nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒01‒28
thirty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Estimating the monetary policy interest-rate-to-performance sensitivity of the European banking sector at the zero lower bound By Bernd Hayo; Kai Henseler; Marc Steffen Rapp
  2. Liquidity and Exchange Rates: An Empirical Investigation By Charles Engel; Steve Pak Yeung Wu
  3. China vs. U.S.: IMS Meets IPS By Emmanuel Farhi; Matteo Maggiori
  4. Gains from Policy Cooperation in Capital Controls and Financial Market Incompleteness By Shigeto Kitano; Kenya Takaku
  5. The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area By William Arrata; Benoit Nguyen; Imene Rahmouni-Rousseau; Miklos Vari
  6. Transmission of foreign monetary shocks to a small open economy under structural instability: the case of Russia By Anna Kruglova; Konstantin Styrin; Yulia Ushakova
  7. The Impact of Exogenous Liquidity Shocks on Banks Funding Costs: Microevidence from the Unsecured Interbank Market By Miguel Sarmiento; ;
  8. What is the Impact of Monetary Policy on Wealth Inequality? By Sutirtha Bagchi; Michael Patrick Curran; Matthew J. Fagerstrom
  9. Shifting Inflation Expectations and Monetary Policy By Agustín Arias; Markus Kirchner
  10. Shall We Twist? By Sophie Altermatt, Simon Beyeler
  11. Monetary policy, trade, and endogenous growth under different international financial market structures By Michael Donadelli; Patrick Grüning; Aurelija Proskute
  12. Quantitative easing and sovereign bond yields: a global perspective By Dimitris Malliaropulos; Petros Migiakis
  13. The Redistributive Effects of a Money-Financed Fiscal Stimulus. By Chiara Punzo; Lorenza Rossi
  14. Testing the Friedman and Schwartz Hypothesis using Time Varying Correlation Analysis By Ghosh, Taniya; Parab, Prashant Mehul
  15. The limits of Quantitative Easing Monetary Policies: how to overcome them? By Albert Marouani
  16. Revisiting the Impacts of Exchange Rate Movement on the Dollarization Process in Cambodia By Samreth, Sovannroeun; Sok, Pagna
  17. Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates By Mertens, Thomas M.; Williams, John C.
  18. Banks’ Trading after the Lehman Crisis – The Role of Unconventional Monetary Policy By Isabel Schnabel; Johannes Tischer
  19. Regulating virtual currencies By Hofert, Eduard
  20. Exchange Rate Overshooting: A Reassessment in a Monetary Framework By Ghosh, Taniya; Bhadury, Soumya Suvra
  21. A Simple Macro-Finance Measure of Risk Premia in Fed Funds Futures By Anthony M. Diercks; Uri Carl
  22. Monetary-fiscal interaction and quantitative easing By Hollmayr, Josef; Kühl, Michael
  23. Financial Cycles, Credit Bubbles and Stabilization Policies By Luisa Corrado; Tobias Schuler
  24. Money Is More Than Memory By Maria Bigoni; Gabriele Camera; Marco Casari
  25. Banking Panics and the Lender of Last Resort in a Monetary Economy By Makoto (M.) Watanabe; Tarishi Matsuoka
  26. The Long-Run Demand for M2 Reconsidered By Sophie Altermatt
  27. Modeling rates of inflation in Nigeria: an application of ARMA, ARIMA and GARCH models By NYONI, THABANI; NATHANIEL, SOLOMON PRINCE
  28. Monetary Policy Communication Shocks and the Macroeconomy By Goodhead, Robert; Kolb, Benedikt
  29. Deposit Spreads and the Welfare Cost of Inflation By Pablo Kurlat
  30. Not all price endings are created equal: Price points and asymmetric price rigidity By Levy, Daniel; Snir, Avichai; Gotler, Alex; Chen, Haipeng (Allan)
  31. Financial Dollarization in Emerging Markets: An Insurance Arrangement By Husnu C. Dalgic
  32. Should the central bank issue e-money? By Kahn, Charles M.; Rivadeneyra, Francisco; Wong, Tsz-Nga
  33. On money, debt, trust and central banking By Claudio Borio
  34. The Founding of the Federal Reserve, the Great Depression and the Evolution of the U.S. Interbank Network By Jaremski, Matthew; Wheelock, David C.
