy framework? By Fuhrer, Jeffrey C.; Olivei, Giovanni P.; Rosengren, Eric S.; Tootell, Geoffrey M. B.
  11. Monetary Independence and Rollover Crises By Bianchi, Javier; Mondragon, Jorge
  12. A Monetary Model of Bilateral Over-the-Counter Markets By Ricardo Lagos; Shengxing Zhang
  13. Asymmetric effects of monetary policy in regional housing markets By Knut Are Aastveit; André K. Anundsen
  14. Deflation Forces and Inequality By Rod Tyers; Yixiao Zhou
  15. The Paper Money of Colonial North Carolina, 1712–74: Reconstructing the Evidence By Cory Cutsail; Farley Grubb
  16. Cross-Border Bank Flows and Monetary Policy By Ricardo Correa; Teodora Paligorova; Horacio Sapriza; Andrei Zlate
  17. Where's the Money‽ An Investigation into the Whereabouts and Uses of Australian Banknotes By Richard Finlay; Andrew Staib; Max Wakefield
  18. On the impact of the launch of the euro on EMU macroeconomic vulnerability By Florian Morvillier
  19. Monetary Theory and Policy: The Debate Revisited By Jean-Luc Gaffard
  20. Gross capital flows by banks, corporates and sovereigns By Stefan Avdjiev; Sebnem Kalemli-Ozcan; Luis Servén
  21. Climate change challenges for central banks and financial regulators By Campiglio, Emanuele; Dafermos, Yannis; Monnin, Pierre; Ryan-Collins, Josh; Schotten, Guido; Tanaka, Misa

  1. By: Tommaso Mancini Griffoli; Maria Soledad Martinez Peria; Itai Agur; Anil Ari; John Kiff; Adina Popescu; Celine Rochon
    Abstract: Digitalization is reshaping economic activity, shrinking the role of cash, and spurring new digital forms of money. Central banks have been pondering wheter and how to adapt. One possibility is central bank digital currency (CBDC)-- a widely accessible digital form of fiat money that could be legal tender. This discussion note proposes a conceptual framework to assess the case for CBDC adoption from the perspective of users and central banks. It discusses possible CBDC designs, and explores potential benefits and costs, with a focus on the impact on monetary policy, financial stability, and integrity. This note also surveys research and pilot studies on CBDC by central banks around the world.
    Keywords: Money;Central banking;Currencies;Monetary policy;Money; Central Bank Digital Currencies; Monetary Policy
    Date: 2018–11–12
  2. By: Stavrakeva, Vania (London Business School); Tang, Jenny (Federal Reserve Bank of Boston)
    Abstract: We document that during the Global Recession, US monetary policy easings triggered the “exorbitant duty” of the United States, the issuer of the world’s dominant currency, by causing a dollar appreciation and a transfer of wealth from the United States to the rest of the world. This dollar appreciation runs counter to the predictions of standard macroeconomic models and works through two channels: (i) a flight-to-safety effect which lowered the expected excess returns of holding safe US government debt relative to foreign debt and (ii) lowered expected future inflation in the United States relative to other countries. We show that the signaling channel of monetary policy, whereby US policy easings are perceived to signal weaker future growth, can reconcile the novel empirical findings that we document.
    Keywords: exchange rates; currency risk; risk premia; monetary policy; forward guidance; Federal Reserve information; interest rates; Global Financial Crisis
    JEL: E52 F31 G01
    Date: 2018–10–01
  3. By: Gunda-Alexandra Detmers; Özer Karagedikli; Richhild Moessner
    Abstract: Every monetary policy decision by the Reserve Bank of New Zealand (RBNZ) is accompanied by a written statement about the state of the economy and the policy outlook, but only every second decision by a published interest rate forecast. We exploit this difference to study the relative influences of qualitative and quantitative forward guidance. We find that announcements that include an interest rate forecast lead to very similar market reactions across the yield curve as announcements that only include written statements. We interpret our results as implying that central bank communication is important, but that the exact form of that communication is less critical. Our results are also consistent with market participants understanding the conditional nature of the RBNZ interest rate forecasts.
