nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒04‒22
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Market-Based Monetary Policy Uncertainty By Bauer, Michael D.; Lakdawala, Aeimit K.; Mueller, Philippe
  2. Monetary policy implications of state-dependent prices and wages By James Costain; Anton Nakov; Borja Petit
  3. Beyond the Doomsday Economics of “Proof-of-Work” in Cryptocurrencies By Auer, Raphael
  4. America First? A US-centric view of global capital flows By McQuade, Peter; Schmitz, Martin
  5. Dynamic fiscal limits and monetary-fiscal policy interactions By Battistini, Niccolò; Callegari, Giovanni; Zavalloni, Luca
  7. Labor Mobility in a Monetary Union By Daniela Hauser; Martin Seneca
  8. Capital Controls as Macro-prudential Policy in a Large Open Economy By Davis, J. Scott; Devereux, Michael B.
  9. Hedger of last resort: evidence from Brazilian FX interventions, local credit, and global financial cycles By Rodrigo Barbone Gonzalez; Dmitry Khametshin; José-Luis Peydró; Andrea Polo
  10. Bank foreign currency funding and currency markets: the case of Mexico post GFC By Bush Georgia
  11. Entrepreneurial finance, home equity, and monetary policy By Paul Jackson; Florian Madison
  12. The portfolio theory of inflation (and policy effectiveness) By Bossone, Biagio
  13. The CSPP at work - yield heterogeneity and the portfolio rebalancing channel By Zaghini, Andrea
  14. Should the Fed Be Constrained? By Frankel, Jeffrey A.
  15. Ties That Bind: Estimating the Natural Rate of Interest for Small Open Economies By Grossman, Valerie; Martinez-Garcia, Enrique; Wynne, Mark A.; Zhang, Ren
  16. The effect of TLTRO-II on bank lending By Laine, Olli-Matti
  17. Can more public information raise uncertainty? The international evidence on forward guidance By Ehrmann, Michael; Gaballo, Gaetano; Hoffmann, Peter; Strasser, Georg
  18. Animal spirits, risk premia and monetary policy at the zero lower bound By Proaño Acosta, Christian; Lojak, Benjamin
  19. The Informational Effect of Monetary Policy and the Case for Policy Commitment By Jia, Chengcheng
  20. How Does the Strength of Monetary Policy Transmission Depend on Real Economic Activity? By Horacio Sapriza; Judit Temesvary
  21. E-shekels across borders: a distributed ledger system to settle payments between Israel and the West Bank By Toffano, Priscilla; Yuan, Kathy
  22. Impact of targeted credit easing by the ECB. Bank-level evidence By Joost Bats; Tom Hudepohl
  23. Does Inflation Targeting Always Matter for the ERPT? A robust approach By Antonia Lopez Villavicencio; Marc Pourroy
  24. Uncertainty Shocks, Monetary Policy and Long-Term Interest Rates By Gianni Amisano; Oreste Tristani
  25. Effectiveness of FX Intervention and the Flimsiness of Exchange rate Expectations By Hernando Vargas-Herrera; Mauricio Villamizar-Villegas
  26. Negative monetary policy rates and portfolio rebalancing: Evidence from credit register data By Margherita Bottero; Camelia Minoiu; José-Luis Peydró; Andrea Polo; Andrea F. Presbitero; Enrico Sette
  27. Macroprudential and monetary policy: Loan-level evidence from reserve requirements By Cecilia Dassatti Camors; José-Luis Peydró; Francesc Rodriguez-Tous
  28. The international bank lending channel of monetary policy rates and QE: Credit supply, reach-for-yield, and real effects By Bernardo Morais; José-Luis Peydró; Jessica Roldán-Peña; Claudia Ruiz-Ortega
  29. What Option Prices tell us about the ECBs Unconventional Monetary Policies By Stan Olijslagers; Annelie Petersen; Nander de Vette; Sweder van Wijnbergen
  30. Inflation Expectations Curve in Japan By Toshitaka Maruyama; Kenji Suganuma
