nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒02‒04
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy Divergence and Net Capital Flows: Accounting for Endogenous Policy Responses By Davis, Scott; Zlate, Andrei
  3. Money, credit, monetary policy and the business cycle in the euro area: what has changed since the crisis? By Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
  4. Monetary Policy Communications and their Effects on Household Inflation Expectations By Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
  5. On the Singular Control of Exchange Rates By Ferrari, Giorgio; Vargiolu, Tiziano
  6. Digital Cash: Principles & Practical Steps By Michael D. Bordo; Andrew T. Levin
  7. The Short-Run Effect of Monetary Policy Shocks on Credit Risk: An Analysis of the Euro Area By Chi Hyun Kim; Lars Other
  8. Monetary policy, product market competition and growth By Aghion, Philippe; Farhi, Emmanuel; Kharroubi, Enisse
  9. Examining the trade-off between price and financial stability in India. By Patnaik, Ila; Mittal, Shalini; Pandey, Radhika
  10. Monetary policy with transitory vs. permanently low growth By Christophe Blot; Paul Hubert
  11. Home Ownership and Monetary Policy Transmission By Winfried Koeniger; Marc-Antoine Ramelet
  12. Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015 By Gabrieli, Silvia; Labonne, Claire
  13. Risk endogeneity at the lender/investor-of-last-resort By Caballero, Diego; Lucas, André; Schwaab, Bernd; Zhang, Xin
  14. Monetary and Exchange Rate Policies for Sustained Growth in Asia By Joseph E Gagnon; Philip Turner
  15. Optimal Trend Inflation By Klaus Adam; Henning Weber
  16. Financial Frictions, Durable Goods and Monetary Policy By Leo Michelis; Ugochi T. Emenogu
  17. Leaning against the wind: macroprudential policy and the financial cycle By Kockerols, Thore; Kok, Christoffer
  18. The Dynamics of Balanced Expansion in Monetary Economies with Sovereign Debt By Böhm, Volker
  19. Off the Radar: Exploring the Rise of Shadow Banking in the EU By Martin Hodula
  20. The euro at twenty: Follies of youth? By Ricardo Cabral; Francisco Louçã
  21. The Relationship between Monetary Policy and Uncertainty in Advanced Economies: Evidence from Time- and Frequency-Domains By Semih Emre Cekin; Besma Hkiri; Aviral Kumar Tiwari; Rangan Gupta
  22. Market Efficiency and Volatility Persistence of Cryptocurrency during Pre- and Post-Crash Periods of Bitcoin: Evidence based on Fractional Integration By Yaya, OlaOluwa S; Ogbonna, Ephraim A; Mudida, Robert
  23. Do Fixers Perform Worse than Non-Fixers during Global Recessions and Recoveries? By Marco E. Terrones
  24. Credit Subsidies By Fiorella de Fiore; Oreste Tristani; Isabel Horta Correia; Pedro Teles
  25. The transmission of unconventional monetary policy to bank credit supply: evidence from the TLTRO By António Afonso; Joana Sousa-Leite
  26. Shadow banking risks in non-securitisation SPEs By Golden, Brian; Maqui, Eduardo
  27. Measuring Redenomination Risks in the Euro Area - New Evidence from Survey Data By Jens Klose
  28. The rationale for GDP-linked bonds for the euro area By Emter, Lorenz; Herzberg, Valerie
  29. The Fiscal Theory of the Price Level in Overlapping Generations Models By Roger Farmer; Pawel Zabczyk
  30. Inflation and wage rigidity/flexibility in the short run By Park, Seonyoung; Shin, Donggyun

  1. By: Davis, Scott (Federal Reserve Bank of Dallas); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: This paper measures the effect of monetary tightening in key advanced economies on net capital flows around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous response of domestic monetary policy depends on each economy's capital account openness and exchange rate regime. We use a method to compute counterfactual impulse responses for net capital outflows under the assumption that the domestic policy rate does not respond to foreign monetary tightening. Our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as one-third for countries with open capital accounts.