    Keywords: monetary policy, forward guidance, interest rate forecasts
    JEL: E43 E44 E52 E58 G12
    Date: 2018
  4. By: Juan Andres Espinosa Torres; Sebastian Sanin Restrepo; Sebastian Sanin-Restrepo
    Abstract: This paper test the presence of the consumption-wealth channel on the trans- mission of monetary policy on economies following the Inflation Targeting (IT) framework. Combining a Structural Vector Autoregression (SVAR) method-ology and a policy counterfactual exercise, this channel is modelled for 27economies divided into four implementing window dates: first, early, inter-mediate and recent implementers. Results show that effects derived from this channel are most significant for those economies that implemented IT earlier, with some particular exceptions among the other groups. This suggest that long-run stability and definition of IT regimes play a significant role to make monetary policy transmit to the economy.
    Keywords: monetary policy transmission, inflation targeting, asset prices.
    JEL: E52 E42 E31
    Date: 2018–11–26
  5. By: Ken Miyajima; James Yetman
    Abstract: Forecasts of agents who are actively involved in the setting of prices and wages are less readily available than those of professional analysts, but may be more relevant for understanding inflation dynamics. Here we compare inflation expectations anchoring between analysts, businesses and trade unions for one country for which comparable forecasts are available for almost two decades: South Africa. Forecasts are modelled as monotonically diverging from an estimated long-run anchor point, or "implicit anchor", towards actual inflation as the forecast horizon shortens. We find that the estimated inflation anchors of analysts lie within the 3-6 percent inflation target range of the central bank. However, those for businesses and trade unions, which our evidence suggests may be most relevant for driving the inflation process, have remained above the top end of the official target range. Our results point to challenges for central banks seeking to gain credibility with agents whose decisions directly influence inflation.
    Keywords: inflation expectations, inflation anchoring, decay function, inflation targeting
    JEL: E31 E58
    Date: 2018–11
  6. By: Gavin Goy; Cars Homme; Kostas Mavromatis
    Abstract: This paper studies the macroeconomic effects of central bank forward guidance when central bank credibility is endogenous. In particular, we take a stylized New Keynesian model with an occasionally binding zero lower bound constraint on nominal interest rates and heterogeneous and boundedly rational households. The central bank uses a bivariate VAR to forecast, not taking into account the time-variation in the distribution of aggregate expectations. In this framework, we extend the central bank's toolkit to allow for the publication of its own forecasts (Delphic guidance) and the commitment to a future path of the nominal interest rate (Odyssean guidance). We find that both Delphic and Odyssean forward guidance increase the likelihood of recovery from a liquidity trap. Even though Odyssean guidance alone appears more powerful, we find it to increase ex post macroeconomic volatility and thus reduce welfare.
    Keywords: Forward Guidance; Heterogeneous Beliefs; Bounded Rationality; Central Bank Learning
    JEL: E12 E58
    Date: 2018–12
  7. By: Gert Peersman
    Abstract: This paper examines the causal effects of shifts in international food commodity prices on euro area inflation dynamics using a structural VAR model that is identified with an external instrument (i.e. a series of global harvest shocks). The results reveal that exogenous food commodity price shocks have a strong impact on consumer prices, explaining on average 25%- 30% of inflation volatility. In addition, large autonomous swings in international food prices contributed significantly to the twin puzzle of missing disinflation and missing inflation in the era after the Great Recession. Specifically, without disruptions in global food markets, inflation in the euro area would have been 0.2%-0.8% lower in the period 2009-2012 and 0.5%-1.0% higher in 2014-2015. An analysis of the transmission mechanism shows that international food price shocks have an impact on food retail prices through the food production chain, but also trigger indirect effects via rising inflation expectations and a depreciation of the euro.