  31. Monetary Policy in a World of Cryptocurrencies By Pierpaolo Benigno
  32. Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates By Georgiadis, Georgios; Zhu, Feng
  33. Changes in Monetary Policy and Banks' Net Interest Margins : A Comparison across Four Tightening Episodes By Jared Berry; Felicia Ionescu; Robert J. Kurtzman; Rebecca Zarutskie
  34. Does informality facilitate inflation stability? By Enrique Alberola-Ila; Carlos Urrutia

  1. By: Bauer, Michael D. (Federal Reserve Bank of San Francisco); Lakdawala, Aeimit K. (University of California, San Diego); Mueller, Philippe (Warwick Business School)
    Abstract: This paper investigates the role of monetary policy uncertainty for the transmission of FOMC actions to financial markets using a novel model-free measure of uncertainty based on derivative prices. We document a systematic pattern in monetary policy uncertainty over the course of the FOMC meeting cycle: On FOMC announcement days uncertainty tends to decline substantially, indicating the resolution of policy uncertainty. This decline is then reversed over the first two weeks of the intermeeting FOMC cycle. Both the level and the changes in uncertainty play an important role for the transmission of monetary policy to financial markets. First, changes in uncertainty have substantial effects on a variety of asset prices that are distinct from the effects of the conventional policy surprise measure. For example, the Fed's forward guidance announcements affected asset prices not only by adjusting the expected policy path but also by changing market-perceived uncertainty about this path. Second, at high levels of uncertainty a monetary policy surprise has only modest effects on assets, whereas with low uncertainty the impact is significantly more pronounced.
    JEL: E43 E44 E47
    Date: 2019–04–11
  2. By: James Costain (ECB and Banco de EspaÑa); Anton Nakov (ECB and CEPR); Borja Petit (CEMFI)
    Abstract: We study the effects of monetary shocks in a model of state-dependent price and wage adjustment based on “control costs”. Suppliers of retail goods and of labor are both monopolistic competitors that face idiosyncratic productivity shocks and nominal rigidities. Stickiness arises because precise decisions are costly, so agents choose to tolerate small errors in the timing of adjustments. Our simulations are calibrated to microdata on the size and frequency of price and wage changes. Money shocks have less persistent real effects in our state-dependent model than they would a time-dependent framework, but nonetheless we obtain sufficient monetary nonneutrality for consistency with macroeconomic evidence. Nonneutrality is primarily driven by wage rigidity, rather than price rigidity. State-dependent nominal rigidity implies a flatter Phillips curve as trend inflation declines, because nominal adjustments become less frequent, making short-run inflation less reactive to shocks.
    Keywords: nominal rigidity, state-dependent adjustment, logit equilibrium, near rationality, control costs
    JEL: E31 D81 C73
    Date: 2019–04
  3. By: Auer, Raphael (Bank for International Settlements)
    Abstract: This paper discusses the economics of how Bitcoin achieves data immutability, and thus payment finality, via costly computations, i.e., “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: D20 D40 E42 E51 F31 G12 G28 G32 G38 L10 L50
    Date: 2019–02–01
  4. By: McQuade, Peter (Central Bank of Ireland); Schmitz, Martin (European Central Bank)
    Abstract: Both academic researchers and policymakers posit a unique role for the US in the international 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.
