nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒02‒11
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Monetary Base in Allan Meltzer's Analytical Framework By Edward Nelson
  2. Unconventional Monetary Policy and the Bond Market in Japan: A New-Keynesian Perspective By Parantap Basu; Kenji Wada
  3. Banking Panics and the Lender of Last Resort in a Monetary Economy By Tarishi Matsuoka; Makoto Watanabe
  4. Optimal Monetary Policy Regime Switches By Choi, Jason; Foerster, Andrew
  5. Expectations' Anchoring and Inflation Persistence By Rudolfs Bems; Francesca G Caselli; Francesco Grigoli; Bertrand Gruss; Weicheng Lian
  6. Covered Interest Parity Deviations: Macrofinancial Determinants By Eugenio M Cerutti; Maurice Obstfeld; Haonan Zhou
  7. Can the U.S. Interbank Market Be Revived? By Kim, Kyungmin; Martin, Antoine; Nosal, Ed
  8. Money, Asset Markets and Efficiency of Capital Formation By van Buggenum, Hugo; Uras, Burak
  9. Exchange Rate vs Foreign Price Pass-through: Evidence from the European Gasoline Market By Deltas, George; Polemis, Michael
  10. Testing the Friedman-Schwartz hypothesis using time varying correlation By Taniya Ghosh; Prashant Mehul Parab
  11. Trade and currency weapons By Agnès Bénassy-Quéré; Matthieu Bussière; Pauline Wibaux
  12. Monetary policy, housing, and collateral constraints By Franz, Thorsten
  13. Imperfect Credibility versus No Credibility of Optimal Monetary Policy By Jean-Bernard Chatelain; Kirsten Ralf
  14. New Frontiers in the Euro Debate in Iceland By Thorgeirsson, Thorsteinn
  15. The Role of Global and Domestic Shocks for In flation Dynamics: Evidence from Asia By David Finck; Peter Tillmann
  16. The Phillips multiplier By Régis Barnichon; Geert Mesters
  17. Taking the Fed at its Word: Direct Estimation of Central Bank Objectives using Text Analytics By Shapiro, Adam Hale; Wilson, Daniel J.
  18. Super-inertial interest rate rules are not solutions of Ramsey optimal monetary policy By Jean-Bernard Chatelain; Kirsten Ralf
  19. Has Higher Household Indebtedness Weakened Monetary Policy Transmission? By R. G Gelos; Tommaso Mancini Griffoli; Machiko Narita; Federico Grinberg; Umang Rawat; Shujaat Khan
  20. Human frictions in the transmission of economic policy By D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
  21. Assessing the uncertainty in central banks' inflation outlooks By Knüppel, Malte; Schultefrankenfeld, Guido
  22. The interest rate exposure of euro area households By Tzamourani, Panagiota
  23. The Transmission of Unconventional Monetary Policy to Bank Credit Supply: Evidence from the TLTRO By António Afonso; Joana Sousa-Leite
  24. Endogenous Trade Protection and Exchange Rate Adjustment By Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
  25. Nonresident Capital Flows and Volatility: Evidence from Malaysia’s Local Currency Bond Market By David A. Grigorian
  26. Assessing the impact of credit de-dollarization measures in Peru By Contreras, Alex; Gondo, Rocío; Pérez, Fernando; Oré, Erick
  27. The Dress Rehearsal: the creation of a Central Bank in Brazil in 1923 By Lúcia Regina Centurião
  28. Cognitive abilities and inflation expectations By D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
  29. Monetary policy and the cost of wage rigidity: Evidence from the stock market By Faia, Ester; Pezone, Vincenzo
  30. Is Inflation Just Around the Corner? The Phillips Curve and Global Inflationary Pressures By Olivier Coibion; Yuriy Gorodnichenko; Mauricio Ulate
  31. Forward guidance with preferences over safe assets By Ansgar Rannenberg
  32. Housing markets, expectation formation and interest rates By Martin, Carolin; Schmitt, Noemi; Westerhoff, Frank
  33. Credit crunches from occasionally binding bank borrowing constraints By Holden, Tom D.; Levine, Paul; Swarbrick, Jonathan M.