    Keywords: food commodity prices, inflation, twin puzzle, euro area, SVAR-IV
    JEL: E31 E52 Q17
    Date: 2018
  8. By: Goodhead, Robert; Kolb, Benedikt
    Abstract: Using federal funds futures data, we show the importance of surprise communication as a component of monetary policy for U.S. macro variables, both before and after 2008. While Gürkaynak et al. (2005) stress the importance of monetary policy communication for asset prices, much of the subsequent VAR literature attributes all effects of monetary policy on macro variables to surprise changes in the policy rate. Instead, we distinguish between monetary policy action and "communication shocks" (surprise announcements about future policy moves), both orthogonal to internal Fed information. To do so,we use a decomposition of futures price movements exploiting variation across contract maturities. In a monthly sample from 1994 to 2008, our results indicate that it is mainly communication shocks - as opposed to actual rate-change surprises - that affect production in the ways traditionally associated with monetary policy shocks.We also use Eurodollar futures to cover the zero-lower bound period and find strong effects on inflation for long-horizon communication shocks.
    Keywords: Federal Funds Futures,FOMC,Monetary Policy,VAR Model
    JEL: E52 E58 G23 C32
    Date: 2018
  9. By: Rod Tyers (Business School, University of Western Australia and Research School of Economics, Centre for Applied Macroeconomic Analysis (CAMA), Australian National University); Yixiao Zhou (School of Economics and Finance, Curtin Business School, Curtin University)
    Abstract: Concern about “lost inflation” has been heightened recently by the apparent inability of central banks in the largest democracies, a decade beyond the GFC, to restore their “safe” CPI inflation ranges. This paper examines the deflationary forces against which monetary policy is now aligned, namely migration, the race to the bottom in capital taxation, and biased technical change, and assesses the consequences looking forward. While inflation rates have edged lower over the past two decades the most important change has been declines in long maturity yields, initially driven by strong growth in high-saving Asia and by redistribution in the advanced economies to high-saving households, and bolstered subsequently by return pessimism due to low growth in measured productivity. Ironically, today’s low rates also stem from conventional monetary policy failure, expanded central bank balance sheets and the resulting global “bond bubble”. Future monetary policy effectiveness as deflationary forces continue will depend in the advanced economies on government interventions to address underlying inequality and financial market “normalisation”.
    Keywords: Inflation, productivity, automation, income distribution, tax, transfers, general equilibrium analysis
    JEL: D33 E52 J11 O33
    Date: 2018
  10. By: Fuhrer, Jeffrey C. (Federal Reserve Bank of Boston); Olivei, Giovanni P. (Federal Reserve Bank of Boston); Rosengren, Eric S. (Federal Reserve Bank of Boston); Tootell, Geoffrey M. B. (Federal Reserve Bank of Boston)
    Abstract: Would a more open and regular evaluation of the monetary policy framework improve policy in the United States? Even when considering a relatively short timeframe that spans the 1960s to the present, it is possible to point to many significant changes to the framework. Some of the changes were precipitated by acute economic conditions, while others were considered and implemented only gradually as a response to long-standing problems with the framework. But the process for evaluating and changing frameworks to date has not always been transparent, and changes have not always been timely. Could a more formal, and open, review improve how well we adhere to our current framework? Could transitions to a new framework be made more effectively? We conclude that such a review might indeed be beneficial, and outline one possible review process.
    Keywords: monetary policy framework; the evolution of monetary policy; FOMC; policy rules
    JEL: E52 E58 E61
    Date: 2018–10–01
  11. By: Bianchi, Javier (Federal Reserve Bank of Minneapolis); Mondragon, Jorge (Federal Reserve Bank of Minneapolis)
    Abstract: This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary autonomy, lenders anticipate that the government will face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy can stabilize the economy and can easily remain immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone vulnerable to a rollover crisis. A lender of last resort can help ease the costs from giving up monetary independence.
    Keywords: Sovereign debt crises; Rollover risk; Monetary unions
    JEL: E4 E5 F34 G15
    Date: 2018–12–03
  12. By: Ricardo Lagos; Shengxing Zhang
    Abstract: We develop a model of monetary exchange in bilateral over-the-counter markets to study the effects of monetary policy on asset prices and financial liquidity. The theory predicts asset prices carry a speculative premium that reflects the asset's marketability and depends on monetary policy and the market microstructure where it is traded. These liquidity considerations imply a positive correlation between the real yield on stocks and the nominal yield on Treasury bonds—an empirical observation long regarded anomalous.
