nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒01‒14
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary policy frameworks and the effective lower bound on interest rates By Mertens, Thomas M.; Williams, John C.
  2. Central Bank Credibility and Monetary Policy By Kwangyong Park
  3. Negative Interest Rate, QE and Exit By Samuel Reynard
  4. Negative Nominal Interest Rates and the Bank Lending Channel By Gauti B. Eggertsson; Ragnar E. Juelsrud; Lawrence H. Summers; Ella Getz Wold
  5. Transmission of U.S. Monetary Policy to Commodity Exporters and Importers By Myunghyun Kim
  6. Inflation Dynamics under Fiscal Deficit Regime Switching in Mexico By Ramos Francia Manuel; García-Verdú Santiago; Sánchez-Martínez Manuel
  8. Forecasting FOMC Forecasts By S. Yanki Kalfa; Jaime Marquez
  9. Spillovers from US monetary policy: Evidence from a time-varying parameter GVAR model By Crespo Cuaresma, Jesus; Doppelhofer, Gernot; Feldkircher, Martin; Huber, Florian
  10. From Commodity to Fiat and Now to Crypto: What Does History Tell Us? By Barry Eichengreen
  11. Time-varying Response of Treasury Yields to Monetary Policy Shocks: Evidence from the Tunisian Bond Market By Lassaâd Mbarek; Hardik A. Marfatia; Sonja Juko
  12. What Determines the Neutral Rate of Interest in an Emerging Economy? By Carrillo Julio A.; Elizondo Rocío; Rodríguez-Pérez Cid Alonso; Roldán-Peña Jessica
  13. The impact of guidance, short-term dynamics and individual characteristics on firms' long-term inflation expectations By Hans-Ueli Hunziker; Christian Raggi; Rina Rosenblatt-Wisch; Attilio Zanetti
  14. Model selection for modeling the demand for narrow money in transitional economies By Błażejowski, Marcin; Kufel, Paweł; Kufel, Tadeusz; Kwiatkowski, Jacek; Osińska, Magdalena
  15. Exchange rate and oil price pass-through to inflation in BRICS countries: Evidence from the spillover index and rolling-sample analysis By Mehmet Balcilar; Usman Ojonugwa
  16. Monetary theory and policy : the debate revisited By Jean-Luc Gaffard
  17. Banks, Sovereign Risk and Unconventional Monetary Policies By Stéphane Auray; Aurélien Eyquem; Xiaofei Ma
  18. Model instability in predictive exchange rate regressions By Hauzenberger, Niko; Huber, Florian
  19. Cash and the Economy: Evidence from India's Demonetization By Gabriel Chodorow-Reich; Gita Gopinath; Prachi Mishra; Abhinav Narayanan
  20. Central bank communication a quantitative assessment By Ernst, Ekkehard; Merola, Rossana.
  21. Does Trilemma Speak Chinese? By Georgios Magkonis; Simon Rudkin
  22. Estimating the Inflation-Output Gap Trade-Off with Triangle Model in Pakistan By Sharif, Bushra; Qayyum, Abdul
  23. The Monetary and Fiscal History of Brazil, 1960-2016 By Joao Ayres; Marcio Garcia; Diogo A. Guillén; Patrick J. Kehoe
  24. Monetary Policy, Corporate Finance and Investment By James Cloyne; Clodomiro Ferreira; Maren Froemel; Paolo Surico
  25. Does Central Bank Independence Matter in Arab Oil Exporters By Hoda Selim
  26. On the Costs of Deflation: A Consumption-Based Approach By García-Verdú Santiago; Ramos Francia Manuel
  27. Invoicing currency and exchange rate pass-through: evidence from firm level analysis of Italian firms By Alessandro Borin; Andrea Linarello; Elena Mattevi; Giordano Zevi

  1. By: Mertens, Thomas M. (Federal Reserve Bank of San Francisco); Williams, John C. (Federal Reserve Bank of New York)
    Abstract: This paper applies a standard New Keynesian model to analyze the effects of monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will become anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained. Second, a dynamic strategy such as price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at the target level and potentially further reduce the effects of the lower bound on the economy.