  34. The Effects of Lender of Last Resort on Financial Intermediation during the Great Depression in Japan By Masami Imai; Tetsuji Okazaki; Michiru Sawada

  1. By: Edward Nelson
    Abstract: This analysis of Allan Meltzer’s analytical framework focuses on the role that Meltzer assigned to the monetary base. For many years, Meltzer suggested that central banks should use the monetary base as their policy instrument, in place of a short-term nominal interest rate. However, he recognized that in practice central banks did not follow this prescription. He believed that the monetary base could play an important role even when an interest rate was used as the instrument. Meltzer’s reasoning was twofold: (i) The monetary base might shed light on the behavior of important asset prices that mattered for aggregate demand. (ii) The base might serve as a useful indicator of the likely future course of the money stock. In later years, while still emphasizing the valuable indicator properties of the monetary base, Meltzer accepted that interest-rate-based rules could deliver monetary control and economic stabilization. For the situation in which the short-term nom inal interest rate was at its lower bound, Meltzer continued to stress quantities as monetary policy instruments. He felt that, at the lower bound, the central bank remained able, through quantitative easing, to boost asset prices, the money stock, and the economy. Such stimulative actions implied increases in the monetary base; however, Meltzer did acknowledge that the manner in which the base was increased (that is, what asset purchases generated the increase) figured importantly in securing the stimulus.
    Keywords: Monetarism ; Monetary base ; Money supply ; Transmission mechanism
    JEL: E52 E51 E58
    Date: 2019–02–01
  2. By: Parantap Basu (Professor, Durham University Business School, Durham University (E-mail:; Kenji Wada (Professor, Faculty of Business and Commerce, Keio University (E-mail:
    Abstract: In this paper, we set up a medium scale new-Keynesian dynamic stochastic general equilibrium (DSGE) model to analyze the effects of various phases of unconventional monetary policy (UMP) on the Japanese bond market. Our model has two novel features: (i) a banking friction in the form of an aggregate bank run risk to motivate commercial banks' demand for excess reserve, and (ii) dynamic linkage between Central Bank resource constraint and the government budget constraint via a transfer payment by the Central Bank to the Treasury. We do three policy simulations to analyze the effects of various phases of UMP shocks on the bond market, namely: (i) effect of a quantitative easing (QE) shock; (ii) the effect of a negative shock to the overnight borrowing rate; and (iii) the effect of a negative shock to the interest rate on banks' excess reserve (IOER). In light of these results, we do an evaluation of the recent yield curve control policy of the Bank of Japan.
    Keywords: QE, QQE, Excess Reserve, Overnight Borrowing Rate, IOER, Yield Curve Control
    JEL: E43 E44 E58
    Date: 2018–08
  3. By: Tarishi Matsuoka; Makoto Watanabe
    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
  4. By: Choi, Jason (University of Wisconsin-Madison); Foerster, Andrew (Federal Reserve Bank of San Francisco)
    Abstract: An economy that switches between high and low growth regimes creates incentives for the monetary authority to change its rule. As lower growth tends to produce lower real interest rates, the monetary authority has an incentive to increase the inflation target and increase the degree of inertia in setting rates in an attempt to keep the nominal rate positive. An optimizing monetary authority therefore responds to permanently lower growth by slightly increasing both the inflation target and inertia; focusing solely on the inflation target ignores a key margin of adjustment. With repeated growth rate regime switches, an optimal monetary rule that switches at the same time internalizes both the direct effects of growth regime change and the indirect expectation effects generated by switching in policy. The switching rule improves economic outcomes relative to a constant rule and one that does not consider the impact of regime changes; this result is robust to the case when the monetary authority misidentifies the growth regime with relatively high frequency.
    JEL: C63 E31 E52
    Date: 2019–02–01
  5. By: Rudolfs Bems; Francesca G Caselli; Francesco Grigoli; Bertrand Gruss; Weicheng Lian
    Abstract: Understanding the sources of inflation persistence is crucial for monetary policy. This paper provides an empirical assessment of the influence of inflation expectations' anchoring on the persistence of inflation. We construct a novel index of inflation expectations' anchoring using survey-based inflation forecasts for 45 economies starting in 1989. We then study the response of consumer prices to terms-of-trade shocks for countries with flexible exchange rates. We fi nd that these shocks have a signifi cant and persistent eff ect on consumer price inflation when expectations are poorly anchored. By contrast, inflation reacts by less and returns quickly to its pre-shock level when expectations are strongly anchored.