  35. The Fiscal Theory of the Price Level in Overlapping Generations Models By Roger E.A. Farmer; Pawel Zabczyk
  36. Has Money Lost Its Relevance? Resolving the Exchange Rate Disconnect Puzzle By Ghosh, Taniya; Bhadury, Soumya Suvra

  1. By: Bernd Hayo (Philipps-Universitaet Marburg); Kai Henseler (Philipps-Universitaet Marburg); Marc Steffen Rapp (Philipps-Universitaet Marburg)
    Abstract: Using an event-study design, we investigate monetary policy interest-rate-to-performance sensitivity of the European banking sector over the 07/2012–06/2017 period when interest rates were (close to) zero. We apply the Wordscores approach to introductory statements of ECB's Governing Council press conferences to estimate a ‘shadow prime rate’. Based on short-run intraday event windows, we find shadow prime rate changes positively affect changes in the EURO-STOXX-Banks Future. Our findings add to the recent evidence documenting that banks benefit from increasing interest rate levels in a low-interest-rate environment.
    Keywords: ECB, central bank communication, banking sector, interest rate sensitivity, textual analysis, Wordscores
    JEL: E43 E52 E58 G14 G21
    Date: 2019
  2. By: Charles Engel; Steve Pak Yeung Wu
    Abstract: We find strong empirical evidence that economic fundamentals can well account for nominal exchange rate movements. The important innovation is that we include the liquidity yield on government bonds as an explanatory variable. We find impressive evidence that changes in the liquidity yield are significant in explaining exchange rate changes for all of the G10 countries. Moreover, after controlling for liquidity yields, traditional determinants of exchange rates – adjustment toward purchasing power parity and monetary shocks – are also found to be economically and statistically significant. We show how these relationships arise out of a canonical two-country New Keynesian model with liquidity returns. Additionally, we find a role for sovereign default risk and currency swap market frictions.
    JEL: F31 F41
    Date: 2018–12
  3. By: Emmanuel Farhi; Matteo Maggiori
    Abstract: Currently both the International Monetary System (IMS) and the International Price Systems (IPS) are dominated by the U.S. The emergence of China, both as reserve currency and as a currency of invoicing, is likely to disrupt this status quo. We provide a framework to understand the forces that will shape this transition and identify sources of instability. We highlight the risk of an abrupt shift triggered by a run on the dollar.
    JEL: D42 E12 E42 E44 F3 F55 G15 G28
    Date: 2019–01
  4. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We examine how the degree of financial market incompleteness affects welfare gains from policy cooperation in capital controls. When financial markets are incomplete, international risk sharing is disturbed. However, the optimal global policy significantly reverses the welfare deterioration due to inefficient risk-sharing. We find that when financial markets are more incomplete, the welfare gap between the optimal global policy and the Nash equilibrium increases, and the welfare gains from policy cooperation in capital controls then become larger.
    Keywords: Financial markets; Incomplete markets; Policy cooperation; Capital controls; Optimal policy; Welfare; Ramsey policy; Open-loop Nash game
    JEL: D52 E61 F32 F42 G15
    Date: 2019–01
  5. By: William Arrata; Benoit Nguyen; Imene Rahmouni-Rousseau; Miklos Vari
    Abstract: Most short-term interest rates in the Euro area are below the European Central Bank deposit facility rate, the rate at which the central bank remunerates banks’ excess reserves. This unexpected development coincided with the start of the Public Sector Purchase Program (PSPP). In this paper, we explore empirically the interactions between the PSPP and repo rates. We document different channels through which asset purchases may affect them. Using proprietary data from PSPP purchases and repo transactions for specific (“special") securities, we assess the scarcity channel of PSPP and its impact on repo rates. We estimate that purchasing 1 percent of a bond outstanding is associated with a decline of its repo rate of 0.78 bps. Using an instrumental variable, we find that the full effect may be up to six times higher.
    Keywords: Central banks and their policies;Repurchase agreements;Monetary policy;Money markets;Interest rates;Assets;Specialness, repo market, asset purchases, money market
    Date: 2018–12–07
  6. By: Anna Kruglova (University of Washington (Bank of Russia at the time of participating in this study)); Konstantin Styrin (Bank of Russia, Russian Federation); Yulia Ushakova (Bank of Russia, Russian Federation)
    Abstract: This paper studies the transmission of monetary policy shocks in the U.S. to a small open economy by estimating their effect on lending based on bank-level balance sheet data of Russian banks for 2000-2018. To identify the causal effect at the bank level we exploit heterogeneity across banks in terms of their reliance on cross-border funding. We find evidence that the effect of U.S. monetary policy shocks has been statistically and economically significant. Surprisingly, the magnitude of the effect remained roughly the same even after the monetary policy in Russia transited from exchange rate to inflation targeting. This finding suggests that a free floating regime does not attenuate the effect of foreign monetary policy shocks on domestic lending.
