nep-mon New Economics Papers
on Monetary Economics
Issue of 2018‒12‒24
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Forecast errors and monetary policy normalisation in the euro area By Zsolt Darvas
  2. Credibility, Flexibility and Renewal: The Evolution of Inflation Targeting in Canada By Thomas J. Carter; Rhys R. Mendes; Lawrence Schembri
  3. Money and Capital in a Persistent Liquidity Trap By Philippe Bacchetta; Yannick Kalantzis
  4. Should the Central Bank Issue E-money? By Charles M. Kahn; Francisco Rivadeneyra; Tsz-Nga Wong
  5. Discretion Rather than Rules: Equilibrium Uniqueness and Forward Guidance with Inconsistent Optimal Plans By Campbell, Jeffrey R.; Weber, Jacob P.
  6. Mobile Money and Money Demand in Kenya By Elizabeth Kasekende; Eftychia Nikolaidou
  7. Estimating the Effective Lower Bound on the Czech National Bank's Policy Rate By Dominika Kolcunova; Tomas Havranek
  8. Money Markets, Collateral and Monetary Policy By Fiorella De Fiore; Marie Hoerova; Harald Uhlig
  9. Dynamic Consequences of Monetary Policy for Financial Stability By William Chen; Gregory Phelan
  10. A Promised Value Approach to Optimal Monetary Policy By Timothy S. Hills; Taisuke Nakata; Takeki Sunakawa
  11. Bank Recapitalizations, Credit Supply, and the Transmission of Monetary Policy By Mark Mink; Sebastiaan Pool
  12. The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy By Ernesto Pasten; Raphael S. Schoenle; Michael Weber
  13. Speculative Eurozone Attacks and Departure Strategies By Stefan Homburg
  14. The Good, the Bad, and the Ugly: Impact of Negative Interest Rates and QE on the Profitability and Risk-Taking of 1600 German Banks By Florian Urbschat
  15. Money Markets and Exchange Rates in Pre-Industrial Europe By Nogues-Marco, Pilar
  16. International spillovers of monetary policy: evidence from France and Italy By Caccavaio, Marianna; Carpinelli, Luisa; Marinelli, Giuseppe; Schmidt, Julia
  17. Macroprudential capital regulation in general equilibrium By Nelson, Benjamin; Pinter, Gabor
  18. The Optimal Monetary Instrument and the (Mis)Use of Causality Tests By Keating, John W.; Smith, Andrew Lee
  19. What Option Prices tell us about the ECB's Unconventional Monetary Policies By de Vette, Nander; Petersen, Annelie; Stan Olijslager, Stan; van Wijnbergen, Sweder
  20. Home Ownership and Monetary Policy Transmission By Winfried Koeniger; Marc-Antoine Ramelet
  21. Is the Response of the Bank of England to Exchange Rate Movements Frequency-Dependent? By Petre Caraiani; Rangan Gupta
  22. Home Ownership and Monetary Policy Transmission By Koeniger, Winfried; Ramelet, Marc-Antoine
  23. Gains from Wage Flexibility and the Zero Lower Bound By Roberto M. Billi; Jordi Galí
  24. The Evolution of Inflation Targeting In Australia By Selwyn Cornish
  25. The natural rate of interest: estimates, drivers, and challenges to monetary policy JEL Classification: E52, E43 By Brand, Claus; Bielecki, Marcin; Penalver, Adrian
  26. Domestic and Global Output Gaps as Inflation Drivers: What Does the Phillips Curve Tell? By Martina Jašová; Richhild Moessner; Előd Takáts
  27. Quantitative Easing By Cui, Wei; Sterk, Vincent
  28. Transmission of Monetary Policy and Bank Heterogeneity in Colombia By Carolina Ortega Londoño; Diego Restrepo
  29. Is ECB monetary policy more powerful during expansions? By Martina Cecioni
  30. Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy By Mitsuru Katagiri
  31. A retrospective on the subprime crisis and its aftermath ten years after Lehman's collapse By Cukierman, Alex
  32. Credit Risk and Fiscal Inflation By Li, Bing; Pei, Pei; Tan, Fei
  33. The Gold Standard and the Great Depression: a Dynamic General Equilibrium Model By Luca Pensieroso; Romain Restout
  34. China’s Monetary Policy Communication: Frameworks, Impact, and Recommendations By Michael McMahon; Alfred Schipke; Xiang Li
  35. Why Does the Yield-Curve Slope Predict Recessions? By Benzoni, Luca; Chyruk, Olena; Kelley, David
  36. Quantitative Easing, Collateral Constraints, and Financial Spillovers By John Geanakoplos; Kieran Haobin Wang
  37. The neutrality illusion: biased economics, biased training, and biased monetary policy. Testing the role of ideology on FOMC voting behaviour By Lepers, Etienne
  38. Banks, Sovereign Risk and Unconventional Monetary Policies By Stéphane Auray; Aurélien Eyquem; Xiaofei Ma

  1. By: Zsolt Darvas
    Abstract: This Policy Contribution was prepared for the Nomura Foundation’s Macro Economy Research Conference - ‘Monetary Policy Normalization Ten Years after the Great Recession’, 24 October 2018, Tokyo. Financial support from the Nomura Foundation is gratefully acknowledged. We consider the lessons of the recent monetary policy normalisation experiences of Sweden, the United States and the United Kingdom, and analyse the European Central Bank’s forecasting track record and possible factors that might explain the forecast errors. From this analysis, we draw the following main conclusions - Monetary tightening involves major risks when the evidence of an improved inflation outlook is not sufficiently strong; it is better to err on the side of a possible inflation overshoot after a long period of