    Keywords: Inflation expectations;Inflation persistence;Anchoring, credibility, terms of trade, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–12–11
  6. By: Eugenio M Cerutti; Maurice Obstfeld; Haonan Zhou
    Abstract: For about three decades until the Global Financial Crisis (GFC), Covered Interest Parity (CIP) appeared to hold quite closely—even as a broad macroeconomic relationship applying to daily or weekly data. Not only have CIP deviations significantly increased since the GFC, but potential macrofinancial drivers of the variation in CIP deviations have also become significant. The variation in CIP deviations seems to be associated with multiple factors, not only regulatory changes. Most of these do not display a uniform importance across currency pairs and time, and some are associated with possible temporary considerations (such as asynchronous monetary policy cycles).
    Date: 2019–01–16
  7. By: Kim, Kyungmin (Federal Reserve Board); Martin, Antoine (Federal Reserve Bank of New York); Nosal, Ed (Federal Reserve Bank of Atlanta)
    Abstract: Large-scale asset purchases by the Federal Reserve as well as new Basel III banking regulations have led to important changes in U.S. money markets. Most notably, the interbank market has essentially disappeared with the dramatic increase in excess reserves held by banks. We build a model in the tradition of Poole (1968) to study whether interbank market activity can be revived if the supply of excess reserves is decreased sufficiently. We show that it may not be possible to revive the market to precrisis volumes due to costs associated with recent banking regulations. Although the volume of interbank trade may initially increase as excess reserves are decreased from their current abundant levels, the new regulations may engender changes in market structure that result in interbank trading being completely replaced by nonbank lending to banks when excess reserves become scarce. This nonmonotonic response of interbank trading volume to reductions in excess reserves may lead to misleading forecasts about future fed funds prices and quantities when/if the Fed begins to normalize its balance sheet by reducing excess reserves.
    Keywords: interbank market; monetary policy implementation; balance sheet costs
    JEL: E42 E58
    Date: 2018–11–01
  8. By: van Buggenum, Hugo (Tilburg University, Center For Economic Research); Uras, Burak (Tilburg University, Center For Economic Research)
    Abstract: Holdings of money and illiquid assets are likely to be determined jointly. Therefore, frictions that give rise to a need for money may affect capital formation, resulting in either too much or too little investment. Existing models of money and capital however tend to overlook that both types of investment inefficiencies can be equilibrium outcomes. Building upon insights from the New-Monetarist literature, we construct a model in which preference heterogeneity between agents implies that both over- and under-investment can arise. We use our framework to study whether monetary policy can effectively resolve both types of investment inefficiencies, and find that increasing inflation could resolve under-investment inefficiencies while reducing inflation could curb over-investment inefficiencies.
    Keywords: optiam monetary policy; asses markets; under-investment; over-investment
    JEL: E22 E41 E44 E52 O16
    Date: 2019
  9. By: Deltas, George; Polemis, Michael
    Abstract: We show that European retail gasoline prices respond slower to changes in the dollar exchange rate than to changes in the international spot price of wholesale gasoline, which is quoted in dollars. This differential passthrough is not specific to the Euro, and is observed both for Euro-member states and also for those using national currencies. We examine the possibility that this pattern is driven by differences in either the variability and or persistence of exchange rates changes relative to those of the dollar price of gasoline, but find minimal supporting evidence for either. Refinery supply contracts treat changes in the dollar price and the exchange rate symmetrically, and are thus also an unlikely explanation. Other possibilities, such pricing to the market or pricing based on the country of origin are precluded by the nature of the product. There is evidence, however, that exchange rate fluctuations are more strongly correlated with country-specific economic conditions, which reduces the ability of firms to pass-through price increases and lessens their incentive to pass-through price decreases. Moreover, consumers likely draw a more direct link between the crude oil and retail gasoline prices, affecting their price expectations and search intensity, and optimal passthrough.
    Keywords: Price Adjustment, Inflation, Gasoline Pricing.
    JEL: F31 L11 L16
    Date: 2019–01–24
  10. By: Taniya Ghosh (Indira Gandhi Institute of Development Research); Prashant Mehul Parab (Indira Gandhi Institute of Development Research)
    Abstract: This study analyses the time varying correlation of money and output using the DCC GARCH model for the Euro, India, Poland, the UK and the US. Apart from simple sum money, this model uses Divisia monetary aggregate, which is theoretically shown as the actual measure of monetary services. The inclusion of Divisia money affirms the Friedman-Schwartz hypothesis that money is procyclical. The procyclical nature of association was not robustly observed in recent data when simple sum money was used.
