nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒02‒25
forty-four papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Beyond the doomsday economics of "proof-of-work" in cryptocurrencies By Raphael Auer
  2. Capital Flows in an Aging World By Zsofia Barany; Nicolas Coeurdacier; Stéphane Guibaud
  3. Monetary policy transmission to mortgages in a negative interest rate environment By Amzallag, Adrien; Calza, Alessandro; Georgarakos, Dimitris; Sousa, João
  4. The Long-Run Information Effect of Central Bank Communication By Hansen, Stephen; McMahon, Michael; Tong, Matthew
  5. Monetary Policy in a World of Cryptocurrencies By Benigno, Pierpaolo
  6. Bitcoin: A solution for payment systems or a solution in search of a problem? By Carlos Conesa
  7. Greening monetary policy By Dirk Schoenmaker
  8. Evaluating the macroeconomic effects of the ECB’s unconventional monetary policies By Sarah Mouabbi; Jean-Guillaume Sahuc
  9. A Framework for Analyzing Monetary Policy in an Economy with E-money By Yu Zhu; Scott Hendry
  10. America First? A US-centric view of global capital flows By McQuade, Peter; Schmitz, Martin
  11. Firms’ Expectations and Monetary Policy Shocks in the Eurozone By Snezana Eminidou; Marios Zachariadis
  12. Identification Versus Misspecification in New Keynesian Monetary Policy Models By Laséen, Stefan; Lindé, Jesper; Ratto, Marco
  13. The Global Component of Inflation Volatility By Carriero, Andrea; Corsello, Francesco; Marcellino, Massimiliano
  14. China vs. U.S.: IMS Meets IPS By farhi, emmanuel; Maggiori, Matteo
  15. Digital Innovation, Data Revolution and Central Bank Digital Currency By Noriyuki Yanagawa; Hiromi Yamaoka
  16. The Fiscal Theory of the Price Level in Overlapping Generations Models By Farmer, Roger E A; Zabczyk, Pawel
  17. Quantitative Easing and the Hot Potato Effect: Evidence from Euro Area Banks By Ryan, Ellen; Whelan, Karl
  18. The Trials of the Trilemma: International Finance 1870-2017 By Eichengreen, Barry; Esteves, Rui
  19. The Distributional Effects of Conventional Monetary Policy and Quantitative Easing: Evidence from an Estimated DSGE Model By Stefan Hohberger; Romanos Priftis; Lukas Vogel
  20. An analysis of the unbiased forward rate hypothesis in developed and emerging economies By Phungo, Muka; Bonga-Bonga, Lumengo
  21. The anatomy of the euro area interest rate swap market By Dalla Fontana, Silvia; Holz auf der Heide, Marco; Pelizzon, Loriana; Scheicher, Martin
  22. A Structural VAR Model for Estimating the Link between Monetary Policy and Home Prices in Israel By Dana Orfaig
  23. The Signalling Effect of Monetary Policy Rate on Lending Rates in Ghana. By Lartey, Lawrencia
  24. Beyond the doomsday economics of "proof-of-work" in cryptocurrencies By Auer, Raphael
  25. Oil Prices, Exchange Rates and Interest Rates By Kilian, Lutz; Zhou, Xiaoqing
  26. Exchange Rates, Foreign Currency Exposure and Sovereign Risk By Kerstin Bernoth; Helmut Herwartz
  27. Debates and dissident inside the FOMC during WW2 By Etienne Farvaque; Antoine Parent; Piotr, Cracow University) Stanek
  28. A Silver Transformation: Chinese Monetary Integration in Times of Political Disintegration during 1898-1933 By Ma, Debin; Zhao, Liuyan
  29. Fed’s Unconventional Monetary Policy and Risk Spillover in the US Financial Markets By Mehmet Balcilar; Zeynel Abidin Ozdemir; Huseyin Ozdemir; Mark E. Wohar
  30. The German undervaluation regime under Bretton Woods: How Germany became the nightmare of the world economy By Höpner, Martin
  31. Money markets, collateral and monetary policy By De Fiore, Fiorella; Hoerova, Marie; Uhlig, Harald
  32. Dynamic Interactions Between Financial and Macroeconomic Imbalances: A Panel VAR Analysis By Amat Adarov
  33. Monetary Policy Strategies for a Low-Rate Environment By Ben S. Bernanke; Michael T. Kiley; John M. Roberts
  34. Central bank communication during normal and crisis time By Christophe Blot; Paul Hubert
  35. Residual Seasonality in Core Consumer Price Inflation : An Update By Ekaterina V. Peneva; Nadia Sadee
  36. Credit, financial conditions and the business cycle in China By Lodge, David; Soudan, Michel
  37. The Phillips Multiplier By Barnichon, Régis; Mesters, Geert
  38. Does Central Bank Tone Move Asset Prices? By Schmeling, Maik; Wagner, Christian
  39. Do zero and sign restricted SVARs identify unconventional monetary policy shocks in the euro area? By Adam Elbourne; Kan Ji
  40. Monetary Policy, Macroprudential Policy, and Financial Stability By Martinez-Miera, David; Repullo, Rafael
  41. The Euro Crisis in the Mirror of the EMS By Corsetti, Giancarlo; Eichengreen, Barry; Hale, Galina B; Tallmann, Eric
  42. Banks' Systemic Risk and Monetary Policy By Faia, Ester; Karau, Soeren
  43. Inflation Expectations, Consumption and the Lower Bound: Micro Evidence from a Large Euro Area Survey By Ioana A. Duca; Geoff Kenny; Andreas Reuter
  44. The effect and risks of ECB collateral framework changes By Christophe Blot; Jérôme Creel; Paul Hubert

  1. By: Raphael Auer
    Abstract: This paper discusses the economics of how Bitcoin achieves data immutability, and thus payment finality, via costly computations, ie "proof-of-work". Further, it explores what the future might hold for cryptocurrencies modelled on this type of consensus algorithm. The conclusions are, first, that Bitcoin counterfeiting via "double-spending" attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of "mining" income via fees as users free-ride on the fees of other transactions in a block and in the subsequent blockchain. Instead, newly minted bitcoins, known as block rewards, have made up the bulk of mining income to date. Looking ahead, these two limitations imply that liquidity is set to fall dramatically as these block rewards are phased out. Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final, unless new technologies are deployed to speed up payment finality. Second-layer solutions such as the Lightning Network might help, but the only fundamental remedy would be to depart from proof-of-work, which would probably require some form of social coordination or institutionalisation.
