nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒04‒08
forty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Easing, Investment and Financial Instability By Viral Acharya; Guillaume Plantin
  2. Event studies, the random walk hypothesis and risk spreads: What role for central bank sovereign bond purchases in the Euro area? By Ansgar Belke; Daniel Gros
  3. The Impact of QE on Liquidity: Evidence from the UK Corporate Bond Purchase Scheme By Boneva, L.; Elliott, D.; Kaminska, I.; Linton, O.; McLaren, N.; Morley, B.
  4. Monetary Policy and Exchange Rate Returns: Time-Varying Risk Regimes By Charles W. Calomiris; Harry Mamaysky
  5. Cash Use Across Countries and the Demand for Central Bank Digital Currency By Tanai Khiaonarong; David Humphrey
  6. The Effects of Conventional and Unconventional Monetary Policy: A New Approach By Atsushi Inoue; Barbara Rossi
  7. Exploring trend inFLation dynamics in Euro Area countries By Mónica Correa-López; Matías Pacce; Kathi Schlepper
  8. Liquidity Management under Fixed Exchange Rate with Open Capital Account By Mariam El Hamiani Khatat; Romain M Veyrune
  9. Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data By Margherita Bottero; Camelia Minoiu; José-Luis Peydro; Andrea Polo; Andrea F Presbitero; Enrico Sette
  10. Capital Controls as Macro-prudential Policy in a Large Open Economy By J. Scott Davis; Michael B. Devereux
  11. The Impact of Monetary Conditions on Bank Lending to Households By Gyöngyösi,; Ongena, Steven; Schindele, Ibolya
  12. After the Bazooka a Bonanza from Heaven – „Helicopter Money“ Now? By Ansgar Belke
  13. Central Bank Intervention, Bubbles and Risk in Walrasian Financial Markets By Chia-Lin Chang; Jukka Ilomäki; Hannu Laurila; Michael McAleer
  14. Debasements and Small Coins: An Untold Story of Commodity Money By Jin, Gu; Zhu, Tao
  15. Monetary Policy Reaction to Uncertainty in Japan: Evidence from a Quantile-on-Quantile Interest Rate Rule By Christina Christou; Ruthira Naraidoo; Rangan Gupta; Christis Hassapis
  16. Inflation Expectations as a Policy Tool? By Olivier Coibion; Yuriy Gorodnichenko; Saten Kumar; Mathieu Pedemonte
  17. Monetary Policy, Corporate Finance and Investment By James Cloyne; Clodomiro Ferreira; Maren Froemel; Paolo Surico
  18. Regulation of Cryptocurrencies: Evidence from Asia and the Pacific By Jose Antonio Pedrosa-Garcia; Yasmin Winther De Araujo Consolino Almeida
  19. Inflation Targeting. Institutional features of the strategy in practice By Joanna Niedźwiedzińska
  20. Inflation targeting and the pass-through effect: The case of Mongolia By Taguchi, Hiroyuki
  21. Covered Interest Parity Arbitrage By Rime, Dagfinn; Schrimpf, Andreas; Syrstad, Olav
  22. Determinants of Currency Composition of Reserves: a Portfolio Theory Approach with an Application to RMB By Yinqiu Lu; Yilin Wang
  23. Robust Monetary Policy Under Uncertainty About the Lower Bound By Peter Tillmann
  24. China’s Evolving Exchange Rate Regime By Sonali Das
  25. How Effective is Macroprudential Policy? Evidence from Lending Restriction Measures in EU Countries By Tigran Poghosyan
  26. Exchange Rate Pass-through to Prices : Bayesian VAR Evidence for Ghana By Asafo, Shuffield Seyram
  27. Thirty years of inflation targeting in New Zealand: The origins, evolution and influence of a monetary policy innovation. By Buckle, Robert A.
  28. FX intervention and domestic credit: evidence from high-frequency micro data By Boris Hofmann; Hyun Song Shin; Mauricio Villamizar-Villegas
  29. The Effect of Cryptocurrency on Exchange Rate of China: Case Study of Bitcoin By Riska Dwi, Astuti; Nadia, Fazira
  30. What anchors for the natural rate of interest? By Claudio Borio; Piti Disyatat; Phurichai Rungcharoenkitkul
  31. Foreign exchange reserves as a tool for capital account management By J. Scott Davis; Ippei Fujiwara; Kevin X.D. Huang; Jiao Wang
  32. Oil Prices and Inflation: Identifying Channels for Oil Exporters By Vugar Ahmadov; Salman Huseynov; Peter Pedroni
  33. The Response of European Energy Prices to ECB Monetary Policy By Torró, Hipòlit
  34. Limited Participation, Capital Accumulation and Optimal Monetary Policy By Xavier Ragot
  35. The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates By Atsushi Inoue; Barbara Rossi
  36. Identifying and Estimating the Effects of Unconventional Monetary Policy in the Data: How to Do It and What Have We Learned? By Barbara Rossi
  37. Monetary policy in a Model with Commodity and Financial Markets By Vo Phuong Mai Le; Ruthira Naraidoo
  38. The impact of the excess reserves of the banking sector on interest rates and money supply in Poland By Mariusz Kapuściński; Ilona Pietryka
  39. International effects of a compression of euro area yield curves By Martin, Feldkircher; Thomas, Gruber; Florian, Huber
  40. Effektivpreise, Lebenskosten und Kaufkraft des Geldes im Niedrigzinsumfeld By Karl-Heinz Tödter; Gerhard Ziebarth

  1. By: Viral Acharya (Reserve Bank of India); Guillaume Plantin (Département d'économie)
    Abstract: This paper studies a model of the interest-rate channel of monetary policy in which a low policy rate lowers the cost of capital for firms thereby spurring investment, but also induces destabilizing “carry trades” against their assets. If the public sector does not have sufficient fiscal capacity to cope with the large resulting private borrowing, then carry trades and productive investment compete for scarce funds, and so the former crowd out the latter. Below an endogenous lower bound, monetary easing generates only limited investment at the cost of large and socially wasteful financial risk taking.