    Keywords: trilemma; structural VAR; counterfactual VAR; net capital inflows; exchange rates
    JEL: E5 F3 F4
    Date: 2018–09–27
  2. By: Roman N. Bozhya-Volya (National Research University Higher School of Economics); Alina S. Rybak (National Research University Higher School of Economics)
    Abstract: We investigate new instrument of monetary policy which is able to stimulate economy in the age of electronic money. Demurrage (negative interest on money holdings) is a non inflationary monetary instrument that is able to boost the rate of economic transactions. We show with the search-theoretic model that the search effort of buyers is increasing in demurrage fees and higher search effort is associated with the lower price level and higher aggregate output. We find that aggregate welfare is higher when demurrage is imposed compared to quantitative easing policy. While demurrage is complicated to impose on banknotes it is easily set on electronic money which makes this unconventional policy measure more technologically feasible
    Keywords: demurrage, negative interest on money, monetary policy, government policy in recession
    JEL: E50
    Date: 2019
  3. By: Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
    Abstract: This paper studies the relationship between the business cycle and financial intermediation in the euro area. We establish stylized facts and study their stability during the global financial crisis and the European sovereign debt crisis. Long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low since the Lehman collapse. Instead, short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis. JEL Classification: E32, E51, E52, C32, C51
    Keywords: euro area, loans, monetary policy, money, non-financial corporations
    Date: 2019–01
  4. By: Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
    Abstract: We study how different forms of communication influence the inflation expectations of individuals in a randomized controlled trial. We first solicit individuals’ inflation expectations in the Nielsen Homescan panel and then provide eight different forms of information regarding inflation. Reading the actual Federal Open Market Committee (FOMC) statement has about the same average effect on expectations as simply being told about the Federal Reserve’s inflation target. Reading a news article about the most recent FOMC meetings results in a forecast revision which is smaller by half. Our results have implications for how central banks should communicate to the broader public.
    Keywords: expectations management, inflation expectations, surveys, communication, randomized controlled trial
    JEL: E31 C83 D84
    Date: 2019
  5. By: Ferrari, Giorgio (Center for Mathematical Economics, Bielefeld University); Vargiolu, Tiziano (Center for Mathematical Economics, Bielefeld University)
    Abstract: Consider the problem of a central bank that wants to manage the exchange rate between its domestic currency and a foreign one. The central bank can purchase and sell the foreign currency, and each intervention on the exchange market leads to a proportional cost whose instantaneous marginal value depends on the current level of the exchange rate. The central bank aims at minimizing the total expected costs of interventions on the exchange market, plus a total expected holding cost. We formulate this problem as an infinite time-horizon stochastic control problem with controls that have paths which are locally of bounded variation. The exchange rate evolves as a general linearly controlled one-dimensional diffusion, and the two nondecreasing processes giving the minimal decomposition of a bounded-variation control model the cumulative amount of foreign currency that has been purchased and sold by the central bank. We provide a complete solution to this problem by finding the explicit expression of the value function and a complete characterization of the optimal control. At each instant of time, the optimally controlled exchange rate is kept within a band whose size is endogenously determined as part of the solution to the problem. We also study the expected exit time from the band, and the sensitivity of the width of the band with respect to the model's parameters in the case when the exchange rate evolves (in absence of any intervention) as an Ornstein-Uhlenbeck process, and the marginal costs of controls are constant. The techniques employed in the paper are those of the theory of singular stochastic control and of one-dimensional diffusions
    Keywords: singular stochastic control, exchange rates, target zones, central bank, variational inequality, optimal stopping
    Date: 2018–08–16
  6. By: Michael D. Bordo; Andrew T. Levin
    Abstract: If the global economy encounters another severe adverse shock in coming years, will major central banks be able to provide sufficient monetary stimulus to preserve price stability and foster economic recovery? Our empirical analysis indicates that the Federal Reserve’s QE3 program was not an effective form of monetary stimulus and that unconventional monetary policies undertaken in the Eurozone and in Japan have been similarly limited in impact. We then consider how digital cash could bolster the effectiveness of monetary policy, and we characterize some potential steps for implementing digital cash via public-private partnerships between the central bank and supervised financial institutions. Our analysis indicates that digital cash could significantly enhance the stability of the financial system.
