nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒01‒07
thirty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Forward Guidance: Is It Useful After the Crisis? By Maliar, Lilia; Taylor, John B.
  2. Lending Relationships and Optimal Monetary Policy By Guillaume Rocheteau; Tsz-Nga Wong; Cathy Zhang
  3. The first twenty years of the European Central Bank: Monetary Policy By Hartmann, Philipp; Smets, Frank
  4. Dominant Currency Debt By Eren, Egemen; Malamud, Semyon
  5. Can the US Interbank Market be Revived? By Kyungmin Kim; Antoine Martin; Ed Nosal
  6. Trilemma-Dilemma: Constraint or Choice? Some Empirical Evidence from a Structurally Identified Heterogeneous Panel VAR By Peter J. Montiel; Peter Pedroni
  7. The Welfare Cost of Inflation with Banking Time By Max Gillman
  8. Limited Commitment, Endogenous Credibility and the Challenges of Price-level Targeting By Gino Cateau; Malik Shukayev
  9. Gains from wage flexibility and the zero lower bound By Roberto M. Billi; Jordi Galí
  10. Monetary Independence and Rollover Crises By Javier Bianchi; Jorge Mondragon
  11. Macroeconomic Effects of Inflation Target Uncertainty Shocks By Marcelo Arbex; Sidney Caetano; Wilson Correa
  12. Spillovers from Euro Area Monetary Policy: A Focus on Emerging Europe By Sona Benecka; Ludmila Fadejeva; Martin Feldkircher
  13. Continuous Time Versus Discrete Time in the New Keynesian Model: Closed-Form Solutions and Implications for Liquidity Trap By Maliar, Lilia
  14. How expectations became governable: institutional change and the performative power of central banks By Wansleben, Leon
  15. The Reversal Interest Rate By Markus K. Brunnermeier; Yann Koby
  16. Monetary and Fiscal History of Peru 1960-2010: Radical Policy Experiments, Inflation and Stabilization By Martinelli, César; Vega, Marco
  17. Monetary Policy, Product Market Competition and Growth By Phillipe Aghion; Emmanuel Farhi; Enisse Kharroubi
  18. Inflation Targeting and the Taylor Principle: evidence from Colombia By Martha Misas, Edgar Villa, Andres F. Giraldo; Edgar Villa; Andres F. Giraldo
  19. Short Takes on Monetary Policy Strategy : An Introduction to Some Basic Concepts By James A. Clouse
  20. The Imbalances of the Bretton Woods System 1965 to 1973: U.S. Inflation, The Elephant in the Room By Michael D. Bordo
  21. Causality deficit-inflation: Wavelet Transform By Elmrabet, Maissa; Boulila, Ghazi
  22. Inflation Expectations and Firm Decisions: New Causal Evidence By Olivier Coibion; Yuriy Gorodnichenko; Tiziano Ropele
  23. The Optimal Inflation Rate with Discount Factor Heterogeneity By Antoine Lepetit
  24. The Transmission of Monetary Policy Shocks By Miranda-Agrippino, Silvia; Ricco, Giovanni
  25. Mortgages, cash-flow shocks and local employment By Cumming, Fergus
  26. International Financial Integration in a Changing Policy Context – the End of an Era? By Chinn, Menzie; Devereux, Michael B.; Kollmann, Robert
  27. The Rise of the Dollar and Fall of the Euro as International Currencies By Matteo Maggiori; Brent Neiman; Jesse Schreger
  28. Monetary policy and the redistribution of net worth in the US By Albert, Juan-Francisco; Gómez-Fernández, Nerea
  29. Navigating the Cryptocurrency Landscape: An Islamic Perspective By Hina Binte Haq; Syed Taha Ali
  30. The Immediate Impact and Persistent Effect of FX Purchases on the Exchange Rate By Itamar Caspi; Amit Friedman; Sigal Ribon
  31. Employment and the Collateral Channel of Monetary Policy By Saleem Bahaj; Angus Foulis; Gabor Pinter; Paolo Surico
  32. A model of endogenous financial inclusion: implications for inequality and monetary policy By Mohammed Ait Lahcen; Pedro Gomis-Porqueras
  33. The Monetary and Fiscal History of Brazil, 1960-2016 By Ayres, Joao Luiz; Garcia, Marcio; Guillen, Diogo; Kehoe, Patrick J.
  34. International Capital Flows in Club of Convergence By Hung Ly-Dai
  35. Non-Linear Pattern of International Capital Flows By Hung Ly-Dai
  36. Interest rates, capital and bank risk-taking By Acosta-Smith, Jonathan

  1. By: Maliar, Lilia; Taylor, John B.
    Abstract: During recent economic crisis, when nominal interest rates were at their effective lower bounds, central banks used forward guidance -- announcements about future policy rates -- to conduct their monetary policy. Many policymakers believe that forward guidance will remain in use after the end of the crisis, however, there is uncertainty about its effectiveness. In this paper, we study the impact of forward guidance in a stylized new Keynesian economy away from the effective lower bound on nominal interest rates. Using closed-form solutions, we show that the impact of forward guidance on the economy depends critically on a specific monetary policy rule, ranging from non-existing to immediate and unrealistically large, the so-called forward guidance puzzle. We show that the puzzle occurs under very special -- empirically implausible and socially suboptimal -- monetary policy rules, whereas empirically relevant Taylor rules lead to sensible implications.