    Keywords: Monetary policy; Financial stability; Shadow banking; Carry trades
    JEL: E52 E58 G01 G21 G23 G28
    Date: 2019–02
  2. By: Ansgar Belke; Daniel Gros
    Abstract: The asset purchase program of the Euro area, active between 2015 and 2018, constitutes an interesting special case of Quantitative Easing (QE) because the ECB’s (Public Sector Purchase Program) PSPP program involved the purchase of the bonds of peripheral Euro area governments, which were clearly not riskless. Moreover, these purchases were undertaken by national central banks at their own risk. Intuition suggests, and a simple model confirms, that, ceteris paribus, large purchases of the bonds of the own sovereign by the national central bank should increase the risk for the remaining private bond holders. This might seem incompatible with the observation that risk spreads on peripheral bonds fell when the Euro area’s QE was announced. However, the initial fall in risk premia might have been due to the expectation of the bond being effective in lowering risk free rates. When these expectations were disappointed risk premia went back to their initial level. Formal statistical test confirm that indeed risk premia on peripheral bonds did not follow a random walk (contrary to what is assumed in event studies). Nor did the announcements of bond buying change the stochastics of these premia. One should thus not expect the impact effect to have been permanent.
    Keywords: European Central Bank, Quantitative Easing, unconventional monetary policies, spreads, structural breaks, time series econometrics
    JEL: E43 E58 G12 G15
    Date: 2019–01
  3. By: Boneva, L.; Elliott, D.; Kaminska, I.; Linton, O.; McLaren, N.; Morley, B.
    Abstract: In August 2016, the Bank of England (BoE) announced a Corporate Bond Purchase Scheme (CBPS) to purchase up to $10bn of sterling corporate bonds. To investigate the impact of these purchases on liquidity, we create a novel dataset that combines transaction-level data from the secondary corporate bond market with proprietary offer-level data from the BoE's CBPS auctions. Identifying the impact of central bank asset purchases on liquidity is potentially impacted by reverse causality, because liquidity considerations might impact purchases. But the offer-level data allow us to construct proxy measures for the BoE's demand for bonds and auction participants' supply of bonds, meaning that we can control for the impact of liquidity on purchases. Across a range of liquidity measures, we find that CBPS purchases improved the liquidity of purchased bonds.
    Keywords: Quantitative easing, Market liquidity, Market-making, Corporate bonds
    JEL: G12 G23 E52 E58
    Date: 2019–03–29
  4. By: Charles W. Calomiris; Harry Mamaysky
    Abstract: We develop an empirical model of exchange rate returns, applied separately to samples of developed and developing economies’ currencies against the dollar. We incorporate into this model natural-language-based measures of the monetary policy stances of the large global central banks, and show that these become increasingly important in the post-crisis era. We find an important spillover effect from the monetary policy of the Bank of England, the Bank of Japan and the ECB to the exchange rate returns of other currencies against the dollar. Furthermore, we find that the relation between a developed country’s interest rate differential relative to the dollar (carry) and the future returns from investing in its currency switches sign from the pre- to the post-crisis subperiod, while for emerging markets the carry variable is never a significant predictor of returns. The high profit from the carry trade for emerging market currencies reflects persistent country characteristics likely reflective of risk rather than the interest differential per se. While measures of global monetary policy stance forecast exchange rate returns against the dollar, they do not predict exchange rate returns against other base currencies. Results regarding returns from carry, however, are insensitive to the choice of the base currency. We construct a no-arbitrage pricing model which reconciles many of our empirical findings.
    JEL: E4 F31 F34 G15
    Date: 2019–03
  5. By: Tanai Khiaonarong; David Humphrey
    Abstract: The level and trend in cash use in a country will influence the demand for central bank digital currency (CBDC). While access to digital currency will be more convenient than traveling to an ATM, it only makes CBDC like a bank debit card—not better. Demand for digital currency will thus be weak in countries where cash use is already very low, due to a preference for cash substitutes (cards, electronic money, mobile phone payments). Where cash use is very high, demand should be stronger, due to a lack of cash substitutes. As the demand for CBDC is tied to the current level of cash use, we estimate the level and trend in cash use for 11 countries using four different measures. A tentative forecast of cash use is also made. After showing that declining cash use is largely associated with demographic change, we tie the level of cash use to the likely demand for CBDC in different countries. In this process, we suggest that one measure of cash use is more useful than the others. If cash is important for monetary policy, payment instrument competition, or as an alternative payment instrument in the event of operational problems with privately supplied payment methods, the introduction of CBDC may best be introduced before cash substitutes become so ubiquitous that the viability of CBDC could be in doubt.
    Keywords: Bank credit;Central banks;Central bank policy;Central bank accounting;Bank accounting;digital cash;e-money;physical cash;non-cash;giro
    Date: 2019–03–01
  6. By: Atsushi Inoue; Barbara Rossi
    Abstract: We propose a new approach to analyze economic shocks. Our new procedure identifies economic shocks as exogenous shifts in a function; hence, we call the "functional shocks". We show how to identify such shocks and how to trace their effects in the economy via VARs using a procedure that we call "VARs with functional shocks". Using our new procedure, we address the crucial question of studying the effects or monetary policy by identifying monetary policy shocks as shifts in the whole term structure of government bond yields in a narrow window of time around monetary policy announcements. Our identification sheds new light on the effects of monetary policy shocks, both in conventional and unconventional periods, and shows that traditional identification procedures may miss important effects. We find that, overall, unconventional monetary policy has similar effects to conventional expansionary monetary policy, leading to an increase in both output growth and inflation; the response is hump-shaped; peaking around one year to one year and a half after the shock. The new procedure has the advantage of identifying monetary policy shocks during both conventional and unconventional monetary policy periods in a unified manner and can be applied more generally to other economic shocks.