    Keywords: monetary policy; zero lower bound; natural rate of interest; inflation targeting; inflation expectations
    JEL: E52
    Date: 2019–01–01
  2. By: Kwangyong Park (Economic Research Institute, The Bank of Korea)
    Abstract: A numerical measure of central bank credibility, which can be incorporated into a New Keynesian model under bounded rationality, is proposed and analyzed. This measure arises mainly due to the existence of the drifts in private long-term predictions, which are different from those of the central bank. It is shown that central bank credibility matters for macroeconomic stability. As the credibility increases, macroeconomic variables vary less. This generates endogenous volatility changes. Lastly, the magnitude of response of inflation to monetary policy depends on the level of credibility. This suggests that ignoring credibility changes might leads to overestimate of the cost of disinflation.
    Keywords: Monetary policy, Credibility, Learning, Bounded Rationality
    JEL: E3 E52 E58 D8
    Date: 2018–12–24
  3. By: Samuel Reynard
    Keywords: Quantitative Easing, Negative Interest Rate, Exit, Monetary Policy Transmission, Money Supply, Banking
    JEL: E52 E58 E51 E41 E43
    Date: 2018
  4. By: Gauti B. Eggertsson; Ragnar E. Juelsrud; Lawrence H. Summers; Ella Getz Wold
    Abstract: Following the crisis of 2008, several central banks engaged in a new experiment by setting negative policy rates. Using aggregate and bank level data, we document that deposit rates stopped responding to policy rates once they went negative and that bank lending rates in some cases increased rather than decreased in response to policy rate cuts. Based on the empirical evidence, we construct a macro-model with a banking sector that links together policy rates, deposit rates and lending rates. Once the policy rate turns negative, the usual transmission mechanism of monetary policy through the bank sector breaks down. Moreover, because a negative policy rate reduces bank profits, the total effect on aggregate output can be contractionary. A calibration which matches Swedish bank level data suggests that a policy rate of -0.50 percent increases borrowing rates by 15 basis points and reduces output by 7 basis points.
    JEL: E3 E31 E4 E41 E42 E43 E44 E5 E51 E52 E58 E65
    Date: 2019–01
  5. By: Myunghyun Kim (Economic Research Institute, The Bank of Korea)
    Abstract: This paper studies international transmission of U.S. monetary policy shocks to commodity exporters and importers. After first showing empirically that the shocks have stronger effects on commodity exporters than on importers, I then augment a standard three-country model to include commodities. Consistent with the empirical evidence, the model indicates that an expansionary monetary policy shock to the U.S. increases the aggregate output of commodity exporters by more than that of importers. This is because the increased U.S. aggregate demand triggered by the shock leads to greater U.S. demand for commodities and higher real commodity prices, and thus the exports of commodity exporters increase relative to those of commodity importers. Furthermore, I show that if commodity exporters¡¯ currencies are pegged to the U.S. dollar, then the U.S. monetary policy shocks have stronger spillovers to commodity exporters and importers. In the event that the U.S. becomes a net energy exporter, the shocks will have weaker effects on commodity exporters and stronger impacts on importers.
    Keywords: Monetary policy shocks, International transmission, Commodity exporters, Commodity importers, VAR with external instruments
    JEL: E52 F42 Q43
    Date: 2018–12–18
  6. By: Ramos Francia Manuel; García-Verdú Santiago; Sánchez-Martínez Manuel
    Abstract: We explore the dynamics of inflation, inflation expectations, and seigniorage-financed fiscal deficits in Mexico. To do so, we estimate the model in Sargent, Williams, and Zha (2009) using Mexican CPI inflation data. This model features dual expected inflation equilibriums and regime switching in the mean and variance of the fiscal deficit probability density function. We examine the dynamics of inflation and mean fiscal deficit regimes. In addition, we comment on the extent to which our results match to key economic events. Mexico has successfully stabilized inflation expectations for the past decades, an achievement for which fiscal policy has been fundamental. Nevertheless, this does not preclude the possibility of an increase in the expected price level or a switch to a regime in which inflation and its expectations become unstable.
    Keywords: Inflation;Inflation Expectations;Public Deficit;Fiscal Deficit;Regime-Switching;Monetary Policy;Fiscal Policy
    JEL: E31 D84 H62 E52 E62 C01
    Date: 2018–11
  7. By: Paulo R. Mota (University of Porto – School of Economics and Business and CEF.UP); Abel L. C. Fernandes (University of Porto – School of Economics and Business and NIFIP)
    Abstract: A fundamental aspect of the ECB’s monetary policy is that it aims to pursue price stability “over the medium term.” However, the ECB has not defined the medium term with reference to a predetermined horizon, retaining some flexibility with regard to the exact time frame. The objective of this paper is to shed some light on how the horizon of price stability is being achieved in practice, in a context where the ECB faces convex and non-convex costs of adjusting the target interest rate. We assume that ECB’s monetary policy follows an average flexible inflation target framework, and we analyse the R2 of an equation where the target interest rate is specified as a function of the j-period window over which average inflation rate is measured. Target interest rate inertia is incorporate through a switching interest rate equation based on the play model of hysteresis. We have found that the ECB is targeting the key interest rate over a seven years window, implying that the ECB is following a hybrid approach to price stability in line with average inflation target. We also have found hysteresis effects in the dynamic adjustment of ECB´s target interest rate.