    Keywords: forward guidance; New Keynesian Model
    JEL: C61 C63 C68 E31 E52
    Date: 2018–12
  2. By: Guillaume Rocheteau; Tsz-Nga Wong; Cathy Zhang
    Abstract: We study optimal monetary policy in a monetary model of internal and external finance with bank entry and endogenous formation of lending relationships through search and bargaining. Following an unanticipated destruction of relationships, optimal monetary policy under com- mitment lowers the interest rate in the aftermath of the shock and uses forward guidance to promote bank entry and rebuild relationships. Absent commitment, forward guidance fails to anchor inflation expectations and optimal policy is subject to a deflationary bias that delays recovery. If there is a temporary freeze in relationship creation, the interest rate is set at the zero lower bound for some period of time.
    Keywords: credit relationships, banks, optimal monetary policy
    JEL: D83 E32 E51
    Date: 2018–12
  3. By: Hartmann, Philipp; Smets, Frank
    Abstract: On 1 May 2018 the ECB celebrated its 20th anniversary. This paper provides a comprehensive view of the ECB’s monetary policy over these two decades. The first section provides a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, going through four cyclical phases “conditioning” ECB monetary policy. We describe the monetary policy decisions from the ECB’s perspective and against the background of its evolving monetary policy strategy and framework. We also highlight a number of the key critical issues that were the subject of debate. The second section contains a partial assessment. We first analyze the achievement of the price stability mandate and developments in the ECB’s credibility. Next, we investigate the ECB’s interest rate decisions through the lens of a simple empirical interest rate reaction function. This is appropriate until the ECB hits the zero-lower bound in 2013. Finally, we present the ECB’s framework for thinking about non-standard monetary policy measures and review the evidence on their effectiveness. One of the main themes of the paper is how ECB monetary policy responded to the challenges posed by the European twin crises and the subsequent slow economic recovery, making use of its relatively wide range of instruments, defining new ones where necessary and developing the strategic underpinnings of its policy framework. JEL Classification: E52, E31, E32, E42, N14, G01
    Keywords: crisis, euro area economy, European Central Bank, European Economic and Monetary Union, inflation, monetary policy, non-standard measures, zero-lower bound
    Date: 2018–12
  4. By: Eren, Egemen; Malamud, Semyon
    Abstract: Why is the dollar the dominant currency for debt contracts and what are its macroeconomic implications? We develop an international general equilibrium model where firms optimally choose the currency composition of their debt. We show that there always exists a dominant currency debt equilibrium, in which all firms borrow in a single dominant currency. It is the currency of the country that effectively pursues aggressive expansionary monetary policy in global downturns, lowering real debt burdens of firms. We show that the dollar empirically fits this description, despite its short term safe haven properties. We provide further modern and historical empirical support for our mechanism across time and currencies. We use our model to study how the optimal monetary policy differs if the Federal Reserve reacts to global versus domestic conditions.
    Keywords: dollar debt; dominant currency; Exchange Rates; inflation
    JEL: E44 E52 F33 F34 F41 F42 F44 G01 G15 G32
    Date: 2018–12
  5. By: Kyungmin Kim; Antoine Martin; Ed Nosal
    Abstract: Large-scale asset purchases by the Federal Reserve as well as new Basel III banking regulations have led to important changes in U.S. money markets. Most notably the interbank market has essentially disappeared with the dramatic increase in excess reserves held by banks. We build a model in the tradition of Poole (1968) to study whether interbank market activity can be revived if the supply of excess reserves is decreased sufficiently. We show that it may not be possible to revive the market to pre-crisis volumes due to costs associated with recent banking regulations. Although the volume of interbank trading may initially increase as excess reserves continue to decline, the new regulations may engender changes in market structure that result in interbank trading being completely replaced by non-bank lending to banks when excess reserves become scarce. This non-monotonic response of interbank trading volume to reductions in excess reserves may lead to misleading forecasts about future fed funds prices and quantities when/if the Fed begins to normalize their balance sheet by reducing excess reserves.