    Keywords: International capital flows, US financial system, VIX, US dollar exchange rate, monetary policy spillovers
    JEL: F15 F21 F36 F42 G15
    Date: 2019–03
  5. By: Battistini, Niccolò; Callegari, Giovanni; Zavalloni, Luca
    Abstract: This paper analyzes the impact of monetary policy on public debt sustainability through the lens of a general equilibrium model with fiscal limits. We find that the mere possibility of a binding ZLB may have detrimental effects on debt sustainability, as a kink in the Laffer curve induces a dead-weight loss in the present discounted value of future primary surpluses. Moreover, debt sustainability improves with monetary policy activeness, that is, with the elasticity of the interest rate to changes in inflation and the output gap. On this basis, we assess the trade-off between economic stabilization and debt sustainability depending on the monetary policy environment. In normal times, large public spending shocks may engender perverse debt dynamics and cause economic contractions. At the ZLB, a muted trade-off between stabilization and sustainability instead expands the fiscal margin, especially if coupled with a commitment to a more active monetary policy during normal times. JEL Classification: E52, E61, E63
    Keywords: fiscal sustainability, monetary policy, ZLB
    Date: 2019–04
  6. By: Pippenger, John
    Abstract: Uncovered interest parity is widely used in open economy macroeconomics. But the evidence rejects UIP and implies forward bias. There are many suggested explanations for the failure of UIP and forward bias, but none are widely accepted, at least partially because none appear to explain the related puzzles discussed below. This paper shows how sterilized “leaning against the wind†and a combination of inflationary and liquidity effects of open market operations can explain forward bias and the failure of UIP even when expectations are rational. They also appear to be able to explain the related puzzles.
    Keywords: Social and Behavioral Sciences, JEL: E43, E44, F30, F31, G14, G15.
    Date: 2018–03–26
  7. By: Daniela Hauser; Martin Seneca
    Abstract: The optimal currency literature has stressed the importance of labor mobility as a precondition for the success of monetary unions. But only a few studies formally link labor mobility to macroeconomic adjustment and policy. In this paper, we study macroeconomic dynamics and optimal monetary policy in an economy with cyclical labor flows across two distinct regions that share trade links and a common monetary framework. In our New Keynesian dynamic, stochastic, general-equilibrium model calibrated to the United States, migration flows are driven by fluctuations in the relative labor market performance across the monetary union. While labor mobility can be an additional channel for cross-regional spillovers as well as a regional shock absorber, we find that a mobile labor force closes the efficiency gaps in the labor market and thus lessens the trade-off between inflation and labor market stabilization. As migration flows are generally inefficient, however, regionspecific disturbances introduce additional trade-offs with regional labor market conditions. Putting some weight on stabilizing fluctuations in the labor market enhances welfare when monetary policy follows a simple rule.
    Keywords: Business fluctuations and cycles; Economic models; Labour markets; Monetary policy framework; Regional economic developments
    JEL: E32 E52 F4
    Date: 2019
  8. By: Davis, J. Scott (Federal Reserve Bank of Dallas); Devereux, Michael B. (University of British Columbia)
    Abstract: The literature on optimal capital controls for macro-prudential policy has focused on capital controls in a small open economy. This ignores the spillover effects 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. There is a tension between the desire to tax inflows to manipulate the terms of trade and tax outflows for macro-prudential purposes. Non-cooperative capital controls are ineffective as macro-prudential policy. Cooperative policy will ignore terms-of-trade manipulation and thus cooperative capital controls yield more effective macro-prudential policy.
    Keywords: Capital controls; large open economy; terms-of-trade; macroprudential; crisis management
    JEL: F40
    Date: 2019–03–27
  9. By: Rodrigo Barbone Gonzalez; Dmitry Khametshin; José-Luis Peydró; Andrea Polo
    Abstract: We show that local central bank policies attenuate global financial cycle (GFC)’s spillovers. For identification, we exploit GFC shocks and Brazilian interventions in FX derivatives using three matched administrative registers: credit, foreign credit flows to banks, and employer-employee. After U.S. Federal Reserve Taper Tantrum (with strong Emerging Markets FX depreciation and volatility increase), Brazilian banks with larger ex-ante reliance on foreign debt strongly cut credit supply, thereby reducing firm-level employment. However, Brazilian FX large intervention supplying derivatives against FX risks—hedger of last resort—halves the negative effects. Finally, a 2008-2015 panel exploiting GFC shocks and local policies confirm the results.