    Keywords: monetary policy, international spillovers, cross-border transmission
    JEL: E52 F34 G21
    Date: 2018–12
  7. By: Miguel Sarmiento (Central Bank of Colombia); ;
    Abstract: This paper examines the impact of exogenous liquidity shocks in the unsecured interbank market. We evaluate the effects of idiosyncratic liquidity shocks—arising from deposits outflow at the bank level—and of the aggregate liquidity shock related to the U.S. tapering observed between May and September of 2013. We find that both liquidity shocks are associated with higher interbank loan prices, albeit the magnitude of the overprice and the impact on the access to interbank liquidity differ depending on the borrower-specific characteristics. More capitalized and liquid banks tend to pay less for liquidity—concurrent with evidence on market discipline—but also can absorb better the impact of exogenous liquidity shocks, suggesting benefits from capital and liquidity ratios. Our results suggest that lending relationships can alleviate funding costs during idiosyncratic liquidity shocks, while central bank liquidity contributes to smooth the impact of aggregate liquidity shocks. Results have implications for both financial stability and monetary policy transmission.
    Keywords: interbank markets; market discipline; liquidity shocks; monetary policy; financial stability.
    JEL: E43 E58 L14 G12 G21
    Date: 2019–01
  8. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University); Michael Patrick Curran (Department of Economics, Villanova School of Business, Villanova University); Matthew J. Fagerstrom (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: We construct a global panel data set to examine the relationship between monetary policy and wealth inequality. Dynamic panel estimates suggest that both overall and inherited wealth inequality increase with growth in the base money supply. These results hold for countries with at least one billionaire and for OECD countries. Interest rates have an insigni cant distributional impact overall, but this relationship becomes signi cant in a sample of OECD countries.
    Keywords: Cantillon effect; wealth inequality; money nonneutrality
    JEL: F30 F31 F41 G15
    Date: 2019–01
  9. By: Agustín Arias; Markus Kirchner
    Abstract: The idea of “anchored” inflation expectations is often understood as a situation in which long-run expected inflation does not significantly respond to new information. Furthermore, expectations are thought to become “unanchored” only after a long enough sequence of inflation surprises. In this paper we conceptualize this idea in a monetary DSGE model with a time-varying learning mechanism, in which the sensitivity of agents to incoming data depends on accumulated inflation forecast errors. The latter affect the learning gain that agents use to update their beliefs on future inflation. We show how this mechanism improves the fit of the model to macroeconomic data, including expected inflation, for the Chilean inflation targeting period. In particular, we show that observed episodes with anchored and unanchored expectations are well captured by the estimated time-varying learning gain. We then use the estimated model to assess the role of monetary policy to anchor inflation expectations over time.
    Date: 2019–01
  10. By: Sophie Altermatt, Simon Beyeler
    Abstract: In recent monetary history, central banks around the world have started to introduce unconventional monetary policy measures, such as extending or restructuring the asset side of their balance sheet. The origin of these mon- etary policy tools goes back to an intervention by the U.S. Federal Reserve System under the Kennedy administration in 1961 known as Operation Twist. Operation Twist serves as a perfect laboratory to study the e ectiveness of such balance sheet policies, because interest rates neither were at their lower bound nor was the economy in a historical turmoil. We assess the actions of the FED and the Treasury under Operation Twist based on balance sheet data and evaluate their success using modern time series techniques. We nd that, although being of rather moderate size, the joint policy actions were e ective in compressing the long-short spreads of the Treasury bond rates.
    Keywords: Operation Twist, Monetary Policy, Interest Rates, Yield Curve, Time Series
    JEL: C22 E43 E52 E63 E65
    Date: 2018–05
  11. By: Michael Donadelli (Ca'Foscari University of Venice); Patrick Grüning (CEFER, Bank of Lithuania and Vilnius University); Aurelija Proskute (Bank of Lithuania)
    Abstract: This study develops a symmetric two-country New-Keynesian general equilibrium model with endogenous growth, Calvo-style price and wage rigidities, and international trade of final consumption goods and intermediate goods. The equilibrium implications of two financial market structures are compared: financial autarky and complete markets. In the case of financial autarky, no international bond is traded. In the case of complete markets, the households have access to a full set of international nominal state-contingent bonds. We find that assuming complete markets instead of financial autarky leads to higher co-movement of most macroeconomic growth rates across countries, higher co-movement of inflation rates across countries, lower uncovered interest rate parity regression coefficients, and a lower correlation between exchange rate growth and consumption growth differentials. These results are mostly in line with US and UK data from 1950-2015, which are split into two samples, 1950-1970 and 1971-2015, in order to be compared to the model with financial autarky and the model with complete markets, respectively.