    Keywords: Balance sheet costs ; Interbank market ; Monetary policy implementation
    JEL: E42 E58
    Date: 2018–12–21
  6. By: Peter J. Montiel (Williams College); Peter Pedroni (Williams College)
    Abstract: We use a heterogeneous panel structural VAR approach to study the role of international financial integration in determining the effectiveness of monetary policy under different exchange rate regimes. In particular, we use the extent to which a country's monetary policy is able to create temporary deviations from uncovered interest parity as a policy-relevant measure of the degree to which the country is effectively integrated with international financial markets, and then correlate this measure to our estimates of the ability of monetary policy to induce temporary movements in commercial bank lending rates. We find that regardless of whether a country pursues fixed or floating exchange rates, the impact of monetary policy shocks on bank lending rates is diminished as the country becomes financially more integrated with the world economy. This is a direct implication of Mundell's trilemma for countries with fixed exchange rates, but not for floaters. For floaters, we find that the weaker effects on domestic interest rates under high integration are accompanied with stronger effects on the exchange rate. This also holds true for monetary shocks originating in ``core'' countries. These results provide a possible reconciliation between Rey's ``dilemma'' and Mundell's famous trilemma: because higher financial integration increases exchange rate volatility in response to foreign monetary shocks, countries in the periphery that seek to avoid such volatility are more likely to pursue monetary policies that shadow those of the core as they become more financially integrated with the core.
    Keywords: Trilemma, exchange rates, financial integration, monetary policy, heterogeneous panel structural VAR
    JEL: E52 E58 F36
    Date: 2018–08
  7. By: Max Gillman (University of Missouri-St. Louis; IEHAS, Budapest; CERGE-EI, Prague)
    Abstract: The paper presents the welfare cost of inflation in a banking time economy that models exchange credit through a bank production approach. The estimate of welfare cost uses fundamental parameters of utility and production technologies. It is compared to a cash-only economy, and a Lucas (2000) shopping economy without leisure, as special cases. The paper estimates the welfare cost of a 10% inflation rate instead of zero, for comparison to other estimates, as well as the cost of a 2% inflation rate instead of a zero inflation rate. The zero rate is specified as the US inflation rate target in the 1978 Employment Act amendments. The paper provides a conservative welfare cost estimate of 2% inflation instead of zero at $33 billion a year. Estimates of the percent of government expenditure that can be financed through a 2% vs. zero inflation rate are also provided.
    Keywords: Euler equation, interest rates, inflation, banking, money demand, velocity, price-theoretic, marginal cost, productivity shocks, Great Recession
    JEL: E13 E31 E43 E52
    Date: 2018–11
  8. By: Gino Cateau; Malik Shukayev
    Abstract: This paper studies the cost of limited commitment when a central bank has the discretion to adjust policy whenever the costs of honoring its past commitments become high. Specifically, we consider a central bank that seeks to implement optimal policy in a New Keynesian model by committing to a price-level target path. However, the central bank retains the flexibility to reset the target path if the cost of adhering to it exceeds a social tolerance threshold. We find that endowing the central bank with such discretion undermines the credibility of the price-level target and weakens its effectiveness to stabilize the economy through expectations. The endogenous nature of credibility also brings novel results relative to models with exogenous timing of target resets. A much higher degree of credibility is needed to realize the stabilization benefits of commitment. Multiple equilibria also emerge, including a low credibility equilibrium with frequent target resets and high volatility.
    Keywords: Credibility, Inflation targets, Monetary policy framework
    JEL: E31 E52
    Date: 2018
  9. By: Roberto M. Billi; Jordi Galí
    Abstract: We analyze the welfare impact of greater wage áexibility 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 ampliÖes the adverse e§ects of greater wage áexibility 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 áexibility 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
  10. By: Javier Bianchi; Jorge Mondragon
    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.
    JEL: E4 E5 F34 G15
    Date: 2018–12
  11. By: Marcelo Arbex (Department of Economics, University of Windsor); Sidney Caetano (Department of Economics, Federal University of Juiz de Fora); Wilson Correa (Department of Economics, Federal University of Minas Gerais)
    Abstract: This note studies the macroeconomic effects of uncertainty shocks on the inflation target (IT). The IT is assumed to change over time and its stochastic volatility is modeled as an autoregressive process. We show that an IT uncertainty shock, namely a shock on its volatility) resembles an aggregate demand shock, a robust qualitative result for different Taylor-type rules. The magnitude of real and nominal variables responses depend crucially on the Taylor rule considered: a more reactive rule implies a less severe recession and deflation, while an empirical plausible degree of interest rate smoothing leads output, unemployment, and inflation to react more strongly causing the recession to be more severe and deflationary.
    Keywords: Uncertainty shocks, Infl ation target, Monetary policy.
    JEL: E31 E32 E52 E58
    Date: 2018–12
  12. By: Sona Benecka (Ceska Narodni Banka); Ludmila Fadejeva (Bank of Latvia); Martin Feldkircher (Oesterreichische Nationalbank)
    Abstract: This paper investigates the international effects of a euro area monetary policy shock, focusing on countries from Central, Eastern, and Southeastern Europe (CESEE). To that end, we use a global vector autoregressive (GVAR) model and employ shadow rates as a proxy for the monetary policy stance during normal and zero-lower-bound periods. We propose a new way of modelling euro area countries in a multi-country framework, accounting for joint monetary policy, and a novel approach to simultaneously identifying shocks. Our results show that in most euro area and CESEE countries prices adjust and output falls in response to a euro area monetary tightening, but with a substantial degree of heterogeneity.
