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on Monetary Economics |
| By: | Paulo de Carvalho Lins; Marcio Issao Nakane |
| Abstract: | In Brazil, there exists a government bond whose return is directly indexed to short-term interest rate set by the Central Bank. Some economists suggest that its existence decreases the effectiveness of monetary policy, mainly by clogging the wealth transmission channel. We introduce a floating-rate bond as a new financial asset in a canonical DSGE model and analyze its effects on the model dynamics. The new bond does not seem to change the dynamics of any variable, even in the presence of rule-of-thumb agents. We interpret these results as evidence against the argument that floating-rate bonds lead to a weaker monetary policy. |
| Keywords: | Monetary Policy; Public Debt; Fiscal Policy; Letras Financeiras do Tesouro |
| JEL: | E52 E63 H63 |
| Date: | 2019–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2019wpecon08&r=all |
| By: | Kwangyong Park (Economic Research Institute, Bank of Korea) |
| Abstract: | We provide a theoretical framework, with empirical evidence, where monetary policy effects become stronger during periods of heightened uncertainty in productivity. Higher aggregate and idiosyncratic productivity volatility induce firms, which are constrained by information capacity, to allocate more attention to productivities and less to the monetary policy shock. This makes firms under-react to monetary policy actions, which increases real effects of monetary policy shocks. A threshold vector autoregression, which incorporates instrumental variables to identify the monetary policy shock, finds that monetary policy shocks have stronger impacts on output when uncertainty, as measured by VIX, is high. |
| Keywords: | Monetary policy asymmetry, Uncertainty, Information choice |
| JEL: | E31 E52 D8 |
| Date: | 2019–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1905&r=all |
| By: | Selcuk Gul; Huseyin Tastan |
| Abstract: | This paper investigates the significance of internal finance in determining firms' fixed capital investments. We estimate an investment model which allows us to test whether the marginal impact of cash flows on investment varies with the central bank's monetary policy stance, financial conditions at the macro level and the Global Financial Crisis (GFC). Using a comprehensive panel data set of Turkish small and medium-sized enterprises (SMEs) in the manufacturing sector, we find that investment-cash flow sensitivity is positive and statistically significant. This result implies that Turkish firms are financially constrained by internal finance. Results suggest that the monetary policy stance, represented by various indicators for robustness, significantly affects firms' financing constraints. In particular, investment-cash flow sensitivity declines during expansionary monetary policy periods. However, the argument does not hold for financially less constrained firms which can access external finance relatively easily. Having examined the response of firms' financing constraints to changes in financial conditions, we find that the investment-cash flow sensitivity declines when financial conditions are relatively supportive. Finally, firms need cash flow more for investing in the GFC compared to other years. The finding is consistent with relatively less availability of external funds in crisis periods. |
| Keywords: | Investment-cash flow sensitivity, Financing constraints, Monetary policy stance, Financial conditions index |
| JEL: | C33 D92 E22 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1811&r=all |
| By: | Andrea Colabella (Bank of Italy) |
| Abstract: | This paper studies the spillover effects of the ECB’s monetary policies on non-euro area countries over the period 2004-2016, using a GVAR methodology, applied to a large sample of countries and an ample set of variables. Monetary policies are proxied by short-term interest rates and the Wu and Xia’s (2016) shadow rates in the euro area, the US and the UK. Identification is performed via a Cholesky decomposition in the euro area only. An increase in the euro area shadow interest rate triggers a broad-based and persistent output decline abroad, especially strong in Central Eastern and South-Eastern European economies. The euro area shadow rate increase is also transmitted to the short-term interest rates of a number of countries, although such rises are short-lived and not as widespread as the GDP spillovers. There is evidence that differences in countries’ responses to the euro area monetary shock depend on their characteristics. The spillover effects are transmitted mainly through the trade channel and also, to a lesser extent, the short-term interest rate channel. |
| Keywords: | global VAR, spillover, euro area monetary policy, Europe, CESEE |
| JEL: | C32 E32 E52 E58 F41 O52 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1207_19&r=all |
| By: | Cristina Arellano; Yan Bai; Gabriel Mihalache |
| Abstract: | Since the early 2000s, many emerging markets have adopted inflation targeting as their monetary policy, against a background of recurring sovereign debt crises. We develop a framework that integrates inflation targeting monetary policy with sovereign default risk and identify important interactions. Monetary policy alters incentives for international borrowing and sovereign default risk leads to more volatile nominal interest rates, needed to target inflation. We show that this framework replicates the positive co-movements of sovereign interest rate spreads with domestic nominal rates and inflation, a salient feature of emerging markets data. Our framework rationalizes the experience of Brazil during the 2015 downturn, which featured high inflation, high nominal rates, and high sovereign spreads. Our counterfactual experiment suggests that by raising the domestic rate the Brazilian central bank not only reduced inflation but also alleviated the debt crisis. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:nys:sunysb:18-14&r=all |
| By: | Meltem Gulenay Chadwick |