    Keywords: foreign exchange, monetary policy, central bank, bank credit, hedging
    JEL: E5 F3 G01 G21 G28
    Date: 2018–10
  10. By: Bush Georgia
    Abstract: This paper examines the impact of foreign currency hedging demand on the foreign exchange market. First, the paper documents deviations from covered interest parity (CIP) for Mexico after the global financial crisis (GFC), and then it evaluates the effect of two variables in a regression-based analysis: (i) the FX funding gap of domestic bank balance sheets and (ii) external foreign currency hedging demand. The main result is that both variables directly influenced CIP deviations in Mexico, and it was robust to including arbitrage funding and foreign exchange transaction costs in the regression. These results suggest hedging demand can be an important factor in emerging economies’ foreign exchange forward markets, even at short maturities. One of the implications is that banks’ ability to manage the currency mismatch is affected by global shocks in the foreign currency market.
    Keywords: foreign currency hedging;financial stability;capital flows;currency mismatch;covered interest parity (CIP)
    JEL: F3 G2 G15 G18
    Date: 2019–01
  11. By: Paul Jackson; Florian Madison
    Abstract: We model entrepreneurial finance using a combination of fiat money, traditional bank loans, and home equity loans. The banking sector is over-the- counter, where bargaining determines the pass-through from the nominal interest rate to the bank lending rate, characterizing the transmission channel of monetary policy. The results show that the strength of this channel depends on the combination of nominal and real assets used to finance investments, and thus declines in the extent to which housing is accepted as collateral. A calibration to the U.S. economy supports the theoretical results and provides novel insights on entrepreneurial finance between 2000 and 2016.
    Keywords: Entrepreneurial finance, money, housing, collateral, monetary policy
    JEL: E22 E40 E52 G31 R31
    Date: 2019–04
  12. By: Bossone, Biagio
    Abstract: The Portfolio Theory of Inflation (PIT) proposed in this study investigates the role of global financial markets in determining the effectiveness of macroeconomic policy in open and fully financial integrated economies. The PIT adopts a modified version of the portfolio balance approach to exchange rate determination and incorporates intertemporal optimal choices from global investors. These investors allocate resources across national economies based on local investment opportunities and policy credibility: when a country's credibility is low, they hold its economy to a tighter intertemporal budget constraint and the issuance of what they deem as "excess" public sector liabilities causes the country's currency to depreciate and inflation to rise due to a large exchange rate pass-through, with limited or no impact on output. On the other hand, high credibility creates space for effective and noninflationary macro policies but, if such space is abused, credibility gets dissipated and higher inflation reflects such dissipation.
    Keywords: credibility,exchange rate,financial integration,global investor,interest rate,intertemporal budget constraint,money, bonds and assets,pass-through
    JEL: E31 E4 E5 E62 F31 G15 H3
    Date: 2019
  13. By: Zaghini, Andrea
    Abstract: We assess the impact of the corporate sector purchase programme (CSPP), the corporate arm of the ECB's quantitative easing, over its first year of activity (June 2016 - June 2017). Focusing on the primary bond market, we find evidence of a significant impact of the CSPP on yield spreads, both directly on purchased and targeted bonds and indirectly on all other bonds. The magnitude and the timing of the changes in yield spreads, coupled with the evolution of bond placements, are fully consistent with the proper unfolding the portfolio rebalancing channel. JEL Classification: G15, G32, G38
    Keywords: bond yields, market segmentation., Quantitative easing, unconventional monetary policy
    Date: 2019–04
  14. By: Frankel, Jeffrey A. (Harvard Kennedy School)
    Abstract: Two distinct questions are of interest. (1) To what extent should the central bank be constrained, versus being allowed full discretion? (2) To whatever extent it is constrained by a rule, what should that rule be? With respect to the second question, a good argument for Nominal GDP targeting is that it is robust with respect to supply shocks, whereas CPI targets, for example, are vulnerable to them. But with respect to the first question, I am increasingly convinced that the constraint--whether a NGDP target or something else--must be very loose. Even the most sincere of central bankers will often fail to hit their targets, due to unforeseen shocks. I therefore propose only a mild innovation: the FOMC could include nominal GDP in its Summary of Economic Projections. I also offer a final thought regarding a different kind of constraint: if Fed independence from political influence is compromised, monetary policy will likely become more pro-cyclical.