    Keywords: International financial markets, Monetary policy, Nominal rigidities, Endogenous growth
    JEL: E30 E44 F44 G12 O30
    Date: 2019–01–11
  12. By: Dimitris Malliaropulos (Bank of Greece); Petros Migiakis (Bank of Greece)
    Abstract: We document the existence of a global monetary policy factor in sovereign bond yields in a panel of 45 countries, consisting of both developed and emerging economies. This global factor is related to the size of the aggregate balance sheet of the four major central banks (Fed, ECB, Bank of Japan and Bank of England). Our estimates suggest that large-scale asset purchases and liquidity provision of major central banks following the Global Financial Crisis have contributed to a significant and permanent decline in long-term yields globally, ranging from 250 basis points for AAA rated sovereigns to 330 basis points for B rated sovereigns. Fiscally weaker Eurozone countries benefited most from Quantitative Easing, with their sovereign yields declining by 600-750 basis points, depending on the rating of their sovereigns. Our findings have important policy implications: normalizing monetary policy by scaling down the expanded balance sheets of major central banks to pre-crisis levels may lead to sharp increases in sovereign bond yields globally with severe consequences for financial stability, vulnerable sovereigns and the global economy
    Keywords: monetary policy; quantitative easing; sovereign bonds; interest rates; panel cointegration.
    JEL: E42 E43 G12 G15
    Date: 2018–11
  13. By: Chiara Punzo (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Lorenza Rossi
    Abstract: This paper analyzes the redistributive channel of a money financed fiscal stimulus (MFFS). It shows that the way in which this regime is implemented is crucial to determine its redistributive effects and consequently its effectiveness. In normal times, the most effective regime is a MFFS with no additional intervention by the Central Bank to stabilize the real public debt using infiation, whereas a MFFS accompanied by real debt stabilization - through the adjustment of seigniorage - is the most effective one in a ZLB scenario. In a TANK model this regime is so effec- tive to avoid the recessionary effects implied by the ZLB. This result does not hold in a RANK model, where the redistributive channel is absent. Remarkably, contrary to the common wisdom a MFFS is followed by a moderate increase of infiation, which is only temporarily higher than the target.
    Keywords: Money-Financed scal stimulus, seignorage, govern- ment spending, redistribution, borrower-saver, scal multipliers, welfare, RANK versus TANK.
    JEL: E32 E52 E62
    Date: 2019–01
  14. By: Ghosh, Taniya; Parab, Prashant Mehul
    Abstract: The study analyses the time varying correlation of money and output using DCC GARCH model for Euro, India, Poland, the UK and the USA. In addition to simple sum money, the model uses Divisia monetary aggregate, theoretically shown as the actual measure of money. The inclusion of Divisia money restores the Friedman and Schwartz hypothesis that money is procyclical. Such procyclical nature of association was not robustly observed in the recent data when simple sum money was used.
    Keywords: DCC GARCH, Divisia, Monetary Aggregates, Real Output
    JEL: E3 E4
    Date: 2018–11–22
  15. By: Albert Marouani (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The Quantitative Easing Monetary Policies, implemented after the financial crisis of 2007-2008 were generally limited in their expected effects on growth, unemployment, inflation and exchange rates. Countries such as the USA, Great Britain and China, who were the most significantly ahead in heterodoxy by massively creating "new" money, obtained better results than those in the Euro zone, who could not create directly new currency, because of the rules laid down by the ECB. Based on this empirical observation, we analyse the theoretical foundations of Q.E monetary policies and show, contrary to generally accepted opinions, that the break away from monetarist orthodoxy and neo-liberal policies has not been complete. By adopting an institutionalist and regulationist point of view on money, we propose macroeconomic policies that could overcome the current economic crisis, while addressing the structural challenges of the energy transition and the digital economy.