| Abstract: | In this study, we aim to measure the dependence between financial markets of certain emerging market countries to the US monetary policy and monetary policy uncertainty. To do so, we apply time-varying copula models proposed by Patton (2006). We are particularly interested in the differences between emerging markets dependence on the US monetary policy, i.e. which country's financial market co-move more or less in response to quantitative easing or quantitative tightening. The results of our study is important as financial risks via contagion became an issue to monitor especially after the subprime crisis of 2008, although this crisis affected the emerging markets relatively less compared to advanced economies. The results of this paper show us that, there exists significant difference between the emerging markets with respect to their dependence to the US monetary policy. The correlation persistence parameters, which control the evolution of time-varying dependence, reveal that especially the emerging countries in the Latin American region are more dependent to both the US monetary policy and the monetary policy uncertainty. In this framework, it is interesting to see that the results acknowledge increasing dependence during the subprime crisis, which decrease after the year 2009, which should be considered as a risk factor for the policy makers that monitor the financial markets of the emerging markets closely. |
| Keywords: | Fragile five, Troubled ten, Financial vulnerability, US monetary policy, Time-varying copulas |
| JEL: | C58 E52 G15 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1817&r=all |
| By: | Ben Charoenwong; Randall Morck; Yupana Wiwattanakantang |
| Abstract: | Since 2010, the Bank of Japan (BOJ) has purchased stocks to boost domestic firms’ valuations to increase GDP growth. The stock return elasticity with respect to BOJ purchases relative to the previous month’s market cap is around 2 and increases across longer horizons. Over one quarter, BOJ share purchases worth 1% of assets correspond to an increase of 1% in share valuation and a .27% increase in assets. Consistent with elevated valuations letting firms “cash out,” BOJ share purchases predict equity issuances and fewer stock buybacks. However, less than 9% of increased assets reflect net tangible capital investments, whereas cash and short-term investments account for over 50%. This unconventional monetary stimulus thus boosts share prices but is largely not transmitted into real investment growth. |
| JEL: | E52 E58 G31 G32 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25525&r=all |
| By: | Jan Zacek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic) |
| Abstract: | This research paper studies the performance of the Taylor-type rules augmented with output and asset prices, and compares their performance in a model with an eternally and occasionally binding constraint. The rules are examined under the optimisation of a central bank's loss function and a welfare maximisation of the economic agents. The analysis delivers the following results. The model with occasionally binding constraint has more favourable properties regarding the hump-shaped and asymmetric impulse responses compared to the eternally binding constraint model. The best rule regarding the lowest value of the central banks' loss function proves to be the rule augmented with asset prices. The optimal reactions are, however, shock- and model-dependent. Moreover, a chosen specification of the loss function plays a significant role. The welfare maximisation reveals that reacting to asset prices might not be welfare-improving for both types of economic agents – households and entrepreneurs. This result is, however, model-dependent. |
| Keywords: | asset prices, DSGE, leaning-against-the-wind, monetary policy, non-linearities, Taylor Rule |
| JEL: | E30 E44 E50 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2018_37&r=all |
| By: | Fethi Ogunc; Mustafa Utku Ozmen; Cagri Sarikaya |
| Abstract: | In this paper, we aim to contribute to the understanding of inflation dynamics in Turkey by estimating a Bayesian VAR (BVAR) model. Our identification strategy is based on a set of zero restrictions and use of exogenous control variables. Main results are as follows: (i) Pass-through from exchange rate to inflation is stronger than that from import prices. Moreover, exchange rate and import price shocks spread over inflation very quickly (most of the adjustment is complete within 9 months), particularly faster for the latter, with the estimates being highly precise (the dispersion around median responses are relatively narrow). (ii) Economic growth has a significant but lagged effect on inflation, yet with a greater uncertainty compared to exchange rate and import price pass-through. (iii) The degree of nominal wage pass-through on inflation is estimated to be close to the degree of exchange rate pass-through, albeit with a longer transmission and a greater uncertainty. |
| Keywords: | Inflation, Cost pass-through, Bayesian vector autoregression |
| JEL: | C11 C15 C32 E31 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1810&r=all |
| By: | Masami Imai; Tetsuji Okazaki; Michiru Sawada |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:19-002e&r=all |
| By: | Darracq Pariès, Matthieu; Körner, Jenny; Papadopoulou, Niki |
| Abstract: | This paper contributes to the debate on the macroeconomic effectiveness of expansionary non-standard monetary policy measures in a regulated banking environment. Based on an estimated DSGE model, we explore the interactions between central bank asset purchases and bank capital-based financial policies (regulatory, supervisory or macroprudential) through its influence on bank risk-shifting motives. We find that weakly-capitalised banks display excessive risk-taking which reinforces the credit easing channel of central bank asset purchases, at the cost of higher bank default probability and risks to financial stability. In such a case, adequate bank capital demand through higher minimum capital requirements curtails the excessive credit origination and restores a more efficient propagation of central bank asset purchases. As supervisors can formulate further capital demands, uncertainty about the supervisory oversight provokes precautionary motives for banks. They build-up extra capital buffer attenuating non-standard monetary policy. Finally, in a weakly-capitalised banking system, countercyclical macroprudential policy attenuates banks risk-taking and dampens the excessive persistence of the non-standard monetary policy impulse. On the contrary, in a well-capitalised banking system, macroprudential policy should look through the effects of central bank asset purchases on bank capital position, as the costs in terms of macroeconomic stabilisation seem to outweigh the marginal financial stability benefits. JEL Classification: E44, E52, F40 |