    Keywords: inflation target, price-level targeting, key interest rates
    JEL: E43 E52
    Date: 2019–01
  8. By: S. Yanki Kalfa (International Monetary Fund); Jaime Marquez (Johns Hopkins School of Advanced International Studies (SAIS))
    Abstract: Summarizing Hendry’s forty years of work on taming uncertainty is "clear and distinct": Test, test, test. Sure - but test what? Test the maintained assumptions of the disturbances. Test the parameter restrictions of a given model. Test the explanatory power of a model against a rival model. In brief, test everything that is not clear and distinct. We implement Hendry’s view to forecast FOMC forecasts. Specifically, monetary policy is forward looking and, in its pursuit of transparency, it communicates its economic projections to the public at large. As a result, there is interest in whether these projections are credible. We argue that central to that credibility is the public’s ability to replicate FOMC’s projections using publicly available data only. In other words, is it possible to anticipate, reliably and independently, what the FOMC will anticipate for the federal funds rate? To address this question, we assemble FOMC projections from 1992 to 2017; examine their statistical properties; postulate models to predict FOMC projections; estimate the parameters of these models; and generate out-of-sample predictions for inflation, unemployment, and the federal funds rate for 2018. As the reader will soon realize, there is a lot more testing to be done.
    Keywords: Autometrics, Federal Funds Rate, FOMC, Survey of Professional Forecasters
    JEL: E5 C4
    Date: 2018–11
  9. By: Crespo Cuaresma, Jesus; Doppelhofer, Gernot (Dept. of Economics, Norwegian School of Economics and Business Administration); Feldkircher, Martin; Huber, Florian (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This paper develops a global vector autoregressive (GVAR) model with time-varying parameters and stochastic volatility to analyze whether international spillovers of US monetary policy have changed over time. The proposed model allows assessing whether coefficients evolve gradually over time or are better characterized by infrequent, but large breaks. Our findings point towards pronounced changes in the international transmission of US monetary policy throughout the sample period, especially so for the reaction of international output, equity prices, and exchange rates against the US dollar. In general, the strength of spillovers has weakened in the aftermath of the global financial crisis. Using simple panel regressions, we link the variation in international responses to measures of trade and financial globalization. We find that a broad trade base and a high degree of financial integration with the world economy tend to cushion risks stemming from a foreign shock such as a US monetary policy tightening, whereas a reduction in trade barriers and/or a liberalization of the capital account increase these risks.
    Keywords: Spillovers; zero lower bound; globalization; mixture innovation models
    JEL: C30 E52 F41
    Date: 2018–12–21
  10. By: Barry Eichengreen
    Abstract: Over time, there has been a tendency for political jurisdictions and residents to converge on a single currency. Monopoly over seigniorage is a source of political power and a valuable lifeline when sovereignty is threatened. Moreover a uniform currency, insofar as it is free of counterparty and liquidity risk, facilitates economic activity. But will digital currencies now reverse this trend toward uniformity, given the apparent ease with which they can be created? The information sensitivity of those units, evident in the fact that they trade at varying prices, suggests that they do not yet provide the core functions of money. So-called stable coins are intended to bridge this gap, but whether they can be successfully scaled up and maintain their stability is doubtful. The one unit that can clearly meet these challenges is central bank digital currency. But there would be both costs and benefits of moving in this direction.