    JEL: E42 E52 E58
    Date: 2019–01
  7. By: Chi Hyun Kim; Lars Other
    Abstract: We examine the credit channel of monetary policy from 2000 to 2015 in the Euro Area using daily monetary policy shock and credit risk measures in an autoregressive distributed lag model. We find that an expansionary monetary policy shock leads to a short-run increase in the credit risk of non-financial corporations. This dysfunctionality of the credit channel is driven by the crisis-dominated post-2009 period. During this period, market participants may have interpreted expansionary monetary policy shocks as a signal of worsening economic prospects. We further distinguish policy shocks aiming at short- and long-run expectations of market participants, i.e. target and path shocks. The adverse effect disappears for crisis countries when the European Central Bank targets long-run rather than short-run expectations.
    Keywords: Credit channel, credit spreads, Euro area financial markets, forward guidance, monetary policy, Zero lower bound
    JEL: C22 E44 E52 G12
    Date: 2019
  8. By: Aghion, Philippe; Farhi, Emmanuel; Kharroubi, Enisse
    Abstract: In this paper we argue that monetary easing fosters growth more in more credit-constrained environments, and the more so the higher the degree of product market competition. Indeed when competition is low, large rents allow firms to stay on the market and reinvest optimally, no matter how funding conditions change with aggregate conditions. To test this prediction, we use industrylevel and firm-level data from the Euro Area to look at the effects on sectoral growth and firm-level growth of the unexpected drop in long-term government bond yields following the announcement of the Outright Monetary Transactions program (OMT) by the ECB. We find that the monetary policy easing induced by OMT, contributed to raising sectoral (firm-level) growth more in more highly leveraged sectors (firms), and the more so the higher the degree of product market competition in the country (sector).
    Keywords: growth; financial conditions; firm leverage; competition
    JEL: E32 E43 E52
    Date: 2018–12
  9. By: Patnaik, Ila (National Institute of Public Finance and Policy); Mittal, Shalini (National Institute of Public Finance and Policy); Pandey, Radhika (National Institute of Public Finance and Policy)
    Abstract: In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global financial crisis, there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with monetary policy instrument.
    Date: 2019–01
  10. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: The recent economic slowdown in the euro area depends on supply-side and demand-side factors with different consequences on potential output. On the one hand, it may grow at a low pace for a long time; on the other hand, it may soon grow a bit faster. The ECB strategy has to adapt to these different possible outcomes. Anyway, we argue that the ECB has rooms for manoeuvre whatever the trend in output
    Keywords: ECB; Monetary Policy; Growth; Slowdown
    Date: 2018–11
  11. By: Winfried Koeniger; Marc-Antoine Ramelet
    Abstract: We present empirical evidence on the heterogeneity in monetary policy transmission across countries with different home ownership rates. We use household-level data together with shocks to the policy rate identified from high-frequency data. We find that housing tenure reacts more strongly to unexpected changes in the policy rate in Germany and Switzerland –the OECD countries with the lowest home ownership rates–compared with existing evidence for the U.S. An unexpected decrease in the policy rate by 25 basis points increases the home ownership rate by 0.8 percentage points in Germany and by 0.6 percentage points in Switzerland. The response of non-housing consumption in Switzerland is less heterogeneous across renters and mortgagors, and has a different pattern across age groups than in the U.S. We discuss economic explanations for these findings and implications for monetary policy.