    Abstract: Les politiques monétaires accommodantes mises en oeuvre après la crise financière de 2007-2008, se sont révélées globalement limitées dans leurs effets attendus sur la croissance, le chômage, l'inflation et les taux de change. On constate que des pays tels que les USA, la Grande Bretagne et la Chine qui ont été le plus loin dans l'hétérodoxie, en créant massivement de la monnaie « neuve », ont obtenu de meilleurs résultats que ceux de la zone Euro qui n'ont pu créer directement de la monnaie, en raison des règles fixées par la BCE. Partant de ce constat empirique nous avons voulu interroger les fondements théoriques des politiques monétaires accommodantes et montrer, à l'inverse des opinions généralement admises, que l'on n'était pas allé jusqu'au bout de la rupture avec le courant monétariste orthodoxe et les politiques néo-libérales. Sur la base d'une vision institutionnaliste et régulationniste de la monnaie nous faisons des propositions de politique macroéconomique qui permettraient selon nous de surmonter la crise actuelle tout en faisant face aux défis structurels de la transition énergétique et de l'économie numérique.
    Date: 2018
  16. By: Samreth, Sovannroeun; Sok, Pagna
    Abstract: Previous studies on factors affecting the substitution process between domestic currency and foreign currency (i.e., the dollarization process) in Cambodia indicate that exchange rate movement is one of its important determinants. These studies tend to assume that the effects of this movement are symmetric. However, domestic currency appreciation and depreciation can have asymmetric impacts on people’s behaviors when substituting between domestic currency and foreign currency. Therefore, this study re-examines the impacts of exchange rate movement on the dollarization process in Cambodia by taking into account the possibility of these asymmetric effects. A cointegration analysis framework is adopted for the estimation of a model that also incorporates a hysteresis effect of the dollarization process. The estimation results of quarterly data between 1994Q2 to 2017Q4 indicate that Cambodian Riel depreciation and appreciation do have asymmetric impacts on its dollarization process. These results provide some implications for policy actions addressing the dollarization issue in Cambodia.
    Keywords: Asymmetric Effects, Currency Substitution, Dollarization
    JEL: E51 F41
    Date: 2018
  17. 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 be 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.
    JEL: E52
    Date: 2019–01–11
  18. By: Isabel Schnabel; Johannes Tischer
    Abstract: Based on a unique trade-level dataset, we analyze the proprietary trading reaction of German banks to the Lehman collapse and the subsequent unconventional monetary policy measures in 2008. After the Lehman collapse, we observe that market liquidity tightened. However, there is no evidence of broad-based fire sales in the German banking sector. Instead, we observe a flight to liquidity. The European Central Bank’s unconventional measures had a strong impact on banks’ trading behavior by inducing shifts towards eligible securities and reducing pressure on market liquidity. This suggests that the unconventional measures helped stabilizing the financial system after the Lehman collapse.
    Keywords: Proprietary trading, fire sales, flight to liquidity, Lehman crisis, market liquidity, unconventional monetary policy
    JEL: E44 E50 G01 G11 G21
    Date: 2018–08
  19. By: Hofert, Eduard
    Abstract: Distributed ledger technology especially in the form of publicly coordinated validation networks such as Ethereum and Bitcoin with their own monetary circles provide for a revealing litmus test for current financial regulatory schemes. The paper highlights the interrelation between distributed coordination and the emission of virtual currency to make sense of the function of the new monetary phenomenon. It then argues for the regulation of financial services on the ground of the technology to ensure integrity standards. In this respect, it is useful to gear the development of a regulatory scheme towards the existing financial regulatory principles. However, future measures of the regulators must take the distributed nature of the platforms into account by relying on a "regulated self-regulation" of the community. Finally, the article focuses on the shortcomings of the current EU regulatory regimes, especially the regulation frameworks regarding financial services, payment services and electronic money.
    Date: 2019
  20. By: Ghosh, Taniya; Bhadury, Soumya Suvra
    Abstract: Most empirical studies on monetary policies have found exchange rate effects that are inconsistent with Dornbusch's overshooting hypothesis. Bjornland (2009) finds evidence of exchange rate overshooting by using interest rate alone as the monetary policy instrument. However, theoretically consistent way of identifying monetary policy requires capturing dual interaction between central bank's reaction to economic conditions and private sector's response to policy action. This calls for the introduction of "monetary‟ aggregates back in the models of exchange rate determination. Motivated by Bjornland's result, identification is achieved by imposing short-run and long-run restrictions while keeping the short-run interactions between monetary policy and exchange rate free. Using more appropriate econometric technique in a model aligned to theory, our paper rediscovers the validity of Dornbusch Overshooting hypothesis for Australia, Canada, New Zealand and Sweden more accurately and more robustly than Bjornland's original model.