    JEL: E4 E40 F0 N0
    Date: 2019–01
  11. By: Lassaâd Mbarek (Central Bank of Tunisia); Hardik A. Marfatia; Sonja Juko
    Abstract: This paper examines the Treasury bond yields response to monetary policy shocks in Tunisia under a heterogeneous economic environment. Using a traditional fixed coefficient model, we first estimate the impact of monetary policy changes on the term structure of interest rates for the whole period from January 2006 to December 2016. We then study the stability of this relationship by distinguishing two sub-periods around the revolution of January 2011. To investigate how the relationship between the monetary policy and the Treasury yield curve evolves over time, we estimate a time-varying parameter model. The results show that the impact of monetary policy is more pronounced at the short end of the yield curve relative to the longer end. Further, this impact declined significantly across all maturities following the revolution and exhibits wide time variation. This evidence supports the negative influence of high levels of uncertainty on monetary policy effectiveness and highlights the desirability of more active monetary policy especially in turbulent environment
    Date: 2018–10–23
  12. By: Carrillo Julio A.; Elizondo Rocío; Rodríguez-Pérez Cid Alonso; Roldán-Peña Jessica
    Abstract: Evidence suggests that potential growth and the neutral rate co-move in advanced economies. In contrast, this co-movement is not observed in emerging economies. We argue that capital flows may explain this behavior. We focus on Mexico, a benchmark emerging economy, and find that capital inflows may account for a temporary reduction in the Mexican neutral rate after the global financial crisis. These inflows surged during the implementation of unconventional monetary policies in advanced economies. In turn, low-frequency changes in the neutral rate may be attributed to increasing domestic savings, demographics, and a decreasing global long-run real interest rate. These results are largely consistent with other studies showing that the neutral rate has decreased in the last 25 years in advanced and emerging economies.
    Keywords: Neutral rate of interest;emerging market economies;transitory and structural factors
    JEL: C10 E43 E52
    Date: 2018–11
  13. By: Hans-Ueli Hunziker; Christian Raggi; Rina Rosenblatt-Wisch; Attilio Zanetti
    Keywords: Long-term inflation expectations, firms' inflation expectations, guidance and uncertainty
    JEL: C22 E31 E50 D83
    Date: 2018
  14. By: Błażejowski, Marcin; Kufel, Paweł; Kufel, Tadeusz; Kwiatkowski, Jacek; Osińska, Magdalena
    Abstract: The aim of this study was to verify the stability of monetary systems. Systems were measured by aggregate narrow money in selected emerging economies. The United Kingdom's economy was used as a benchmark. The Baumol-Tobin and Friedman monetary models were used as the theoretical basis for the for empirical error-correction models. A Bayesian averaging of classical estimates (BACE) approach was used to incorporate model uncertainty and select the best model. The results show that the monetary systems in 6 of the 11 economies were stable in the long run and that a set of factors changed in the short run. The robustness of the model selection based on the BACE procedure was strongly confirmed.
    Keywords: model uncertainty, BACE, jointness, robust variables selection, gretl
    JEL: C52 E41 P24
    Date: 2018–12–11
  15. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Usman Ojonugwa (Department of Economics, Eastern Mediterranean University)
    Abstract: This paper investigates the pass-through of exchange rate and oil price to inflation for BRICS countries through the analysis of Diebold and Yilmaz (2012) spillover index and rolling-window. Using the monthly frequency data, our results provide the following novelties: (i) There is strong evidence of directional spillover in all the countries; (ii) the total spillover is low, with Brazil (India) having the highest (lowest). This suggests that a greater percent of shocks is explained by idiosyncratic shocks; (iii) the net spillover of oil price (output growth) is positive (negative) for all the countries, indicating that oil price (output growth) contributes to the forecast error variance decomposition of other variables more (less) than it receives from other variables. In addition, the net spillover of exchange rate is positive only for Russia and China while consumer price index is positive only for Brazil and China; (iv) the historical events and crises interrupt the extent of spillover in all the countries; (v) even though the spillover exhibits significant bursts, there is no clear-cut evidence of trends. Therefore, our findings have policy implications for the attainment of monetary policy objectives in these countries.
    Keywords: Exchange rate; Oil price; Pass-through; Inflation; Diebold-Yilmaz spillover index
    JEL: C32 C58 E31
    Date: 2018
  16. By: Jean-Luc Gaffard (Observatoire français des conjonctures économiques)
    Abstract: This paper is aimed at revisiting monetary analysis in order to better understand erroneous choices in the conduct of monetary policy. According to the prevailing consensus, the market economy is intrinsically stable and is upset only by poor behaviour by government or the banking system. We maintain on the contrary that the economy is unstable and that achieving stability requires a discretionary economic policy. This position relies upon an analytical approach in which monetary and financial organisations are devices that help markets to function. In this perspective, which focuses on the heterogeneity of markets and agents, and, consequently, on the role of institutions in determining overall performance, it turns out that nominal rigidities and financial commitment offer the means to achieve economic stability. This is because they prevent successive, unavoidable disequilibria from becoming explosive.