undershooting; Inadequate forward guidance can cause market turbulence; Market participants might disregard forward guidance after large systematic forecast errors; Terminating net asset purchases might not increase long-term rates, though it might have an impact on other asset prices because of the lack of portfolio rebalancing; The ECB has made huge and systematic forecasting errors in the past five years, indicating that some of the behavioural relationships in ECB forecasting models are mis-specified. The ECB is not the only institution to suffer from incorrect forecasts and there should be broader debate on forecasting practices. However, the ECB’s forecast errors and its inability to lift core inflation above 1 percent have major implications; Market-based inflation expectations have already started to fall in the euro area, suggesting that the trust has weakened in the ECB’s ability to reach its inflation aim of the below but close to two percent over the medium term; More time is needed to see if the forecasting failures of the past five years were driven by factors whose impact will gradually fade away, or if the ECB’s ability to lift core inflation has been compromised; In the meantime, a very cautious approach to monetary policy normalisation is recommended. A rate increase is only recommended after a significant increase in actual core inflation. This intention should be made clear in the ECB’s forward guidance; If forecasting failures continue and core inflation does not approach two percent, the ECB’s credibility could be undermined, making necessary a discussion on either the deployment of new tools to influence core inflation, or a possible revision of the ECB’s inflation goal; In the new ‘normal’ the natural rate of interest might remain low, and thereby central bank balance sheet policies will likely became part of the regular toolkit; Monetary policy tools are ill-suited to address financial stability concerns in general, especially in the euro area. Financial stability concerns should not play a role in monetary policy normalisation. Instead, country-specific macroprudential policy should complement micro-prudential supervision and regulation.
    Date: 2018–12
  2. By: Thomas J. Carter; Rhys R. Mendes; Lawrence Schembri
    Abstract: In 1991, Canada became the second country to adopt an inflation target as a central pillar of its monetary policy framework. The regime has proven much more successful than initially expected, both in achieving price stability and in stabilizing the real economy against a wide range of shocks. We identify and discuss three factors that have contributed to this performance: i.the simple, readily understood and consistently applied specification of the inflation target, which, since adoption, has taken the form of a point target inside a symmetric control range; ii.the establishment of the target in an agreement between the central bank and government, in which inflation control was recognized as a joint duty of both parties, implying key supporting roles for fiscal and macroprudential policy; and iii.the agreement’s regular and thorough review-and-renewal process, which has led to continual improvement based on accumulated experience and advances in the academic literature. Together, these factors have helped anchor inflation expectations around a credible target. This anchoring has in turn made it easier for monetary policy to stay on target, setting a powerful virtuous cycle into motion. An additional benefit is that well-anchored inflation expectations leave monetary policy with greater flexibility to consider its impacts on output and employment variability, as well as financial stability. Nonetheless, certain features of the current economic landscape—including low equilibrium real interest rates and high debt burdens in key sectors—now present monetary policy in Canada and other jurisdictions with significant challenges. We discuss these issues and argue that they require inflation-targeting central banks to give careful thought to the steps that can be taken to refine and strengthen their policy frameworks, widen their toolkits and best ensure complementarity with other macrofinancial policies.
    Keywords: Credibility, Inflation targets, Monetary Policy, Monetary policy framework
    JEL: E5 E52 E58 E6 E61
    Date: 2018
  3. By: Philippe Bacchetta; Yannick Kalantzis
    Abstract: In this paper we analyze the implications of a persistent liquidity trap in a monetary model with asset scarcity. We show that a liquidity trap may lead to an increase in real cash holdings and be associated with a decline in output in the medium term. This medium-term impact is a supply-side effect that may arise when agents are heterogeneous. It occurs in particular with a persistent deleveraging shock, leading investors to hold cash yielding a low return. Policy implications differ from shorter-run analyses implied by nominal rigidities. Quantitative easing leads to a deeper liquidity trap. Exiting the trap by increasing expected inflation or applying negative interest rates does not solve the asset scarcity problem.
    Keywords: Zero lower bound, liquidity trap, asset scarcity, deleveraging.