| Keywords: | asset purchases, bank capital regulation, effective lower bound, non-standard monetary policy, regulatory uncertainty, risk-taking |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192237&r=all |
| By: | GUNJI Hiroshi |
| Abstract: | We investigate the effects of the negative interest rate policy (NIRP) in Japan on bank lending using regression discontinuity design (RDD). On January 29, 2016, the Bank of Japan announced the beginning of the NIRP from February 16, 2016. Since the financial market did not anticipate this policy, we use the event as a natural experiment. For a few months, starting from February 2016, a negative interest rate was levied on banks that held reserves exceeding the average monthly reserves of 2015. This allows us to employ RDD. The results suggest the average treatment effect on the banks to which a negative interest was levied was approximately -1.5% to -3.5%. In other words, the loan rates of banks to which negative interest rates were levied declined compared to those of the banks that were not subject to NIRP. |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:18086&r=all |
| By: | Anne Kathrin Funk (IHEID, Graduate Institute of International and Development Studies, Geneva); ; |
| Abstract: | After the global financial crisis and during the European sovereign debt crisis, bank lending to companies in the euro area slowed down dramatically, bringing the economy close to a credit crunch. It was only after the start of the European Central Bank (ECB) quantitative easing programme in early 2015 that bank lending improved sustainably. This study analyses the impact of the ECB’s Public Sector Purchase Programme (PSPP) on the access to finance of small- and medium-sized enterprises using firm-level data of the Survey on the Access to Finance of Enterprises and a fixed effects model. The analysis comprises several measures of financial access, such as credit availability, financial constraints, and interest rates. The micro-level nature of the data allows me to distinguish between aggregate and heterogeneous effects across firm size, age, sector, and country. The ECB’s government bond purchases improved financial access on the aggregate euro area level and particularly in the periphery of the euro area. Hence, countries that need the most stimulus benefit the most from the PSPP. |
| Keywords: | Unconventional monetary policy, credit channel, bank lending, ECB, SME |
| JEL: | E44 E51 E52 E58 |
| Date: | 2019–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp02-2019&r=all |
| By: | Matuka, Adelajda |
| Abstract: | This paper estimates the impact of exchange rate shocks to prices in Albania from 2000Q1 to 2017Q1. The empirical analysis is based on a Vector Autoregressive approach for Albanian economy following Cholesky decomposition scheme. Impulse-response functions give evidence for an incomplete “pass-through” of exchange rate shocks to prices. Impulse-response functions to oil shocks indicates initial positive values for import and producer prices and negative value for consumer prices and interest rates. Variance decomposition reveal that the highest fluctuations of import prices is triggered by growth rate and oil prices shocks, whereas the variance of producer prices and consumer prices is explained by its own innovations. Exchange rate’s innovations are less aggressive to import prices and producer prices then to consumer prices. We perform the robustness check allowing interest rate to be ordered before exchange rates and the results do not change from the previous findings. |
| Keywords: | Exchange Rate, Pass Through Effect, Inflation, Vector Autoregressive |
| JEL: | C32 E31 E41 F41 |
| Date: | 2019–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92005&r=all |
| By: | Antonia Arsova (Leuphana University Lueneburg, Germany) |
| Abstract: | This paper takes a panel cointegration approach to the estimation of short- and long-run exchange rate pass-through (ERPT) to import prices in the European countries. Although economic theory suggests a long-run relationship between import prices and exchange rate, in recent empirical studies its existence has either been overlooked, or it has proven dicult to establish. Resorting to novel tests for panel cointegration, we nd support for the equilibrium relationship hypothesis. Exchange rate pass-through elasticities, estimated by two di erent techniques for cointegrated panel regressions, give insight into the most recent development of the ERPT. |
| Keywords: | exchange rate pass-through, import prices, panel cointegration, cross-sectional dependence, common factors |
| JEL: | C12 C23 F31 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:lue:wpaper:384&r=all |
| By: | Yakup Kutsal Koca; Tuba Yilmaz |
| Abstract: | [EN] This study addresses the differences in the pricing dynamics between core goods and services group, using the contributions of the main macroeconomic variables to inflation rates. To estimate the contributions, we fit time varying parameter Phillips Curve model for the period 2007-2018. Results indicate that, for the core goods inflation, exchange rate and import prices have been major determinants, whereas inflation rigidity is smaller. For the services prices, results point out that inflation rigidity is quite large. Moreover, while the exchange rate pass-through is smaller, backward indexation and food prices significantly impact on services inflation.[TR] Bu calismada, 2007 ve 2018 yillari arasindaki donem icin temel makro degiskenlerin temel mal ve hizmet enflasyonuna katkilari, parametreleri zamana gore degisen bir Philips Egrisi modeline gore tahmin edilmekte ve bu iki grup arasindaki fiyatlama dinamigi farkliliklari ele alinmaktadir. Calismanin bulgulari, temel mal grubunda doviz kuru ve ithalat fiyatlarinin temel belirleyici oldugunu, buna karsilik enflasyon katiliginin gorece zayif oldugunu ortaya koymaktadir. Hizmet grubunda ise, bulgular yuksek katiliga isaret etmektedir. Ayrica, hizmet grubuna doviz kuru geciskenligi daha zayifken, gecmise endeksleme ve gida enflasyonu hizmet enflasyonunu onemli olcude etkilemektedir. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:econot:1807&r=all |
