nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒01‒21
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Attenuating the forward guidance puzzle: implications for optimal monetary policy By Nakata, Taisuke; Ogaki, Ryota; Schmidt, Sebastian; Yoo, Paul
  2. The exchange rate pass-through to CPI inflation and its components in Azerbaijan By Vugar Rahimov; Nigar Jafarova
  3. New VAR evidence on monetary transmission channels: temporary interest rate versus inflation target shocks By Elizaveta Lukmanova; Katrin Rabitsch
  4. The Macroeconomics of the Gold Economy in Sudan By Ibrahim Elbadawi; Kabbashi Suliman
  5. A large central bank balance sheet? floor vs corridor systems in a new keynesian environment By Óscar Arce; Galo Nuño; Dominik Thaler; Carlos Thomas
  6. The fear of float of the Swiss National Bank By Berthold, Kristin; Stadtmann, Georg
  7. Non-monetary news in central bank communication By Anna Cieslak; Andreas Schrimpf
  8. The Foreign Exchange Market With the Cryptocurrency and "Kimchi Premium" By Oh, Jeong Hun
  9. Endogenous forward guidance By Boris Chafwehé; Rigas Oikonomou; Romanos Priftis; Lukas Vogel
  10. Exchange Rates and Uncovered Interest Differentials: The Role of Permanent Monetary Shocks By Stephanie Schmitt-Grohé; Martín Uribe
  11. “Has the ECB’s Monetary Policy Prompted Companies to Invest or Pay Dividends?” By Lior Cohen; Marta Gómez-Puig; Simón Sosvilla-Rivero
  12. Central Bank Policies and Financial Markets: Lessons from the Euro Crisis By Ashoka Mody; Milan Nedeljkovic
  13. Dominant currencies How firms choose currency invoicing and why it matters By Mary Amiti; Oleg Itskhoki; Jozef Konings
  14. Does Monetary Policy in Advanced Economies Have Differentiated Effects on Portfolio Flows to Emerging Economies? By Hernández Vega Marco A.
  15. Forecasting and Trading Monetary Policy Effects on the Riskless Yield Curve with Regime Switching Nelson‐Siegel Models By Massimo Guidolin; Manuela Pedio
  16. Does Inflation Uncertainty Matter for Validity of Romer’s Hypothesis? Evidence from Nigeria. By Alimi, R. Santos; Olorunfemi, Sola
  17. Money growth and inflation : International historical evidence on high inflation episodes for developed countries By Gallegati, Marco; Giri, Federico; Fratianni, Michele
  18. Inflation Expectations and Firm Decisions: New Causal Evidence By Coibion, Olivier; Gorodnichenko, Yuriy; Ropele, Tiziano
  19. Model instability in predictive exchange rate regressions By Niko Hauzenberger; Florian Huber
  20. Inflation Globally By Jorda, Oscar; Nechio, Fernanda
  21. Is euro area lowflation here to stay ? Insights from a time-varying parameter model with survey data By Arnoud Stevens; Joris Wauters
  22. International Food Commodity Prices and Missing (Dis)Inflation in the Euro Area By Gert Peersman
  23. Classifying de facto exchange rate regimes of financially open and closed economies: A statistical approach By Dąbrowski, Marek A.; Papież, Monika; Śmiech, Sławomir
  24. A key currency view of global imbalances By Robert N McCauley; Hiro Ito
  25. Tighter Dollar Liquidity Exacerbates Pressure on Risk-parity Thesis By Xing, Victor
  26. Interest rates and foreign spillovers By De Santis, Roberto A.; Zimic, Srečko
  27. Systemic risk governance in a dynamical model of a banking system By Lorella Fatone; Francesca Mariani
  28. The Monetary and Fiscal History of Brazil, 1960-2016 By Joao Ayres; Marcio Garcia; Diogo Guillen; Patrick Kehoe
  29. Can in?ation expectations in business or consumer surveys improve in?ation forecasts? By Raïsa Basselier; David de Antonio Liedo; Jana Jonckheere; Geert Langenus
  30. Does Inflation Targeting Reduce the Dispersion of Price Setters’ Inflation Expectations? By Paulie, Charlotte
  31. Interbank Connections, Contagion and Bank Distress in the Great Depression By Calomiris, Charles W.; Jaremski, Matthew; Wheelock, David C.