    Keywords: cryptocurrencies, crypto-assets, digital currencies, blockchain, proof-of-work, proof-of-stake, distributed ledger technology, consensus, bitcoin, ethereum, money, digitalisation, finance, history of money
    JEL: D40 D20 E42 E51 F31 G12 G28 G32 G38 L10 L50
    Date: 2019–01
  2. By: Zsofia Barany (Département d'économie); Nicolas Coeurdacier (Département d'économie); Stéphane Guibaud (Département d'économie)
    Abstract: We investigate the importance of worldwide demographic evolutions in shaping capital flows across countries and over time. Our lifecycle model incorporates cross-country differences in fertility and longevity as well as differences in countries’ ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers uphill capital flows from emerging to advanced economies, while country-specific demographic evolutions reallocate capital towards countries aging more slowly. Our quantitative multi-country overlapping generations model explains a large fraction of long-term capital flows across advanced and emerging countries.
    Keywords: Aging; Household Saving; International Capital Flows
    JEL: E21 F21 J11
    Date: 2018–12
  3. By: Amzallag, Adrien; Calza, Alessandro; Georgarakos, Dimitris; Sousa, João
    Abstract: Do negative policy rates hinder banks’ transmission of monetary policy? To answer this question, we examine the behaviour of Italian mortgage lenders using a novel loan-level dataset. When policy rates turn negative, banks with higher ratios of retail overnight deposits to total assets charge more on new fixed rate mortgages. This suggests that the funding structure of banks may matter for the transmission of negative policy rates, especially for long-maturity illiquid assets. Nevertheless, the aggregate economic implications for households are small, suggesting that concerns about inefficient monetary policy transmission to households under modestly negative rates are likely overstated. JEL Classification: E40, E52, E58, G21
    Keywords: bank lending, monetary policy, mortgages, negative interest rates
    Date: 2019–02
  4. By: Hansen, Stephen; McMahon, Michael; Tong, Matthew
    Abstract: Why do long-run interest rates respond to central bank communication? Whereas existing explanations imply a common set of signals drives short and long-run yields, we show that news on economic uncertainty can have increasingly large effects along the yield curve. To evaluate this channel, we use the publication of the Bank of England's Inflation Report, from which we measure a set of high-dimensional signals. The signals that drive long-run interest rates do not affect short-run rates and operate primarily through the term premium. This suggests communication plays an important role in shaping perceptions of long-run uncertainty.
    Keywords: communication; Machine Learning; monetary policy
    JEL: E52 E58
    Date: 2019–01
  5. By: Benigno, Pierpaolo
    Abstract: Can currency competition destabilize central banks' control of interest rates and prices? Yes, it can. In a two-currency world, the growth rate of cryptocurrency sets a lower bound on the nominal interest rate and the attainable inflation rate. In a world of multiple competing currencies issued by profit-maximizing agents, the central bank completely loses control of the nominal interest rate and the inflation rate, which are both determined by structural factors, and thus not subject to manipulation, a result welcomed by the proponents of currency competition. The article also proposes some fixes for the classical problem of indeterminacy of exchange rates.
    Date: 2019–02
  6. By: Carlos Conesa (Banco de España)
    Abstract: In October 2008 a mysterious article was published under the pseudonym Satoshi Nakamoto: “Bitcoin: a peer-to-peer electronic cash system”. Bitcoin’s entry into operation some months later in early 2009 barely caused a ripple. Since then, the scheme has accumulated more than half a million blocks in its blockchain and they include more than 300 million transactions. In view of the media impact of Bitcoin, it is worth explaining in some detail how Bitcoin works and what its limitations are. This article reviews the aims and basic functioning of Bitcoin, analyses its strengths and weaknesses, and discusses its usefulness as an exchange mechanism.
    Keywords: blockchain, hash function, bitcoin, cryptoassets, cryptography, innovation, technology.