| By: | Bobeica, Elena; Ciccarelli, Matteo; Vansteenkiste, Isabel |
| Abstract: | This paper documents, for the first time in a systematic manner, the link between labor cost and price inflation in the euro area. Using country and sector quarterly data over the period 1985Q1-2018Q1 we find a strong link between labor cost and price inflation in the four major economies of the euro area and across the three main sectors. The dynamic interaction between prices and wages is time-varying and depends on the state of the economy and on the shocks hitting the economy. Our results show that it is more likely that labor costs are passed on to price inflation with demand shocks than with supply shocks. However, the pass-through is systematically lower in periods of low inflation as compared to periods of high inflation. These results confirm that, under circumstances of predominantly demand shocks, labor cost increases will be passed on to prices. Coming from a period of low inflation, however, this pass-through could be moderate at least until inflation stably reaches a sustained path. JEL Classification: C32, E24, E31 |
| Keywords: | euro area, inflation, labor costs, pass-through, structural VAR |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192235&r=all |
| By: | Oguzhan Cepni; Ibrahim Ethem Guney; Doruk Kucuksarac; Muhammed Hasan Yilmaz |
| Abstract: | [EN] Understanding the determinants of yield curve and its interaction with economic variables is quite crucial for both policymakers and investors. This note aims to explore the relation between yield curve and macroeconomic factors. To this end, firstly, the yield curve is depicted by a small number of unobservable factors, namely the level, slope and curvature, using Nelson-Siegel methodology for the 2006:02-2017:08 period. Rather than combining the yield curve factors with a few macroeconomic variables, a comprehensive dataset is set used, which is comprised of 164 global and domestic macroeconomic/financial variables. The principal components obtained under four categories (global variables, inflation, domestic financial variables, and economic activity) are incorporated into a Vector Autoregressive model together with the yield curve factors. Empirical results suggest that the level factor responds to shocks originated from inflation, domestic financial variables and global variables. Furthermore, the slope factor is affected by shocks in global variables, and the curvature factor appears to be influenced by domestic financial developments. Overall, the results indicate the significance of macroeconomic information on the yield curve, especially of domestic financial variables and global variables. Given the spillover effects of unconventional monetary policies of advanced countries, emerging market bond rates tend to be exposed to the swings in the global financial conditions, which weakens the monetary policy transmission in emerging countries. [TR] [TR] Getiri egrisinin belirleyicilerinin ve iktisadi degiskenlerle olan etkilesiminin anlasilmasi politika yapicilar ve yatirimcilar icin onem tasimaktadir. Bu notta, getiri egrisi ve makroekonomik faktorler arasindaki dinamik iliski incelenmektedir. Bu amacla ilk asamada getiri egrisi, 2006:02- 2017:08 donemi icin Nelson-Siegel yontemi kullanilarak seviye, egim ve egrilik faktorleri uzerinden ozetlenmistir. Uygulamada yaygin metot olan getiri egrisinin birkac makroekonomik gostergeyle iliskilendirilmesi yerine, kuresel ve yerel makroekonomik/finansal 164 seriyi iceren bir veri seti kullanilmistir. Getiri egrisi faktorleri ve dort sektorden elde edilen temel bilesenler arasinda vektor ozbaglanim analizi gerceklestirilmistir. Ampirik sonuclar, seviye faktorunun enflasyon gelismeleri, yerel finansal degiskenler ile kuresel degiskenlerden etkilendigine isaret etmektedir. Ek olarak, egim faktoru kuresel degiskenlerden, egrilik faktoru ise yerel finansal gelismelerden etkilenmektedir. Ozetle, sonuclar kuresel finansal degiskenler basta olmak uzere, makroekonomik degiskenlerin getiri egrisini onemli derecede etkiledigine isaret etmektedir. Geleneksel-olmayan para politikasi uygulamalarinin bulasicilik etkisi dikkate alindiginda, gelismekte olan ulke tahvil faizlerinin kuresel kosullardaki degisimlere duyarli oldugu ve bu durumun para politikasi aktarim mekanizmasini azalttigi gorulmektedir. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:econot:1802&r=all |
| By: | Adolfson, Malin (Research Department, Central Bank of Sweden); Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Ratto, Marco (Financial Stability Department, Central Bank of Sweden) |
| Abstract: | In this paper, we study identification and misspecification problems in standard closed and open-economy empirical New-Keynesian DSGE models used in monetary policy analysis. We find that problems with model misspecification still appear to be a first-order issue in monetary DSGE models, and argue that it is problems with model misspecification that may bene.t the most from moving from a classical to a Bayesian framework. We also argue that lack of identification should neither be ignored nor be assumed to affect all DSGE models. Fortunately, identification problems can be readily assessed on a case-by-case basis, by applying recently developed pre-tests of identification. |
| Keywords: | Bayesian estimation; Monte-Carlo methods; Maximum Likelihood Estimation; DSGE Model; Closed economy; Open economy |
| JEL: | C13 C51 E30 |
| Date: | 2018–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0362&r=all |
| By: | James Chapman; Carolyn A. Wilkins |