    Keywords: euro area monetary policy, global vector autoregression, spillovers
    JEL: C32 F44 E32 O54
    Date: 2018–10–18
  13. By: Maliar, Lilia
    Abstract: Economists often use interchangeably the discrete- and continuous-time versions of the Keynesian model. In the paper, I ask whether or not the two versions effectively lead to the same implications. I analyze several alternative monetary policies, including a Taylor rule, discretionary interest rate choice and forward guidance. I show that the answer depends on a specific scenario and parameterization considered. In particular, in the presence of liquidity trap, the discrete-time analysis helps overcome some negative implications of the continuous-time model, such as excessively strong impact of price stickiness on inflation and output, unrealistically large government multipliers, as well as implausibly large effects of forward guidance.
    Keywords: closed-form solution; continuous time; forward guidance; New Keynesian Model; ZLB. liquidity trap
    JEL: C61 C63 C68 E31 E52
    Date: 2018–12
  14. By: Wansleben, Leon
    Abstract: Central banks have accumulated unparalleled power over the conduct of macroeconomic policy. Key for this development was the articulation and differentiation of monetary policy as a distinct policy domain. While political economists emphasize the foundational institutional changes that enabled this development, recent performativity-studies focus on central bankers’ invention of expectation management techniques. In line with a few other works, this article aims to bring these two aspects together. The key argument is that, over the last few decades, central banks have identified different strategies to assume authority over “expectational politics” and reinforced dominant institutional forces within them. I introduce a comparative scheme to distinguish two different expectational governance regimes. My own empirical investigation focuses on a monetarist regime that emerged from corporatist contexts, where central banks enjoyed “embedded autonomy” and where commercial banks maintained conservative reserve management routines. I further argue that innovations towards inflation targeting took place in countries with non-existent or disintegrating corporatist structures and where central banks turned to finance to establish a different version of expectation coordination. A widespread adoption of this “financialized” expectational governance has been made possible by broader processes of institutional convergence that were supported by central bankers themselves.
    Keywords: expectations; financialization; monetarism; monetary policy; neoliberal institutional change; performativity
    JEL: E5 E58
    Date: 2018–11–21
  15. By: Markus K. Brunnermeier; Yann Koby
    Abstract: The “reversal interest rate” is the rate at which accommodative monetary policy reverses its intended effect and becomes contractionary for lending. It occurs when banks' asset revaluation from duration mismatch is more than offset by decreases in net interest income on new business, lowering banks' net worth and tightening their capital constraints. The determinants of the reversal interest rate are 1) banks' fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of pass-through to deposit rates, and 4) the initial capitalization of banks. Furthermore, quantitative easing increases the reversal interest rate and should only be employed after interest rate cuts are exhausted. Over time the reversal interest rate creeps up since asset revaluation fades out as fixed-income holdings mature while net interest income stays low. We calibrate a New Keynesian model that embeds our banking frictions and show that the economics behind the reversal interest rate carry through general equilibrium.
    JEL: E43 E44 E52 G21
    Date: 2018–12
  16. By: Martinelli, César (George Mason University); Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: We show Peru's experience of chronic inflation through the 1970s and 1980s resulted from inflationary taxation in a regime of fiscal dominance of monetary policy. Hyperinflation occurred when further debt accumulation became unavailable, and a populist administration engaged in a counterproductive policy of price controls and loose credit. We interpret the fiscal difficulties preceding the stabilization as a process of social learning to live within the realities of fiscal budget balance. The credibility of policy regime change in the 1990s may be linked ultimately to the change in public opinion giving proper incentives to politicians, after the traumatic consequences of the hyper stagflation of 1987-1990.
    Date: 2018–11
  17. By: Phillipe Aghion; Emmanuel Farhi; Enisse Kharroubi
    Abstract: In this paper we argue that monetary easing fosters growth more in more credit-constrained environments, and the more so the higher the degree of product market competition. Indeed when competition is low, large rents allow firms to stay on the market and reinvest optimally, no matter how funding conditions change with aggregate conditions. To test this prediction, we use industry-level and firm-level data from the Euro Area to look at the effects on sectoral growth and firm-level growth of the unexpected drop in long-term government bond yields following the announcement of the Outright Monetary Transactions program (OMT) by the ECB. We find that the monetary policy easing induced by OMT, contributed to raising sectoral (firm-level) growth more in more highly leveraged sectors (firms), and the more so the higher the degree of product market competition in the country (sector).