    JEL: O31 O33
    Date: 2019–02
  7. By: Dirk Schoenmaker
    Abstract: Central banks have already started to look at climate-related risks in the context of financial stability. Should they also take the carbon intensity of assets into account in the context of monetary policy? The guiding principle in the implementation of monetary policy has been ‘market neutrality’, whereby the central bank buys a proportion of the market portfolio of available corporate and bank bonds (in addition to government bonds). But this implies a carbon bias, because capital-intensive companies tend to be more carbon intensive. The author first reviews the legal mandate of the Eurosystem. While the primary objective is price stability, the Treaty on European Union allows the greening of monetary policy as a secondary objective. He proposes a tilting approach to steer or tilt the allocation of the Eurosystem’s assets and collateral towards low-carbon sectors, which would reduce the cost of capital for these sectors relative to high-carbon sectors. This allocation policy must be designed so it does not affect the effective implementation of monetary policy. The working of the tilting approach is calibrated with data on European corporate and bank bonds. We find that a modest tilting approach could reduce carbon emissions in the corporate and bank bond portfolio by 44 per cent and lower the cost of capital of low carbon companies by 4 basis points. Our findings also suggest that such a low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy. Price stability, the primary objective, is, and should remain, the priority of the Eurosystem.
    Date: 2019–02
  8. By: Sarah Mouabbi; Jean-Guillaume Sahuc
    Abstract: We quantify the macroeconomic effects of the European Central Bank’s unconventional monetary policies using a DSGE model which includes a set of shadow interest rates. Extracted from the yield curve, these shadow rates provide unconstrained measures of the overall stance of monetary policy. Counterfactual analyses show that, without unconventional measures, the euro area would have suffered (i) a substantial loss of output since the Great Recession and (ii) a period of deflation from mid-2015 to early 2017. Specifically, year-on-year inflation and GDP growth would have been on average about 0.61% and 1.09% below their actual levels over the period 2014Q1-2017Q2, respectively.
    Keywords: Unconventional monetary policy, shadow policy rate, DSGE model, euro area
    JEL: E32 E44 E52
    Date: 2019
  9. By: Yu Zhu; Scott Hendry
    Abstract: This paper considers an economy where central-bank-issued fiat money competes with privately issued e-money. We study a policy-setting game between the central bank and the e-money issuer and find (1) the optimal monetary policy of the central bank depends on the policy of the private issuer and may deviate from the Friedman rule; (2) there may exist multiple equilibria; (3) when the economy approaches a cashless state, the central bank’s optimal policy improves the market power of the e-money issuer and can lead to a discrete decrease in welfare and a discrete increase in inflation; and (4) first best cannot be achieved. Central-bank-issued e-money leads to a simple optimal policy that achieves the first best.
    Keywords: Digital Currencies; Monetary Policy
    JEL: E52
    Date: 2019
  10. By: McQuade, Peter; Schmitz, Martin
    Abstract: Both academic researchers and policymakers posit a unique role for the US in the inter-national financial system. This paper investigates the characteristics and determinants of US cross-border financial flows and examines how these contrast with those of the rest of the world. We analyse the relative importance of US, country-specific, and global variables as determinants of aggregate and bilateral US financial flows and as determinants of country-level cross-border financial flows excluding those directly involving the US. Our results indicate that variation in US variables – notably the VIX and US dollar exchange rate – has a quantitatively important influence on global financial flows, but mostly via US cross-border flows. Global and national risk indicators perform better in explaining “rest of the world” flows. Moreover, we find that the correlation between US and rest of the world flows peaks in periods of elevated uncertainty. We interpret our findings as evidence for the existence of a global financial cycle, only some of which is driven by policies and events in the US. JEL Classification: F15, F21, F36, F42, G15
    Keywords: international capital flows, monetary policy spillovers, US dollar exchange rate, US financial system, VIX
    Date: 2019–02
  11. By: Snezana Eminidou; Marios Zachariadis
    Abstract: The purpose of this paper is to investigate the impact of monetary policy shocks on firms’ selling price and production expectations. We estimate a panel structural vector autoregressive (SVAR) model for 10 euro-area economies using monthly survey data for the period from 1999:1 to 2018:6. To identify the monetary policy shocks, we use narrative and high frequency instruments taking into account the central bank’s announcements regarding its policy decisions. The impulse responses from a panel SVAR analysis indicate that firms typically revise their expectations in a manner consistent with imperfect information theoretical settings, e.g., increasing their production and selling price expectations after an unanticipated interest rate hike. Interestingly, we observe an overshooting pattern where following the initial surprise that leads imperfectly informed firms to raise (reduce) their production and selling expectations after an unanticipated interest rate hike (M1 expansion), firms gradually come to expect contractionary (expansionary) monetary policy shocks to eventually decrease (increase) production and then inflation, thus revise their expectations accordingly by decreasing (increasing) first their production expectations and then their selling price expectations in accordance with this learning experience over time.
    Keywords: Rational inattention; imperfect information; survey data; SVAR; narrative shocks; interest rate shock; divisia index
    JEL: E31 E52
    Date: 2019–02
  12. By: Laséen, Stefan; Lindé, Jesper; Ratto, Marco
    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 benefit 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; Closed economy; DSGE model; Maximum Likelihood Estimation; Monte-Carlo methods; Open economy
    JEL: C13 C51 E30
    Date: 2019–01
  13. By: Carriero, Andrea; Corsello, Francesco; Marcellino, Massimiliano
    Abstract: Global developments play an important role for domestic inflation rates. Earlier literature has found that a substantial amount of the variation in a large set of national inflation rates can be explained by a single global factor. However, inflation volatility has been typically neglected, while it is clearly relevant both from a policy point of view and for structural analysis and forecasting. We study the evolution of inflation rates in several countries, using a novel model that allows for commonality in both levels and volatilities, in addition to country-specific components. We find that inflation volatility is indeed important, and a substantial fraction of it can be attributed to a global factor that is also driving inflation levels and their persistence. While various phenomena may contribute to global inflation dynamics, it turns out that since the early '90s level and volatility of the estimated global factor are correlated with the Chinese PPI and Oil inflation. The extent of commonality among core inflation rates and volatilities is substantially smaller than for overall inflation, which leaves scope for national monetary policies. Finally, we show that the point and density forecasting performance of the model is good relative to standard benchmarks, which provides additional evidence on its reliability.