    Keywords: DCC GARCH, Divisia, Monetary Aggregates, Real Output
    JEL: C32 E52 E51
    Date: 2019–01
  11. By: Agnès Bénassy-Quéré (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Matthieu Bussière (Banque de France - Banque de France); Pauline Wibaux (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The debate on trade wars and currency wars has re-emerged since the Great recession of 2009. We study the two forms of non-cooperative policies within a single framework. First, we compare the elasticity of trade flows to import tariffs and to the real exchange rate, based on product level data for 110 countries over the 1989-2013 period. We find that a 1 percent depreciation of the importer's currency reduces imports by around 0.5 percent in current dollar, whereas an increase in import tariffs by 1 percentage point reduces imports by around 1.4 percent. Hence the two instruments are not equivalent. Second, we build a stylized short-term macroeconomic model where the government aims at internal and external balance. We find that, in this setting, monetary policy is more stabilizing for the economy than trade policy, except when the internal transmission channel of monetary policy is muted (at the zero-lower bound). One implication is that, in normal times, a country will more likely react to a trade "aggression" through monetary easing rather than through a tariff increase. The result is reversed at the ZLB.
    Keywords: tariffs,exchange rates,trade elasticities,protectionism
    Date: 2018–06
  12. By: Franz, Thorsten
    Abstract: House-purchasing decisions and the possibility of existing homeowners to tap into their housing equity depend decisively on prevailing loan-to-value (LTV) ratios in mortgage markets with borrowing constrained households. Utilizing a smooth transition local projection (STLP) approach, I show that monetary policy shocks in the U.S. evoke stronger reactions in the housing sector in times of high LTV ratios, which, through changes in mortgage lending and mortgage equity withdrawals (MEWs), translate into larger effects of consumption. This result is more pronounced for contractionary shocks, in line with occasionally binding constraints. The strong procyclicality of LTV ratios reconciles these findings with past evidence on a less powerful transmission of monetary policy during recessions.
    Keywords: monetary policy,LTV ratio,mortgage equity withdrawals,collateral constraints,local projections,non-linear impulse responses
    JEL: E21 E52 G21 R31
    Date: 2019
  13. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: When the probability of not reneging commitment of optimal monetary policy under quasi-commitment tends to zero, the limit of this equilibrium is qualitatively and quantitatively different from the discretion equilibrium assuming a zero probability of not reneging commitment for the classic example of the new-Keynesian Phillips curve. The impulse response functions and welfare are different. The policy rule parameter have opposite signs. The inflation auto-correlation parameter crosses a saddlenode bifurcation when to near-zero to zero probability of not reneging commitment. These results are obtained for all values of the elasticity of substitution between goods in monopolistic competition which enters in the welfare loss function and in the slope of the new-Keynesian Phillips curve.
    Keywords: Ramsey optimal policy under imperfact commitment,zero-credibility policy,Impulse response function,Welfare,New-Keynesian Phillips curve, zero-,credibility policy, Impulse response function, Welfare, New-Keynesian Phillips,curve
    Date: 2018–07
  14. By: Thorgeirsson, Thorsteinn
    Abstract: The debate on currency arrangements and monetary policy frameworks in lceland has been motivated by developments in lceland and internationally in recent decades. Historically, lcelanders' colonial experience and struggle to retain control of vital natural resources made them hesitant participants in the European integration process. While sidestepping direct participation in the process leading to EU and EMU membership, they joined EFTA, the EEA and Schengen. Economic growth and development have been rapid, but the modernisation and liberalisation of the economy have been attended by signi:ficant volatility in nominal and real variables. At the same time, the European integration process has continued with its own set of challenges. It is in this context that a vibrant debate has taken place on the choice of currency and associated policies. The main emphasis has been on whether to adopt the euro (through EU membership) or retain the Icelandic króna with the most efficacious monetary policy framework possible. This article offers a review of salient contributions to the debate and the main lessons drawn from it. The key themes of the debate involve the impact currency choice would have on economic growth and resilience to shocks. While the early debate was mostly concerned with trade-theoretic issues, institutional factors have become increasingly important. A new theory concerning a heretofore overlooked policy variable, the evolution of inequality as measured by the wage-productivity gap, is discussed. It is shown to be potentially important for economic and financial outcomes, with implications for the debate.