    Keywords: growth, financial conditions, firm leverage, competition
    JEL: E32 E43 E52
    Date: 2018–12
  18. By: Martha Misas, Edgar Villa, Andres F. Giraldo; Edgar Villa; Andres F. Giraldo
    Abstract: We develop a theoretical model that generates an optimal Taylor rule in which structural parameters can change in a two monetary policy regime under ináation targeting. The theoretical model gives rise to an empirical structural STAR model. SpeciÖcation tests suggest a LSTAR speciÖcation of the transition function with the output gap lagged four periods as the transition variable. We Önd estimate this LSTAR model in reduced form that is used to recover structural deep parameters, like the weights in Banco de la Rep ?blicaís loss function for the two monetary regimes during the period of ináation targeting from IV.2000 to IV.2017. We Önd evidence that the nonlinear LSTAR Taylor rule outperforms in terms of within sample predictions the linear optimal Taylor rule which supports the conclusion that under ináation targeting the behavior of Banco de la Rep ?blica (Banrep) is described better with a two monetary regime policy than with a single monetary regime. We also Önd evidence that suggests that the monetary policy has been consistent with the so called Taylor principle in both regimes where in one of these Banrep has reacted aggresively to ináationary pressures while in the other regime it has reacted strongly, but not aggresively, to recessionary pressures. The asymmetric behavior of the monetary policy can be rationalized through asymmetric neo Keynesian price stickiness.
    Keywords: Monetary policy Taylor rules, Ináation Targeting, Taylor Principle, Nonlinear STAR models
    JEL: C22 E42 E43 E52 E58 E61
    Date: 2018–12–13
  19. By: James A. Clouse
    Abstract: Over recent decades, central banks have made enormous strides in enhancing transparency around many elements of the formulation and conduct of monetary policy. Still, even for an audience of seasoned policy experts, providing clarity about aspects of monetary policy strategy is a daunting task and all the more so when the audience extends to the public at large. This collection of short notes attempts to take a small step in fostering more inclusive discussion of monetary policy strategy by presenting some standard results in a way that may be useful as an introduction to basic concepts for students and nonspecialists.
    Date: 2018–12–21
  20. By: Michael D. Bordo
    Abstract: This paper argues that the key deep underlying fundamental for the growing international imbalances leading to the collapse of the Bretton Woods system between 1971 and 1973 was rising U.S. inflation since 1965. It was driven in turn by expansionary fiscal and monetary policies—the elephant in the room. What was kept in the background at the Camp David meeting on August 15 1971 when President Richard Nixon closed the U.S. gold window, as well as imposing a ten per cent surcharge on all imports and a ninety day wage price freeze—was that U.S. inflation, driven by macro policies, was the main problem facing the Bretton Woods System, and that for political and doctrinal reasons was not directly addressed. Instead President Nixon blamed the rest of the world rather than focusing on issues with U.S. monetary and fiscal policies. In addition, at the urging of Federal Reserve Chairman Arthur F. Burns, Nixon adopted wage and price controls to mask the inflation, hence punting the problem into the future. This paper revisits the story of the collapse of the Bretton Woods system and the origins of the Great Inflation. Based on historical narratives and conversations with the Honorable George P. Shultz, a crucial player in the events of the period 1969 to 1973, I argue the case that the pursuit of tighter monetary and fiscal policies could have avoided much of the turmoil in the waning years of Bretton Woods. Moreover, I point out some of the similarities between the imbalances of the 1960s and 1970s—especially fiscal and the use of tariff protection as a strategic tool, as well as some differences—relatively stable monetary policy and floating exchange rates.
    JEL: E31 E42 E62 F33 F41 N10
    Date: 2018–12
  21. By: Elmrabet, Maissa; Boulila, Ghazi
    Abstract: Few researchers have addressed the problem of the causality inflation-deficits, and even Previous worktreated this causality they have only focused on the Granger causality technique in which the results of thisapproach raises many doubts. This investigation aim to study the relationship between inflation and the pri-mary deficit using the wavelet transform for different euro area member countries from 1980 until 2014 withquarterly data. We have characterized the inflation-primary deficit relationship in a time-frequency scale.First we found that the deficit causes inflation in log term. We detected also, that inflation-primary deficitrelationship is highly consistent during the post-financial crisis in the euro area in the long run. Finally wecan judge through the wavelet transform that this relationship is non linear.
    Keywords: Few researchers have addressed the problem of the causality inflation-deficits, and even Previous worktreated this causality they have only focused on the Granger causality technique in which the results of thisapproach raises many doubts. This investigation aim to study the relationship between inflation and the pri-mary deficit using the wavelet transform for different euro area member countries from 1980 until 2014 withquarterly data. We have characterized the inflation-primary deficit relationship in a time-frequency scale.First we found that the deficit causes inflation in log term. We detected also, that inflation-primary deficitrelationship is highly consistent during the post-financial crisis in the euro area in the long run. Finally wecan judge through the wavelet transform that this relationship is non linear.