    JEL: E40 E22 E58
    Date: 2018
  4. By: Charles M. Kahn; Francisco Rivadeneyra; Tsz-Nga Wong
    Abstract: Should a central bank take over the provision of e-money, a circulable electronic liability? We discuss how e-money technology changes the tradeoff between public and private provision, and the tradeoff between e-money and a central bank's existing liabilities like bank notes and reserves. The tradeoffs depend on i) the technological setup of the e-money system (as a token or an account; centralized or decentralized); ii) the potential improvement in the implementation and transmission of monetary policy; iii) the risks to safety and privacy from cyber attacks; and iv) the uncertain impact on banks’ efficiency and financial stability. The most compelling argument for central banks to issue e-money is to address competition problems in the banking sector.
    Keywords: Bank notes, Digital Currencies, Financial services, Payment clearing and settlement systems
    JEL: E42 E51 E58
    Date: 2018
  5. By: Campbell, Jeffrey R. (Federal Reserve Bank of Chicago); Weber, Jacob P. (University of California at Berkely)
    Abstract: New Keynesian economies with active interest rate rules gain equilibrium determinacy from the central bank’s incredible off-equilibrium-path promises (Cochrane, 2011). We suppose instead that the central bank sets interest rate paths and occasionally has the discretion to change them. Private agents taking future central bank actions and their own best responses to them as given reduces the scope for self-fulfilling prophecies. With empirically-reasonable frequencies of central-bank reoptimization, the monetary-policy game has a unique Markov-perfect equilibrium wherein forward guidance influences current outcomes without displaying a forward-guidance puzzle.
    Keywords: Keynesian economics; Markov processes; Money policy; Open Market Operations;
    JEL: E12 E52
    Date: 2018–09–07
  6. By: Elizabeth Kasekende (Bank of Uganda); Eftychia Nikolaidou (School of Economics, University of Cape Town)
    Abstract: Over the years, several countries have experienced a variety of financial innovations that can have implications for monetary policy. Kenya has been at the forefront of a unique type of financial innovation, mobile money (M-PESA), introduced in 2007. This paper re-estimates the Kenyan money demand including the country specific innovation, mobile money, using the ARDL approach to cointegration over the period 2000 Q1 to 2014 Q2. The results suggest that there is a positive relationship between mobile money and money demand and that the Kenyan demand for money is stable when mobile money is taken into consideration. These results are robust even with the use of alternative measures of mobile money. This finding has important implications for the effectiveness of monetary policy in Kenya and possibly in other countries that have seen developments in mobile money in recent years.
    Date: 2018
  7. By: Dominika Kolcunova; Tomas Havranek
    Abstract: This paper focuses on the estimation of the effective lower bound on the Czech National Bank's policy rate. The effective lower bound is determined by the value below which holding and using cash would be preferable to holding deposits with negative yields. This bound is approximated on the basis of the storage, insurance and transport costs of cash and the loss of convenience associated with cashless payments. This estimate is complemented by a calculation based on interest charges reflecting the impact of negative rates on banks' profitability. Overall, we get a mean of slightly below -1%, approximately in the interval (-2.0%, -0.4%). In addition, by means of a vector autoregression we show that the potential of negative rates is not sufficient to deliver monetary policy easing similar in its effects to the impact of the Czech National Bank's exchange rate commitment during the years 2013-2017.
    Keywords: Costs of cash, effective lower bound, negative interest rates, transmission of monetary policy, zero lower bound
    JEL: E43 E44 E52 E58
    Date: 2018–09
  8. By: Fiorella De Fiore; Marie Hoerova; Harald Uhlig
    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.
    JEL: E44 E58
    Date: 2018–11
  9. By: William Chen (Williams College); Gregory Phelan (Williams College)
    Abstract: We theoretically investigate the state-dependent effects of monetary policy on macroeconomic instability. In the model, banks borrow using deposits and allocate resources to productive projects. Because banks do not actively issue equity, aggregate outcomes depend on the level of equity in the financial sector. Carefully targeted monetary policy can improve stability by increasing the rate of bank equity growth, and improve allocations by encouraging leverage when intermediation is needed. A fed put is generally stabilizing, but the marginal impact of a rate cut depends on the state of the economy. The effectiveness of monetary policy depends on the extent to which rate cuts pass through to bank returns. When banks are relatively well-capitalized, rate cuts primarily decrease banks' returns. In terms of welfare, the costs of "leaning against the wind" generally outweigh the benefits, but a fed put can improve outcomes if the costs of deviating from the inflation target are sufficiently small.
    Keywords: Monetary policy, Leaning against the wind, Financial stability, Macroeconomic instability, Banks, Liquidity
    JEL: E44 E52 E58 G01 G12 G20 G21
    Date: 2018–10
  10. By: Timothy S. Hills; Taisuke Nakata; Takeki Sunakawa
    Abstract: This paper characterizes optimal commitment policy in the New Keynesian model using a novel recursive formulation of the central bank's infinite horizon optimization problem. In our recursive formulation motivated by Kydland and Prescott (1980), promised inflation and output gap---as opposed to lagged Lagrange multipliers---act as pseudo-state variables. Using three well known variants of the model---one featuring inflation bias, one featuring stabilization bias, and one featuring a lower bound constraint on nominal interest rates---we show that the proposed formulation sheds new light on the nature of the intertemporal trade-off facing the central bank.