    Keywords: Currency; exchange rates; monetary stability; financial stability; euro; factor incomes; distribution; wage productivity gap;
    JEL: E12 E13 E31 E32 E42 E52 E58 E63 E64 N12 N14 N22 N24 O47
    Date: 2018–10–12
  15. By: David Finck (Justus-Liebig-University Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: This paper studies the determinants of business cycles in small open economies and adds to the discussion about the changing nature of in flation dynamics. We estimate a series of VAR models for a set of six Asian emerging market economies, in which we identify a battery of domestic and global shocks using sign restrictions. We find that global shocks explain large parts of infl ation and output dynamics. The global shocks are procyclical with respect to the domestic components of economic activity. We estimate Phillips curve regressions based on alternative decompositions of output into global and domestic components. For the domestic component of GDP we find a positive and significant Phillips curve slope. While the output component driven by oil prices 'fl attens' the Phillips curve, the component driven by global demand shocks 'steepens' the trade-off. Hence, whether or not global shocks fl atten the Phillips curve crucially depends on the nature of these global shocks. A series of counterfactuals supports these findings and suggests that the role of monetary policy and exchange rate shocks is limited.
    Keywords: in ation targeting, business cycle, open economy, monetary policy, Phillips curve
    JEL: E3 E5 F4
    Date: 2019
  16. By: Régis Barnichon; Geert Mesters
    Abstract: We propose a model-free approach for determining the inflation-unemployment trade-off faced by a central bank, i.e., the ability of a central bank to transform unemployment into inflation (and vice versa) via its interest rate policy. We introduce the Phillips multiplier as a statistic to non-parametrically characterize the trade-off and its dynamic nature. We compute the Phillips multiplier for the US, UK and Canada and document that the trade-off went from being very large in the pre-1990 sample period to being small (but significant) post-1990 with the onset of inflation targeting and the anchoring of inflation expectations.
    Keywords: Marginal rate of transformation, inflation-unemployment, trade-off, dynamic multiplier, Instrumental variables, Phillips curve
    JEL: C14 C32 E32 E52
    Date: 2019–01
  17. By: Shapiro, Adam Hale (Federal Reserve Bank of San Francisco); Wilson, Daniel J. (Federal Reserve Bank of San Francisco)
    Abstract: There is an extensive literature that studies optimal monetary policy with an assumed central bank loss function, yet there has been very little study of what central bank preferences are in practice. We directly estimate the Federal Open Market Committee's (FOMC) loss function, including the implicit inflation target, from the tone of the language used in FOMC transcripts, minutes, and members' speeches. Direct estimation is advantageous because it requires no knowledge of the underlying macroeconomic structure nor observation of central bank actions. We fi nd that the FOMC had an implicit inflation target of approximately 1 1/2 percent on average over our baseline 2000-2012 sample period. We also find that the FOMC's loss depends strongly on output growth and stock market performance and less so on their perception of current slack.
    Date: 2019–01–18
  18. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (ESCE – International Business School)
    Abstract: Giannoni and Woodford (2003) found that the equilibrium determined by com- mitment to a super-inertial rule (where the sum of the parameters of lags of interest rate exceed ones and does not depend on the auto-correlation of shocks) corresponds to the unique bounded solution of Ramsey optimal policy for the new-Keynesian model. By contrast, this note demonstrates that commitment to an inertial rule (where the sum of the parameters of lags of interest rate is below one and depends on the auto-correlation of shocks) corresponds to the unique bounded solution.
    Keywords: Ramsey optimal policy,Interest rate smoothing,Super-inertial rule,Inertial rule,New-Keynesian model
    Date: 2018–08
  19. By: R. G Gelos; Tommaso Mancini Griffoli; Machiko Narita; Federico Grinberg; Umang Rawat; Shujaat Khan
    Abstract: Has monetary policy in advanced economies been less effective since the global financial crisis because of deteriorating household balance sheets? This paper examines the question using household data from the United States. It compares the responsiveness of household consumption to monetary policy shocks in the pre- and post-crisis periods, relating changes in monetary transmission to changes in household indebtedness and liquidity. The results show that the responsiveness of household consumption has diminished since the crisis. However, household balance sheets are not the culprit. Households with higher debt levels and lower shares of liquid assets are the most responsive to monetary policy, and the share of these households in the population grew. Other factors, such as economic uncertainty, appear to have played a bigger role in the decline of households’ responsiveness to monetary policy.