| Abstract: | The market for cryptoassets has exploded in size in the 10 years since bitcoin was launched. The technology underlying cryptoassets, blockchain, has also been held up as a technology that promises to transform entire industries. In this paper we examine what is new about cryptoassets and their technology and how they may affect core central bank functions. We do this by outlining what we think are the three most important research and policy questions for central bankers around cryptoassets and cryptocurrencies specifically. First, what is fundamentally new about the technology that underpins cryptocurrencies and other cryptoassets? Second, how do cryptocurrencies affect a central bank’s role in the economy? Third, given the two challenges of a rise of cryptoassets and a decline in the use of cash, should digital payments be left entirely to the private sector or should central banks issue their own digital currencies? We discuss these three policy questions and highlight what aspects of them are most important to central bankers. Finally, we raise several new questions to help guide researchers in studying cryptoassets and their underlying technology. |
| Keywords: | Bank notes; Digital Currencies; Financial services; Payment clearing and settlement systems |
| JEL: | E41 E42 E51 E58 H4 P43 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:19-1&r=all |
| By: | Kohei Hasui; Yoshiyuki Nakazono; Yuki Teranishi |
| Abstract: | A number of previous studies suggest that inflation expectations are important in considering the effectiveness of monetary policy in a liquidity trap. However, the role of inflation expectations can be very different, depending on the type of monetary policy that a central bank implements. This paper reveals how a private agent forms inflation expectation affects the effectiveness of monetary policy under the optimal commitment policy, the Taylor rule, and a simple rule with price-level targeting. We examine two expectation formations: (i) different degrees of anchoring, and (ii) different degrees of forward-lookingness. We show that how to form inflation expectations is less relevant when a central bank implements the optimal commitment policy, while it is critical when the central bank adopts the Taylor rule or a simple rule with price-level targeting. Even for the Japanese economy, the effects of monetary policy on economic dynamics significantly change according to expectation formations under rules other than the optimal commitment policy. |
| Keywords: | Expectations, Liquidity Trap, Monetary Policy |
| JEL: | E31 E52 E58 E61 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-16&r=all |
| By: | Giuseppe Ferrero (Bank of Italy); Mario Pietrunti (Bank of Italy); Andrea Tiseno (Bank of Italy) |
| Abstract: | Should monetary policy be more aggressive or more cautious when facing uncertainty on the relationship between macroeconomic variables? This paper's answer is: “it depends” on the degree of persistence of the shocks that hit the economy. The paper studies optimal monetary policy in a basic (two-equation) forward looking New-Keynesian (NK) framework with random parameters. It relaxes the assumption of full central bank information in two ways: by allowing for uncertainty on the model parameters and by assuming asymmetric information. While the private sector observes the realizations of the random process of the parameters as they occur, the central bank observes them with a one period delay. Compared to the problem with full information, the monetary authority must solve the Bayesian decision problem of minimizing the expected stream of future welfare losses integrating over its prior probability distribution of the unknown parameters. The paper proposes a general method to account for uncertainty on any subset of parameters of the model. As an application, it focuses on two cases: uncertainty on the natural rate of interest and on the slope of the Phillips curve. |
| Keywords: | optimal monetary policy, parameter uncertainty, asymmetric information, natural rate of interest, Phillips curve |
| JEL: | E31 E32 E52 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1205_19&r=all |
| By: | Ashoka Mody (Princeton University); Milan Nedeljkovic (Metropolitan University, FEFA) |
| JEL: | E52 E58 G10 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:253&r=all |
| By: | Giorgia Rocco (Banca d'Italia) |
| Abstract: | The study investigates the use of cash and other payment instruments at points of sale (POS) in Italy, using data from the Italian sample of the Study on the Use of Cash by Households (SUCH) conducted by the ECB in 2016. The aim of the study was to estimate the number and value of cash transactions and to obtain information on consumers’ payment behaviour. The results show that cash was the most used instrument, although alternative instruments and cards would be preferred if the method of payment could be selected without constraints. Cash was mainly used for low-value payments, whereas other instruments were used more frequently for higher value transactions. Daily payments were mainly made in cash, even when alternatives were available. The choice of payment instrument is more affected by the characteristics of the transaction than by socio-demographic factors: the significant use of cash is explained by the fact that only transactions at POS, where the value of payments is typically low, were recorded in the diaries. |
| Keywords: | cash, payment instruments, payment behaviour, consumers’ choice |
| JEL: | E41 D12 D14 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_481_19&r=all |
| By: | Adriana Grasso (LUISS University); Tiziano Ropele (Bank of Italy) |
| Abstract: | In past years there have been suggestions for monetary policy to engineer higher inflation expectations to stimulate spending. We examine the relationship between the inflation expectations of firms and their investment plans using Italian business survey data over the period 2012-2016. We show that higher expected inflation is positively correlated with firms’ willingness to invest. In our baseline specification, a one percentage point rise in expected inflation is associated with a higher probability of reporting higher investment plans by 4.0 percentage points. This expansionary effect operates through the standard interest rate channel and its magnitude is positively correlated with firms’ liquidity and debt position. |
| Keywords: | investment expenditure, inflation expectations, survey data |
| JEL: | E22 E31 E58 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1203_18&r=all |