    Date: 2019–01
  15. By: Grossman, Valerie (Federal Reserve Bank of Dallas); Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas); Wynne, Mark A. (Federal Reserve Bank of Dallas); Zhang, Ren (Bowling Green State University)
    Abstract: This paper estimates the natural interest rate for six small open economies (Australia, Canada, South Korea, Sweden, Switzerland and the U.K.) with a structural New Keynesian model using Bayesian techniques. Our empirical analysis establishes the following four novel findings: First, we show that the open-economy framework provides a better fit of the data than its closed-economy counterpart for the six countries we investigate. Second, we also show that, in all six countries, a monetary policy rule in which the domestic real policy rate tracks the Wicksellian domestic short-term natural rate fits the data better than an otherwise standard Taylor (1993) rule. Third, we show that over the past 35 years, the natural interest rates in all six countries have shifted downwards and strongly comoved with each other. Fourth, our findings illustrate that foreign output shocks (spillovers from the rest of the world) are a major contributor to the dynamics of the natural rate in these six small open economies, and that natural rates comove strongly with estimated U.S. natural rates.
    Keywords: Small Open-Economy Model; Monetary Policy; Natural Rate; Bayesian Estimation
    JEL: C11 C13 E43 E58 F41
    Date: 2019–03–31
  16. By: Laine, Olli-Matti
    Abstract: This study applies a difference-in-differences approach to estimate the effect of the European Central Bank’s second series of targeted longer-term refinancing operations (TLTRO-II) on bank lending. Effects on corporate loans, loans for house purchase and loans for consumption are analysed separately. The results indicate that TLTRO-II increased lending to non-financial corporations. The cumulative effect of TLTRO-II on participating banks’ corporate lending is estimated to be about 30 per cent. The estimated effects for house purchase and consumption loans are positive, but statistically insignificant.
    JEL: E44 E51 E52 G21
    Date: 2019–04–08
  17. By: Ehrmann, Michael; Gaballo, Gaetano; Hoffmann, Peter; Strasser, Georg
    Abstract: Central banks have used different types of forward guidance, where the forward guidance horizon is related to a state contingency, a calendar date or left open-ended. This paper reports cross-country evidence on the impact of these different types of forward guidance on the sensitivity of bond yields to macroeconomic news, and on forecaster disagreement about the future path of interest rates. We show that forward guidance mutes the response to macroeconomic news in general, but that calendar-based forward guidance with a short horizon counterintuitively raises it. Using a model where agents learn from market signals, we show that the release of more precise public information about future rates lowers the informativeness of market signals and, as a consequence, may increase uncertainty and amplify the reaction of expectations to macroeconomic news. However, when the increase in precision of public information is sufficiently large, uncertainty is unambiguously reduced. JEL Classification: D83, E43, E52, E58
    Keywords: central bank communication, disagreement, forward guidance, heterogeneous beliefs, macroeconomic news
    Date: 2019–04
  18. By: Proaño Acosta, Christian; Lojak, Benjamin
    Abstract: In this paper we investigate the risk-related effects of monetary policy both in normal times, as well as in periods where the zero lower bound (ZLB) binds, in a stylized macroeconomic model with boundedly rational beliefs. In our model, financial market participants use heuristics to assess the risk premium over the policy rate in accordance to an "implicit Taylor rule" that measures the stance of conventional monetary policy and which serves as an informative instrument during times when the funds rate is constrained by the ZLB. In such a case, conventional monetary policy is exhausted so that the central bank is forced to use unconventional types of policy. We propose alternative monetary policy measures to help the economy out of the liquidity trap which take into account this assumed form of bounded rationality.