    JEL: D83 E31 E52 G12
    Date: 2018–11
  13. By: Knut Are Aastveit (Norges Bank & Centre for Applied Macro and Petroleum Economics, BI Norwegian Business School); André K. Anundsen (Norges Bank)
    Abstract: The responsiveness of house prices to monetary policy shocks depends on the nature of the shock – expansionary versus contractionary – and on local housing supply elasticities. These findings are established based on a panel of 263 US metropolitan areas. We test and find supporting evidence for the hypothesis that expansionary monetary policy shocks have a larger impact on house prices when supply elasticities are low. Our results also suggest that contractionary shocks are orthogonal to supply elasticities, as implied by downward rigidity of housing supply. A standard theoretical conjecture is that contractionary shocks have a greater impact on house prices than expansionary shocks, as long as supply is not perfectly inelastic. For areas with high housing supply elasticity, our results are in line with this conjecture. However, for areas with an inelastic housing supply, we find that expansionary shocks have a greater impact on house prices than contractionary shocks. We provide evidence that the direction of the asymmetry is related to a momentum effect that is more pronounced when house prices are increasing than when they are falling.
    Keywords: House prices, Heterogeneity, Monetary policy, Non-linearity, Supply elasticities
    JEL: E32 E43 E52 R21 R31
    Date: 2018
  14. By: Rod Tyers (Business School, University of Western Australia and Research School of Economics, Centre for Applied Macroeconomic Analysis (CAMA), Australian National University); Yixiao Zhou (School of Economics and Finance, Curtin Business School, Curtin University)
    Abstract: Proximity to short yield zero lower bounds has challenged the inflation targeting central banks of the advanced regions. Central to this development are three-decade declining trends in long yields and underlying real, equilibrium interest rates that have flattened yield curves, restricting “normalisation” and adding deflationary pressure by boosting demand for portfolio money. Inflationary forces, such as fiscal deficits, industrial protection and resurgent regional growth, have proved comparatively weak. In this paper global modelling is used to show that key deflationary forces in these regions include automation, the race to the bottom in capital taxation and immigration. Each is shown to redistribute income so as to expand the welfare gap between the low-skilled and capital owners by 2.5 to 3.5 per cent per year. The high saving rates of capital owners depress real equilibrium rates and their expanding portfolios demand monetary expansion. These forces ensure that the challenges of macro stabilisation and distributional policy making are both intertwined and urgent.
    Keywords: Inflation, deflation, productivity, automation, income distribution, tax, transfers, general equilibrium analysis
    JEL: D33 E52 J11 O33
    Date: 2018
  15. By: Cory Cutsail; Farley Grubb
    Abstract: Beginning in 1712, North Carolina’s assembly emitted its own paper money and maintained some amount of paper money in public circulation for the rest of the colonial period. Yet, data on colonial North Carolina’s paper money regime in the current literature are thin and often erroneous. We correct that here. We forensically reconstruct North Carolina’s paper money regime from original sources—providing yearly quantitative data on printings, net new emissions, redemptions and removals, and amounts remaining in public circulation. These new data provide the basis for future economic, political, and social histories of colonial North Carolina.
    JEL: E42 E51 N11 N21
    Date: 2018–11
  16. By: Ricardo Correa; Teodora Paligorova; Horacio Sapriza; Andrei Zlate
    Abstract: We analyze the impact of monetary policy on bilateral cross-border bank flows using the BIS Locational Banking Statistics between 1995 and 2014. We find that monetary policy in the source countries is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border bank portfolio channel. As relatively tighter monetary conditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate their claims toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for banks in source countries with weaker financial sectors, which are likely to be more risk averse. Lastly, the reallocation is directed toward borrowers in safer countries, such as advanced economies or economies with an investment grade sovereign rating. By highlighting the effect of domestic monetary policy on foreign credit, this study enhances our understanding of the monetary policy transmission mechanism through global banks.