    Keywords: Commitment ; Inflation bias ; Optimal policy ; Ramsey plans ; Stabilization bias ; Zero lower bound
    JEL: E61 E63 E52 E32 E62
    Date: 2018–12–03
  11. By: Mark Mink; Sebastiaan Pool
    Abstract: We integrate a banking sector in a standard New-Keynesian DSGE model, and examine how government policies to recapitalize banks after a crisis affect the supply of credit and the transmission of monetary policy. We examine two types of recapitalizations: immediate and delayed ones. In the steady state, both policies cause the banking sector to charge inefficiently low lending rates, which leads to an inefficiently large capital stock. Raising bank equity requirements reduces this dynamic inefficiency and increases lifetime utility. After the banking sector suffered large losses, a delay in recapitalizations creates banking sector debt-overhang. This debt-overhang leads to inefficiently high lending rates, which reduces the supply of credit and weakens the transmission of monetary policy to inflation (the transmission to output is largely unchanged). Raising bank equity requirements under these circumstances can cause lifetime utility to decline. Hence, the timing of bank recapitalizations after a crisis has several macro-economic implications.
    Keywords: bank recapitalizations; credit supply; monetary policy transmission; bank equity requirements; NK-DSGE models
    JEL: E30 E44 E52 E61
    Date: 2018–12
  12. By: Ernesto Pasten; Raphael S. Schoenle; Michael Weber
    Abstract: We study the transmission of monetary policy shocks in a model in which realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages, and derive conditions under which these heterogeneities generate large real effects. Empirically, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects, whereas heterogeneity in input-output linkages contributes only marginally, with differences in consumption shares in between. Heterogeneity in price rigidity further is key in determining which sectors are the most important contributors to the transmission of monetary shocks, and is necessary but not sufficient to generate realistic output correlations. In the model and data, reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and for the real effects of nominal shocks.
    Keywords: input-output linkages, multi-sector, Calvo model, monetary policy
    JEL: E30 E32 E52
    Date: 2018
  13. By: Stefan Homburg
    Abstract: This paper shows that the eurozone payment system does not effectively protect member states from speculative attacks. Suspicion of a departure from the common currency induces a terminal outflow of central bank money in weaker member states. TARGET2 cannot inhibit this drain but only protects central bank assets. Evidence presented here suggests that a run on Italy is already on the way. The paper also considers departure strategies of strong and weak member states and the distributive effects of an orderly eurozone dissolution.
    Keywords: currency speculation, TARGET2, eurozone, Italexit, dexit, trilemma
    JEL: E52 E58
    Date: 2018
  14. By: Florian Urbschat
    Abstract: The recent negative interest rate policy (NIRP) and quantitative easing (QE) programme by the ECB have raised concerns about the pass-through of monetary policy. On the one hand, negative rates could lead to declining bank profitability making an expansionary monetary policy contractionary. Also, if interest rates are too low for too long banks could be induced to take too much risky credit. On the other hand, several economists argue that there is nothing special about negative interest rates per se. This paper uses a large micro level data set of the German bank universe to examine how banks behave in this uncharted territory. The evidence found suggests that bank’s business model, i.e. the share of overnight deposits, plays a crucial role. While some banks may benefit in the short run via for instance reduced refinancing costs or lower loan loss provisions, many banks with high deposit ratios face lower net interest income and lower credit growth rates. If continued for too long QE and NIRP erode bank profits for most banks eventually.
    Keywords: negative interest rate policy, banks’ profitability, net interest rate margin, risk-taking channel
    JEL: C53 E43 E52 G11 G21
    Date: 2018
  15. By: Nogues-Marco, Pilar
    Abstract: This article focuses on money markets and exchange rates in preindustrial Europe. The foreign exchange market was mostly based on bills of exchange, the instrument used to transfer money and provide credit between distant centers in pre-industrial Europe. In this chapter, first I explain bill of exchange operations, money market integration, usury regulations and circumventions to hide the market interest rate as well as the evolution of bills of exchange in history, focusing mainly on the most relevant features generalized during the first half of the 17th century: endorsement and the joint liability rule, which facilitated the full expansion of the foreign exchange market beyond personal networks. Then, I describe the European geography of money in the mid-18th century, characterized by a very high degree of multilateralism with the triangle of Amsterdam, London and Paris as the backbone of the European settlement system. Finally, I measure the cost of capital and relate it to liquidity. I show evidence of interest rates in the 18th century for Amsterdam, London, Paris and Cadiz. While Amsterdam, London and Paris presented low and similar interest rates, Cadiz had higher interest rates, mostly being double the cost of capital. These results seem to show a high inverse correlation between liquidity and interest rates, suggesting that the share in international trade of European centers might have been a powerful driver of international monetary leadership. While more empirical evidence and further research is needed, this approach opens the scope of the analysis beyond the national institutional explanation.