    Keywords: Forecasting; Global factors; inflation; large datasets; Multivariate Autoregressive Index models; Reduced Rank Regressions; volatility
    JEL: C32 C53 E31 E37
    Date: 2019–01
  14. By: farhi, emmanuel; Maggiori, Matteo
    Abstract: Currently both the International Monetary System (IMS) and the International Price Systems (IPS) are dominated by the U.S. The emergence of China, both as reserve currency and as a currency of invoicing, is likely to disrupt this status quo. We provide a framework to understand the forces that will shape this transition and identify sources of instability. We highlight the risk of an abrupt shift triggered by a run on the dollar.
    Keywords: Confidence Crises; Dollar; Exorbitant Privilege; Nurkse Instability; reserve currencies; RMB; safe assets; Triffin dilemma
    JEL: D42 E12 E42 E44 F3 F55 G15 G28
    Date: 2019–01
  15. By: Noriyuki Yanagawa (University of Tokyo); Hiromi Yamaoka (Bank of Japan)
    Abstract: Under the developments of digital innovation, global expansion of cashless payments and the emergence of crypto-assets, some argue that central banks should issue digital currencies that can be used by ordinary people instead of paper-based banknotes. The debates on central bank digital currencies are now gathering great attention from worldwide. Although many of major central banks, including the Bank of Japan, do not have an immediate plan to issue digital currencies that can replace banknotes, some central banks are seriously considering whether they should issue digital currencies in the near future or have already issued them as pilot studies. The debates on central bank digital currencies cover broad issues, such as their possible impacts on payment efficiency, banks f fund intermediation, liquidity crises and the transmission mechanism of monetary policy. All of these issues have important implications for the functions of money as well as its future. Digital innovation expands the possibility of money and enables new types of money with a variety of functions to emerge. These functions may include not only traditional payments but also processing various information and data attached to payments as well as executing transactions. In order to consider the pros and cons of central bank digital currencies as well as the future of money, it is needed to assess their possible impacts not only on payment efficiency but also on financial structure and the overall economy. It is also important to examine their impacts on effective utilization of data and the dynamics of gnetworks externality h, which is one of major characteristics of payment infrastructure.
    Keywords: central bank digital currency; innovation; payment; negative interest rate
    Date: 2019–02–19
  16. By: Farmer, Roger E A; Zabczyk, Pawel
    Abstract: We demonstrate that the Fiscal Theory of the Price Level (FTPL) cannot be used to determine the price level uniquely in the overlapping generations (OLG) model. We provide two examples of OLG models, one with three 3-period lives and one with 62-period lives. Both examples are calibrated to an income profile chosen to match the life-cycle earnings process in U.S. data estimated by Guvenen et al. (2015). In both examples, there exist multiple steady-state equilibria. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies. As long as the primary deficit or the primary surplus is not too large, the fiscal authority can conduct policies that are unresponsive to endogenous changes in the level of its outstanding debt. Monetary and fiscal policy can both be active at the same time.
    Keywords: FTPL; Indeterminacy; Monetary and Fiscal Policy; monetary policy; OLG model
    JEL: E31 E52 E58 H62
    Date: 2019–01
  17. By: Ryan, Ellen; Whelan, Karl
    Abstract: We use a bank-level data set to examine the behaviour of central bank reserves in the euro area banking system over the course of the ECB QE programme. Previous research on QE has generally paid little attention to the role of reserve dynamics within the banking system and some have assumed that the system passively absorbs additional reserves generated by asset purchases. However, with a negative deposit rate in place throughout the sample we study, euro area banks have had a disincentive to hold excess reserves and thus could wish to treat them as a "hot potato" that is preferably passed on to other banks. We find evidence for this hot potato effect, reporting substantial month-to-month churn in bank reserves as well as evidence that banks are responding to high reserve balances by pushing them off their balance sheets. Unlike in the traditional money multiplier model, where excess reserves are used in loan creation, banks appear to be primarily managing reserves through debt security purchases. As such, this hot potato effect seems likely to have had an effect on European bond yields that is distinct from the portfolio rebalancing effect emphasised in the QE literature thus far.
    Keywords: central banks; Quantitative easing; Reserves
    JEL: E4 E5 G21
    Date: 2019–02
  18. By: Eichengreen, Barry; Esteves, Rui
    Abstract: In this paper we survey the history of international finance spanning a century and a half. We start by characterizing capital flows in the long run, organizing our discussion around six facts relating to the volume and volatility of capital flows, measured in both net and gross terms. We then connect up the discussion with exchange rates and monetary policies. The organizing framework for this section is the macroeconomic trilemma. We describe where countries situated themselves relative to the trilemma over time and consider the political economy of their choices. Finally, we study the connections between international finance and economic and financial stability. We present consistent measures of growth and debt crises over the century and a half covered in this paper and discuss how their incidence is related to those institutional and political circumstances and, more generally, to the nature of the international monetary and financial regime.