    Keywords: shock identification, VARs, zero-lower bound, unconventional monetary policy, forward guidance
    JEL: E4 E52 E21 H31 I3 D1
    Date: 2019–10
  7. By: Mónica Correa-López (Banco de España); Matías Pacce (Banco de España); Kathi Schlepper (Deutsche Bundesbank)
    Abstract: This paper analyzes the inflation processes of twelve Euro Area countries over the period 1984:q1-2017:q4. The stylized features of inflation uncover its changing nature and cross-country heterogeneity, in terms of mean, volatility and persistence. After estimation of a wide array of unobserved components models, we isolate trend inflation rates in a framework that allows for time-varying inflation gap persistence and stochastic volatility in both the trend and transitory components. On average, a sizeable share of overall inflation dynamics is accounted for by movements in the trend. In explaining trend dynamics, we consistently find a signficant role for short-term inflation expectations, economic slack, and openness variables. However, the cumulated impacts of these are fairly small, except in certain, sustained episodes. This is of policy relevance since the monetary authority might want to respond to shocks that are prone to affect the inflation trend in order to ensure that long-term inflation expectations remain anchored.
    Keywords: trend inflation, inflation dynamics, UCSV models, monetary policy
    JEL: E31 E52
    Date: 2019–03
  8. By: Mariam El Hamiani Khatat; Romain M Veyrune
    Abstract: This paper introduces a theoretical framework for liquidity management under fixed exchange rate arrangement, derived from the price-specie flow mechanism of David Hume. The framework highlights that the risk of short-term money market rates un-anchoring from the uncovered interest rate parity due to money and foreign exchange market frictions could jeopardize financial stability and market development. The paper then discusses operational solutions that stabilize money market rates close to the level implied by the Uncovered Interest Rate Parity (UIP). Liquidity management under fixed exchange rate with an open capital account presents specific challenges due to: (1) the larger liquidity shocks induced by foreign reserve swings that challenge the development of money markets; and (2) more complicated liquidity forecasts. The theoretical framework is empirically tested based on the estimate of “offset” coefficients for Denmark and Hong Kong SAR.
    Date: 2019–03–18
  9. By: Margherita Bottero; Camelia Minoiu; José-Luis Peydro; Andrea Polo; Andrea F Presbitero; Enrico Sette
    Abstract: We study negative interest rate policy (NIRP) exploiting ECB's NIRP introduction and administrative data from Italy, severely hit by the Eurozone crisis. NIRP has expansionary effects on credit supply-- -and hence the real economy---through a portfolio rebalancing channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets, not with higher retail deposits. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downwards, NIRP differs from rate cuts just above the ZLB.
    Keywords: Bank credit;Reserve requirements;Interest rates on loans;Central banks;Bank liquidity;Negative interest rates;portfolio rebalancing;bank lending channel;liquidity management;Eurozone crisis;interbank;credit supply;ex-ante;rebalance;negative rate
    Date: 2019–02–28
  10. By: J. Scott Davis; Michael B. Devereux
    Abstract: The use of international capital flow controls has become increasingly popular in academic and policy circles. But almost all the recent literature studies the case of a small economy, ignoring the spillover effects of capital controls to the rest of the world. This paper re-examines the case for capital controls in a large open economy, where domestic financial constraints may bind following a large negative shock. We consider both ex-ante capital controls (prudential) and ex-post controls (crisis management). In a large open economy, there is a tension between the desire to tax capital inflows to manipulate the terms-of-trade and tax capital outflows for either prudential or crisis management purposes. When capital controls are chosen non-cooperatively, we show that ex-post capital controls are unsuccessful in alleviating financial constraints in a crisis, and ex-ante capital controls are unsuccessful at reducing financial instability before the crisis. Non-cooperative capital controls leave the crisis-hit country even worse off than in an environment with unrestricted capital flows. In addition, a non-cooperative equilibrium with capital controls actually increases the likelihood of a financial crisis occurring. By contrast, capital controls can be effective under international cooperation and can significantly ease financial constraints when applied ex-post for crisis management and reduce the likelihood of a crisis when used ex-ante for prudential purposes.
    JEL: F40
    Date: 2019–03
  11. By: Gyöngyösi,; Ongena, Steven; Schindele, Ibolya
    Abstract: We study the impact of monetary conditions on the supply of mortgage credit by banks to households. Using comprehensive credit register data from Hungary, we first establish a "bank-lending-to-households" channel by showing that monetary conditions affect the supply of mortgage credit in volume. We then study the impact of monetary conditions on the composition of mortgage credit along its currency denomination and borrower risk. We find that expansionary domestic monetary conditions increase the supply of mortgage credit to all households in the domestic currency and to risky households in the foreign currency. Because most households are unhedged, bank lending in multiple currencies may involve additional risk taking. Changes in foreign monetary conditions affect lending in the foreign currency more than in the domestic currency, and also differ in their compositional impact along firm risk.
    Keywords: bank balance-sheet channel; Foreign currency lending; household lending; monetary policy
    JEL: E51 F3 G21
    Date: 2019–03
  12. By: Ansgar Belke
    Abstract: Helicopter money has once been proposed as a theoretical thought experiment by Milton Friedman in order to elucidate the effect of money injections into the macroeconomy over time. However, some Euro area member states nowadays consider helicopter money, i.e. permanent Quantitative Easing (QE), as a permanent ingredient of future EMU governance. We set helicopter money apart from QE monetary policy measures and also distinguish it from a traditional fiscal stimulus. We then deal with and critically assess further developments of the helicopter money idea à la Bernanke und Buiter. Furthermore, the paper then comes up with three practical variants of helicopter money, basically available for the European Central Bank. Taking this as a starting point, the pros and cons of helicopter money and its closely defined implementation conditions are discussed. Finally, we derive some implications of helicopter money implementation for the monetary system as a whole.