    JEL: E17
    Date: 2018–12–13
  22. By: Olivier Coibion; Yuriy Gorodnichenko; Tiziano Ropele
    Abstract: We use a unique design feature of a survey of Italian firms to study the causal effect of inflation expectations on firms’ economic decisions. In the survey, a randomly chosen subset of firms is repeatedly treated with information about recent inflation (or the European Central Bank’s inflation target) whereas other firms are not. This information treatment generates exogenous variation in inflation expectations. We find that higher inflation expectations on the part of firms leads them to raise their prices, increase their utilization of credit, and reduce their employment. However, when policy rates are constrained by the effective lower bound, demand effects are stronger, leading firms to raise their prices more and no longer reduce their employment.
    JEL: E2 E3
    Date: 2018–12
  23. By: Antoine Lepetit
    Abstract: This paper shows that deviations from long-run price stability are optimal in the presence of price stickiness whenever profit and utility flows are discounted at a different rate. In that case, a monetary authority acting under commitment will choose a path for the inflation rate that ends with a non-zero value. Such a property is relevant in a wide range of macroeconomic environments. I first illustrate this by studying optimal monetary policy in a New Keynesian model with a perpetual youth structure. In this setting, profit flows are discounted more heavily than utility flows and the optimal inflation target is equal to 3.2 percent in a baseline calibration of the model. I also show that this property leads to a positive long-run inflation rate in models with firm entry and exit and in environments with search and matching frictions in the labor market and another form of nominal rigidity, wage stickiness.
    Keywords: Discount factor heterogeneity ; Inflation target ; Optimal inflation rate ; Optimal monetary policy ; Perpetual youth ; Sticky prices
    JEL: E31 E32 E52
    Date: 2018–12
  24. By: Miranda-Agrippino, Silvia; Ricco, Giovanni
    Abstract: Commonly used instruments for the identification of monetary policy disturbances are likely to combine the true policy shock with information about the state of the economy due to the information disclosed through the policy action. We show that this signalling effect of monetary policy can give rise to the empirical puzzles reported in the literature, and propose a new high-frequency instrument for monetary policy shocks that accounts for informational rigidities. We find that a monetary tightening is unequivocally contractionary, with deterioration of domestic demand, labour and credit market conditions, as well as of asset prices and agents' expectations.
    Keywords: Expectations; External Instruments; Information Rigidity; local projections; monetary policy; Survey Forecasts; VARs
    JEL: C11 C14 E52 G14
    Date: 2018–12
  25. By: Cumming, Fergus (Bank of England)
    Abstract: This paper quantifies the local impact of monetary policy through the cash-flow channel during the Crisis by combining novel micro datasets with near-universal coverage of UK mortgages and employment. I estimate that a reduction in mortgage payments equivalent to 1% of household income led to around a 5 percentage point increase in employment growth in non-tradable businesses the following year. But the spatial distribution of mortgage and labour market structures resulted in significant heterogeneity of this effect across the country. Taken at face value, the estimates suggest that the overall effect of accommodative monetary policy on total employment growth in 2010 varied by around 1.5 percentage points across regions.
    Keywords: Mortgages; interest rates; monetary policy; employment
    JEL: E21 E52 G21
    Date: 2018–12–21
  26. By: Chinn, Menzie; Devereux, Michael B.; Kollmann, Robert
    Abstract: International financial integration has faced major changes and challenges since the 2008-09 global financial crisis. The crisis triggered a persistent contraction in international capital flows. Regulatory reforms and new macro-prudential frameworks have been reshaping international finance since the crisis. Financial flows are also affected by the unwinding of ultra-accommodative post-crisis monetary policies in advanced economies. Finally, protectionist attitudes have been on the rise, since the financial crisis, and already shape the agenda of a number of governments in advanced economies. This special issue of the Journal of International Money and Finance consists of thirteen papers that provide new perspectives on key issues facing international financial integration. All papers were presented at a conference held at the European Commission in Brussels on March 1-2, 2018, organized by the Journal of International Money and Finance, the European Commission, CEPR, Tilburg University, Université Libre de Bruxelles, University of British Columbia, University of Southern California, and University of Wisconsin.
    Keywords: International financial integration, global financial crisis, international capital flows, regulatory reforms, monetary policy normalization, protectionism
    JEL: F3 F4
    Date: 2018–12–06
  27. By: Matteo Maggiori; Brent Neiman; Jesse Schreger
    Abstract: The modern notion of an international currency involves use in areas of international finance and trade that extend well beyond central banks' coffers. In addition to their important roles as foreign exchange reserves, international currencies are most frequently used to denominate corporate and government bonds, bank loans, and import and export invoices. These currencies offer unrivaled liquidity, constituting large shares of the volume on global foreign exchange markets, and are commonly chosen as the anchors targeted by countries with pegged or managed exchange rate regimes. In this short article, we provide evidence suggesting a recent rise in the use of the dollar, and fall of the use in the euro, with similar patterns manifesting across all these aspects of international currency use.