  1. By: Nakata, Taisuke; Ogaki, Ryota; Schmidt, Sebastian; Yoo, Paul
    Abstract: We examine the implications of less powerful forward guidance for optimal policy using a sticky-price model with an effective lower bound (ELB) on nominal interest rates as well as a discounted Euler equation and Phillips curve. When the private-sector agents discount future economic conditions more in making their decisions today, an announced cut in future interest rates becomes less effective in stimulating current economic activity. While the implication of such discounting for optimal policy depends on its degree, we find that, under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the ELB for longer. JEL Classification: E52, E58, E61
    Keywords: discounted euler equation, discounted phillips curve, effective lower bound, forward guidance, optimal policy
    Date: 2019–01
  2. By: Vugar Rahimov (Central Bank of Azerbaijan Republic); Nigar Jafarova (Central Bank of Azerbaijan Republic)
    Abstract: In this study, we explore the pass-through of exchange rate fluctuations to domestic CPI inflation and its components in Azerbaijan. Using the data of 2003:Q1-2016:Q2, we estimate a VAR model and find significant but incomplete pass-through. The accumulated pass-through to aggregate CPI inflation is 28 percent within one year. According to our empirical findings, the largest pass-through (ERPT) is observed in the non-food component of CPI inflation which is 41 percent after twelve months period. Since the ERPT is an essential ingredient of price developments in Azerbaijan, it should be assessed precisely and taken into account in monetary policy decisions and inflation forecasting.
    Keywords: Exchange rate pass-through, VAR model, disaggregated CPI, oil exporting countries
    JEL: F31 E31 E52 C51 C52
    Date: 2017–02–09
  3. By: Elizaveta Lukmanova (KU Leuven, Faculty of Economics and Business, Department of Economics); Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business)
    Abstract: We augment a standard monetary VAR on output growth, inflation and the nominal interest rate with the central bank's inflation target, which we estimate from a New Keynesian DSGE model. Inflation target shocks give rise to a simultaneous increase in inflation and the nominal interest rate in the short run, at no output expense, which stands at the center of an active current debate on the Neo-Fisher effect. In addition, accounting for persistent monetary policy changes reflected in inflation target changes improves identification of a standard temporary nominal interest rate shock in that it strongly alleviates the price puzzle.
    Keywords: Monetary policy, Neo-Fisher effect, Time-varying inflation target, DSGE, VAR
    JEL: E12 E31 E52 E58
    Date: 2018–11
  4. By: Ibrahim Elbadawi; Kabbashi Suliman (Department of Economics, University of Khartoum, Sudan)
    Abstract: After the secession of South Sudan and the resultant drop in oil exports, Sudan has enjoyed a surge in gold exports, dominated by vast networks of artisanal and small-scale informal mining operations. A combination of fiscally dominated monetary policy and stifling foreign exchange gap prompted the government to pursue a policy of large scale gold purchases by the Central Bank, almost all financed by printing money. We argued in this paper that such policy has resulted in a ‘resource curse’, manifested by short-term macroeconomic instability and medium-term loss of competitiveness. To substantiate the argument, the paper developed a simple game-theoretic rational expectations macroeconomic model, where the payoffs associated with the strategic behavior of individual gold’s traders are used to define the Bank’s problem. The results suggested that the Bank’s monetary policy was largely influenced by the international gold price, the social tolerance for high inflation and the public sector borrowing requirements that rendered it ineffective for anchoring inflation expectations. Also, we found that higher international gold prices and the probability of successful gold’s smuggling lead to higher domestic gold pricing by the Bank. Moreover, we showed that the Bank’s gold dealership and the chosen mode of financing has caused short term inflationary spiral, excessive nominal exchange rate devaluation and medium to longer term real exchange rate appreciation. Therefore, we recommend that the gold dealership should be operated by a fiscal authority, rather than the Bank, and be part of a macroeconomic framework based on economic diversification and geared towards stabilization of the economy.
    Date: 2018–06–07
  5. By: Óscar Arce (Banco de España); Galo Nuño (Banco de España); Dominik Thaler (Banco de España); Carlos Thomas (Banco de España)
    Abstract: The quantitative easing (QE) policies implemented in recent years by central banks have had a profound impact on the working of money markets, giving rise to large excess reserves and pushing down key interbank rates against their floor – the interest rate on reserves. With macroeconomic fundamentals improving, central banks now face the dilemma as to whether to maintain this large balance sheet/floor system, or else to reduce their balance sheet size towards pre-crisis trends and operate traditional corridor systems. We address this issue using a New Keynesian model featuring heterogeneous banks that trade funds in an interbank market characterized by matching frictions. In this environment, balance sheet expansions push market rates towards their floor by slackening the interbank market. A large balance sheet regime is found to deliver ampler “policy space” by widening the steady-state distance between the interest on reserves and its effective lower bound (ELB). Nonetheless, a lean-balance-sheet regime that resorts to temporary but prompt QE in response to recessions severe enough for the ELB to bind achieves similar stabilization and welfare outcomes as a large-balance-sheet regime in which interest-rate policy is the primary adjustment margin thanks to the larger policy space.