    Keywords: Behavioral Macroeconomics,Monetary Policy,Zero Lower Bound,Bounded Rationality
    Date: 2019
  19. By: Jia, Chengcheng (Federal Reserve Bank of Cleveland)
    Abstract: I explore how asymmetric information between the central bank and the private sector changes the optimal conduct of monetary policy. I build a New Keynesian model in which private agents have imperfect information about underlying shocks, while the central bank has perfect information. In this environment, private agents extract information about the underlying shocks from the central bank’s interest-rate decisions. This informational effect weakens the direct effect of monetary policy: When the central bank adjusts the interest rate to offset the effects of underlying shocks, the interest rate also reveals information about the realization of underlying shocks. Because private agents have more precise information about the shocks and consequently react more aggressively to it, the economy becomes harder to stabilize with monetary policy. I show that committing to the optimal state-contingent policy rule alleviates this problem by controlling the information revealed through the interest rate.
    Keywords: Monetary Policy; Policy Rule;
    JEL: D83 E43 E52 E58
    Date: 2019–04–17
  20. By: Horacio Sapriza; Judit Temesvary
    Abstract: We study the relationship between the strength of the bank credit channel (BCC) of monetary policy and real GDP growth in the United States using quarterly commercial bank level data between 1986 and 2008. We find that the BCC was significantly stronger during periods of low economic growth. Monetary policy is more effective through this channel in spurring economic activity during periods of low growth, rather than in cooling the economy when growth is high. Furthermore, we find that the BCC operated through a broader range of loan categories and banks than previously documented, underscoring this channel’s economic relevance.
    Keywords: Bank balance sheet ; Bank lending channel ; GDP growth ; Monetary policy transmission
    JEL: E3 E5 G2
    Date: 2019–04–08
  21. By: Toffano, Priscilla; Yuan, Kathy
    Abstract: Beginning in 2016, Israeli banks announced their intention to sever correspondent ties with their counterparts in the West Bank, citing risks around money laundering and terror financing. This paper contributes to the discussion about how to save Palestinian/Israeli transactions by proposing a private, permissioned distributed ledger system, jointly owned by the Palestinian and Israeli central banks, where Israeli and Palestinian banks can exchange e-shekels to settle payments.
    JEL: F3 G3
    Date: 2019–04
  22. By: Joost Bats; Tom Hudepohl
    Abstract: The interest rate in the second series of ECB targeted longer-term refinancing operations is conditional on a participant-specific lending benchmark. The restrictiveness of this benchmark varies between banks. We employ fixed effects estimations on a unique micro-dataset and investigate the relationship between the benchmark restrictiveness and net bank lending. We find that a more restrictive benchmark is associated with more total net lending and net lending to non-financial corporates by relatively large banks. Banks that are relatively large and face the most restrictive benchmark increase their lending to the real economy with 9 to 17 percent. We find no significant effects on net lending by relatively small banks. Furthermore, the restrictiveness of the benchmark does not affect net lending to households. Our findings suggest that the design of targeted lending benchmarks influences bank credit flows and that a more binding benchmark would have been even more effective in stimulating bank lending.
    Keywords: central bank; monetary policy; refinancing operations; credit easing; bank credit
    JEL: C23 E51 E58 G21
    Date: 2019–04
  23. By: Antonia Lopez Villavicencio (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Marc Pourroy (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper estimates the effects of different forms of inflation targeting (IT) in the exchange rate pass-through (ERPT). To this end, we first estimate the ERPT for a large sample of countries using state-space models. We then consider the adoption of an inflation targeting framework by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we confirm that the ERPT tends to be lower for countries adopting explicit IT. However, we uncover that older regimes, adopting a range or point with tolerance band and keeping inflation close to the target, outperform other IT regimes. We also show that IT is effective even with a relatively high inflation target or low central bank independence.