    Keywords: Capital Flows; financial crises; Monetary Systems
    JEL: F21 F33 F34 N10
    Date: 2019–01
  19. By: Stefan Hohberger; Romanos Priftis; Lukas Vogel
    Abstract: This paper compares the distributional effects of conventional monetary policy and quantitative easing (QE) within an estimated open-economy DSGE model of the euro area. The model includes two groups of households: (i) wealthier households, who own financial assets and can smooth consumption over time, and (ii) poorer households, who only receive labor and transfer income and live “hand to mouth.” We compare the impact of policy shocks on constructed measures of income and wealth inequality (net disposable income, net asset position, and relative per-capita income). Except for the short term, expansionary conventional policy and QE shocks tend to mitigate income and wealth inequality between the two population groups.
    Keywords: Economic models; Interest rates; Monetary Policy; Transmission of monetary policy
    JEL: E44 E52 E53 F41
    Date: 2019
  20. By: Phungo, Muka; Bonga-Bonga, Lumengo
    Abstract: This study assesses whether the unbiased forward rate hypothesis (UFRH) holds in its strong or weak form in selected developed and emerging economies. Moreover, the paper assesses whether this hypothesis, or the relationship between the forward and spot exchange rates, is better specified by a linear or nonlinear model. The paper makes use of the smooth transition error correction model (STECM) to account for long-run relationship and asymmetric adjustment between the two exchange rates. The results of the empirical analysis show the possibility of nonlinear cointegration between the spot and forward exchange rates in a number of developed and emerging economies. In addition, the results reveal that the magnitude of the speed of adjustment to cancel arbitrage opportunities is higher in emerging than in developed markets. This occurs because the size of arbitrage profit is higher in emerging markets compared to developed markets
    Keywords: forward market, spot market, exchange rate, unbiased forward rate hypothesis, smooth transition error correction model
    JEL: C50 G14 G15
    Date: 2019
  21. By: Dalla Fontana, Silvia; Holz auf der Heide, Marco; Pelizzon, Loriana; Scheicher, Martin
    Abstract: Using a novel regulatory dataset of fully identified derivatives transactions, this paper provides the first comprehensive analysis of the structure of the euro area interest rate swap (IRS) market after the start of the mandatory clearing obligation. Our dataset contains 1.7 million bilateral IRS transactions of banks and non-banks. Our key results are as follows: 1) The euro area IRS market is highly standardised and concentrated around the group of the G16 Dealers but also around a significant group of core ”intermediaries" (and major CCPs). 2) Banks are active in all segments of the IRS euro market, whereas non-banks are often specialised. 3) When using relative net exposures as a proxy for the “flow of risk" in the IRS market, we find that risk absorption takes place in the core as well as the periphery of the network. 4) Among the Basel III capital and liquidity ratios, the leverage ratio plays a key role in determining a bank's IRS trading activity. 5) Also, after mandatory central clearing, there is still a large dispersion in IRS transaction prices, which is partly determined by bank characteristics, such as the leverage ratio. JEL Classification: G21, E43, E44
    Keywords: banking, hedging, interest rate risk, network analysis, OTC derivatives, risk management
    Date: 2019–02
  22. By: Dana Orfaig (Bank of Israel)
    Abstract: In recent years, the marked increase in home prices in Israel has prompted the need to understand the impact of monetary policy on home prices, including the mag- nitude and persistence of that impact. This paper finds that in response to a positive shock of 1 percentage point in the Bank of Israel's monetary interest rate, nominal home prices decline by 2.6 percent, and real home prices decline by 1.1 percent (and in a symmetrical manner to a negative shock). A broad international comparison indicates that the impact on home prices in Israel of a monetary shock is similar to the average impact worldwide. This paper adds to a wide global research base, and proposes-apparently for the first time in Israel-a structural VAR examination of the dynamic links between monetary policy and home prices. The VAR structure takes into account the main variables in the economy that affect, and are affected by, this link. The main conclusion is that monetary shocks, on their own, were not a dominant factor in explaining the changes in home prices in the research period-from the second quarter of 1995 through the first quarter of 2015.
    Date: 2017–09
  23. By: Lartey, Lawrencia
    Abstract: This study was undertaken to determine the pass through effect of the Central bank’s monetary policy rate on commercial banks’ lending rates. Specifically, the study sought to ascertain the short and long run relationship between these variables of interest. It employed monthly time series data spanning from 2002 to 2017 which was sourced mainly from the World Development Indicator (WDI) and Bank of Ghana (BOG). Autoregressive Distributed Lag Model (ARDL) was the estimation technique used for analyzing the data. Estimates from the Augmented Dicker- Fuller (ADF) and Phillips-Perron (PP) unit root test showed that the variables were all integrated of order one (1). The findings found that there is a positive relationship between average lending rates and Monetary Policy Rate (MPR). MPR was significant in both the long and short run and had a large marginal effect on lending rates compared to all the other variables. However, in the short run the speed of adjustment was relatively slow. This implied a more rigid downward adjustment of average lending rate to changes in all the variables. Money supply in the economy denoted by M2+ was negatively related to average lending rates. Treasury bill rate was the only variable which was negatively insignificant in the short run. Based on the above findings the study recommends appropriate measures to be implemented to assist in fully developing the financial markets.