    Keywords: central bank balance sheet, interbank market, search and matching frictions, reserves, zero lower bound
    JEL: E42 E44 E52 G21
    Date: 2018–12
  6. By: Berthold, Kristin; Stadtmann, Georg
    Abstract: We theoretically examine under which assumptions the impossible trinity holds. We also focus on the most recent Swiss experience and ask, if the SNB gained monetary independence by switching from a fixed to a floating exchange rate system in January 2015. The theoretical examination shows that the impossible trinity holds under the following assumptions: Equality of domestic and foreign real interest rates, the quantity theory of money holds, and that the relative PPP is fulfilled. The empirical analysis reveals that relative PPP does not hold for the Swiss case and it was necessary for the SNB to adopt its monetary policy in accordance with the ECB's expansive monetary policy. The paper shows that for a small open economy, such as Switzerland, it does not play a role for its monetary policy independence whether the central bank implements a fixed or a floating exchange rate system.
    Keywords: foreign exchange market,Swiss crisis,impossible trinity,monetary policy independence
    JEL: E52 E58 E42
    Date: 2018
  7. By: Anna Cieslak; Andreas Schrimpf
    Abstract: We quantify the importance of non-monetary news in central bank communication. Using evidence from four major central banks and a comprehensive classification of events, we decompose news conveyed by central banks into news about monetary policy, economic growth, and separately, shocks to risk premia. Our approach exploits high-frequency comovement of stocks and interest rates combined with monotonicity restrictions across the yield curve. We find significant differences in news composition depending on the communication channel used by central banks. Non-monetary news prevails in about 40% of policy decision announcements by the Fed and the ECB, and this fraction is even higher for communications that provide context to policy decisions such as press conferences. We show that non-monetary news accounts for a significant part of financial markets' reaction during the financial crisis and in the early recovery, while monetary shocks gain importance since 2013.
    Keywords: central bank communication, monetary policy shocks, yield curve, stock-bond comovement, central bank information effects, risk premia
    JEL: G12 E43 E52 E58
    Date: 2018–12
  8. By: Oh, Jeong Hun
    Abstract: This paper explores the remarkable roles of exchange rates when a cryptocurrency is adopted and commonly used as another type of foreign currency in the international economy. First, in order to examine its movement, we describe the price of a cryptocurrency as the relative price in terms of a standard currency using the exchange rate formula. Second, we identify three determinants of the "Kimchi premium" from the equilibrium condition in the foreign exchange market: the gaps in the rates of return of the cryptocurrency, the interest rates of the standard currencies, and the expected cryptocurrency exchange rates. Finally, using the money market and the foreign exchange market rationalities, we demonstrate the process that the new cryptocurrency in a country can cause a rise in the money supply, a fall in the interest rate, and a rise in the exchange rate in the end.
    Keywords: Cryptocurrency,"Kimchi premium," Exchange rate,Interest Rate
    Date: 2018
  9. By: Boris Chafwehé (Universit´e Catholique de Louvain and FNRS); Rigas Oikonomou (Universit´e Catholique de Louvain); Romanos Priftis (Bank of Canada); Lukas Vogel (Directorate General for Economic and Financial Affairs. European Commission)
    Abstract: We propose a novel framework where forward guidance (FG) is endogenously determined. Our model assumes that a monetary authority solves an optimal policy problem under com- mitment at the zero-lower bound. FG derives from two sources: 1. from commiting to keep interest rates low at the exit of the liquidity trap, to stabilize inflation today. 2. From debt sustainability concerns, when the planner takes into account the consolidated budget constraint in optimization. Our model is tractable and admits an analytical solution for interest rates in which 1 and 2 show up as separate arguments that enter additively to the standard Taylor rule. In the case where optimal policy reflects debt sustainability concerns (satisfies the consoli- dated budget) monetary policy becomes subservient to fiscal policy, giving rise to more volatile inflation, output and interest rates. Liquidity trap (LT) episodes are longer, however, the impact of interest rate policy commitments on inflation and output are moderate. ’Keeping interest rates low’ for a long period, does not result in positive inflation rates during the LT, in contrast our model consistently predicts negative inflation at the onset of a LT episode. In contrast, in the absence of debt concerns, LT episodes are shorter, but the impact of commitments to keep interest rates low at the exit from the LT, on inflation and output is substantial. In this case monetary policy accomplishes to turn inflation positive at the onset of the episode, through promising higher inflation rates in future periods. We embed our theory into a DSGE model and estimate it with US data. Our findings suggest that FG during the Great Recession may have partly reflected debt sustainability concerns, but more likely policy reflected a strong commitment to stabilize inflation and the output gap. Our quantitative findings are thus broadly consistent with the view that the evolution of debt aggregates may have had an impact on monetary policy in the Great Recession, but this impact is likely to be small.