    Keywords: economic stimulus programmes, full reserve banking, helicopter money, interest rate, joint analysis of fiscal and monetary policy, Quantitative Easing
    JEL: E52 E58 E63
    Date: 2018–02
  13. By: Chia-Lin Chang (Department of Applied Economics and Department of Finance, National Chung Hsing University, Taiwan and Department of Finance, Asia University, Taiwan.); Jukka Ilomäki (Faculty of Management and Business, Tampere University, Finland.); Hannu Laurila (Faculty of Management and Business, Tampere University, Finland.); Michael McAleer (Department of Quantitative Finance National Tsing Hua University, Taiwan and Econometric Institute Erasmus School of Economics Erasmus University Rotterdam, The Netherlands and Department of Quantitative Economics Complutense University of Madrid, Spain And Institute of Advanced Sciences Yokohama National University, Japan.)
    Abstract: The paper investigates the effects of central bank interventions in financial markets, composed of asymmetrically-informed rational investors and noise traders. If the central bank suspects a bubble, it should lift the real risk-free rate to deflate the bubble in “leaning against the wind”. A rise in the real risk-free rate reduces the risk of rational informed investors, and increases the risk of rational uninformed investors. If the central bank intervenes through the nominal risk-free rate and the Fisher arbitrage condition holds, an increase in the nominal rate is transferred to inflation, thereby dampening the policy effect. Conversely, this implies that the central bank can also deflate the bubble by inducing a reduction in inflationary expectations. The effect on the informed investor risk remains ambiguous, while the risk of he uninformed investor grows, but only if they suffer from money illusion.
    Keywords: Central bank intervention, Asymmetric information, Rational investors, Noise traders, Bubbles, Risk-free rate, Fisherian arbitrage, Inflation, Expectations, Money illusion.
    JEL: D82 E52 G11 G14 G32
  14. By: Jin, Gu; Zhu, Tao
    Abstract: This paper draws quantitative implications for some historical coinage issues from an existing formulation of a theory that explains the society's demand for multiple denominations. The model is parameterized to match some key monetary characteristics in late medieval England. Inconvenience for an agent due to a shortage of a type of coin is measured by the difference between his welfare given the shortage and his welfare in a hypothetical scenario that the mint suddenly eliminates the shortage. A small coin has a more prominent role than small change. Because of this role, a shortage of small coins is highly inconvenient for poor people and, the inconvenience may extend to all people when commerce advances. A debasement may effectively supply substitutes to small coins in shortage. Large increase in the minting volume, cocirculation of old and new coins, and circulation by weight, critical facts constituting the debasement puzzle, emerge in the equilibrium path that follows the debasement.
    Keywords: The debasement puzzle; Gresham's Law; Medieval coinage; Commodity money; Coinage; Shortages of small coins
    JEL: E40 E42 N13
    Date: 2019–03–30
  15. By: Christina Christou (Open University of Cyprus, School of Economics and Finance, 2220 Latsia, Cyprus.); Ruthira Naraidoo (Department of Economics, University of Pretoria, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Christis Hassapis (Department of Economics, University of Cyprus, 1678 Nicosia, Cyprus)
    Abstract: Japan’s episodes of lower bound of interest rates together with macroeconomic uncertainty for over the past two decades stands as a tremendous hurdle for the estimation of Taylor-type rule models. We demarcate our study from previous literature by conducting the estimations not only at various points on the conditional distribution of the interest rate but also at various quantiles of an additional regressor on top of inflation and output, viz., an uncertainty measure, by adopting a quantile nonseparable triangular system estimation. The results show that the reaction to uncertainty seems to have substituted the Bank’s reaction to inflation and output, lending support to the Brainard attenuation principle. In essence, faced with higher uncertainty, the monetary authority reacts by cutting (attenuating) its policy rate across all quantiles of uncertainty at all conditional quantiles of interest rate, with an increased response of the Bank of Japan to uncertainty at its lower quantiles when interest rate is at its lower conditional quantiles. A possible explanation is the greater concern of getting out from the lower bounds of interest rate.
    Keywords: Conditional quantile on quantile regressions, interest rate rule, zero lower bound, shadow rate of interest, uncertainty, Japan
    JEL: C22 E52
    Date: 2019–04
  16. By: Olivier Coibion (UT Austin and NBER); Yuriy Gorodnichenko (UC Berkeley); Saten Kumar (Auckland University of Technology); Mathieu Pedemonte (UC Berkeley)
    Abstract: We assess whether central banks may use inflation expectations as a policy tool for stabilization purposes. We review recent work on how expectations of agents are formed and how they affect their economic decisions. Empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear, especially for firms. Two additional limitations prevent policy-makers from being able to actively manage inflation expectations. First, available surveys of firms’ expectations are systematically deficient, which can only be addressed through the creation of large, nationally representative surveys of firms. Second, neither households’ nor firms’ expectations respond much to monetary policy announcements in low-inflation environments. We provide suggestions for how monetary policy-makers can pierce this veil of inattention through new communication strategies. At this stage, there remain a number of implementation issues and open research questions that need to be addressed to enable central banks to use inflation expectations as a policy tool.
    Keywords: survey, inflation expectations, firms, managers
    JEL: E31 C83 D84
    Date: 2018–06
  17. By: James Cloyne (University of California Davis, NBER and CEPR); Clodomiro Ferreira (Banco de españa); Maren Froemel (London Business School); Paolo Surico (London Business School, Bank of England and CEPR)
    Abstract: We provide new evidence on how monetary policy affects investment and firm finance in the United States and the United Kingdom. Younger firms paying no dividends exhibit the largest and most signifcant change in capital expenditure – even after conditioning on size, asset growth, Tobin’s Q, leverage or liquidity – and drive the response of aggregate investment. Older companies, in contrast, hardly react at all. After a monetary policy tightening, net worth falls considerably for all firms but borrowing declines only for younger non-dividend payers, as their external finance is mostly exposed to asset value fluctuations. Conversely, cash-flows change less markedly and more homogeneously across groups. Our findings highlight the role of firm finance and financial frictions in amplifying the effects of monetary policy on investment.