    Keywords: state-space model,propensity score matching,exchange rate pass-through,inflation targeting
    Date: 2019–03–28
  24. By: Gianni Amisano; Oreste Tristani
    Abstract: We study the relationship between monetary policy and long-term rates in a structural, general equilibrium model estimated on both macro and yields data from the United States. Regime shifts in the conditional variance of productivity shocks, or "uncertainty shocks", are an important model ingredient. First, they account for countercyclical movements in risk premia. Second, they induce changes in the demand for precautionary saving, which affects expected future real rates. Through changes in both risk-premia and expected future real rates, uncertainty shocks account for about 1/2 of the variance of long-term nominal yields over long horizons. The remaining driver of long-term yields are changes in in ation expectations induced by conventional, autoregressive shocks. Long-term in ation expectations implied by our model are in line with those based on survey data over the 1980s and 1990s, but less dogmatically anchored in the 2000s.
    Keywords: Monetary policy rules ; Uncertainty shocks ; Term structure of interest rates ; Regime switches ; Bayesian estimation
    JEL: E40 C11 E43 E52 C34
    Date: 2019–04–11
  25. By: Hernando Vargas-Herrera (Banco de la República de Colombia); Mauricio Villamizar-Villegas (Banco de la República de Colombia)
    Abstract: Most of the foreign exchange intervention literature overlooks the influence of market uncertainty when evaluating effectiveness. In this paper we take a fresh new look at how this uncertainty amplifies exchange rate effects. Our contribution is twofold. We first posit a partial equilibrium model with frictions to illustrate that when uncertainty is low, intervention is less effective, for agents are willing to bet against the central bank. Conversely, when uncertainty is high, intervention faces a weaker countervailing force from speculators and arbitragers. Second, we empirically test for the incremental effects of flimsy exchange rate fundamentals by using a sharp policy discontinuity in the way the Central Bank of Colombia intervened in the FX market. Our results indicate that market uncertainty increases depreciation of domestic currency in approximately 1% following central bank purchases of foreign currency and extends its duration in up to 2 weeks. Additionally, these purchases have an incremental effect in stemming exchange rate volatility in up to 7%. **** RESUMEN: En este trabajo examinamos la influencia de la incertidumbre sobre la tasa de cambio futura en la efectividad de la intervención cambiaria. Nuestra contribución consta de dos partes. Primero, desarrollamos un modelo teórico de equilibrio parcial para ilustrar cómo la efectividad cambiaria aumenta a medida que aumenta la incertidumbre sobre la tasa de cambio futura o de sus determinantes. Segundo, presentamos evidencia empírica de esta relación haciendo uso del esquema de intervención cambiaria del Banco de la República, empleado durante el periodo 2002-2012, a través de opciones put de volatilidad. Nuestros resultados indican que, en presencia de alta incertidumbre en los fundamentales de la tasa de cambio, la efectividad de la intervención esterilizada aumenta en aproximadamente 1% y su duración se extiende hasta por dos semanas. Adicionalmente, encontramos que, en períodos de alta incertidumbre, la intervención reduce la volatilidad cambiaria hasta en un 7% adicional.
    Keywords: Sterilized FX intervention, Exchange rate uncertainty, policy discontinuity, incremental effect of intervention, Regression Discontinuity Design, Intervención cambiaria esterilizada, incertidumbre sobre la tasa de cambio futura, efecto incremental de la intervención cambiaria, regresión discontinua
    JEL: C14 C31 E58 F31
    Date: 2019–04
  26. By: Margherita Bottero; Camelia Minoiu; José-Luis Peydró; 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: negative interest rates, portfolio rebalancing, bank lending channel of monetary policy, liquidity management, Eurozone crisis.