    Keywords: Bayesian estimationDSGE modelfiscal policyforward guidanceinflationLiquidity trapmonetary policy
    JEL: E31 E52 E58 E62 C11
    Date: 2018–10
  10. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: We estimate an empirical model of exchange rates with transitory and permanent monetary shocks. Using monthly post-Bretton-Woods data from the United States, the United Kingdom, and Japan, we report four main findings: First, there is no exchange rate overshooting in response to either temporary or permanent monetary shocks. Second, a transitory increase in the nominal interest rate causes appreciation, whereas a permanent increase in the interest rate causes short-run depreciation. Third, transitory increases in the interest rate cause short-run deviations from uncovered interest-rate parity in favor of domestic assets, whereas permanent increases cause deviations against domestic assets. Fourth, permanent monetary shocks explain the majority of short-run movements in nominal exchange rates.
    JEL: E4 F3 F40
    Date: 2018–12
  11. By: Lior Cohen (Department of Economics. Universidad de Barcelona.); Marta Gómez-Puig (Department of Economics and Riskcenter, Universidad de Barcelona.); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid.)
    Abstract: This paper focuses on how the European Central Bank’s (ECB) monetary policies influenced non-financial firms. The paper’s two main contributions are, first, to shed light on non-financial firms’ decisions on leverage, and how the ECB’s conventional and unconventional policies may have affected them. Second, the paper also examines how these policies influenced non-financial firms’ decisions on capital allocation – primarily capital spending and shareholder distribution (for example, dividends and shares repurchases). Towards this end, we use an exhaustive and unique dataset comprised of income statements and balance sheets of leading non-financial firms that operate in the European Economic and Monetary Union (EMU). The main results suggest that ECB’s monetary policies have encouraged firms to raise their debt burden especially after the global recession of 2008. Finally, the ECB’s policies, mainly after 2011, seem to have also stimulated non-financial firms to allocate more resources towards not only capital spending but also shareholder distribution
    Keywords: ECB’s monetary policy, capital structure, leverage, quantitative easing, capital expenditure, dividend’s policy, shareholder yield. JEL classification:E52, E58, G31, G32.
    Date: 2019–01
  12. By: Ashoka Mody; Milan Nedeljkovic
    Abstract: The European Central Bank (ECB) took many measures to combat the eurozone’s rolling financial crisis. For providing desperately scarce dollars to eurozone banks, the ECB relied on the U.S. Federal Reserve. Using a novel econometric framework, we identify financial markets’ response to the ECB’s liquidity injections and its more pro-active monetary stimulus between October 2009 and September 2012, the most intense phase of the eurozone crisis. Dollar liquidity clearly reduced stress in bond markets and improved economic sentiment, as reflected in higher equity prices. In contrast, passive euro liquidity provision and even active measures (policy rate reductions and bond market interventions) delivered modest results. Although government bond spreads did typically decline, markets remained worried that spreads could rise quickly; moreover, broad economic sentiment remained unchanged. Only the Outright Monetary Transactions (OMT) “bazooka” had a substantial beneficial effect. Overall, the results point to the ECB’s limits in helping improve financial market’s sentiment.