    Keywords: Monetary policy transmission, Home ownership, Housing tenure, Consumption
    JEL: E21 E52 R21
    Date: 2018
  12. By: Gabrieli, Silvia (Banque de France); Labonne, Claire (Federal Reserve Bank of Boston)
    Abstract: We measure the relative role of sovereign-dependence risk and balance sheet (credit) risk in euro area interbank market fragmentation from 2011 to 2015. We combine bank-to-bank loan data with detailed supervisory information on banks’ cross-border and cross-sector exposures. We study the impact of the credit risk on banks’ balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders’ liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks’ access to the interbank market throughout the sample period; (ii) large sovereign bond holdings are priced in interbank rates from mid-2011 until the announcement of the OMT; (iii) the OMT was successful in closing this channel of cross-border shock transmission; it reduced sovereign-dependence and balance sheet fragmentation alike.
    Keywords: interbank market; credit risk; fragmentation; sovereign risk; country risk; credit rationing; market discipline
    JEL: E43 E58 G01 G15 G21
    Date: 2018–07–12
  13. By: Caballero, Diego; Lucas, André; Schwaab, Bernd; Zhang, Xin
    Abstract: We address the question to what extent a central bank can de-risk its balance sheet by unconventional monetary policy operations. To this end, we propose a novel risk measurement framework to empirically study the time-variation in central bank portfolio credit risks associated with such operations. The framework accommodates a large number of bank and sovereign counterparties, joint tail dependence, skewness, and time-varying dependence parameters. In an application to selected items from the consolidated Eurosystem's weekly balance sheet between 2009 and 2015, we find that unconventional monetary policy operations generated beneficial risk spill-overs across monetary policy operations, causing overall risk to be nonlinear in exposures. Some policy operations reduced rather than increased overall risk. JEL Classification: G21, C33
    Keywords: central bank, credit risk, lender-of-last-resort, risk measurement, unconventional monetary policy
    Date: 2019–01
  14. By: Joseph E Gagnon; Philip Turner
    Abstract: The more advanced economies in Asia are experiencing slower growth rates. Structural reforms are the most important policies for keeping growth rates up, but this paper takes the growth slowdown as given and focuses on implications for monetary policy. The key policy implication is the impor­tance of keeping core inflation at or above 2 percent to avoid prolonged periods of economic slack.
    Date: 2019–01
  15. By: Klaus Adam; Henning Weber
    Abstract: Sticky price models featuring heterogeneous firms and systematic firm-level productivity trends deliver radically different predictions for the optimal inflation rate than their popular homogenous-firm counterparts: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. We show this by aggregating a heterogenous-firm model with sticky prices in closed form. Using firm-level data from the U.S. Census Bureau, we estimate the historically optimal inflation path for the U.S. economy. In the year 1977, the optimal inflation rate stood at 1.5%, but subsequently declined to around 1.0% in the year 2015. Inflation rates up to twice these numbers can be rationalized if one considers product demand elasticities more in line with the trade literature or if one considers firms that (partially) index prices to lagged inflation rates
    Keywords: optimal inflation rate, sticky prices, firm heterogeneity
    JEL: E52 E31 E32
    Date: 2018–04
  16. By: Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada); Ugochi T. Emenogu (Bank of Canada, Ottawa, Canada)
    Abstract: This paper examines the effect of financial frictions on the consumption of durables and non-durables in a two-sector DSGE model with sticky prices and heterogeneous agents. The financial frictions are a combination of loan-to-value (LTV) and payment-to-income (PTI) constraints faced by borrowers. In this setting a monetary contraction reduces drastically the maximum amount that consumers can borrow in order to purchase durable goods. As a result, the model predicts that the consumption of durables falls, along with non-durables even when durable prices are fully flexible. Also output falls and the nominal interest rate increases following a monetary tightening. Thus, the model matches better the predictions of the model with the data, relative to the existing literature.