    Date: 2019–01–15
  20. By: D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
    Abstract: Intertemporal substitution is at the heart of modern macroeconomics and finance as well as economic policymaking, but a large fraction of a representative population of men - those below the top of the distribution by cognitive abilities (IQ) - do not change their consumption propensities with their inflation expectations. Low-IQ men are also less than half as sensitive to interest-rate changes when making borrowing decisions. Our microdata include unique administrative information on cognitive abilities, as well as economic expectations, consumption and borrowing plans, and total household debt from Finland. Heterogeneity in observables such as education, income, other expectations, and financial constraints do not drive these patterns. Costly information acquisition and the ability to form accurate forecasts are channels that cannot fully explain these results. Limited cognitive abilities could be human frictions in the transmission and effectiveness of fiscal and monetary policies that operate through household consumption and borrowing decisions.
    Keywords: Macroeconomic Beliefs,Limited Cognition,Heterogeneous Agents,Fiscal and Monetary Policy,Survey Data,Household Finance
    JEL: D12 D84 D91 E21 E31 E32 E52 E65
    Date: 2019
  21. By: Knüppel, Malte; Schultefrankenfeld, Guido
    Abstract: Recent research has found that macroeconomic survey forecasts of uncertainty exhibit several deficiencies, such as horizon-dependent biases and lower accuracy than simple unconditional uncertainty forecasts. We examine the inflation uncertainty forecasts from the Bank of England, the Banco Central do Brasil, the Magyar Nemzeti Bank and the Sveriges Riksbank to assess whether central banks' uncertainty forecasts might be subject to similar problems. We find that, while most central banks' uncertainty forecasts also tend to be underconfident at short horizons and overconfident at longer horizons, they are mostly not significantly biased. Moreover, they tend to be at least as precise as unconditional uncertainty forecasts from two different approaches.
    Keywords: Density Forecasts,Fan Charts,Forecast Optimality,Forecast Accuracy
    JEL: C13 C32 C53
    Date: 2018
  22. By: Tzamourani, Panagiota
    Abstract: We estimate the "unhedged interest rate exposure" (URE) of euro area households. The URE is a welfare metric that captures the extent to which households are exposed to changes in real interest rates, and reflects the direct gains and losses in interest income flows incurred by households after such a change. It is defined as the difference between maturing assets and maturing liabilities at a given point in time (Auclert 2019). We examine the distribution of the UREs along the net wealth, income, age and housing status distributions for the euro area as a whole and for individual countries, and document substantial heterogeneity across these dimensions. The median household in the euro area has a positive interest rate exposure, indicating that it would gain, in the first instance, from an increase in the interest rate, all other things remaining constant. Households in the lower end of the net wealth and income distribution, younger households and mortgagors, have negative interest rate exposure and would lose from an increase in interest rates. The heterogeneity across countries is largely attributed to the differences in the prevalence of adjustable rate mortgages (ARMs). Countries with a high prevalence of ARMs have interest rate exposure distributions skewed to the left, with negative mean interest rate exposure. Interest gains/losses after a monetary policy shock can be substantial for households with negative interest rate exposure, particularly for mortgagors, and of a similar (absolute) magnitude to capital gains/losses from associated changes in house prices. Besides the direct distributional consequences and the implications for monetary policy, the distribution of the interest rate exposures may help explain the general public's views with the respect to the prevailing monetary policy regime or the central bank.
    Keywords: interest rate exposure,URE,monetary policy,distributional effects,adjustable rate mortgage (ARM),Household Finance and Consumption Survey (HFCS)
    JEL: D31 E21 E52 E58
    Date: 2019
  23. 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.
    Keywords: Unconventional Monetary Policy, TLTRO, credit supply, lending interest rates, bank-lending channel, Euro area, Portugal.