    Keywords: monetary policy, euro crises, uncertainty, conditional quantiles, MCMC, FAVAR
    JEL: E44 E58 C32 C38
    Date: 2018
  13. By: Mary Amiti (Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045); Oleg Itskhoki (Princeton University, Department of Economics, Princeton, NJ 08544); Jozef Konings (University of Liverpool Management School, Chatham St, Liverpool L69 7ZH, UK and Katholieke Universiteit Leuven, Department of Economics, Naamsestraat 69, 3000 Leuven, Belgium)
    Abstract: Large movements in exchange rates have small eects on the prices of internationally traded goods. Using a new dataset on currency invoicing of Belgian rms, we study how the currency of invoicing interacts with rm characteristics in shaping the extent of exchange rate pass-through at dierent time horizons. The US dollar and the Euro are the dominant currencies in both Belgium’s exports and imports, with substantial variation in currency choice across rms and products even within narrowly dened manufacturing industries. We nd that smaller, nonimport-intensive rms tend to denominate their exports in euros (producer currency pricing) and exhibit nearly complete exchange-rate pass-through into destination currency prices at all horizons. In contrast, the largest most import-intensive rms, and in particular with imports denominated in US dollars, tend to also denominate their exports in US dollars (dominant currency pricing) and exhibit very low passthrough in the short run, which gradually increases to 40–50% pass-through at the annual horizon. We show that these empirical patterns are in line with the predictions of a theoretical framework featuring heterogeneous rms with variable markups, endogenous international input sourcing and staggered price setting with endogenous currency choice. We plan to use a variant of a such model, disciplined with the Belgian rm-level data, for counterfactual analysis of the gradual increase in the use of the euro in international trade flows.
    Keywords: inflation forecastsmonthly consumer and producer surveysqualitative survey informationmodel-consistent expectationsJDemetra+ SSF library
    JEL: E31 E37
    Date: 2018–10
  14. By: Hernández Vega Marco A.
    Abstract: This work analyzes whether monetary policy in advanced economies has differentiated effects on portfolio flows towards emerging economies coming from the US, the Euro Area and the UK. The results show the following: First, portfolio flows' response to US monetary policy events is vastly homogeneous across regions, whilst the reaction to Euro Area or UK polices are more diverse. Second, US policies have a bigger effect on portfolio flows from each of the selected advanced economies. Third, the magnitude of investors' responses is stronger towards Emerging Europe and Latin America than to Emerging Asia. These results could be useful for policymakers in emerging economies as a benchmark to anticipate differentiated effects in portfolio flows caused by monetary policy in advanced economies.
    Keywords: Emerging Markets;Foreign Portfolio Investment;Monetary Policy Announcements
    JEL: E52 F21 G10
    Date: 2018–12
  15. By: Massimo Guidolin; Manuela Pedio
    Abstract: We use monthly data on the US riskless yield curve for a 1982-2015 sample to show that mixing simple regime switching dynamics with Nelson-Siegel factor forecasts from time series models extended to encompass variables that summarize the state of monetary policy, leads to superior predictive accuracy. Such spread in forecasting power turns out to be statistically significant even controlling for parameter uncertainty and sample variation. Exploiting regimes, we obtain evidence that the increase in predictive accuracy is stronger during the Great Financial Crisis in 2007-2009, when monetary policy underwent a significant, sudden shift. Although more caution applies when transaction costs are accounted for, we also report that the increase in predictive power owed to the combination of regimes and of monetary variables that capture the stance of unconventional monetary policies is tradeable. We devise and test butterfly strategies that trade on the basis of the forecasts from the models and obtain evidence of riskadjusted profits both per se and in comparisons to simpler models. Key words: Term structure of interest rates, Dynamic Nelson-Siegel factors, regime switching, butterfly strategies, unconventional monetary policy.
    Date: 2019
  16. By: Alimi, R. Santos; Olorunfemi, Sola
    Abstract: Romer (1993) posits openness to international restricts inflation. He offers an explanation based on time-inconsistency of monetary policy, however ensuing studies have raised questions on the validity of Romer’s assertion and its explanation. The aim of this paper was to estimate the effect of trade openness on inflation employing quantile regression analysis, contrary to traditional mean regression methods using annual data from Nigeria for the period 1970 to 2016. The paper also tested the hypothesis of whether inflation uncertainty influence the validity of Romer’s hypothesis for Nigeria. The study adopted two measures of openness – share of trade to GDP and KOF globalization index. The results of the study validate Romer’s hypothesis for both openness indexes that openness restrict inflation. With the inclusion of inflation uncertainty, the estimated impact of trade openness on inflation was quantitatively larger and the t-statistic on the interaction variable is significant in all quantiles except for the median quantile (0.50) and their coefficients are positive. The study concluded that in all distributions of inflation, inflation uncertainty reduces the ability of openness to trade in curbing inflation. Therefore, it recommends that policy maker should target and control inflation uncertainty when openness is employed as key policy instrument for controlling inflation.
    Keywords: Trade openness, inflation, globalization index, inflation uncertainty, quantile regression.