    Keywords: Monetary Policy; Money Demand; Structural VAR; Exchange Rate Overshooting
    JEL: E4 E5 E50 F0 F3 F30
    Date: 2017–11
  21. By: Anthony M. Diercks; Uri Carl
    Abstract: In this Note, we use rolling covariances between real and nominal activity in a regression framework, combined with a model averaging approach, to uncover intuitive dynamics in the term premium.
    Date: 2019–01–08
  22. By: Hollmayr, Josef; Kühl, Michael
    Abstract: This paper analyzes the monetary-fiscal interaction if the central bank conducts quantitative easing. Although asset purchases have similar effects on the real economy under monetary and fiscal dominance, wealth effects yield a qualitatively different response on the rate of inflation. Our results show that under fiscal dominance, unconventional monetary policy has similar effects to conventional monetary policy on inflation because these wealth effects exert downward pressure on prices. The longer the average maturity, the more volatile is the transmission of quantitative easing to the real economy.
    Keywords: Monetary Policy,Fiscal Policy,Asset Purchase Program
    JEL: E32 E44 E62
    Date: 2018
  23. By: Luisa Corrado; Tobias Schuler
    Abstract: This paper analyzes the effects of several policy instruments to mitigate financial bubbles generated in the banking sector. We augment a New Keynesian macroeconomic framework by endogenizing boundedly-rational expectations on asset values of loan portfolios and allow for interbank trading. We then show how a financial bubble can develop from a financial innovation. By incorporating a loan management technology and a bank equity channel we can evaluate the efficacy of several policy instruments in counteracting financial bubbles. We find that an endogenous capital requirement reduces the impact of a financial bubble significantly while central bank intervention (“leaning against the wind”) proves to be less effective. A welfare analysis ranks the policy reaction through an endogenous capital requirement as best.
    Keywords: financial bubbles, credit-to-GDP gap, endogenous capital requirement, stabilization policies
    JEL: E44 E52
    Date: 2018
  24. By: Maria Bigoni (University of Bologna & IZA); Gabriele Camera (Chapman University & University of Bologna); Marco Casari (University of Bologna & IZA)
    Abstract: Impersonal exchange is the hallmark of an advanced society and money is one key institution that supports it. Economic theory regards money as a crude arrangement for monitoring counterparts’ past conduct. If so, then a public record of past actions—or memory—should supersede the function performed by money. This intriguing theoretical postulate remains untested. In an experiment, we show that the suggested functional equivalence between money and memory does not translate into an empirical equivalence: money removed the incentives to free ride, while memory did not. Monetary systems performed a richer set of functions than just revealing past behaviors.
    Keywords: Cooperation, intertemporal trade, experiments, institutions, social norms.
    JEL: C70 C90 D03 E40
    Date: 2018
  25. By: Makoto (M.) Watanabe (VU Amsterdam); Tarishi Matsuoka (Tokyo Metropolitan University)
    Abstract: This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of bank’s monetary reserves (or a banking panic) occurs endogenously. We show that while a discount window policy introduced by the LLR is welfare improving, it reduces the banks’ ex ante incentive to hold reserves, which increases the probability of a panic, and causes moral hazard in asset investments. We also examine the combined effect of other related policies such as a penalty in lending rate, liquidity requirements, and constructive ambiguity.
    Keywords: Monetary Equilibrium; Banking Panic; Moral Hazard; Lender of Last Resort
    JEL: E40
    Date: 2019–01–11
  26. By: Sophie Altermatt
    Abstract: This paper reconsiders the long-run demand for M2 based on a newly con- structed dataset featuring 32 countries since the rst half of the 19th century. The evidence from cointegration tests suggests that a long-run equilibrium re- lationship for M2 demand is hardly present. Speci cally, only for ve countries (Finland, Korea, Mexico, Paraguay and Taiwan) cointegration tests produce strong evidence in favor of a stable long-run money demand. Evidence for Israel and Lebanon is weaker, but still points towards a stable long-run demand for M2. For all other countries evidence speaks against a stable money demand or it is mixed across money demand speci cations and/or type of cointegration test.