    Keywords: Average Lending Rates, Monetary Policy Rate, Bank of Ghana
    JEL: E4 E5
    Date: 2018–07
  24. By: Auer, Raphael
    Abstract: This paper discusses the economics of how Bitcoin achieves data immutability, and thus payment finality, via costly computations, ie "proof-of-work". Further, it explores what the future might hold for cryptocurrencies modelled on this type of consensus algorithm. The conclusions are, first, that Bitcoin counterfeiting via "double-spending" attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of "mining" income via fees as users free-ride on the fees of other transactions in a block and in the subsequent blockchain. Instead, newly minted bitcoins, known as block rewards, have made up the bulk of mining income to date. Looking ahead, these two limitations imply that liquidity is set to fall dramatically as these block rewards are phased out. Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final, unless new technologies are deployed to speed up payment finality. Second-layer solutions such as the Lightning Network might help, but the only fundamental remedy would be to depart from proof-of-work, which would probably require some form of social coordination or institutionalisation.
    Keywords: Bitcoin; blockchain; cryptocurrencies; Digital Currencies; distributed ledger technology; ethereum; Finance; money; proof-of-stake; Proof-of-Work
    JEL: D20 D40 E42 E51 F31 G12 G28 G32 G38 L10 L50
    Date: 2019–02
  25. By: Kilian, Lutz; Zhou, Xiaoqing
    Abstract: There has been much interest in the relationship between the price of crude oil, the value of the U.S. dollar, and the U.S. interest rate since the 1980s. For example, the sustained surge in the real price of oil in the 2000s is often attributed to the declining real value of the U.S. dollar as well as low U.S. real interest rates, along with a surge in global real economic activity. Quantifying these effects one at a time is difficult not only because of the close relationship between the interest rate and the exchange rate, but also because demand and supply shocks in the oil market in turn may affect the real value of the dollar and real interest rates. We propose a novel identification strategy for disentangling the causal effects of oil demand and oil supply shocks from the effects of exogenous shocks to the U.S. real interest rate and exogenous shocks to the real value of the U.S. dollar. We empirically evaluate popular views about the role of exogenous real exchange rate shocks in driving the real price of oil, and we examine the extent to which shocks in the global oil market drive the U.S. real exchange rate and U.S. real interest rates. Our evidence for the first time provides direct empirical support for theoretical models of the link between oil prices, exchange rates, and interest rates.
    Keywords: carry trade; commodity; Exchange rate; global real activity; interest rate; oil price
    JEL: E43 F31 F41 Q43
    Date: 2019–01
  26. By: Kerstin Bernoth; Helmut Herwartz
    Abstract: We quantify the causal link between exchange rate movements and sovereign risk of 16 major emerging market economies (EMEs) by means of structural vector autoregressive models (SVARs) using data from 10/2004 through 12/2016. We apply a novel data based identification approach of the structural shocks that allows to account for the complex interrelations within the triad of exchange rates, sovereign risks and interest rates. We find that the direction and size of the response of sovereign risk to FX rate movements depend on the type of exchange rate measure we look at and on the size of the net foreign currency exposure of an economy. A depreciation of the domestic currency against the USD increases sovereign risk. In contrast, a depreciation of the effective exchange rate turns out to have only a significant effect on sovereign risk for countries with large negative net foreign currency exposures of the private sector. In this case, a depreciation of the NEER also induces an increase in sovereign risk. We conclude that the `financial channel' is more important in the transmission of exchange rate shocks to sovereign risk in comparison with the traditional `net trade channel'.
    Keywords: Exchange rates, sovereign risk, foreign currency exposure, structural VAR
    JEL: C32 G12 G15 G23
    Date: 2019
  27. By: Etienne Farvaque (Economie Quantitative, Intégration, Politiques Publiques et Econométrie); Antoine Parent (Observatoire français des conjonctures économiques); Piotr, Cracow University) Stanek (Cracow University)
    Abstract: We demonstrate that even though during WWII the interest rate was close to zero supporting the financing of the military effort, dissent inside the FOMC occurred with a similar frequency to other policy episodes. Our analysis highlights that the debates which resulted in dissents turned around two broad issues: the size of the Fed’s balance sheet as well as the functioning of and communication with financial markets. Thus, we argue that the conventional view depicting the Fed as merely accommodating treasury needs should be revised. Our detailed investigation of dissents emphasises the modernity of the objections raised by Fed officials.
    Keywords: Central Banking; Federal open market committee; Governance; Public debt; WW2
    JEL: D71 D78 E58 N12 N42
    Date: 2018–12
  28. By: Ma, Debin; Zhao, Liuyan
    Abstract: This paper provides the first systematic econometric study on the evolution of Chinese silver exchange and monetary regimes during 1898-1933. Using high quality data sets of monthly and daily prices of silver dollars, we apply the threshold autoregressive models to estimate the silver points between Shanghai and other seventeen cities in Northern and Central China. We find a dramatic improvement in monetary integration from the 1910s, consolidated throughout the 1920s and 1930s to rival the global standard. We supplement our analysis with new data sets on volumes and costs of silver flows and with an in-depth historical narrative. Our paper revaluates the efficiency of the silver regime and China's economic performance in the Republican era.