    Keywords: Bank lending ; Cross-border bank flows ; Monetary policy ; Portfolio rebalancing
    JEL: E52 F34 F36 G21
    Date: 2018–12–03
  17. By: Richard Finlay (Reserve Bank of Australia); Andrew Staib (Reserve Bank of Australia); Max Wakefield (Reserve Bank of Australia)
    Abstract: The Reserve Bank of Australia is the sole issuer and redeemer of Australian banknotes. This means that we know exactly how many banknotes have ever been printed and issued to the public, and how many banknotes, at the end of their life, have been returned to the Reserve Bank and destroyed. Between issuance and destruction, however, there is little public information about where banknotes go or what they are used for. Such information would be of interest for a number of reasons, including to aid in forecasting future banknote demand, and to assess the extent to which banknotes are used to facilitate illegal activities or avoid tax obligations. To address this we use a range of techniques to estimate the whereabouts and uses of Australian banknotes. The techniques that we employ suggest that, of total outstanding banknotes: 15–35 per cent are used to facilitate legitimate transactions; roughly half to three-quarters are hoarded as a store of wealth or for other purposes, of which we can allocate 10–20 percentage points to domestic hoarding and up to 15 percentage points to international hoarding; 4–8 per cent are used in the shadow economy; and 5–10 per cent are lost.
    Keywords: banknotes; lost money; transactional demand; hoarding; shadow economy
    JEL: E41 E58
    Date: 2018–12
  18. By: Florian Morvillier
    Abstract: This paper aims at investigating the role played by the euro’s inception on external imbalances and macroeconomic vulnerability of the eurozone. To this end, we estimate a panel VAR model over the pre-euro (1980-1998) and EMU (1999-2016) periods for eleven eurozone members. Our findings show that with the adoption of the single currency, current account vulnerability to demand and currency misalignments shocks increases significantly. The correction of external imbalances within the euro area also becomes more difficult because of the disparition of a slow-growth process and devaluations as adjustment tools.
    Keywords: Global imbalances, current account, output gap, exchange-rate misalignments, panel VAR.
    JEL: F32 F31 C33
    Date: 2018
  19. By: Jean-Luc Gaffard (OFCE Sciences-Po; Université Côte d'Azur; GREDEG CNRS; Institut Universitaire de France)
    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
    JEL: E31 E32 E5 E61 E62
    Date: 2018–12
  20. By: Stefan Avdjiev; Sebnem Kalemli-Ozcan; Luis Servén
    Abstract: We construct a new data set of quarterly international capital flows by sector, with an emphasis on debt flows. Using our new data set, we establish four facts. First, the co-movement of capital inflows and outflows is driven by inflows and outflows vis-à-vis the domestic banking sector. Second, the procyclicality of capital inflows is driven by banks and corporates, whereas sovereigns' external liabilities move acyclically in advanced and countercyclically in emerging countries. Third, the procyclicality of capital outflows is driven by advanced countries' banks and emerging countries' sovereigns (reserves). Fourth, capital inflows and outflows decline for banks and corporates when global risk aversion (VIX) increases, whereas sovereign flows show no response. These facts are inconsistent with a large class of theoretical models.
    Keywords: quarterly capital flows, business cycles, external corporate and bank debt, sovereign debt, VIX, systemic risk, emerging markets
    JEL: F21 F41 O1
    Date: 2018–11
  21. By: Campiglio, Emanuele; Dafermos, Yannis; Monnin, Pierre; Ryan-Collins, Josh; Schotten, Guido; Tanaka, Misa
    Abstract: The academic and policy debate regarding the role of central banks and financial regulators in addressing climate-related financial risks has rapidly expanded in recent years. This Perspective presents the key controversies and discusses potential research and policy avenues for the future. Developing a comprehensive analytical framework to assess the potential impact of climate change and the low-carbon transition on financial stability seems to be the first crucial challenge. These enhanced risk measures could then be incorporated in setting financial regulations and implementing the policies of central banks.
    JEL: F3 G3
    Date: 2018–05–30

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