    Keywords: Money Demand, Velocity, Cointegration
    JEL: E4 E41
    Date: 2018–03
    Abstract: Based on time series data on inflation rates in Nigeria from 1960 to 2016, we model and forecast inflation using ARMA, ARIMA and GARCH models. Our diagnostic tests such as the ADF tests indicate that NINF time series data is essentially I (1), although it is generally I (0) at 10% level of significance. Based on the minimum Theil’s U forecast evaluation statistic, the study presents the ARMA (1, 0, 2) model, the ARIMA (1, 1, 1) model and the AR (3) – GARCH (1, 1) model; of which the ARMA (1, 0, 2) model is clearly the best optimal model. Our diagnostic tests also indicate that the presented models are stable and hence reliable. The results of the study reveal that inflation in Nigeria is likely to rise to about 17% per annum by end of 2021 and is likely to exceed that level by 2027. In order to address the problem of inflation in Nigeria, three main policy prescriptions have been suggested and are envisioned to assist policy makers in stabilizing the Nigerian economy.
    Keywords: ARIMA; ARMA; Forecasting; GARCH; Inflation; Nigeria
    JEL: C53 E31 E37 E47
    Date: 2018–11–15
  28. By: Goodhead, Robert (Central Bank of Ireland); Kolb, Benedikt (Deutsche Bundesbank)
    Abstract: Using federal funds futures data, we show the importance of suprise communication as a component of monetary policy for U.S. macro variables, both before and after 2008. We distinguish between monetary policy action and "communication shocks" (suprise announcements about future policy moves) by decomposing futures price movements across contract maturities. Our results indicate that it is mainly communication shocks- as opposed to actual rate-change suprises- that affect production in the ways traditionally associated with monetary policy shocks between 1994 and 2008. Covering the zero-lower bound period using Eurodollar futures, we find strong effects of long-horizon communication on inflation.
    Keywords: Federal Funds Futures, FOMC, Monetary Policy, VAR Model
    JEL: E52 E58 G23 C32
    Date: 2018–12
  29. By: Pablo Kurlat
    Abstract: Since bank deposits and currency are substitutes and banks have monopoly power, higher nominal interest rates lead to higher deposit spreads. This raises the cost of transaction services, increases bank profits and attracts entry into the banking sector. Taking these effects into account, a one percentage point increase in inflation has a welfare cost of 0.086% of GDP, 6.9 times higher than traditional estimates.
    JEL: D43 E31 E41 G21
    Date: 2018–12
  30. By: Levy, Daniel; Snir, Avichai; Gotler, Alex; Chen, Haipeng (Allan)
    Abstract: We document an asymmetry in the rigidity of 9-ending prices relative to non-9-ending prices. Consumers have difficulty noticing higher prices if they are 9-ending, or noticing price-increases if the new prices are 9-ending, because 9-endings are used as a signal for low prices. Price setters respond strategically to the consumer-heuristic by setting 9-ending prices more often after price-increases than after price-decreases. 9-ending prices, therefore, remain 9-ending more often after price-increases than after price-decreases, leading to asymmetric rigidity: 9-ending prices are more rigid upward than downward. These findings hold for both transaction-prices and regular-prices, and for both inflation and no-inflation periods.
    Keywords: Asymmetric Price Adjustment, Sticky/Rigid Prices, 9-Ending Prices, Psychological Prices, Price Points, Regular/Sale Prices
    JEL: C91 C93 D01 D12 D22 D4 D40 D83 E12 E31 E52 E58 L11 L16 L21 L81 M21 M31
    Date: 2019–01–03
  31. By: Husnu C. Dalgic
    Abstract: Households in emerging markets hold significant amounts of dollar deposits while firms have significant amounts of dollar debt. Motivated by the perceived dangers, policymakers often develop regulations to limit dollarization. In this paper, I draw attention to an important benefit of dollarization, which should be taken into account when crafting regulations. I argue that dollarization repre- sents an insurance arrangement in which the entrepreneurs that own firms pro- vide income insurance to households. Emerging market exchange rates tend to depreciate in a recession so that dollar deposits in effect provide households with income insurance. With their preference for holding deposits denominated in dol- lars, households effectively starve local financial markets of local currency, which raises local interest rates. By raising local currency interest rates, they cause entrepreneurs to borrow in dollars. Consistent with my argument, countries in which the exchange depreciates in a recession have a higher level of deposit and credit dollarization. In those countries, I verify that the premium of the local interest rate over the dollar interest rate is higher. This premium is the price paid by households for insurance.
    Keywords: Emerging Markets. Financial Dollarization. Corporate Dollar Debt.