| By: | Jose L. Fillat (Federal Reserve Bank of Boston); Stefania Garetto (Boston University, CEPR, and NBER); Arthur V. Smith (Boston University) |
| Abstract: | The global financial crisis of 2008 was followed by a wave of regulatory reforms that affected large banks, especially those with a global presence. These reforms were reactive to the crisis. In this paper we propose a structural model of global banking that can be used proactively to perform counterfactual analysis on the effects of alternative regulatory policies. The structure of the model mimics the US regulatory framework and highlights the organizational choices that banks face when entering a foreign market: branching versus subsidiarization. When calibrated to match moments from a sample of European banks, the model is able to replicate the response of the US banking sector to the European sovereign debt crisis. Our counterfactual analysis suggests that pervasive subsidiarization, higher capital requirements, or ad hoc monetary policy interventions would have mitigated the effects of the crisis on US lending. |
| Keywords: | global banks, banking regulation, shock transmission. |
| JEL: | F12 F23 F36 G21 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2019-001&r=all |
| By: | Marco Vega (Departamento de Economía de la Pontificia Universidad Católica del Perú); César Martinelli |
| Abstract: | We show that Peru’s chronic inflation through the 1970s and 1980s was the result of the need for inflationary taxation in a regime of fiscal dominance of monetary policy. Hyperinflation occurred when debt accumulation became unavailable, and a populist administration engaged in a counterproductive policy of price controls and loose credit. We interpret the fiscal difficulties preceding the stabilization as a process of social learning to live within the realities of fiscal budget balance. The credibility of the policy regime change in the 1990s may be linked ultimately to the change in public opinion giving proper incentives to politicians, after the traumatic consequences of the hyperstagflation of 1987-1990. JEL Classification-JEL: E52 , E58 , E62 |
| Keywords: | Hyperstagflation, Inflation, Fiscal policy, Monetary policy |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00468&r=all |
| By: | Grodecka, Anna (Research Department, Central Bank of Sweden); Kenny, Seán (Lund University); Ögren, Anders (Lund University) |
| Abstract: | This paper contributes to literature on bank distress using the Swedish experience of the international crisis of 1907, often paralleled with 2008. By employing previously unanalyzed bank-level data, we use logit regressions and principal component analysis to measure the impact of pre-crisis bank characteristics on the probability of their subsequent distress. The crisis was characterized by “creative destruction,” as those banks with weaker corporate governance structures, wider branching networks, operating with lower cost efficiency were more likely to experience distress. We find that poor credit allocation rather than foreign borrowing, as often stressed, were associated with ultimate demise. |
| Keywords: | Bank Distress; Financial Crises; Swedish Banks; Lender of Last Resort |
| JEL: | E58 G21 G28 H12 N23 |
| Date: | 2018–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0358&r=all |
| By: | Davis, Douglas (Virginia Commonwealth University); Korenok, Oleg (Virginia Commonwealth University); Norman, Peter (University of North Carolina); Sultanum, Bruno (Federal Reserve Bank of Richmond); Wright, Randall (UW-Madison, FRB Minneapolis, FRB Chicago, NBER) |
| Abstract: | Experimental studies in monetary economics usually study infinite horizon models. Yet, the time constraints of the laboratory sessions in which these models are conducted create finite horizons that imply monetary equilibria cannot exist. Moreover, laboratory subjects do not treat the probabilistic termination rule typically used in a manner consistent with the discount factor that the rule is intended to replace. Thus, it is unclear whether these experiments evaluate subjects' use of money to ameliorate trading frictions as an equilibrium phenomenon, their inability to understand backward induction, or features of games that promote the use of money behaviorally, even when doing so is not an equilibrium strategy. To address this issue, we present a pair of finite-horizon games where monetary exchange is an equilibrium, and report an experiment that evaluates behavior in these games in light of a finitely repeated alternative where monetary exchange is not an equilibrium. |
| Keywords: | monetary economics; probabilistic termination rule; monetary theory |
| Date: | 2019–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:19-02&r=all |
| By: | Zelal Aktas; Yasemin Erduman; Neslihan Kaya Eksi |
| Abstract: | We analyze how changes in market expectations about the Federal Reserve’s future monetary policy stance affect an emerging country’s share in total portfolio flows to emerging markets. We estimate a seemingly unrelated regression model for a panel of 19 emerging countries, using monthly data from January 2010 to October 2017. Our findings suggest that the effect of Fed’s policy expectations on the country share is asymmetric. The expectations of Fed’s monetary policy is found to reduce an emerging country’s share in total emerging market portfolio flows when expectations imply a policy tightening, while easing expectations do not have a significant effect on the share. A country with stronger financial conditions and safer business environment for international investors tend to downsize the negative effect of Fed’s policy tightening on its share in total portfolio flows, with respect to its counterparts. |
| Keywords: | Fed expectations, Capital flows, Emerging markets, Panel regression |
| JEL: | E43 F32 F41 G11 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1809&r=all |
| By: | Hess Chung; Etienne Gagnon; Taisuke Nakata; Matthias Paustian; Bernd Schlusche; James Trevino; Diego Vilan; Wei Zheng |
| Abstract: | We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in response to the Global Financial Crisis are modestly effective in speeding up the labor market recovery and return of inflation to 2 percent following an economic slump. However, these policies have only small effects in limiting the initial rise in the unemployment rate during a recession because of transmission lags. As with any model-based analysis, we also discuss a number of c aveats regarding our results. |