    JEL: C12 C22 E31 F41
    Date: 2018–04
  17. By: Gallegati, Marco; Giri, Federico; Fratianni, Michele
    Abstract: How long is the long run in the relationship between money growth and inflation? How important are high inflation episodes for the unit slope finding in the quantity theory of money? To answer these questions we study the relationship between excess money growth and inflation over time and across frequencies using annual data from 1871 to 2013 for several developed countries. Wavelet-based exploratory analysis shows the existence of a close stable relationship between excess money growth and inflation only over longer time horizons, i.e. periods greater than 16 and 24 years, with money growth mostly leading. When we investigate the sensitivity of the unit slope finding to inflation episodes using a scale-based panel data approach we find that low-frequency regression coefficients estimated over variable-length subsamples before and after WWII are largely affected by high inflation episodes. Taken together the results that inflationary upsurges affect regression coefficients but not the closeness of the long-run relationship call for a qualification of the Quantity Theory of Money and suggests that policymakers should not lose interest on monetary developments.
    JEL: C22 E40 E50 N10
    Date: 2019–01–09
  18. By: Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley); Ropele, Tiziano (Bank of Italy)
    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.
    Keywords: inflation expectations, surveys, inattention
    JEL: E2 E3
    Date: 2018–12
  19. By: Niko Hauzenberger (Vienna University of Economics and Business, Department of Economics); Florian Huber (Paris Lodron University of Salzburg, Salzburg Centre of European Union Studies)
    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
    JEL: C30 E32 E52 F31
    Date: 2018–12
  20. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Nechio, Fernanda (Federal Reserve Bank of San Francisco)
    Abstract: The Phillips curve remains central to stabilization policy. Increasing financial linkages, international supply chains, and managed exchange rate policy have given core currencies an outsized influence on the domestic affairs of world economies. We exploit such influence as a source of exogenous variation to examine the effects of the recent financial crisis on the Phillips curve mechanism. Using a difference-in-differences approach, and comparing countries before and after the 2008 financial crisis sorted by whether they endured or escaped the crisis, we are able to assess the evolution of the Phillips curve globally.
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2018–12–07
  21. By: Arnoud Stevens (National Bank of Belgium); Joris Wauters (National Bank of Belgium and Ghent University)
    Abstract: Inflation has been persistently weak in the euro area despite the economic recovery since 2013. We investigate the sources behind this protracted low inflation by building a time-varying parameter model that jointly explains the dynamics of inflation and inflation expectations from the ECB’s Survey of Professional Forecasters. We find that the inclusion of survey data strengthens the view that low inflation was mainly due to cyclical drivers. In particular, the model with survey expectations finds a more muted decline of trend inflation in recent years and a larger degree of economic slack. The impact of economic slack and import prices on inflation is found to have increased in recent years. We also find that survey expectations have become less persistent over the financial crisis period, and that including survey data improves the model’s out-of-sample forecasting performance.
    Keywords: in?ation dynamics, trend in?ation, survey-based in?ation expectations, ECB Survey of Pro- fessional Forecasters, nonlinear state space model, Bayesian estimation, euro area
    JEL: E31 C11 C32
    Date: 2018–10
  22. By: Gert Peersman (Ghent University)
    Abstract: This paper examines the causal effects of shifts in international food commodity prices on euro area inflation dynamics using a structural VAR model that is identified with an external instrument (i.e. a series of global harvest shocks). The results reveal that exogenous food commodity price shocks have a strong impact on consumer prices, explaining on average 25%-30% of inflation volatility. In addition, large autonomous swings in international food prices contributed significantly to the twin puzzle of missing disinflation and missing inflation in the era after the Great Recession. Specifically, without disrup- tions in global food markets, inflation in the euro area would have been 0.2%-0.8% lower in the period 2009-2012 and 0.5%-1.0% higher in 2014-2015. An analysis of the transmission mechanism shows that international food price shocks have an impact on food retail prices through the food production chain, but also trigger indirect effects via rising inflation expectations and a depreciation of the euro.