    JEL: E32 E43 E44 F32 F41 F43
    Date: 2018–11
  32. By: Kahn, Charles M. (University of Illinois at Urbana-Champaign); Rivadeneyra, Francisco (Bank of Canada); Wong, Tsz-Nga (Federal Reserve Bank of Richmond)
    Abstract: Should a central bank take over the provision of e-money, a circulable electronic liability? We discuss how e-money technology changes the tradeoff between public and private provision, and the tradeoff between e-money and a central bank's existing liabilities like bank notes and reserves. The tradeoffs depend on i) the technological setup of the e-money system (as a token or an account; centralized or decentralized); ii) the potential improvement in the implementation and transmission of monetary policy; iii) the risks to safety and privacy from cyber attacks; and iv) the uncertain impact on banks' efficiency and financial stability. The most compelling argument for central banks to issue e-money is to address competition problems in the banking sector.
    Keywords: central bank digital currencies; e-money; cryptocurrencies; token- and account- based payment payments
    JEL: E42 E51 E58
    Date: 2019–01–18
  33. By: Claudio Borio
    Abstract: This essay examines in detail the properties of a well functioning monetary system - defined as money plus the mechanisms to execute payments - in both the short and long run, drawing on both theory and the lessons from history. It stresses the importance of trust and of the institutions needed to secure it. Ensuring price and financial stability is critical to nurturing and maintaining that trust. In the process, the essay addresses several related questions, such as the relationship between money and debt, the viability of cryptocurrencies as money, money neutrality, and the nexus between monetary and financial stability. While the present monetary system, with central banks and a prudential apparatus at its core, can and must be improved, it still provides the best basis to build on.
    Keywords: monetary system, money, debt, payments, trust, monetary stability, financial stability, central bank
    JEL: E00 E30 E40 E50 G21 N20
    Date: 2019–01
  34. By: Jaremski, Matthew (Utah State University); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: Financial network structure is an important determinant of systemic risk. This paper examines how the establishment of the Federal Reserve and Great Depression affected U.S. interbank network structure. Seeking liquidity sources, banks generally preferred to connect to Federal Reserve member banks in cities with Fed offices or clearinghouses. Overall network concentration declined initially as banks connected to Federal Reserve cities other than New York, but increased in the Depression. Banks that survived the Depression generally had higher percentages of connections to Federal Reserve cities and to correspondent banks that also survived.
    Keywords: Interbank Networks; Bank Concentration; Contagion; Systemically Important Financial Institutions; Federal Reserve Act; Great Depression
    JEL: G21 L14 N22
    Date: 2019–01–17
  35. By: Roger E.A. Farmer; Pawel Zabczyk
    Abstract: We demonstrate that the Fiscal Theory of the Price Level (FTPL) cannot be used to determine the price level uniquely in the overlapping generations (OLG) model. We provide two examples of OLG models, one with three 3-period lives and one with 62-period lives. Both examples are calibrated to an income profile chosen to match the life-cycle earnings process in U.S. data estimated by Guvenen et al. (2015). In both examples, there exist multiple steady-state equilibria. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies. As long as the primary deficit or the primary surplus is not too large, the fiscal authority can conduct policies that are unresponsive to endogenous changes in the level of its outstanding debt. Monetary and fiscal policy can both be active at the same time.
    JEL: E31 E58 H62
    Date: 2019–01
  36. By: Ghosh, Taniya; Bhadury, Soumya Suvra
    Abstract: The objective of this study is to identify the monetary policy shock causing exchange rate fluctuations in the economies of India, Poland and the UK. For this purpose, an open-economy structural vector auto-regression model is used, resorting to data covering the period 2000-2015. The model used in the paper is appropriate for the small, open economies being analysed here as it facilitates estimation of theoretically correct and significant responses in terms of the price, output, and exchange rate to monetary policy tightening. The importance of monetary policy shock is established by examining the variance decomposition of forecast error, impulse response function, and out-of-sample forecast. The model also allows for the precise measurement of money through the adoption of a new monetary measure, namely, aggregation–theoretic Divisia monetary aggregate. The empirical results lead to three critical findings. Firstly, it is imperative to consider the estimated responses of output, prices, money and exchange rate to monetary policy shocks in models using monetary aggregates. Secondly, the incorporation of Divisia money in monetary policy helps in explaining fluctuations in the exchange rate. Thirdly, the inclusion of Divisia money also promotes better out-of-sample forecasting of the exchange rate.
    Keywords: Monetary policy, Monetary aggregates, Divisia, Structural VAR, Exchange rate overshooting, Liquidity puzzle, Price puzzle, Exchange rate disconnect puzzle, Forward discount bias puzzle
    JEL: E5 F00
    Date: 2018–10–02

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