    JEL: C33 C87 E50 E51 E52 E58
    Date: 2019–01
  24. By: Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
    Abstract: This paper explores the relationship between exchange rate adjustment and trade policy in a simple New Keynesian open economy macro model. We show that movement in exchange rates have a direct implication for trade policy when governments choose tariffs endogenously. In particular, we show that the strategic incentive to impose trade restrictions is greater under flexible exchange rates than when exchange rates are fixed. This surprising result goes counter to conventional wisdom, which suggests that pressures to impose trade restrictions are greater when countries resist adjustments in exchange rates. But in fact, we show that the empirical evidence supports the model predictions. The paper goes on to characterize the path of equilibrium sustainable tariffs in the presence of sticky prices and flexible exchange rates. In our baseline model, tariff rates will rise in response to monetary policy shocks, but fall in response to productivity shocks. Estimating an SVAR model, we also find evidence in support of this prediction.
    JEL: F13 F33 F41
    Date: 2019–01
  25. By: David A. Grigorian
    Abstract: Malaysia’s local currency debt market is one of the most liquid public debt markets in the world. In recent years, the growing share of nonresident holders of debt has been a source of concern for policymakers as a reason behind exchange rate volatility. The paper provides an overview of the recent developments in the conventional debt market. It builds an empirical two-stage model to estimate the main drivers of debt capital flows to Malaysia. Finally, it uses a GARCH model to test the hypothesis that nonresident flows are behind the observed exchange rate volatility. The results suggest that the public debt market in Malaysia responds adequately to both pull and push factors and find no firm evidence that nonresident flows cause volatility in the onshore foreign exchange market.
    Date: 2019–01–25
  26. By: Contreras, Alex (Banco Central de Reserva del Perú); Gondo, Rocío (Banco Central de Reserva del Perú); Pérez, Fernando (Banco Central de Reserva del Perú); Oré, Erick (Banco Central de Reserva del Perú)
    Abstract: This paper assesses the impact of de-dollarization measures implemented by the Central Reserve Bank of Peru between the years 2013 and 2016. Our results show that, despite an already slight downward trend in credit dollarization indicators before their implementation, the pace of de-dollarization increased after the adoption of the mentioned policy measures, especially after the announcement in the beginning of 2015. In contrast to a generalized impact of measures in 2015 onwards on all market segments, de-dollarization measures in 2013 affected mainly certain segments by firm size such as corporate and small firms. In addition, an heterogeneous impact is identified by loan size, where banks prefered to substitute larger loans from foreign to domestic currency.
    Keywords: credit dollarization, macroprudential policies, credit register data
    JEL: E58 G21 G28
    Date: 2018–12
  27. By: Lúcia Regina Centurião
    Abstract: This paper aims to analyze an experiment in the history of the Brazilian economy: the transformation of Banco do Brasil into a Central Bank in 1923, and the debate surrounding this experiment. More strictly, the article proposes to answer the following question: what was the role of a Central Bank for Brazilian policymakers in the mid-1920s? I point out that the Central Banks abroad were associated at the time with the maintenance of the gold standard, while in Brazil, although the discussion echoed the discourse between papelistas and metalistas, the defense of the creation of the Central Bank was appropriated by the agenda of the first group. Therefore, a generational change of policymakers probably was necessary to undo the association between a Central Bank and the excess of paper currency, in the economic thought of the political environment. The work is based on the idea of communities of interpretation, and editions of the Retrospecto Comercial, the Correio Paulistano, and annals of the Federal Senate were analyzed.
    Keywords: Central Bank; Gold Standard; policymakers
    JEL: B10 B15
    Date: 2019–02–04
  28. By: D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
    Date: 2019
  29. By: Faia, Ester; Pezone, Vincenzo
    Abstract: Using a unique confidential contract level dataset merged with firm-level asset price data, we find robust evidence that firms' stock market valuations and employment levels respond more to monetary policy announcements the higher the degree of wage rigidity. Data on the renegotiations of collective bargaining agreements allow us to construct an exogenous measure of wage rigidity. We also find that the amplification induced by wage rigidity is stronger for firms with high labor intensity and low profitability, providing evidence of distributional consequences of monetary policy. We rationalize the evidence through a model in which firms in different sectors feature different degrees of wage rigidity due to staggered renegotiations vis-a-vis unions.