    Keywords: Food commodity prices, inflation, twin puzzle, euro area, SVAR-IV
    JEL: E31 E52 Q17
    Date: 2018–10
  23. By: Dąbrowski, Marek A.; Papież, Monika; Śmiech, Sławomir
    Abstract: This paper offers a new de facto exchange rate regime classification that draws on the strengths of three popular classifications. Its two hallmarks are the careful treatment of a nexus between exchange rate regime and financial openness and the use of formal statistical tools (the trimmed k-means and k-nearest neighbour methods). It is demonstrated that our strategy minimises the impact of differences between market-determined and official exchange rates on the ‘fix’ and ‘float’ categories. Moreover, it is more suited to assess empirical relevance of the Mundellian trilemma and ‘irreconcilable duo’ hypotheses. Using comparative analysis we find that the degree of agreement between classifications is moderate: the null of no association is strongly rejected, but its strength ranges from low to moderate. Moreover, it is shown that our classification is the most strongly associated with each of the other classifications and as such can be considered (closest to) a centre of a space of alternative classifications. Finally, we demonstrate that unlike other classifications, ours lends more support to the Mundellian trilemma than to the ‘irreconcilable duo’ hypothesis. Overall, our classification cannot be considered a variant of any other de facto classification. It is a genuinely new classification.
    Keywords: exchange rate regime; financial openness; macroeconomic trilemma; cluster analysis
    JEL: C38 C82 F31 F33
    Date: 2019–01–09
  24. By: Robert N McCauley; Hiro Ito
    Abstract: This study divides the world into currency zones according to the co-movement of each currency with the key currencies. The dollar zone groups economies that produce well over half of global GDP. The euro zone now includes almost all of Europe and some commodity producers, but remains less than half the size of the dollar zone. The dollar zone share has shown striking stability despite big shifts across zones over time. These include the demise of the sterling zone and the expansion of the DM/euro from northwestern Europe to Europe and beyond. Global imbalances differ from a currency perspective. In the 2000s, the dollar zone's current account disappeared by the onset of the Global Financial Crisis (GFC), even as the US current account plumbed all-time lows. The dollar zone's net international investment position also reached balance then. Thus, neither flow nor stock readings on the dollar zone supported widespread predictions in the early 2000s of an imminent dollar crash. In fact, most of the long-term widening of current accounts occurred within currency zones, where by construction currency risk is limited. Our account of the dollar's dominance rests not on the US economy's size but rather on the size of the dollar zone. In such a world, the rise of another large economy poses the question not of relative size but rather of re-alignment of third currencies. What if the renminbi becomes a key currency alongside the dollar and the euro? Already some emerging market currencies are co-moving with the renminbi against the dollar. On current evidence, a renminbi zone would shrink the dollar zone, and widen its current account deficit.
    Keywords: global imbalances, current accounts, currency zones, international investment positions
    JEL: F31 F32 F33 F41
    Date: 2018–12
  25. By: Xing, Victor
    Abstract: Global monetary authorities remained steadfast in policy normalization to pare unconventional easing programs, as Federal Reserve’s balance sheet run-off and China’s BRI loans created a perfect storm in dollar liquidity tightening. There are signs that risk-parity funds are in the grip of a pincer movement, with rising reflationary pressure from globalization’s retreat and tighter dollar liquidity spur deleveraging flows and deny investors safe harbors from cross asset risk shedding; this can be seen in short-covering and flight-to-quality flows to long-maturity Treasuries, which increased bond funds' vulnerabilities to higher interest rates. Some investors view tighter financial conditions as signs of “policy error” after past decade’s policy easing, but BIS cautioned that FCIs’ sensitivity to equities may induce policymakers to place excess weight on stock valuations, overstate easy financial conditions’ benefits, and overlook the distributional effects of monetary accommodation.
    Keywords: Risk-parity investments, quantitative tightening, dollar liquidity shortage, Belt and Road Initiative, financial conditions, distributional effects
    JEL: E0 E3 E4 E5 G1 G2
    Date: 2018–12–23
  26. By: De Santis, Roberto A.; Zimic, Srečko
    Abstract: We show that medium-term interest rates in the euro area, Japan, UK and US are affected by domestic and foreign shocks. We find that US rates are the main source of spillovers globally and are less exposed to foreign shocks. Foreign spillovers to European rates were negligible only during the sovereign debt crisis and the introduction of more aggressive monetary policies by the ECB. We identify causal relations among asset prices through structural vector autoregressions (SVAR) and magnitude restrictions. We use preliminary regressions on event days to estimate key parameters employed to constrain the structural parameter space of the SVAR. JEL Classification: C3, G2
    Keywords: event-study, magnitude restrictions, money market rates, spillovers, SVAR
    Date: 2019–01
  27. By: Lorella Fatone; Francesca Mariani
    Abstract: We consider the problem of governing systemic risk in a banking system model. The banking system model consists in an initial value problem for a system of stochastic differential equations whose dependent variables are the log-monetary reserves of the banks as functions of time. The banking system model considered generalizes previous models studied in [5], [4], [7] and describes an homogeneous population of banks. Two distinct mechanisms are used to model the cooperation among banks and the cooperation between banks and monetary authority. These mechanisms are regulated respectively by the parameters $\alpha$ and $\gamma$. A bank fails when its log-monetary reserves go below an assigned default level. We call systemic risk or systemic event in a bounded time interval the fact that in that time interval at least a given fraction of the banks fails. The probability of systemic risk in a bounded time interval is evaluated using statistical simulation. A method to govern the probability of systemic risk in a bounded time interval is presented. The goal of the governance is to keep the probability of systemic risk in a bounded time interval between two given thresholds. The governance is based on the choice of the log-monetary reserves of a kind of "ideal bank" as a function of time and on the solution of an optimal control problem for the mean field approximation of the banking system model. The solution of the optimal control problem determines the parameters $\alpha$ and $\gamma$ as functions of time, that is defines the rules of the borrowing and lending activity among banks and between banks and monetary authority. Some numerical examples are discussed. The systemic risk governance is tested in absence and in presence of positive and negative shocks acting on the banking system.