    Keywords: Durable goods, Sticky prices, Financial frictions, Monetary policy
    JEL: E44 E52
    Date: 2019–01
  17. By: Kockerols, Thore; Kok, Christoffer
    Abstract: Should monetary policy lean against financial stability risks? This has been a subject of fierce debate over the last decades. We contribute to the debate about “leaning against the wind” (LAW) along three lines. First, we evaluate the cost and benefits of LAW using the Svensson (2017) framework for the euro area and find that the costs outweigh the benefits. Second, we extend the framework to address a critique that Svensson does not consider the lower frequency financial cycle. Third, we use this extended framework to assess the costs and benefits of monetary and macroprudential policy. We find that macroprudential policy has net marginal benefits in addressing risks to financial stability in the euro area, whereas monetary policy has net marginal costs. This would suggest that an active use of macroprudential policies targeting financial stability risks would alleviate the burden on monetary policy to “lean against the wind”. JEL Classification: E58, G01
    Keywords: financial cycle, leaning against the wind, macroprudential policy
    Date: 2019–01
  18. By: Böhm, Volker (Center for Mathematical Economics, Bielefeld University)
    Abstract: The paper examines the role of fiscal and monetary policy on the dynamics of monetary expansion in a macroeconomy. Its microeconomic structure defined by producers with neoclassical production functions, heterogeneous OLG consumers, and a stationary fiscal and monetary policy induces a consistent dynamic closed macroeconomic model of the AS-AD type. Existence and uniqueness of a temporary competitive monetary equilibrium are shown in a two-market economy (determining prices, wages, output, and employment) under a standard set of neoclassical conditions on production, consumer preferences, fiscal and monetary parameters. Comparative statics on prices, wages, and allocations for all levels of the state variables: money balances, debt, and expectations are shown. The dynamic development of temporary equilibria is defined by orbits of a dynamical system generated by three mappings of the one-step (recursive) time change, one for each state variable. The paper defines and describes explicitly the forecasting rules for prices as functions (so-called perfect predictors) which induce perfect foresight along orbits of the economy. It establishes sufficient conditions for their existence and uniqueness and provides a constructive characterization of perfect predictors for the AS-AD economy. Given existence of a globally perfect predictor, perfect foresight holds along all orbits of the economy. The results show that constant intertemporal allocations are uniquely gener- ated by orbits of balanced expansion of both money balances and public debt. Generically, depending on parameters, there exist two or no balanced paths while stationary equilibria with zero inflation exist only on a small (non-open) set of parameters. For a benchmark case (defined by isoelastic utility and production functions) perfect foresight dynamics exist globally and are monotonic (no cycles). There exist at most two balanced paths one of which is always unstable. Their existence and stability are influenced in a decisive way by fiscal and monetary parameters determining steady state inflation rates, allocations, as well as bounds for sustainable debt-to-GDP ratios.
    Keywords: monetary/fiscal policy, deficit, monetary growth, stability, perfect foresight
    Date: 2018–09–28
  19. By: Martin Hodula
    Abstract: This paper uses novel ECB/Eurosystem data on non-bank financial intermediation to investigate the potential factors of shadow banking growth for a panel of 24 EU countries. Consistent with several strands of literature, the EU shadow banking system is found to be highly procyclical and positively related to increasing demand of long-term institutional investors, more stringent capital regulation, and faster financial development. In addition, the paper offers two findings that have not been reported in the literature. First, it shows that the relationship between monetary policy and shadow banking growth is level-dependent and may be determined by the relative magnitude of interest rates in the economy. In this respect, two main motives driving the relationship are identified - the "funding cost" motive and the "search for yield" motive. Second, the driving forces of shadow banking differ between the old and new EU countries, largely due to the missing legal framework for securitization in the new members.
    Keywords: European Union, monetary policy, panel data analysis, shadow banking
    JEL: E44 E52 G21 G23
    Date: 2018–12
  20. By: Ricardo Cabral; Francisco Louçã
    Abstract: This paper overviews the early history of the euro and argues that the euro was suboptimally designed, without monetary sovereignty of Eurozone (EZ) Member States, in order to comply with political goals set by wealthier Member States. Given this constraint, the euro architects designed a single currency in which its irreversibility is achieved through the EZ banking system, with recourse to the TARGET2 payment system. This allowed the banking systems of deficit Member States to fund large cumulative current account deficits in the first decade of the euro. The euro crisis led EZ policy makers to define new far more demanding fiscal rules and a new Banking Union to constrain the ability of EZ banking systems to fund sovereigns and current account deficits. Thus, the euro at twenty has become more fragile.