| Keywords: | Effective lower bound ; Federal Reserve balance sheets ; Forward guidance ; Large-scale asset purchases ; Monetary policy |
| JEL: | E58 E52 E31 E32 |
| Date: | 2019–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-03&r=all |
| By: | António Afonso; João Tovar Jalles; Mina Kazemi |
| Abstract: | We assess the impact of announcements corresponding to different fiscal and monetary policy measures on the 10-year sovereign bond yield spreads (relative to Germany) of the 10 EMU countries during the period 01:1999 - 07:2016. Implementing pooled and country-fixed effects OLS regressions, we find that the European Commission’s (EC) releases of the excessive deficit procedure significantly affect the yield spreads. The EC releases of higher debt and better budget balance forecasts contribute to the rise and the decline of spreads, respectively. Moreover, we find that the announcements of the ECB’s key interest rates together with the longer-term refinancing operations (LTROs) and the first covered bond purchase programme (CBPP1) negatively affect sovereign yield spreads in our sample of EMU countries. |
| Keywords: | sovereign yields, fiscal policy, monetary policy, event analysis, panel data |
| JEL: | C23 E52 E62 G10 H63 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp0672019&r=all |
| By: | Ki Young Park (School of Economics, Yonsei University); Youngjoon Lee (School of Business, Yonsei University); Soohyon Kim (Economic Research Institute, The Bank of Korea) |
| Abstract: | We quantify the Monetary Policy Board (MPB) minutes of the Bank of Korea (BOK) using text mining. We propose a novel approach using a field-specific Korean dictionary and contiguous sequences of words (n-grams) to better capture the subtlety of central bank communications. We find that our lexicon-based indicators help explain the current and future BOK monetary policy decisions when considering an augmented Taylor rule, suggesting that they contain additional information beyond the currently available macroeconomic variables. Our indicators remarkably outperform English-based textual classifications, a media-based measure of economic policy uncertainty, and a data-based measure of macroeconomic uncertainty. Our empirical results also emphasize the importance of using a field-specific dictionary and the original Korean text. |
| Keywords: | Monetary policy; Text mining; Central banking; Bank of Korea, Taylor rule |
| JEL: | E43 E52 E58 |
| Date: | 2019–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:bok:wpaper:1901&r=all |
| By: | Desislava C. Andreeva (European Central Bank); Miguel García-Posada (Banco de España) |
| Abstract: | We assess the impact of the Eurosystem’s Targeted Long-Term Refinancing Operations (TLTROs) on the lending policies of euro area banks. To guide our empirical research, we build a theoretical model in which banks compete à la Cournot in the credit and deposit markets. According to the model, we distinguish between direct and indirect effects. Direct effects take place because bidding banks expand their loan supply due to the lower marginal costs implied by the TLTROs. Indirect effects on non-bidders operate via changes in the competitive environment in banks’ credit and deposit markets and are a priori ambiguous. We then test these theoretical predictions with a sample of 130 banks from 13 countries and the confidential answers to the ECB’s Bank Lending Survey. Regarding direct effects on bidders, we find an easing impact on margins on loans to relatively safe borrowers, but no impact on credit standards. Regarding indirect effects, there is a positive impact on the loan supply on non-bidders but, contrary to the direct effects, the transmission of the TLTROs takes place through an easing of credit standards, and it is mainly concentrated in banks facing high competitive pressures. We also find evidence of positive funding externalities. |
| Keywords: | unconventional monetary policy, TLTROs, lending policies, competition |
| JEL: | G21 E52 E58 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1903&r=all |
| By: | André Binette; Dmitri Tchebotarev |
| Abstract: | This note analyzes the evolution of the narrative in the Bank of Canada’s Monetary Policy Report (MPR). It presents descriptive statistics on the core text, including length, most frequently used words and readability level—the three Ls. Although each Governor of the Bank of Canada focuses on the macroeconomic events of the day and the mandate of inflation targeting, we observe that the language used in the MPR varies somewhat from one Governor’s tenure to the next. Our analysis also suggests that the MPR has been, on average, slightly more complicated than the average Canadian would be expected to understand. However, recent efforts to simplify the text have been successful. Using word embeddings and applying a well-established distance metric, we examine how the content of the MPR has changed over time. Increased levels of lexical innovation appear to coincide with important macroeconomic events. If substantial changes in economic conditions have been reflected in the MPR, quantifying changes in the text can help assess the perceived level of uncertainty regarding the outlook in the MPR. Lastly, we assess the sentiment (tone) in the MPR. We use a novel deep learning algorithm to measure sentiment (positive or negative) at the sentence level and aggregate the results for each MPR. The exceptionally large impacts of key events, such as 9/11, the global financial crisis and others, are easily recognizable by their significant effect on sentiment. The resulting measure can help assess the implicit balance of risks in the MPR. These measures (lexical innovations and sentiment) could then potentially serve to adjust the probability distributions around the Bank’s outlook by making them more reflective of the current situation. |
| Keywords: | Central bank research; Monetary Policy |
| JEL: | E02 E52 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:19-5&r=all |
| By: | Doruk Kucuksarac; Abdullah Kazdal; Ibrahim Ethem Guney |