    Date: 2019–02
  29. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Zeynel Abidin Ozdemir (Gazi University, Ankara, Turkey); Huseyin Ozdemir (Gazi University, Ankara, Turkey); Mark E. Wohar (University of Nebraska-Omaha, USA)
    Abstract: This study examines volatility spillover dynamics among the S&P 500 index, the US 10-year Treasury yield, the US dollar index futures and the commodity price index. The focus of the study is to analyze effects of Fed’s unconventional monetary policy on the US financial markets. We use realized volatility measures based on daily data covering the period from December 29, 1996 to November 12, 2018. To address nonlinear and asymmetric spillover dynamics in low and high volatility states, we propose a new regime-dependent spillover index based on a smooth transition vector autoregressive (STVAR) model, extending the study of Diebold and Yilmaz (2009,2012) to regime switching models. When applied to US financial data, we find strong evidence that the US financial market risk structure changes after the announcement of quantitively easing (QE) through the portfolio balance channel. The risk spillover moves from purchased assets to non-purchased assets after the QE announcements.
    Keywords: Unconventional Monetary Policy; US Financial Markets; Volatility Spillover; STVAR Model
    JEL: C01 C51 C58 E58 G01 G11 G12 G14 Q43
    Date: 2019
  30. By: Höpner, Martin
    Abstract: Germany is an undervaluation regime, a regime that steers economic behavior towards deterioration of the real exchange rate and thereby towards export surpluses. This regime has brought the eurozone to the brink of collapse. But it is much older than the euro. It was established during the Bretton Woods years and has survived all subsequent European currency orders. The regime operates in two steps: competitive disinflation against trading partners; and resistance against correcting revaluations. The Bretton Woods order provided perfect conditions for the establishment and perpetuation of the regime: it was flexible enough for sufficient macroeconomic policy autonomy to bring about differential inflation rates, and sticky enough to delay and minimize revaluations.
    Keywords: current account surpluses,exchange rate policy,inflation,political economy,undervaluation,varieties of capitalism,Inflation,Leistungsbilanzüberschüsse,Politische Ökonomie,Spielarten des Kapitalismus,Unterbewertung,Wechselkurspolitik
    Date: 2019
  31. By: De Fiore, Fiorella; Hoerova, Marie; Uhlig, Harald
    Abstract: Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline. JEL Classification: G10, G20, E44, E52, E58
    Keywords: collateral, liquidity, monetary policy, money markets
    Date: 2019–02
  32. By: Amat Adarov (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: We use Bayesian and GMM panel VAR frameworks to study interactions between financial cycles and macroeconomic imbalances based on a global sample of 24 countries spanning the period 1998‑2012. We find that financial cycles play an important role in shaping macroeconomic imbalances with expansions inducing economic overheating and a downward pressure on public debt-to-GDP ratios, and vice versa. Bank-based economies exhibit a deeper and faster response of business cycles to financial misalignments, while the impact in market-based economies is milder, but more persistent, as well as more significant for current account and public debt dynamics. Financial cycles invoke a particularly strong reaction of current account balances and especially public debt ratios in the euro area.
    Keywords: financial cycles, macroeconomic imbalances, financial stability, business cycles, panel VAR, Bayesian VAR
    JEL: E44 F32 G15 F4
    Date: 2019–02
  33. By: Ben S. Bernanke; Michael T. Kiley; John M. Roberts
    Abstract: In low-rate environments, policy strategies that involve holding rates “lower for longer” (L4L) may mitigate the effects of the effective lower bound (ELB). However, these strategies work in part by managing the public’s expectations, which is not always realistic. Using the Fed’s large-scale macroeconometric model, we study the effectiveness of L4L policies when financial market participants are forward-looking but other agents are not. We find that the resulting limited ability to manage expectations reduces but does not eliminate the advantages of L4L policies. The best policies provide adequate stimulus at the ELB while avoiding sizable overshoots of inflation and output.
    Keywords: Intererst rates ; Model comparison ; Monetary policy
    JEL: E58 E61 E52 E13
    Date: 2019–02–13
  34. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Central banks have intensified their communication strategy since the mid 1990’s and it has become an important instrument of central banks’ policymaking toolkit. A large empirical evidence suggests that central bank communication has effectively enhanced the transmission of monetary policy before and during the financial crisis. Nevertheless, the use of communication as a policy instrument is fragile since it depends on economic agents’ perceptions and beliefs. It is crucial that central bank communication be consistent with policy decisions.
    Keywords: ECB; Communication; Monetary policy
    Date: 2018–09
  35. By: Ekaterina V. Peneva; Nadia Sadee
    Abstract: In this Note, we take another look at residual seasonality in several measures of core inflation.