    Keywords: monetary policy, financial frictions, firm finance, investment
    JEL: E22 E32 E52
    Date: 2019–03
  18. By: Jose Antonio Pedrosa-Garcia (United Nations ESCAP); Yasmin Winther De Araujo Consolino Almeida (Macroeconomic Policy and Financing for Development Division, ESCAP)
    Abstract: This paper reviews the key features of cryptocurrencies and their underlying technology, blockchain. It becomes clear that cryptocurrencies do not fulfill the three functions of money, at least for the moment, but should instead be understood as high-risk, high-profitability securities. While there are great opportunities such as increased remittances, their potential disruption of economic activity, and particularly of monetary policy is mind-blowing. Under this premise, and keeping in mind hackers’ heists suffered by cryptocurrency exchanges, it is important to regulate cryptocurrencies. Four core questions countries should decide on are: whether they consider cryptocurrencies’ legal tender, whether they allow cryptocurrency exchanges to operate (and if so, how); whether Initial Coin Offerings (ICOs) should be allowed (and if so, how); and whether they allow mining. Several policy options are presented, both from a theoretical perspective, and as they have been implemented by countries in Asia-Pacific. While countries such as China have decided to be restrictive, others such as Japan have chosen to regulate to let the sector thrive. Such diversity may be understandable, given that is such a novel technology that still poorly understood – especially its evolution. This diversity of standards offers great room for regulatory arbitrage, and highlights a great need for global coordination on cryptocurrency regulation and supervision.
    Keywords: Cryptocurrencies, Blockchain, Bitcoin, Regulation
    JEL: E51 G11 G18 G28 O16
    Date: 2018–08
  19. By: Joanna Niedźwiedzińska (Narodowy Bank Polski)
    Abstract: New Zealand was the first country to introduce a monetary strategy known as inflation targeting (IT) in 1989. Since then, many other countries have adopted an inflation targeting regime. The paper discusses in detail the key institutional features of an IT strategy, as practiced by central banks. It includes an overview of mandates, inflation targets, decisionmaking processes and accountability mechanisms of inflation targeters. Instead of only describing the current state of IT, in many instances the paper indicates changes introduced in the past years to central banks’ practices. The historical perspective relates to such aspects as reformulations of inflation targets and the evolution of decision-making processes. The paper analyses more than 40 IT central banks and indicates similarities and differences among advanced and emerging market economies. The main finding is that the reviewed institutional features have not been homogenous – neither across time, nor across central banks. In particular, when comparing advanced and emerging market inflation targeters, while in many aspects there is hardly any difference to be noted, in some cases the approach of advanced economies differs significantly from that of emerging market economies. This holds especially for the key feature of the strategy – namely defining the inflation target.
    Keywords: Monetary Policy, Central Banking, Policy Design
    JEL: E31 E52 E58 E61
    Date: 2018
  20. By: Taguchi, Hiroyuki
    Abstract: This paper aims to provide empirical evidence on the relationship between inflation targeting and the pass-through effect from exchange rate to consumer prices, focusing on the case of Mongolia. The study estimates a vector-autoregressive model, and examines the impulse responses of consumer prices to the shock of exchange rate for the pre-inflation targeting period and the post-inflation targeting period. The empirical analysis identified the existence of the pass-through effect during the pre-inflation targeting period and the loss of the pass-through during the post-inflation targeting period. It was speculated that the loss of the pass-through comes from the “forward-looking” monetary policy rule in Mongolian inflation targeting, so that it can work on the expectations of domestic agents such that they are less inclined to change prices in response to a given exchange rate shock.
    Keywords: Inflation Targeting; Pass-through Effect; Mongolia; Vector Autoregressive Model; Forward-looking Rule
    JEL: E52 F31 O53
    Date: 2019–03
  21. By: Rime, Dagfinn; Schrimpf, Andreas; Syrstad, Olav
    Abstract: We show that it is crucial to account for the heterogeneity in funding costs, both across banks and across currency areas, in order to understand recently documented deviations from Covered Interest Parity (CIP). When CIP arbitrage is implemented accounting for marginal funding costs and realistic risk-free investment instruments, the no-arbitrage relation holds fairly well for the majority of market participants. A narrow set of global high-rated banks, however, does enjoy riskless arbitrage opportunities. Such arbitrage opportunities emerge as an equilibrium outcome as FX swap dealers set prices to avoid inventory imbalances. Low-rated banks find it attractive to turn to the FX swap market to cover their U.S. dollar funding, while swap dealers elicit opposite (arbitrage) flows by high-rated banks. Such arbitrage opportunities are difficult to scale, with funding rates adjusting as soon as arbitrageurs increase their positions.
    Keywords: Covered Interest Parity; Funding Liquidity Premia; FX Swap Market; U.S. Dollar Funding
    JEL: E43 F31 G15
    Date: 2019–03
  22. By: Yinqiu Lu; Yilin Wang
    Abstract: The way central banks manage their foreign reserve assets has evolved over the past decades. One major trend is managing reserves in two or more tranches—liquidity tranche and investment tranche—especially for those with adequate reserves. Incorporating reserve tranching, we have developed in this paper a central bank’s reserve portfolio choice model to analyze the determinants of the currency composition of reserves. In particular, we adopt the classical mean-variance framework for the investment tranche and the asset-liability framework for the liquidity tranche. Building on these frameworks, the roles of currency compositions in imports invoicing and short-term external debt, and risk and returns of reserve currencies can be quantified by our structural model—a key contribution of our paper given the absence of structural models in the literature. Finally, we estimate the potential paths of the share of RMB in reserves under different scenarios to shed light on its status as an international currency.
    Date: 2019–03–08
  23. By: Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: Central banks face uncertainty about the true location of the effective lower bound (ELB) on nominal interest rates. We model optimal discretionary monetary policy during a liquidity trap when the central bank designs policy that is robust with respect to the location of the ELB. If the central bank fears the worst-case location of the ELB, monetary conditions will be more expansionary before the liquidity trap occurs.