    Keywords: Bills of Exchange; cost of capital; Exchange Rates; interest rates; monetary geography; money market; Specie-Point Mechanism; usury regulations
    JEL: E42 F31 G15 N23
    Date: 2018–12
  16. By: Caccavaio, Marianna; Carpinelli, Luisa; Marinelli, Giuseppe; Schmidt, Julia
    Abstract: In this paper we provide empirical evidence on the impact of US and UK monetary policy changes on credit supply of banks operating in Italy and France over the period 2000–2015, exploring the existence of an international bank lending channel based on the reliance on funding sources located in these two countries or denominated in their currency. We find that US monetary policy tightening leads to a reduction of lending to the domestic economy in both France and Italy, and this is mainly driven by banks that relied more intensely on USD funding markets. Conversely, we find that both French and Italian banks are isolated from UK monetary policy shocks, as most of their UK funding is denominated in Euro, despite being larger than funding from the US. JEL Classification: E51, F30, F42, G20
    Keywords: bank lending channel, foreign funding, global banks
    Date: 2018–12
  17. By: Nelson, Benjamin (Rokos Capital); Pinter, Gabor (Bank of England)
    Abstract: We examine macroprudential bank capital policy in a macroeconomic model with a financial accelerator originating in the banking sector. Under Ramsey-optimal policy, the bank capital buffer tracks closely a model-based measure of the credit gap, defined as the gap between equilibrium credit in the economy featuring financial frictions and that in a hypothetical frictionless economy. Simple rules that vary the capital buffer in response to the credit gap perform worse than Ramsey policy, but only modestly so. When monetary policy controls inflation less aggressively, optimal macroprudential responses are smaller. Optimal macroprudential policy operates at a lower frequency than monetary policy.
    Keywords: Macroprudential policy; bank capital; monetary policy
    JEL: E50 G20
    Date: 2018–12–07
  18. By: Keating, John W.; Smith, Andrew Lee (Federal Reserve Bank of Kansas City)
    Abstract: This paper uses a New-Keynesian model with multiple monetary assets to show that if the choice of instrument is based solely on its propensity to predict macroeconomic targets, a central bank may choose an inferior policy instrument. We compare a standard interest rate rule to a k-percent rule for three alternative monetary aggregates determined within our model: the monetary base, the simple sum measure of money, and the Divisia measure. Welfare results are striking. While the interest rate dominates the other two monetary aggregate k-percent rules, the Divisia k-percent rule outperforms the interest rate rule. Next we study the ability of Granger Causality tests – in the context of data generated from our model – to correctly identify welfare improving instruments. All of the policy instruments considered, except for Divisia, Granger Cause both output and prices at extremely high levels of significance. Divisia fails to Granger Cause prices despite the Divisia rule stabilizing inflation better than these alternative policy instruments. The causality results are robust to using a popular version of the Sims Causality test for which we show standard asymptotics remain valid when the variables are integrated, as in our case.
    Keywords: Monetary Policy Instrument; Monetary Aggregates; Granger Causality
    JEL: C32 C43 E37 E44 E52
    Date: 2018–11–28
  19. By: de Vette, Nander; Petersen, Annelie; Stan Olijslager, Stan; van Wijnbergen, Sweder
    Abstract: We use a series of different approaches to extract information about crash risk from option prices for the Euro-Dollar exchange rate, with each step sharpening the focus on extracting more specific measures of crash risk around dates of ECB measures of Unconventional Monetary Policy. Several messages emerge from the analysis. Announcing policies in general terms without precisely describing what exactly they entail does not move asset markets or actually increases crash risk. Also, policies directly focused on changing relative asset supplies do seem to have an impact, while measures aiming at easing financing costs of commercial banks do not.
    Keywords: Exchange Rate Crash Risk; mixed diffusion jump risk models; Quantitative easing; risk reversals; unconventional monetary policies
    JEL: E44 E52 E58 E65 G12 G13 G14
    Date: 2018–12
  20. By: Winfried Koeniger; Marc-Antoine Ramelet
    Abstract: We present empirical evidence on the heterogeneity in monetary policy transmission across countries with different home ownership rates. We use household-level data together with shocks to the policy rate identified from high-frequency data. We find that housing tenure reacts more strongly to unexpected changes in the policy rate in Germany and Switzerland –the OECD countries with the lowest home ownership rates– compared with existing evidence for the U.S. An unexpected decrease in the policy rate by 25 basis points increases the home ownership rate by 0.8 percentage points in Germany and by 0.6 percentage points in Switzerland. The response of non-housing consumption in Switzerland is less heterogeneous across renters and mortgagors, and has a different pattern across age groups than in the U.S. We discuss economic explanations for these findings and implications for monetary policy.