    Date: 2019–02–12
  36. By: Lodge, David; Soudan, Michel
    Abstract: This paper presents empirical evidence of the role of financial conditions in China’s business cycle. We estimate a Bayesian-VAR for the Chinese economy, incorporating a financial conditions index for China that captures movements across a range of financial variables, including interest rates and interbank spreads, bond returns, and credit and equity flows. We impose sign restrictions on the impulse response functions to identify shocks to financial conditions and shocks to monetary policy. The model suggests that monetary policy, credit and financial conditions have played an important role in shaping China’s business cycle. Using conditional scenarios, we examine the role of credit in shaping economic outcomes in China over the past decade. Those scenarios underscore the important role of credit growth in supporting activity during the past decade, particularly the surge in credit following the global financial crisis in 2008. The financial tightening since the end of 2016 has contributed to a modest slowing of credit growth and activity. JEL Classification: E32, E44, E51, E17
    Keywords: Bayesian VAR, credit conditions, financial conditions index, monetary policy
    Date: 2019–02
  37. By: Barnichon, Régis; Mesters, Geert
    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: Dynamic Multiplier; Inflation-Unemployment trade-off; instrumental variables; Marginal Rate of Transformation; Phillips curve
    JEL: C14 C32 E32 E52
    Date: 2019–01
  38. By: Schmeling, Maik; Wagner, Christian
    Abstract: This paper shows that changes in the tone of central bank communication have a significant effect on asset prices. Tone captures how the central bank frames economic fundamentals and its monetary policy. When tone becomes more positive, stock prices increase, and more so for stocks with high systematic risk, whereas credit spreads and volatility risk premia decrease. These tone effects are robust to controlling for fundamentals, policy actions, and other features of central bank communication, which suggests that tone is a generic instrument of monetary policy that can affect risk premia embedded in asset prices.
    Keywords: central bank communication; credit spreads; monetary policy; risk premia; Stock returns; textual analysis; volatility risk
    JEL: E43 E44 E58 G10 G12
    Date: 2019–01
  39. By: Adam Elbourne (CPB Netherlands Bureau for Economic Policy Analysis); Kan Ji (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This research re-examines the findings of the existing literature on the effects of unconventional monetary policy. It concludes that the existing estimates based on vector autoregressions in combination with zero and sign restrictions do not successfully isolate unconventional monetary policy shocks from other shocks impacting the euro area economy. In our research, we show that altering existing published studies by making the incorrect assumption that expansionary monetary shocks shrink the ECB’s balance sheet or even ignoring all information about the stance of monetary policy results in the same shocks and, therefore, the same estimated responses of output and prices. As a consequence, it is implausible that the shocks previously identified in the literature are true unconventional monetary policy shocks. Since correctly isolating unconventional monetary policy shocks is a prerequisite for subsequently estimating the effects of unconventional monetary policy shocks, the conclusions from previous vector autoregression models are unwarranted. We show this lack of identification for different specifications of the vector autoregression models and different sample periods.
    JEL: C32 E52
    Date: 2019–02
  40. By: Martinez-Miera, David; Repullo, Rafael
    Abstract: This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms' financing that banks' equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in terms of financial stability and leads to higher social welfare.
    Keywords: Bank monitoring; Capital requirements; Financial Stability; intermediation margin; macroprudential policy; monetary policy
    JEL: E44 E52 G21 G28
    Date: 2019–02
  41. By: Corsetti, Giancarlo; Eichengreen, Barry; Hale, Galina B; Tallmann, Eric
    Abstract: Why was recovery from the euro area crisis delayed for a decade? The explanation lies in the absence of credible and timely policies to backstop financial intermediaries and sovereign debt markets. In this paper we add light and color to this analysis, contrasting recent experience with the 1992-3 crisis in the European Monetary System, when national central banks and treasuries more successfully provided this backstop. In the more recent episode, the incomplete development of the euro area constrained the ability of the ECB and other European institutions to do likewise.
    Keywords: Backstop; Currency devaluation; financial crises; Sovereign and banking risk
    JEL: E63 G01 N14
    Date: 2019–02
  42. By: Faia, Ester; Karau, Soeren
    Abstract: The risk-taking channel of monetary policy acquires relevance only if it affects systemic risk. We find robust evidence of a systemic risk-taking channel using cross-country and time-series evidence in panel and proxy VARs for 29 G-SIBs from seven countries. We detect a significant role for pecuniary externalities by exploiting the differential impact of monetary policy shocks on book and market leverage. We rationalize these findings through a model in which a fall in interest rates induces banks to increase leverage and reduce monitoring. In an interacted VAR, we find that macro-prudential policy has a significant role in taming the un-intended consequences of monetary policy on systemic risk.
    Keywords: DeltaCoVaR; leverage; LRMES; macroprudential policy; monitoring intensity; panel VAR; policy complementarities; proxy VAR; Risk-taking channel of monetary policy
    JEL: E44 E52 G18 G21
    Date: 2019–01
  43. By: Ioana A. Duca; Geoff Kenny; Andreas Reuter
    Abstract: This paper exploits a very large multi-country survey of consumers to investigate empirically the relationship between inflation expectations and consumer spending. We document that for the Euro Area and almost all of its constituent countries this relationship is generally positive: a higher expected change in inflation is associated with an increase in the probability that a given consumer will make major purchases. Moreover, in line with the predictions of macroeconomic theory, the impact is stronger when the lower bound on nominal interest rates is binding. Also, using the estimated spending probabilities from our micro-level analysis, we indirectly estimate the impact of a gradual increase in inflation expectations on aggregate private consumption. We find the effects to be economically relevant, especially when the lower bound is binding.
    JEL: D12 D84 E21 E31 E52
    Date: 2019–02
  44. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: During the crisis, the ECB modified its collateral framework to face increased liquidity needs of commercial banks. This has taken two forms: the minimum required rating for different classes of assets has been reduced and the haircut associated to these assets has evolved conditional on the default risks of these assets. The benefits in terms of cushioning a liquidity crisis and enhancing monetary policy transmission have most probably exceeded the costs in terms of riskier central bank balance sheet and potential capital losses. This document was provided by Policy Department A at the request of the Economic and Monetary Affairs Committee.
    Date: 2018–07

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