    Keywords: optimal monetary policy, discretion, robust control, uncertainty, liquidity trap
    JEL: E31 E32 E58
    Date: 2019
  24. By: Sonali Das
    Abstract: China’s exchange rate regime has undergone gradual reform since the move away from a fixed exchange rate in 2005. The renminbi has become more flexible over time but is still carefully managed, and depth and liquidity in the onshore FX market is relatively low compared to other countries with de jure floating currencies. Allowing a greater role for market forces within the existing regime, and greater two-way flexibility of the exchange rate, are important steps to build on the progress already made. This should be complemented by further steps to develop the FX market, improve FX risk management, and modernize the monetary policy framework.
    Date: 2019–03–07
  25. By: Tigran Poghosyan
    Abstract: This paper assesses the effectiveness of lending restriction measures, such as loan-to-value and debt-service-to-income ratios, in affecting developments in house prices and credit. We use data on 99 lending standard restrictions implemented in 28 EU countries over 1990–2018. The results suggest that lending restriction measures are generally effective in curbing house prices and credit. However, the impact is delayed and reaches its peak only after three years. In addition, the impact is asymmetric, with tightening measures having weaker association with target variables compared to loosening measures. The association is stronger in countries outside of euro area and for legally-binding measures and measures involving sanctions. The results have practical implications for macroprudential authorities.
    Keywords: Monetary policy instruments;Exchange rate policy;Central banks;Monetary policy;Monetary expansion;macroprudential regulation;financial stability;credit;house price;Kleibl;target variable;type of measure;real GDP growth;dependent variable
    Date: 2019–03–01
  26. By: Asafo, Shuffield Seyram
    Abstract: Using quarterly data from 2006q3 to 2017q4, this paper employed sign restrictions with rejection method in a Vector Autoregression to estimate the pass-through of exchange rate dynamics to domestic prices in Ghana. The priors of the model belongs to the flat Normal inverted-Wishart family. Markov Chain Monte Carlo (MCMC) is used to collect 1000 draws from the posterior distribution of the SVAR parameters that satisfy the sign restrictions. The model specification included some idiosyncratic features of the Ghanaian economy such as the dependence on primary export commodities for foreign exchange revenue and the dependence on foreign aid. Impulse response functions was used to analyze exchange rate pass-through whilst variance decomposition was used to explain the most dominant source of inflation in the study sample. The impulse response showed a fairly large but not unitary pass-through of exchange rate dynamics to domestic prices. The implication herein is that exchange rate depreciation led to upsurge in prices in Ghana albeit, the impact is incomplete. Results from the variance decomposition indicated a monetary expansion was most dominant in explaining inflationary pressures in Ghana. For inflation to be lowered, policy directives should be geared towards exchange rate stability as well as ensuring a stable interest rate environment.
    Keywords: Exchange Rate Pass-through, Monetary policy, Inflation, Structural Vector Autoregressive, Bayesian Analysis
    JEL: C1 C11 C13 C32 E30 E37 E5 E52 F3
    Date: 2019–03–12
  27. By: Buckle, Robert A.
    Abstract: Nearly thirty years ago New Zealand ushered in a revolutionary approach to monetary policy. This was formalised by the Reserve Bank of New Zealand Act 1989 which specified price stability as the primary function of monetary policy and provided operational independence for New Zealand’s central bank. This innovation spawned the spread of more central banks around the world with a mandate to prioritise inflation targeting. This paper explains the historical origins of the RBNZ Act, its design and the ideas that influenced its design. It reviews how the practice of inflation targeting and the choice of policy instruments have evolved. The paper includes a review of research evaluating the impact of inflation targeting in New Zealand and concludes with a discussion of contemporary issues including a proposal before the New Zealand Parliament to introduce significant changes to the Act which could have important implications for future monetary policy.
    Keywords: Monetary policy, Inflation targeting, Central bank governance,, Accountability, Transparency, Credibility, Sustainability,
    Date: 2018
  28. By: Boris Hofmann; Hyun Song Shin; Mauricio Villamizar-Villegas (Banco de la República de Colombia)
    Abstract: We employ a rarely available high-frequency micro dataset to study the impact of foreign exchange intervention on domestic credit growth. We find that sterilised purchases of dollars by the central bank dampens the flow of new domestic corporate loans in Colombia. Slowing the pace of currency appreciation plays a key role in dampening credit expansion. Our analysis sheds light on the role of FX intervention as part of the financial stability-oriented policy response to credit booms associated with capital inflow surges. **** RESUMEN: En este trabajo utilizamos datos panel de frecuencia diaria, para estudiar el impacto de las intervenciones cambiarias sobre el crédito comercial. Para el caso colombiano, encontramos que las compras (esterilizadas) de divisas ayudaron a frenar el crecimiento del crédito, sobre todo en momentos donde hubo fuertes entradas de capital. Nuestros hallazgos también indican que la devaluación de la moneda jugó un papel fundamental en la disminución del crédito. Nuestro análisis resalta el papel de la intervención cambiaria como herramienta de estabilidad financiera.
    Keywords: FX intervention, credit registry, emerging markets, financial channel of exchange rates, Intervención cambiaria, créditos comerciales, países emergentes, canal financiero de tasa de cambio
    JEL: E58 F31 F33 F41 G20
    Date: 2019–03
  29. By: Riska Dwi, Astuti; Nadia, Fazira
    Abstract: In recent years, there have been many significant changes in commercial transactions. Not only e-commerce continues to grow, but also the form of payment services and service providers are consistently growing, such as virtual currency. One of virtual currency that quite popular is cryptocurrency especially Bitcoin. China became the country with the largest Bitcoin market in the world in the past few years. However, due to the concerns about money laundering and threats to China's financial stability and affecting the domestic currency, the Chinese government has formed a strict policy on Bitcoin. Therefore, nowadays, China is no longer the largest Bitcoin market in the world. Regarding the recently implemented policy, this study aims to analyze whether Bitcoin does affect China's exchange rate. The main independent variables in this research are specified to Bitcoin price volatility from BTCE, and controlled with the variable of the current account, inflation, and money supply. Monthly time series data from November 2012 until July 2017 is analyzed using autoregressive distributed lag (ARDL). The estimation results show that Bitcoin price volatility significantly affects the exchange rate in the long run. The higher of Bitcoin price volatility implies higher risk. The negative sign in the coefficient suggests that when Bitcoin's price volatility increases, investors tend to switch their investments on real currency will be preferable so that the exchange rate will be appreciated.