    Keywords: Euro crisis, fiscal rules, banking union, Eurozone, austerity strategy
    JEL: F32 F34 E62 E52 F36 F42
    Date: 2019–01
  21. By: Semih Emre Cekin (Department of Economics, Turkish-German University); Besma Hkiri (College of Business, University of Jeddah, Saudi Arabia); Aviral Kumar Tiwari (Montpellier Business School, 2300, avenue des Moulins, 34185 Montpellier cedex 4 0002, France); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: In this work we offer new insight into the relationship between interest rates and uncertainty for several advanced economies (Canada, EU, Japan, UK, US) for the period 2003-2018. For this purpose, we utilize the wavelets methodology, which allows us to analyze how the relationship changes over time and across different frequencies and to make inference about causality. To analyze a wide range of frequencies, and because our analysis contains the post-2008 period as well, we use the daily shadow interest rate measure of Krippner (2012, 2013) to capture the stance of monetary policy making at the zero lower bound. We also use the daily uncertainty measure by Scotti (2016), which measures uncertainty related to the real economy. Our findings suggest that there is significant comovement across time and across different frequencies in all the countries we analyze. Corresponding to the similar, yet different conduct of monetary policy, we also find that the relationship exhibits different characteristics and causality in all the economies we analyze, implying that one must be careful not to draw generalized conclusions.
    Keywords: Interest Rate, Uncertainty, Advanced Economies, Wavelet
    JEL: C22 E52 E58
    Date: 2019–01
  22. By: Yaya, OlaOluwa S; Ogbonna, Ephraim A; Mudida, Robert
    Abstract: This paper investigates both market efficiency and volatility persistence in 12 cryptocurrencies during pre-crash and post-crash periods. We were motivated by the erroneous belief of some authors that driving currency, Bitcoin is inefficient. By considering robust fractional integration methods in linear and nonlinear set up, we found that markets of Bitcoin and most altcoins considered in our samples can be dubbed as efficient, and these are highly volatile particularly in the post-crash sample that we are now. These volatilities will then persist for shorter period than in the pre-crash period. Our work therefore renders important information to cryptocurrency market participants and portfolio managers.
    Keywords: Bitcoin; Cryptocurrency; Market efficiency; Fractional integration; Virtual currency
    JEL: C2 C22
    Date: 2019–01–13
  23. By: Marco E. Terrones (Universidad del Pací fico)
    Abstract: There is an important debate about how economies with different exchange rate regimes performed during the Great Recession and its ensuing recovery. While economic theory suggests that economies with fixed exchange rates are more affected and recover more slowly from global shocks than economies with non-fixed exchange rates, the empirical evidence on the most recent global recession has been mixed. This paper examines the exchange rate and economic growth nexus and assesses how this relationship is affected by the four global recessions and recoveries the world economy has experienced post-Bretton Woods. While there is no robust long-term relationship between exchange rate regimes and growth, there is evidence that fixers recover from global recessions at a weaker pace than non-fixers.
    Keywords: Cycles, international cycles, global recessions and recoveries, exchange rates, economic growth of open economies
    JEL: E32 F31 F41 F43 F44
    Date: 2019–01
  24. By: Fiorella de Fiore; Oreste Tristani; Isabel Horta Correia; Pedro Teles
    Abstract: Credit subsidies are an alternative to interest rate and credit policies when dealing with high and volatile credit spreads. In a model where credit spreads move in response to shocks to the net worth of financial intermediaries, credit subsidies are able to stabilize those spreads avoiding the transmission to the real economy. Interest rate policy can be a substitute for credit subsidies but is limited by the zero bound constraint. Credit subsidies overcome this constraint. They are superior to a policy of credit easing as long as the government is less efficient than financial intermediaries in providing credit.