    Keywords: monetary policy transmission, home ownership, housing tenure, consumption
    JEL: F21 E52 R21
    Date: 2018
  21. By: Petre Caraiani (Institute for Economic Forecasting, Romanian Academy Calea 13 Septembrie no. 13, Casa Academiei, Bucharest, Romania); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: In this paper, we estimate a Small Open Economy Dynamic Stochastic General Equilibrium (SOEDSGE) model of the United Kingdom (UK), with the main focus being to test the hypothesis whether the Bank of England (BoE) responds to (frequency-dependent) exchange rate movements or not. For our purpose, we use an extended quarterly data set spanning the period of 1986:Q1 to 2018:Q1, which in turn includes the zero lower bound situation, and also estimate the SOEDSGE model based on observable data decomposed into its frequency components, under the presumption that central banks is more comfortable in responding to long-term fundamental movements in exchange rates. We find that the BoE not only responds to exchange rate movements in a statistically significant manner, but also that it primarily focuses on long-term movements of currency depreciations more strongly than short-term fluctuations of the same.
    Keywords: Small Open Economy DSGE Model, Monetary Policy Rule, Exchange Rate, Structural Estimation, Bayesian Analysis, Wavelets
    JEL: C32 E52 F41
    Date: 2018–12
  22. By: Koeniger, Winfried (University of St. Gallen); Ramelet, Marc-Antoine (University of St. Gallen)
    Abstract: We present empirical evidence on the heterogeneity in monetary policy transmission across countries with different home ownership rates. We use household-level data together with shocks to the policy rate identified from high-frequency data. We find that housing tenure reacts more strongly to unexpected changes in the policy rate in Germany and Switzerland - the OECD countries with the lowest home ownership rates - compared with existing evidence for the U.S. An unexpected decrease in the policy rate by 25 basis points increases the home ownership rate by 0.8 percentage points in Germany and by 0.6 percentage points in Switzerland. The response of non-housing consumption in Switzerland is less heterogeneous across renters and mortgagors, and has a different pattern across age groups than in the U.S. We discuss economic explanations for these findings and implications for monetary policy.
    Keywords: monetary policy transmission, home ownership, housing tenure, consumption
    JEL: E21 E52 R21
    Date: 2018–11
  23. By: Roberto M. Billi; Jordi Galí
    Abstract: We analyze the welfare impact of greater wage flexibility while taking into account explicitly the existence of the zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint generally amplifies the adverse effects of greater wage flexibility on welfare when the central bank follows a conventional Taylor rule. When demand shocks are the driving force, the presence of the ZLB implies that an increase in wage flexibility reduces welfare even under the optimal monetary policy with commitment.
    Keywords: labor market flexibility, Nominal rigidities, optimal monetary policy with commitment, Taylor rule, ZLB
    JEL: E24 E32 E52
    Date: 2018–12
  24. By: Selwyn Cornish
    Abstract: When inflation targeting was adopted in Australia is disputed. Some believe it commenced in March 1993 when the Governor of the Reserve Bank (Bernie Fraser) referred in a speech to the desirability of maintaining inflation between 2-3 per cent a year. However, he made a similar remark in a speech in August 1992. Some overseas authorities assert that inflation targeting began in 1994, referring to a speech that Fraser made in September of that year when he declared that 2-3 per cent inflation ‘is a reasonable goal for monetary policy’. The year 1994 is also significant because the Treasurer (Ralph Willis) stated in parliament that the government and the Bank had an inflation target of 2-3 per cent. Paul Keating, on the other hand, prefers 1995 as the commencing date, when he and the Secretary of the ACTU (Bill Kelty) included an inflation target of 2-3 per cent in the final Accord agreement between the government and the trade union movement. Another possible starting date is 1996 when the first Statement on the Conduct of Monetary Policy, signed by the Treasurer (Peter Costello) and the incoming Governor of the Reserve Bank (Ian Macfarlane), endorsed ‘the Reserve Bank[‘s]…objective of keeping underlying inflation between 2 and 3 per cent, on average, over the cycle.’ In all probability, there is no definitive starting date for the commencement of inflation targeting in Australia. Rather, its adoption was the result of an evolutionary process, like many other developments in the history of central banking.
    Date: 2018–11
  25. By: Brand, Claus; Bielecki, Marcin; Penalver, Adrian
    Keywords: demographics, monetary policy, natural rate of interest, productivity growth, return on capital
    Date: 2018–12
  26. By: Martina Jašová; Richhild Moessner; Előd Takáts
    Abstract: We study how domestic and global output gaps affect CPI inflation. We use a New-Keynesian Phillips curve framework which controls for nonlinear exchange rate movements for a panel of 26 advanced and 22 emerging economies covering the 1994Q1-2017Q4 period. We find broadly that both global and domestic output gaps are significant drivers of inflation both in the pre-crisis (1994-2008) and post-crisis (2008-2017) periods. Furthermore, after the crisis, in advanced economies the effect of the domestic output gap declines, while in emerging economies the effect of the global output gap declines. The paper demonstrates the usefulness of the New Keynesian Phillips curve in identifying the impact of global and domestic output gaps on inflation.