    Keywords: heterogeneous monetary policy response,distributional consequences of monetary policy,employer-employee level dataset,monetary policy surprise shocks,heterogeneous wage rigidity
    Date: 2018
  30. By: Olivier Coibion; Yuriy Gorodnichenko; Mauricio Ulate
    Abstract: The length of the recovery since the Great Recession and the low reported levels of the unemployment rate in the U.S. are increasingly generating concerns about inflationary pressures. We document that an expectations-augmented Phillips curve can account for inflation not just in the U.S. but across a range of countries, once household or firm-level inflation expectations are used. Given this relationship, we can infer the dynamics of slack from the dynamics of inflation gaps and vice versa. We find that the implied slack was pushing inflation below expectations in the years after the Great Recession but the global and U.S. inflation gaps have shrunk in recent years thus suggesting tighter economic conditions. While we find no evidence that inflation is on the brink of rising, the sustained deflationary pressures following the Great Recession have abated.
    JEL: E24 E31
    Date: 2019–01
  31. By: Ansgar Rannenberg (National Bank of Belgium)
    Abstract: I develop a New Keynesian model with preferences over safe assets (POSA) calibrated using evidence on the wedge between household discount rates and market interest rates. POSA attenuate intertemporal consumption smoothing and thus the household’s responsiveness to future interest rates, the more so the more distant in time they are located, and imply a consumption wealth effect. Therefore, POSA substantially lower the macroeconomic effect of forward guidance policies. By contrast, POSA does not substantially change the effect of the standard shocks of Smets/Wouters (2007) type DSGE models. The results carry over to a model with Iacoviello (2005,2014)-type collateral constraints. Such constraints in themselves tend to strongly amplify the effect of forward guidance.
    Keywords: Forward guidance puzzle, preferences over safe assets, monetary policy, collateral constraints
    JEL: E52 E62 E32
    Date: 2019–01
  32. By: Martin, Carolin; Schmitt, Noemi; Westerhoff, Frank
    Abstract: Based on a behavioral stock-flow housing market model in which the expectation formation behavior of boundedly rational and heterogeneous investors may generate endogenous boom-bust cycles, we explore whether central banks can stabilize housing markets via the interest rate. Using a mix of analytical and numerical tools, we find that the ability of central banks to tame housing markets by increasing the base (target) interest rate, thereby softening the demand pressure on house prices, is rather limited. However, central banks can greatly improve the stability of housing markets by following an interest rate rule that adjusts the interest rate with respect to mispricing in the housing market.
    Keywords: housing markets,heterogeneous expectations,variance beliefs,endogenous boom-bust cycles,interest rates,nonlinear dynamics
    JEL: D91 E58 R31
    Date: 2019
  33. By: Holden, Tom D.; Levine, Paul; Swarbrick, Jonathan M.
    Abstract: We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints, and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the counter-cyclical, positively skewed equity issuance that are characteristic of the credit crunches observed in the data.
    Keywords: Occasionally binding constraints,Credit crunches,Financial crises,Spreads,Dividends,Equity,Banking
    JEL: E22 E32 E51 G2
    Date: 2018
  34. By: Masami Imai (Department of Economics, Wesleyan University); Tetsuji Okazaki (University of Tokyo); Michiru Sawada (University of Tokyo)
    Abstract: The interwar Japanese economy was unsettled by chronic banking instability, and yet the Bank of Japan (BOJ) restricted access to its liquidity provision to a select group of banks, i.e. BOJ correspondent banks, rather than making its loans widely available “to merchants, to minor bankers, to this man and to that man” as prescribed by Bagehot (1873). This historical episode provides us with a quasi-experimental setting to study the impact of Lender of Last Resort (LOLR) policies on financial intermediation. We find that the growth rate of deposits and loans was notably faster for BOJ correspondent banks than the other banks during the bank panic phase of the Great Depression from 1931-1932, whereas it was not faster before the bank panic phase. Furthermore, BOJ correspondent banks were less likely to be closed during the bank panics. To address possible selection bias, we also instrument a bank’s corresponding relationship with the BOJ with its geographical proximity to the nearest branch or the headquarters of the BOJ, which was a major determinant of a bank’s transaction relationship with the BOJ at the time. This instrumental variable specification yields qualitatively same results. Taken together, Japan’s historical experience suggests that central banks’ liquidity provisions play an important backstop role in supporting the essential financial intermediation services in time of financial stringency.
    Date: 2019–01

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