    JEL: E4 E5 F3 G15 G23
    Date: 2018–12
  28. By: Albert, Juan-Francisco; Gómez-Fernández, Nerea
    Abstract: The view that expansionary monetary policy can exacerbate both income and wealth inequality by increasing asset prices has become increasingly popular. The aim of this paper is to study the distributive effects of monetary policy on wealth inequality. In the first part of this research, we develop a simple framework based on accounting identity to examine the redistributive repercussions of changes in monetary policy on net worth through different channels. Based on this framework, in the second part of the paper, we show empirical evidence concerning the effects of monetary policy on wealth inequality in the US. To derive this, we combined macro and micro data, and proceeded in two steps. Firstly, we estimated a Proxy structural vector autoregression (SVAR) model, combining high-frequency identification used as external instruments with a classic SVAR, to measure the response of the real and financial variables that could affect wealth inequality after an expansive monetary policy shock. Considering this information, we then used the microdata of the Survey of Consumer Finance (US, 2016) and simulated changes to the value of a household's assets and liabilities, as well as the inflation rate, produced by an expansive monetary policy. We considered three different time horizons and the whole of the distribution, measured by the Gini coefficients, and the simulation results suggest that wealth inequality increases after an expansive monetary policy shock. Additionally, focusing on the net worth by deciles, we found a relevant result. The expansive monetary policy shock substantially increases the net worth of the richest and the poorest households, while the middle class tends to benefit the least. Monetary policy on stock prices is the most important driver of the significant increases in net wealth among the richest households, while its effect on debt is most significant among the poorest.
    JEL: E52 E58
    Date: 2018–12–15
  29. By: Hina Binte Haq; Syed Taha Ali
    Abstract: Almost a decade on from the launch of Bitcoin, cryptocurrencies continue to generate headlines and intense debate. What started as an underground experiment by a rag tag group of programmers armed with a Libertarian manifesto has now resulted in a thriving $230 billion ecosystem, with constant on-going innovation. Scholars and researchers alike are realizing that cryptocurrencies are far more than mere technical innovation; they represent a distinct and revolutionary new economic paradigm tending towards decentralization. Unfortunately, this bold new universe is little explored from the perspective of Islamic economics and finance. Our work aims to address these deficiencies. Our paper makes the following distinct contributions We significantly expand the discussion on whether cryptocurrencies qualify as "money" from an Islamic perspective and we argue that this debate necessitates rethinking certain fundamental definitions. We conclude that the cryptocurrency phenomenon, with its radical new capabilities, may hold considerable opportunity which merits deeper investigation.
    Date: 2018–11
  30. By: Itamar Caspi (Bank of Israel); Amit Friedman (Bank of Israel); Sigal Ribon (Bank of Israel)
    Abstract: In recent years, Forex (FX) interventions have been routinely used by the Bank of Israel as well as by other central banks as an additional monetary instrument, with the objective of moderating appreciation trends of the domestic currency. This paper analyzes the immediate effect of the Bank of Israel’s FX interventions on the exchange rate and the persistence of this effect over time. To identify this effect, we first measure the intraday impact of FX intervention using a novel high-frequency, minute-by-minute dataset of interventions between 2009 and 2017. Next, we use our intraday measure to estimate the persistence of FX intervention shocks over longer horizons (in trading days), where we base our empirical approach on the potential outcome framework and the Local Projections method. We find that FX intervention shocks – that is, unexpected FX purchases – cause, on impact USDILS exchange rate depreciation in over 90 percent of the cases. We also find that this effect has a persistent impact on the nominal effective exchange rate for about 40­–60 trading days, which are equivalent to between 2 and 3 calendar months. Based on this finding we infer that between 2013 and 2017 interventions caused the level of the exchange rate to depreciate by about 2–3 percent on average, where the effect of each intervention varied with its intensity. We stress that these results reflect the contribution of unexpected FX purchases given the fact that the discretionary intervention regime was in place throughout the investigated period, and not the effect of the presence of the regime itself.​
    Keywords: Sterilized FX interventions, high frequency data, impulse response, local projections, potential outcome, Bank of Israel
    JEL: C22 E58 F31
    Date: 2018–06
  31. By: Saleem Bahaj (Centre for Macroeconomics (CFM); Bank of England); Angus Foulis (Centre for Macroeconomics (CFM); Bank of England); Gabor Pinter (Centre for Macroeconomics (CFM); Bank of England); Paolo Surico (Centre for Macroeconomics (CFM); London Business School)
    Abstract: This paper uses a detailed firm-level dataset to show that monetary policy propagates via asset prices through corporate debt collateralised on real estate. Our research design exploits the fact that many small and medium sized firms use the homes of the firm’s directors as a key source of collateral, and directors’ homes are typically not in the same region as their firm. This spatial separation of firms and firms’ collateral allows us to separate the propagation of monetary policy via fluctuations in collateral values from that via demand channels. We find that younger and more levered firms who have collateral values that are particularly sensitive to monetary policy show the largest employment response to monetary policy. The collateral channel explains a sizeable share of the aggregate employment response.