    JEL: E31 E40 E44 E52 E58 E62 E63
    Date: 2018
  25. By: António Afonso; Joana Sousa-Leite
    Abstract: We assess the transmission of the Targeted Longer-Term Refinancing Operations (TLTRO) to the bank credit supply for the Euro area (2014:05-2018:01) and for Portugal (2011:01-2018:01), using a panel data setup. For the Euro area, we find a positive relationship between the TLTRO and the amount of credit granted to the real economy. For the vulnerable countries, the effects of the TLTRO on the stock of credit increased from 2016 to 2017. Among the group of small banks, the effects are stronger in less vulnerable countries. We also find that competition has no statistically significant impact on the transmission of the TLTRO to the bank credit supply for the Euro area. For Portugal, using a difference-in-differences model, we find no statistically significant impact of the TLTRO on credit granted by banks. Finally, bidding banks set lower interest rates than non-bidding banks and the difference seems to be larger in 2017. In Portugal, the effects of the TLTRO on loan interest rates also increased from 2016 to 2017 and are stronger for small banks.
    JEL: C33 C87 E50 E51 E52 E58
    Date: 2019
  26. By: Golden, Brian (Central Bank of Ireland); Maqui, Eduardo (Central Bank of Ireland)
    Abstract: Central Bank of Ireland data on non-securitisation SPEs allow for a qualified assessment of shadow banking risks within the sector. While risks appear to be relatively contained, international co-operation is required to undertake a complete risk assessment. Within these SPEs, risks are the most prominent for entities engaged in loan origination, bank-linked portfolio investment or external financing activity. The level of cross-border interconnectedness is high and a full understanding of risks requires an overview of the entire structures, which typically spans more than one jurisdiction.
    Date: 2018–12
  27. By: Jens Klose (THM Business School)
    Abstract: This article introduces a new indicator to measure redenomination risks in Euro area countries. The measure is based on survey data. The influence of this indicator in determining sovereign bond yield spreads is tested using an ARDL-approach. The results for ten EMU countries in the period June 2012 to January 2018 show that the risk of a depreciation is almost abandoned for Euro area countries, i.e. the former crisis countries Ireland and Portugal. If anything an appreciation may occur for some countries once they leave the EMU. The only countries facing depreciation problems once leaving the monetary union are Italy and to some extent Spain.
    Keywords: Redenomination Risk, Euro Area, Exit
    JEL: E43 G01
    Date: 2019
  28. By: Emter, Lorenz (Central Bank of Ireland); Herzberg, Valerie (Central Bank of Ireland)
    Abstract: Performance related government bonds such as GDP-linked bonds can play a role in enhancing the architecture of the Economic Monetary Union. This Letter highlights the potential contribution of such instruments to reduce and share risks outside of financial crisis through more integrated capital markets. For governments to avail of this insurance, however, and to issue these bonds requires the additional cost or premium to be contained. Using the Capital Asset Pricing Model as a yardstick, we find that in the euro area this is likely to be the case for large issuers. Consequently, large member states should lead the development of this market.
    Date: 2018–11
  29. By: Roger 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.
    Date: 2019–01
  30. By: Park, Seonyoung; Shin, Donggyun
    Abstract: A recent literature uses accurate wage data from payroll records and provides compelling evidence against the conventional belief that nominal wages are downward sticky. This paper provides a unique contribution to this literature by conducting a formal analysis of the role of inflation in cyclical wage rigidity/flexibility. Analysis of payroll-based wage data from the Korean labor market for the period 1971 to 2014 finds that the degree of downward nominal wage flexibility is countercyclical, and the countercyclicality becomes stronger during a deflationary, relative to inflationary, recession. This serves as a counter-example to the conventional theory of cyclical wage rigidity.
    Keywords: Cyclicality, Downward nominal wage rigidity, Inflation, Recession, Establishment,
    Date: 2019

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