    Keywords: Cryptocurrency, Bitcoin, Exchange Rate, ARDL, China
    JEL: E52 G15 G18
    Date: 2018–09–12
  30. By: Claudio Borio; Piti Disyatat; Phurichai Rungcharoenkitkul
    Abstract: The paper takes a critical look at the conceptual and empirical underpinnings of prevailing explanations for low real (inflation-adjusted) interest rates over long horizons and finds them incomplete. The role of monetary policy, and its interaction with the financial cycle in particular, deserve greater attention. By linking booms and busts, the financial cycle generates important path dependencies that give rise to intertemporal policy trade-offs. Policy today constrains policy tomorrow. Far from being neutral, the policy regime can exert a persistent influence on the economy’s evolution, including on the real interest rate. This raises serious conceptual and practical questions about the use of the natural interest rate as a monetary policy guidepost. In developing the analysis, the paper also provides a specific critique of the safe asset shortage hypothesis – a hypothesis that has gained considerable popularity in recent years.
    Keywords: Real interest rate, natural interest rate, saving, investment, inflation, monetary policy, safe asset shortage hypothesis
    JEL: E32 E40 E44 E50 E52
    Date: 2019–03
  31. By: J. Scott Davis (Federal Reserve Bank of Dallas); Ippei Fujiwara (Keio University and Australian National University); Kevin X.D. Huang (Vanderbilt University); Jiao Wang (University of Melbourne)
    Abstract: Many recent theoretical papers have argued that countries can insulate themselves from volatile world capital flows by using a variable tax on foreign capital as an instrument of monetary policy. But at the same time many empirical papers have argued that only rarely do we observe these cyclical capital taxes used in practice. In this paper we present a small open economy framework where the central bank can engage in sterilized foreign exchange intervention. When private agents can freely buy and sell foreign bonds, sterilized foreign exchange intervention has no effect. But we analytically prove that when private agents cannot freely buy and sell foreign bonds, that is, under acyclical capital controls, optimal sterilized foreign exchange intervention is equivalent to an optimally chosen tax on foreign capital. Numerical simulations of the model show that a variable capital tax is a reasonable approximation for sterilized foreign exchange intervention under the levels of capital controls observed in many emerging markets.
    Keywords: Central bank, Small open economy, foreign exchange reserves, capital controls
    JEL: E5 F4
    Date: 2019–03–25
  32. By: Vugar Ahmadov (Central Bank of Azerbaijan Republic); Salman Huseynov (Central Bank of Azerbaijan Republic); Peter Pedroni (Williams College)
    Abstract: In this paper, we study oil price pass through into domestic inflation in a panel of oil exporting countries and propose a methodology to disentangle potential effects of different transmission channels. In particular, we investigate effects of three transmission channels, namely, import (cost) channel, exchange rate channel, and fiscal (demand) channel and quantify the relative importance of them. We find that the most important channel is the import channel and the least important one is the fiscal channel in contrast to wildly held belief. This finding, though surprising, can be explained by vast heterogeneity and rising integration among countries. We also find that institutional arrangements such as exchange regime, existence of fiscal rules and sovereign wealth funds are important pillars of a lower inflation environment in oil exporting countries.
    Keywords: Panel VAR, Oil Exporting Countries
    JEL: C22 C23 E31
    Date: 2018–01–02
  33. By: Torró, Hipòlit
    Abstract: To our knowledge, this paper is the first to discuss the response of European energy commodity prices to unexpected monetary policy surprises from the European Central Bank. Using the Rigobon (2003) identification through heteroscedasticity method, we find a significant and positive response during the crisis period for Brent and coal. Similar results are obtained by other authors for European financial assets in this period. This result reinforces the idea that during this period, financial assets and some commodities positively responded to conventional and unconventional expansionary monetary policy measures, increasing confidence about the survival of the European monetary union. The remaining European energy commodities (electricity, EUAs, and natural gas prices) seem to be unaffected by monetary policy actions. We think these results are of interest to those economic agents and institutions involved in European energy markets and are especially important for the European Central Bank in order to predict the consequences of its monetary policy on the inflation objective.
    Keywords: Research Methods/ Statistical Methods
    Date: 2018–03–12
  34. By: Xavier Ragot (Département d'économie)
    Abstract: Motivated by recent empirical findings on money demand, the paper presents a general equilibrium model where agents have limited participation in financial markets and use money to smooth consumption. In such setup, investment is not optimal because only a fraction of households participate in financial markets in each period. Optimal monetary policy substantially increases welfare by changing investment decisions over the business cycle, but adverse redistributive effects limit the scope for an active monetary policy. Recent developments in the heterogeneous-agents literature are used to develop a tractable framework with aggregate shocks, where optimal monetary policy can be analyzed.
    Keywords: Limited participation; Incomplete markets; Optimal policy
    JEL: E41 E52 E32
    Date: 2018
  35. By: Atsushi Inoue; Barbara Rossi
    Abstract: What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy shocks as changes int he whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substancial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents'expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis; (iv) changes in expected real interest rates play an important role in the transmission of monetary policy shocks.