    Keywords: Inflation; Market; Money; Stability
    JEL: E31 E32 E5 E61 E62
    Date: 2018–11
  17. By: Stéphane Auray (ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information - Ensai, Ecole Nationale de la Statistique et de l'Analyse de l'Information, CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], ULCO - Université du Littoral Côte d'Opale); Aurélien Eyquem (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Xiaofei Ma (CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], UEVE - Université d'Évry-Val-d'Essonne)
    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
    Date: 2018
  18. By: Hauzenberger, Niko; Huber, Florian
    Abstract: In this paper we aim to improve existing empirical exchange rate models by accounting for uncertainty with respect to the underlying structural representation. Within a flexible Bayesian non-linear time series framework, our modeling approach assumes that different regimes are characterized by commonly used structural exchange rate models, with their evolution being driven by a Markov process. We assume a time-varying transition probability matrix with transition probabilities depending on a measure of the monetary policy stance of the central bank at the home and foreign country. We apply this model to a set of eight exchange rates against the US dollar. In a forecasting exercise, we show that model evidence varies over time and a model approach that takes this empirical evidence seriously yields improvements in accuracy of density forecasts for most currency pairs considered.
    Keywords: Empirical exchange rate models, exchange rate fundamentals, Markov switching
    Date: 2018–12
  19. By: Gabriel Chodorow-Reich; Gita Gopinath; Prachi Mishra; Abhinav Narayanan
    Abstract: We analyze a unique episode in the history of monetary economics, the 2016 Indian “demonetization.” This policy made 86% of cash in circulation illegal tender overnight, with new notes gradually introduced over the next several months. We present a model of demonetization where agents hold cash both to satisfy a cash-in-advance constraint and for tax evasion purposes. We test the predictions of the model in the cross-section of Indian districts using several novel data sets including: a data set containing the geographic distribution of demonetized and new notes for causal inference; nightlights data and employment surveys to measure economic activity including in the informal sector; debit/credit cards and e-wallet transactions data; and banking data on deposit and credit growth. Districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth. The cross-sectional responses cumulate to a contraction in employment and nightlights-based output due to demonetization of 2 p.p. and of bank credit of 2 p.p. in 2016Q4 relative to their counterfactual paths, effects which dissipate over the next few months. We use our model to show these cumulated effects are a lower bound for the aggregate effects of demonetization. We conclude that unlike in the cashless limit of new-Keynesian models, in modern India cash serves an essential role in facilitating economic activity.
    JEL: E5 O23
    Date: 2018–12
  20. By: Ernst, Ekkehard; Merola, Rossana.
    Abstract: This paper attempts to quantify the impact of central bank communication on macroeconomic variables using an purpose-built index.
    Keywords: 1, 2, 3
    Date: 2018
  21. By: Georgios Magkonis (University of Portsmouth); Simon Rudkin (Swansea University)
    Abstract: Based on the limitations imposed by the trilemma, this paper examines the trade-offs faced by the Chinese economy. Taking into account the role of accumulation of foreign reserves we examine how binding the constraints are for the Chinese monetary authorities. Using a Panel VAR with dynamic and static interdependencies as well as cross-sectional heterogeneities, we examine the monetary spillovers from China to a series of Asian economies. In this way, we measure the degree to which the Chinese trilemma constraints are exported to other countries. Consistent with previous research, our empirical evidence suggests that China's trilemma configurations are unique as China manages to achieve exchange rate stability, along with moderate financial liberalization, without losing its monetary autonomy. Furthermore, there are no significant spillovers to regional economies. Overall, trilemma does speak Chinese, but only for a short period.
    Keywords: Trilemma, international reserves, Panel VAR
    JEL: F36 F41 O53
    Date: 2019–01–09
  22. By: Sharif, Bushra; Qayyum, Abdul
    Abstract: In this study, we attempt to estimate Inflation-Output Gap Trade-off with Triangle model using Time Series data over the periods of 1971-2016 in case of Pakistan. For this purpose we used a three step methodology to estimate inflation-output trade-off with triangle model such as Unit root Analysis, cointegration Analysis and Error Correction Model. Dynamic of inflation has significant impact on output containing different two shock dummy variables in inflation. Empirical finding of this thesis shows that long run and significant relationship exist between inflation and supply shocks variables such as oil prices and nominal exchange rate but no long run relationship exist between inflation and output gap. Output gap has positive and significant impact on inflation in short run but supply shock variables have no impact on inflation dynamic in short run. The dynamic inflation is important to determine the relationship between inflation-outpu
    Keywords: Inflation; Output Gap; Trade-off; Triangle Model; Unit Root, Cointegration; Pakistan
    JEL: C22 E0 E2
    Date: 2018
  23. By: Joao Ayres; Marcio Garcia; Diogo A. Guillén; Patrick J. Kehoe
    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.