    Keywords: output gaps, global factors, inflation
    JEL: E31 E58
    Date: 2018
  27. By: Cui, Wei; Sterk, Vincent
    Abstract: 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: HANK; Large-scale asset purchases; monetary policy
    JEL: E21 E30 E50 E58
    Date: 2018–11
  28. By: Carolina Ortega Londoño; Diego Restrepo
    JEL: G21 E52 E59
    Date: 2018–06–30
  29. By: Martina Cecioni (Bank of Italy)
    Abstract: This paper tests whether the effects of ECB monetary policy vary over different phases of the business cycle. It uses local projections to estimate the state-dependent impulse responses of economic activity and prices to monetary policy shocks. These are identified through high-frequency financial market responses after Governing Council meetings. While the impact of monetary policy on economic activity is roughly similar during recessions and expansions, prices respond more strongly during booms. The result holds when the state of the economy is based on measures of resource utilization, rather than on GDP growth rates. Nominal wages also respond more strongly to monetary policy during expansions and when there is no slack in the economy. The empirical findings are consistent with the presence of downward rigidity on nominal wages.
    Keywords: monetary policy, business cycle
    JEL: E52 E32
    Date: 2018–12
  30. By: Mitsuru Katagiri
    Abstract: Upward sloping yield curves are hard to reconcile with the positive association between income and inflation (the Phillips curve) in consumption-based asset pricing models. Using US and UK data, this paper shows inflation is negatively correlated with long-run income growth but positively correlated with cyclical income, thus enabling the model to replicate positive and sizable term premiums, along with the Phillips curve over business cycles. Quantitative analyses also emphasize the importance of monetary policy, predicting that a permanently low growth and low inflation environment would precipitate flatter yield curves due to constraints to monetary policy around the zero lower bound.
    Date: 2018–11–09
  31. By: Cukierman, Alex
    Abstract: This paper reviews the interactions between policymaking, the financial system and the U.S. economy before, during and after the subprime crisis with particular attention to current controversies about the policy decisions that led to Lehman's downfall and their lessons for the future. The first part of the paper documents and analyzes the interactions between policy, financial markets and the economy during the acute and subsequent moderate phases of the crisis as well as during the later gradual exit from the zero lower bound and the extremely slow reduction in high powered money and bank reserves. The remaining parts develop alternative aspects of the thesis that mutual uncertainties inflicted by financial institutions on policymakers and by the latter on financial markets were at the root of the non-negligible surprises that the crisis inflicted on everybody. In particular, it discusses the political economy of bailout operations, reviews and evaluates recent controversies about the reasons for not rescuing Lehman Brothers and present informally the structure and policy lessons from a general equilibrium model of the financial sector which highlights the consequences of policy actions that have raised (Knightian) bailout uncertainty. The last section takes a brief look ahead and discusses some longer term consequences of the crisis.
    Keywords: bailouts; banks' reserves; credit; exit; financial crisis; monetary policy; uncertainty
    JEL: E51 E52 E58 E65 G1
    Date: 2018–12
  32. By: Li, Bing; Pei, Pei; Tan, Fei
    Abstract: Is inflation ‘always and everywhere a monetary phenomenon’ or is it fundamentally a fiscal phenomenon? This article augments a standard monetary model to incorporate fiscal details and credit market frictions. These ingredients allow for both interpretations of the inflation process in a financially constrained environment. We find that adding financial frictions to the model generates important identifying restrictions on the observed pattern between inflation and measures of financial and fiscal stress, to the extent that it can overturn existing findings about which monetary-fiscal policy regime produced the pre-crisis U.S. data.
    Keywords: monetary and fiscal policy, financial frictions, marginal likelihood
    JEL: C52 E44 E62 E63 H63
    Date: 2018–04–03
  33. By: Luca Pensieroso (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Romain Restout (Université de Lorraine, Université de Strasbourg, CNRS, BETA)
    Abstract: Was the Gold Standard a major determinant of the onset and the protracted character of the the Great Depression of the 1930s in the United States and Worldwide? In this paper, we model the ‘Gold-Standard hypothesis’ in a dynamic general equilibrium framework. We show that encompassing the international and monetary dimensions of the Great Depression is important to understand what happened in the 1930s, especially outside the United States. Contrary to what is often maintained in the literature, our results suggest that the vague of successive nominal exchange rate devaluations coupled with the monetary policy implemented in the United States did not act as a relief. On the contrary, they made the Depression worse.