| Abstract: | [EN] Currency swap is a financial derivative that allows parties to transform assets or liabilities denominated in one currency into another one. This product has been widely utilized in global financial markets in order to manage foreign exchange liquidity and to conduct carry trade transactions. Besides, central banks and investors follow currency swap market for the purposes of valuing financial derivatives, estimating counterparty risk and inferring about monetary policy stance. Currency swap transactions have substantial amount of volume in Turkey and they are extensively used by the banks. Given its frequent use, it is crucial to interpret the information related to currency swap rates. However, currency swap rates are quoted as par-rate, which is the coupon rate that makes the value of all cash flows equal to the face value, and their interpretation is not straightforward. This note employs one of the most popular parametric methods, Nelson-Siegel model, for currency swap rates to form a zero-coupon currency swap yield curve. In this regard, we provide an approach to convert the quoted currency swap rates to zero-coupon currency rates. The estimation results show that the fitted and quoted currency swap rates are quite close to each other. Additionally, the zero-coupon swap rates are compared with forward implied rates for specific maturities since both products are quite similar in nature. Both rates are observed to move together, which shows the consistency of our estimations. Overall, we believe that the approach we adopt in this study provides a useful tool for investors and regulatory authorities. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:econot:1803&r=all |
| By: | Ioannis Lazopoulos (University of Surrey); Vasco J. Gabriel (University of Surrey and NIPE-UM) |
| Abstract: | The model developed in this paper examines the interaction between monetary and macroprudential policies in promoting macroeconomic stability, highlighting the role of shocks and policy instruments. The paper shows that assigning the mandates of monetary and financial stability to independent authorities enhances macroeconomic stability only when some level of coordination exists between policymakers and it is the dominant institutional arrangement when monetary stability is socially important. Instead, when society values financial stability, internalising the policy spillovers by assigning the two mandates to a single policymaker could become the dominant configuration depending on the model's parameter values. |
| JEL: | E42 E44 E52 E58 E61 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0419&r=all |
| By: | Salih Fendoglu; Steven Ongena |
| Abstract: | How does a sudden stop affect the local supply of credit by domestic banks? To answer this question, we study the Turkish credit register around Lehman. We find that the credit supply channel during a sudden stop works through not only banks’ ex-ante level of reliance on foreign funding (as is often documented in extant research), but also the difficulty of banks in rolling over their maturing foreign debt (which we capture by remaining maturity of and premium on their foreign funding), and for banks with ex-ante more optimistic exchange rate expectations, their holding of ex-ante riskier loan portfolios. Our research thereby uncovers the latter two channels as a significant source of amplification in contracting credit supply during a sudden stop. |
| Keywords: | Sudden stop, Credit supply channel, Emerging market economies |
| JEL: | E44 F34 F41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1818&r=all |
| By: | Takayuki Tsuruga; Shota Wake |
| Abstract: | Previous studies argue that, based on the New Keynesian framework, a fiscal stimulus financed by money creation has a strong positive effect on output under a reasonable degree of nominal price rigidities. This paper investigates the effects of an implementation lag in a money-financed fiscal stimulus on output. We show that if a money-financed government purchase has a time lag between the decision and the implementation: (1) it may cause a recession rather than a boom when the economy is in normal times; (2) it may deepen a recession when the economy is in a liquidity trap; (3) the longer the implementation lag, the deeper the recession; and (4) the depth of the recession depends on the interest semi-elasticity of money demand. Our results imply that, if money demand is unstable, the money-financed fiscal stimulus with an implementation lag may have unstable effects on output, in contrast to the debt-financed fiscal stimulus. |
| Keywords: | Anticipation effect, Fiscal multiplier, Government spending, Seigniorage |
| JEL: | E32 E52 E62 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-12&r=all |
| By: | Edward Nelson |
| Abstract: | Although he was based in the United States, leading monetarist Karl Brunner participated in debates in the United Kingdom on monetary analysis and policy from the 1960s to the 1980s. During the 1960s, his participation in the debates was limited to research papers, but in the 1970s, as monetarism attracted national attention, Brunner made contributions to U.K. media discussions. In the pre-1979 period, he was highly critical of the U.K. authorities’ nonmonetary approach to the analysis and control of inflation-an approach supported by leading U.K. Keynesians. In the early 1980s, Brunner had direct interaction with Prime Minister Margaret Thatcher on issues relating to monetary control and monetary strategy. He was unsuccessful in persuading her to use the monetary base-instead of a short-term interest rate-as the instrument for implementing monetary policy. However, following his interventions, the U.K. authorities during the 1980s assigned weight to the monetary b ase as an indicator and target of monetary policy. Brunner’s imprint on U.K. monetary policy has also been felt in the twenty-first century. Brunner’s analysis, with Allan Meltzer, of the monetary transmission mechanism helped provide the basis for the policy of quantitative easing followed by the Bank of England. |
| Keywords: | Karl Brunner ; U.K. monetary policy ; Monetarism ; Monetary base control ; Transmission mechanism |
| JEL: | E51 E58 E52 |
| Date: | 2019–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-04&r=all |