    JEL: E0 E02 E3 E4 E42 E5 E58 E6
    Date: 2019–01
  24. By: James Cloyne; Clodomiro Ferreira; Maren Froemel; Paolo Surico
    Abstract: We provide new evidence on how monetary policy affects investment and firm finance in the United States and the United Kingdom. Younger firms paying no dividends exhibit the largest and most significant change in capital expenditure - even after conditioning on size, asset growth, Tobin's Q, leverage or liquidity - and drive the response of aggregate investment. Older companies, in contrast, hardly react at all. After a monetary policy tightening, net worth falls considerably for all firms but borrowing declines only for younger non-dividend payers, as their external finance is mostly exposed to asset value fluctuations. Conversely, cash flows change less markedly and more homogeneously across groups. Our findings highlight the role of firm finance and financial frictions in amplifying the effects of monetary policy on investment.
    JEL: E22 E32 E52
    Date: 2018–12
  25. By: Hoda Selim (International Monetary Fund)
    Abstract: The paper shows that central banks in Arab oil exporters are not independent. Low independence reflects institutional arrangements that allow the executive branch to influence, interfere and in some cases, dominate over central bank operations. The paper argues that in a context of weak institutions, CBI has not always mattered for macroeconomic policy outcomes in Arab oil exporters. GCC central banks delivered a better macroeconomic policy performance than those of the populous group. CBI mattered less for the GCC because the credible peg discouraged discretion and was a good substitute for it. Soft peg arrangements in the populous economies in a context of weak institutions and discretionary policymaking in the absence of a de facto independent central bank led to disappointing monetary policy outcomes. As oil exporters adapt to a new normal of low oil prices, the sustainability of fixed exchange regimes may not be guaranteed without sound macroeconomic institutions. Stronger institutions and effective accountability mechanisms are needed to insulate central banks from political pressures. In the short-term, a rules-based framework could help.
    Date: 2018–09–18
  26. By: García-Verdú Santiago; Ramos Francia Manuel
    Abstract: Our interest is to understand the costs of deflation. Thus, we explore the extent to which deflationary risks have surged in a selected set of European economies. To that end, we develop a simple consumption-based asset pricing model and, based on it, we estimate a(n) (in)deflation risk premium. We find that our aggregate risk premium and a systemic financial stress indicator correlate negatively. The absolute values of their (time-averaged) risk premiums and their financial development indices correlate as well. Both relations are in line with our model. In addition, we estimate panel data regressions to explore the extent to which changes in the price and debt levels, are priced in by the (in)deflation risk premium. We generally find that deflation terms contributes negatively to such a premium and inflation positively. The magnitudes of the coefficients associated with deflation tend to be greater, compared to those associated with inflation. This suggests that deflationary costs are relatively larger than inflationary ones. We rationalize this cost asymmetry with the presence of a credit constraint under deflationary periods.
    Keywords: Consumption-based asset pricing;Inflation;Deflation;Inflation Risk Premium;Deflation Risk Premium;Eurozone
    JEL: G12 E31
    Date: 2018–11
  27. By: Alessandro Borin (Bank of Italy); Andrea Linarello (Bank of Italy); Elena Mattevi (Bank of Italy); Giordano Zevi (Bank of Italy)
    Abstract: The paper analyzes how the choice of the invoicing currency used in international transactions by the Italian companies influences the transmission of exchange rates shocks to their price strategies and business activity. Companies invoicing in euros tend to not adjusting the prices of exported goods; in this case the exchange rate fluctuations are transmitted almost entirely to the prices of their goods in the destination countries, also inducing a large response of the exported volumes. On the other hand, companies that invoice in local currency transmit weakly the exchange rate fluctuations to prices in destination markets and therefore attenuate the impacts on exports volumes. Fixing prices in foreign currency is more frequent among larger and more productive companies, which tend to transfer the exchange rate shocks mostly on unit margins. Overall, despite the different transmission channels, the effect of exchange rate fluctuations on foreign turnover in euros, is quite similar among the different pricing strategies.
    Keywords: invoicing currency, exchange rate pass-through
    JEL: F3 F4
    Date: 2018–12

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