    Keywords: Gold Standard, Great Depression, Dynamic General Equilibrium
    JEL: N10 E13 N01
    Date: 2018–12–03
  34. By: Michael McMahon; Alfred Schipke; Xiang Li
    Abstract: Financial markets are eager for any signal of monetary policy from the People’s Bank of China (PBC). The importance of effective monetary policy communication will only increase as China continues to liberalize its financial system and open its economy. This paper discusses the country’s unique institutional setup and empirically analyzes the impact on financial markets of the PBC’s main communication channels, including a novel communication channel. The results suggest that there has been significant progress but that PBC communication is still evolving toward the level of other major economies. The paper recommends medium-term policy reforms and reforms that can be adopted quickly.
    Keywords: Financial markets;Central banks and their policies;Asia and Pacific;Monetary policy;People’s Bank of China, Communication, Central Bank, Monetary Policy Transmission, People’s Bank of China, Monetary Policy (Targets, Instruments, and Effects), General
    Date: 2018–11–16
  35. By: Benzoni, Luca (Federal Reserve Bank of Chicago); Chyruk, Olena (Federal Reserve Bank of Chicago); Kelley, David (Federal Reserve Bank of Chicago)
    Abstract: Why is an inverted yield-curve slope such a powerful predictor of future recessions? We show that a decomposition of the yield curve slope into its expectations and risk premia components helps disentangle the channels that connect fluctuations in Treasury rates and the future state of the economy. In particular, a change in the yield curve slope due to a monetary policy easing, measured by the current real-interest rate level and its expected path, is associated with an increase in the probability of a future recession within the next year. In contrast, a decrease in risk premia is associated with either a higher or lower recession probability, depending on the source of the decline. In recent years, a decrease in the inflation risk premium slope has been accompanied by a heightened risk of recession, while a lower real-rate risk premium slope is a signal of diminished recession probabilities. This means that not all declines in the yield curve slope are bad news for the economy, and not all instances of steepening are good news either.
    Keywords: Interest rates; yield-curve slope; recession forecasts; monetary policy; bond risk premia; policy path
    JEL: E32 E37 E44 E52 G10 G12
    Date: 2018–09–28
  36. By: John Geanakoplos (Cowles Foundation, Yale University); Kieran Haobin Wang (International Monetary Fund)
    Abstract: The steady application of Quantitative Easing (QE) has been followed by big and non-monotonic e?ects on international asset prices and international capital flows. These are di?icult to explain in conventional models, but arise naturally in a model with collateral. This paper develops a general-equilibrium framework to explore QE’s international transmission involving an advanced economy (AE) and an emerging market economy (EM) whose assets have less collateral capacity. Capital flows arise as a result of international sharing of scarce collateral. The crucial insight is that private AE agents adjust their portfolios in di?erent ways in response to QE, conditional on whether they are (i) fully leveraged, (ii) partially leveraged or (iii) unleveraged. These portfolio shifts of international assets can diminish or even reverse the e?ectiveness of ever-larger QE interventions on asset prices. The model provides a simultaneous interpretation of several important stylized facts associated with QE.
    Keywords: Quantitative easing, Collateral, Leverage, Financial spillovers, Emerging markets, Capital flows
    JEL: D52 D53 E32 E44 E52 F34 F36 G01 G11 G12
    Date: 2018–12
  37. By: Lepers, Etienne
    Abstract: This research is trying to shed light on two myths that are usually widespread: the first one being the idea of the academic economist as a neutral scientist finding uncontestable consensual truths, thanks to uncontestable empirical methods, the second, the idea of the central banker as a Weberian neutral bureaucrat setting aside personal beliefs to act mechanically for the common good. Deconstructing this ‘neutrality illusion’, this work argues that economics is actually a divided and ideologically marked discipline despite its aim at natural-science-type-legitimacy. It argues in a related discussion that such ideological bias also impedes a purely neutral conduct of monetary policy, undermining the very idea of central bank independence. Linking these two arguments, it argues that graduate training in economics is the first place for the formation of biased preferences, because of the substantial ideological sorting that exists across universities. Using a unique database on FOMC members’ votes and ideology, the paper tests this idea empirically and despite unavoidable caveats, finds robust evidence of a systematic impact of the ideological features of their alma mater on FOMC members’ voting behaviour – impact that we found more important than the other traditional determinants of central bankers’ actions.
    Keywords: Fed; monetary policy; FOMC; central bank independence; dissent; ideological bias; educational training; freshwater; saltwater; economics science
    JEL: J1 F3 G3
    Date: 2017–06–07
  38. By: Stéphane Auray (CREST-Ensai and ULCO); Aurélien Eyquem (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France ; Institut Universitaire de France); Xiaofei Ma (CREST-Ensai and Université d'Evry;)
    Abstract: We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Calibrated to the core and the periphery of the Euro Area, the model gives rise to a debt-banks-credit loop that substantially amplifies the effects of financial shocks, especially for the periphery. We use the model to investigate the effects of a stylized public asset purchase program at the steady state and during a crisis. We find that it is more effective in stimulating the economy during a crisis, in particular for the periphery.
    Keywords: Recession, Interbank Market, Sovereign Default Risk, Asset Purchases
    JEL: E32 E44 E58 F34
    Date: 2018

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