    Date: 2018–12
  32. By: Mohammed Ait Lahcen; Pedro Gomis-Porqueras
    Abstract: We propose a monetary dynamic general equilibrium model with endogenous credit market participation to study the impact of financial inclusion on welfare and inequality. We find that significant consumption inequality can result from limited access to basic financial services. In this environment, monetary policy has distributional consequences as agents face different liquidity constraints. This heterogeneity generates a pecuniary externality which can result in overconsumption of financially included agents above the socially efficient level. We conduct a quantitative assessment for the case of India. Our simple model is able to account for approximately a third of the observed consumption inequality. We analyze various policies aimed at increasing financial inclusion. As a result of pecuniary externalities, interest rate policies can result in a decrease in welfare and an increase in consumption inequality. Moreover, we find that a direct benefit transfer to bank account owners is superior to interest rate policies as it can increase welfare and reduce consumption inequality despite a decrease in individual consumption.
    Keywords: Money, credit, banking, financial inclusion, inequality
    JEL: E40 E50
    Date: 2018–12
  33. By: Ayres, Joao Luiz (Inter-American Development Bank); Garcia, Marcio (Pontifical Catholic University of Rio de Janeiro,); Guillen, Diogo (Itau-Unibanco Asset Management); Kehoe, Patrick J. (Federal Reserve Bank of Minneapolis)
    Abstract: Brazil has had a long period of high inflation. It peaked around 100 percent per year in 1964, decreased until the first oil shock (1973), but accelerated again afterward, reaching levels above 100 percent on average between 1980 and 1994. This last period coincided with severe balance of payments problems and economic stagnation that followed the external debt crisis in the early 1980s. We show that the high-inflation period (1960-1994) was characterized by a combination of fiscal deficits, passive monetary policy, and constraints on debt financing. The transition to the low-inflation period (1995-2016) was characterized by improvements in all of these features, but it did not lead to significant improvements in economic growth. In addition, we document a strong positive correlation between inflation rates and seigniorage revenues, although inflation rates are relatively high for modest levels of seigniorage revenues. Finally, we discuss the role of the weak institutional framework surrounding the fiscal and monetary authorities and the role of monetary passiveness and inflation indexation in accounting for the unique features of inflation dynamics in Brazil.
    Keywords: Brazils hyperinflation; Brazils stagnation; Stabilization plans; Fiscal deficit; Debt accounting
    JEL: E42 E63 H62 H63
    Date: 2018–12–20
  34. By: Hung Ly-Dai (VNU - Vietnam National University [Hanoï])
    Abstract: We explain U-shape pattern of international capital inflows by one multi-country OLG economy and one cross-section data sample. The theory proves that capital inflows are decreasing on distance to frontier, which is measured by ratio of domestic productivity level over United States' level. The evidences not only confirm the theory but also reveal that growth is decreasing on distance to frontier for club of convergence but increasing for club of unconvergence. Therefore, Neo-Classical growth model's implication, that capital inflows are positively correlated to growth, applies for club of convergence. However, Allocation puzzle, that capital inflows are negatively correlated to growth, works for club of unconvergence. The turning point of U-shape pattern is the productivity growth rate at world technology frontier.
    Keywords: International Capital Flows,Productivity Growth,Relative Convergence
    Date: 2018–07
  35. By: Hung Ly-Dai (VNU - Vietnam National University [Hanoï])
    Abstract: We establish one non-linear pattern of international capital flows by building up one two-country OLG economy. With symmetric growth and asymmetric interest rate wedges across countries, net total capital inflows are either decreasing or increasing on productivity growth rate. However, with asymmetric growth and asymmetric wedges, they follow one U-shaped curve by first decreasing and then increasing on growth. The turning point of the curve is built on world average growth rate and wedges. Our proposed model can provide an explanation for inconsistencies between theories (i.e, Lucas paradox, uphill capital flows, and allocation puzzle) about the pattern of international capital flows.
    Keywords: Allocation Puzzle,Capital Flows,Financial Frictions,Productivity Growth
    Date: 2018–10
  36. By: Acosta-Smith, Jonathan (Bank of England)
    Abstract: Are low interest rates more likely to incentivise greater bank risk-taking? This is the question we seek to answer. Using a model in which banks raise funds from depositors to create an investment portfolio which can differ in its risk and return, we suggest so. In particular, we show that lowering the interest rate makes it more likely banks will make risky investments. This is because reducing the interest rate makes safer assets less attractive, while increasing the relative gains from gambling. We show that risk-taking is highly dependent on banks’ skin-in-the-game, as banks always ignore the full extent of losses on bankruptcy. Raising the interest rate has a similar effect. It reinforces this behaviour, as by increasing the yield on the portfolio, banks have more to lose on bankruptcy.
    Keywords: Banking; monetary policy; risk-taking; interest rates
    JEL: E44 E58 G21
    Date: 2018–12–21

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