    Keywords: exchange rates, zero-lower bound, unconventional monetary policy, forward guidance
    JEL: F31 F37 C22 C53
    Date: 2018–10
  36. By: Barbara Rossi
    Abstract: How should one identify monetary policy shocks in unconventional times? Are unconventional monetary policies as effective as conventional ones? And has the transmission mechanism of monetary policy changed in the zerolower bound era? The recent Önancial crisis led Central banks to lower their interest rates in order to stimulate the economy, and interest rates in many advanced economies hit the zero lower bound. As a consequence, the traditional approach to the identification and the estimation of monetary policy faces new econometric challenges in unconventional times. This article aims at providing a broad overview of the recent literature on the identification of unconventional monetary policy shocks and the estimation of their effects on both financial as well as macroeconomic variables. Given that the prospects of slow recoveries and long periods of very low interest rates are becoming the norm, many economists believe that we are likely to face unconventional monetary policy measures often in the future. Hence, these are potentially very important issues in practice.
    Keywords: shock identification, VARs, zero lower bound, unconventional monetary policy, monetary policy, external instruments, forward guidance
    JEL: E4 E52 E21 H31 I3 D1
    Date: 2019–01
  37. By: Vo Phuong Mai Le (Cardiff Business School, Aberconway Building, Cardiff University, Colum Drive, Cardiff, Wales, United Kingdom, CF 10 3EU); Ruthira Naraidoo (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: This paper builds a small open economy model for a net commodity exporter to consider financial frictions and monetary policies in order to investigate the main determinants of business cycles. Since we make a distinction to the access of financial markets between the commodity and non-commodity sectors, we notice that as usual, a commodity price shock benefits the competitiveness of the economy and its borrowing terms. We outline a novel effect in this paper which we dub the “financial market effect” following a positive commodity price shock that decreases the credit premium and hence exacerbate the commodity price boom. However, the negative sectoral downturn affects entrepreneur credit together with disinflationary pressures of a real exchange rate appreciation. This opens the role for stabilization policies which we analyze comparing three types of monetary regimes. Estimating the model on South Africa, a major commodity exporting economy with inflation targeting regime, we find as conventional wisdom suggests that a hypothetical Taylor rule targeting the price-level allows for adjustment in inflation expectations that can dampen disinflationary pressures. Furthermore, due to smoother change in nominal rate of interest, there is lesser variability in financial markets.
    Keywords: Business cycles, Small open economy, Commodity prices, Financial frictions, Emerging markets, Monetary policy, Price-level targeting, South Africa economy
    JEL: E32 E44 E58 F41 F44 O16
    Date: 2019–03
  38. By: Mariusz Kapuściński (SGH Warsaw School of Economics); Ilona Pietryka (Nicolaus Copernicus University in Torun)
    Abstract: In this study we aim to analyse the effects of leaving excess reserves in the banking sector by the central bank on the level and the variability of interest rates, as well as on money supply. To this end, we use mainly data for Poland, but in some cases, for robustness, also for a panel of Poland, the euro area, the Czech Republic and Hungary, as there had only been a limited variability in some policy variables in our sample for Poland. We estimate the parameters of GARCH, (P)VAR and (panel) linear regression models. We find that excess reserves affect the level and the variability of an overnight money market interest rate. However, the variability of the overnight money market interest rate, shaped to a large extent by excess reserves, does not affect the level of longer-term interest rates, and we find little evidence of its impact on their variability. Neither do excess reserves translate into higher money supply. Our results imply that the current monetary policy operational framework in Poland is adequate to ensure the transmission of the central bank policy rate to money market interest rates. Furthermore, it appears unlikely that raising the amount of excess reserves left, as proposed by some policymakers, would affect money supply. Instead, it would lower the money multiplier and the overnight money market interest rate, as well as increase its volatility.
    Keywords: excess reserves; interest rate pass through; money multiplier; GARCH; VAR; panel data models
    JEL: E52 E43 E51 C32 C33
    Date: 2019
  39. By: Martin, Feldkircher (Oesterreichische Nationalbank (Austrian Central Bank)); Thomas, Gruber (Oesterreichische Nationalbank (Austrian Central Bank)); Florian, Huber (University of Salzburg)
    Abstract: In this paper, we use a Bayesian global vector autoregressive model to analyze the macroeconomic effects of a flattening of euro area yield curves. Our findings indicate positive effects on real activity and prices, both within the euro area as well as in neighboring economies. Spillovers transmit through an exchange rate channel and a broad financial channel. We complement our analysis by conducting a portfolio optimization exercise. Our results show that multi-step-ahead forecasts conditional on the euro area yield curve shock improve Sharpe ratios relative to other investment strategies.
    Keywords: Unconventional monetary policy; spillovers; GVAR; minimum variance portfolio
    JEL: C30 E32 E52 F41
    Date: 2019–03–27
  40. By: Karl-Heinz Tödter; Gerhard Ziebarth
    Abstract: For the purposes of private consumption present and future goods are constantly evaluated and traded. A reliable und comprehensive measure of the general purchasing power of money and its changes over time should take due account of this basic fact. In contrast to conventional statistical consumer price indexes, an economic cost of life index is of intertemporal nature by construction as it incorporates the effective consumer prices over the planning horizon of private households. Any standard of price stability that suppresses this interrelationship tends to be biased and bears the risk of asymmetric monetary policy. Effective prices are present value prices for future consumption, include goods prices as well as interest rates (and asset price changes, respectively), are based on consumer utility and welfare theory, and are forming the central building blocks for the model class of economic cost of life indices. Given the preference based approach, effective prices are money valued marginal utilities of the final unit consumed. Effective inflation rates derived from effective prices are intertemporal marginal rates of substitution. The present paper develops an intertemporal cost of life index based on the concept of effective prices and presents empirical time series and cohort-specific scenario results for Germany.
    Keywords: Purchasing power of money, monetary policy, interest rates, present value prices, asset prices, effective inflation, cost of life index
    JEL: E31 E21 E58 I3
    Date: 2018–03

This nep-mon issue is ©2019 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.