    Date: 2018–12
  28. By: Joao Ayres (Inter-American Development Bank); Marcio Garcia (CNPq; FAPERJ; Pontifical Catholic University of Rio de Janeiro); Diogo Guillen (Itau-Unibanco Asset Management; ); Patrick Kehoe (Centre for Macroeconomics (CFM); Federal Reserve Bank of Minneapolis; Stanford University; Unbiversity College London (UCL))
    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.
    Date: 2018–12
  29. By: Raïsa Basselier (National Bank of Belgium, Economics and Research Department); David de Antonio Liedo (National Bank of Belgium, R&D Statistics); Jana Jonckheere (National Bank of Belgium, Economics and Research Department); Geert Langenus (National Bank of Belgium, Economics and Research Department)
    Abstract: In this paper we develop a new model that incorporates inflation expectations and can be used for the structural analysis of inflation, as well as for forecasting. In this latter connection, we specifically look into the usefulness of real-time survey data for inflation projections. We contribute to the literature in two ways. First, our model extracts the inflation trend and its cycle, which is linked to real economic activity, by exploiting a much larger information set than typically seen in this class of models and without the need to resort to Bayesian techniques. The reason is that we use variables reflecting inflation expectations from consumers and firms under the assumption that they are consistent with the expectations derived from the model. Thus, our approach represents an alternative way to shrink the model parameters and to restrict the future evolution of the factors. Second, the inflation expectations that we use are derived from the qualitative questions on expected price developments in both the consumer and the business surveys. This latter source, in particular, is mostly neglected in the empirical literature. Our empirical results suggest that overall, inflation expectations in surveys provide useful information for inflation forecasts. In particular for the most recent period, models that include survey expectations on prices tend to outperform similar models that do not, both for Belgium and the euro area. Furthermore, we find that the business survey, i.e. the survey replies by the price-setters themselves, contributes most to these forecast improvements
    Keywords: in?ation forecastsmonthly consumer and producer surveysqualitative survey informationmodel-consistent expectationsJDemetra+ SSF library
    JEL: E31 E37
    Date: 2018–10
  30. By: Paulie, Charlotte (Department of Economics)
    Abstract: Using detailed Swedish micro data on prices and costs, this paper documents a decrease in the dispersion of changes in prices and markups following the introduction of an official inflation target of 2 percent. Using a structural model to decompose the change in the price-change distribution by potential explanatory factors, about 63 percent of the decrease in the price-change dispersion can be attributed to a decrease in the cross-sectional variance of inflation expectations. The lower dispersion of inflation expectations results in a lower markup dispersion and a welfare gain equivalent to a 0.79 percent increase in consumption.
    Keywords: inflation targeting; price setting; misallocation; welfare
    JEL: D84 E52 L11
    Date: 2019–01–07
  31. By: Calomiris, Charles W. (Columbia University); Jaremski, Matthew (Utah State University); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were much more likely to close when their correspondents closed. Further, after the Federal Reserve was established, banks’ management of cash and capital buffers was less responsive to network risk, suggesting that banks expected the Fed to reduce network risk. Because the Fed’s presence removed the incentives for the most systemically important banks to maintain capital and cash buffers that had protected against liquidity risk, it likely contributed to the banking system’s vulnerability to contagion during the Depression.
    Keywords: Bank Contagion; Great Depression; Interbank Networks; Liquidity Risk; Federal Reserve System
    JEL: G21 L14 N22
    Date: 2019–01–01

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