    JEL: E52 E58 G01 G21 G28
    Date: 2019–02
  27. By: Cecilia Dassatti Camors; José-Luis Peydró; Francesc Rodriguez-Tous
    Abstract: We analyze the impact of reserve requirements on the supply of credit to the real sector. For identification, we exploit a tightening of reserve requirements in Uruguay during a global capital inflows boom, where the change affected more foreign liabilities, in conjunction with its credit register that follows all bank loans granted to non-financial firms. Following a difference-in-differences approach, we compare lending to the same firm before and after the policy change among banks differently affected by the policy. The results show that the tightening of the reserve requirements for banks lead to a reduction of the supply of credit to firms. Importantly, the stronger quantitative results are for the tightening of reserve requirements to bank liabilities stemming from non-residents. Moreover, more affected banks increase their exposure into riskier firms, and larger banks mitigate the tightening effects. Finally, the firm-level analysis reveals that the cut in credit supply in the loan-level analysis is binding for firms. The results have implications for global monetary and financial stability policies.
    JEL: E51 E52 G21 G28
    Date: 2019–03
  28. By: Bernardo Morais; José-Luis Peydró; Jessica Roldán-Peña; Claudia Ruiz-Ortega
    Keywords: monetary policy, financial globalization, quantitative easing (QE), credit supply, risk-taking, foreign banks.
    JEL: E52 E58 G01 G21 G28
    Date: 2018–10
  29. By: Stan Olijslagers; Annelie Petersen; Nander de Vette; Sweder van Wijnbergen
    Abstract: We use a series of different approaches to extract information about crash risk from option prices for the Euro-Dollar exchange rate, with each step sharpening the focus on extracting more specific measures of crash risk around dates of ECB measures of Unconventional Monetary Policy. Several messages emerge from the analysis. Announcing policies in general terms without precisely describing what exactly they entail does not instantly move asset markets or actually increases crash risk. Also, policies directly focused on changing relative asset supplies do seem to have an impact, while measures aiming at easing financing costs of commercial banks do not.
    Keywords: Quantitative Easing; Unconventional Monetary Policies; Exchange Rate Crash Risk; risk reversals; mixed diffusion jump risk models
    JEL: E44 E52 E58 E65 G12 G13 G14
    Date: 2019–04
  30. By: Toshitaka Maruyama (Bank of Japan); Kenji Suganuma (Bank of Japan)
    Abstract: In this paper, we estimate "inflation expectations curve" - a term structure of inflation expectations - combining forecast data of various agents. We use a state-space model which considers consistency among expectations at different horizons, and for relationships between inflation rate, real growth rate and nominal interest rate. We find that the slope of the curve in Japan is positive in almost all periods since the 1990s. In addition, looking at the estimated inflation expectations in time series, the inflation expectations at all horizons rose in the mid-2000s and from late 2012 to 2013, after the downward trend from the early 1990s to the early 2000s. Short-term inflation expectations in particular have tended to shift upwards since the launch of Quantitative and Qualitative Monetary Easing, while being affected by fluctuations in the import price. Finally, a structural VAR analysis shows that the estimated inflation expectations in Japan are largely adaptive, meaning their formation is affected by actual inflation rates.
    Keywords: Inflation expectations; Term structure; State-space model
    JEL: C32 D84 E31 E43 E52
    Date: 2019–04–09
  31. By: Pierpaolo Benigno (LUISS and EIEF)
    Abstract: Can currency competition affect central banks' control of interest rates and prices? Yes, it can. In a two-currency world, the growth rate of the cryptocurrency sets an upper bound on the nominal interest rate and the attainable inflation rate, if the government currency is to retain its role as medium of exchange. In a world of multiple competing currencies issued by profit-maximizing agents, the nominal interest rate and inflation are both determined by structural factors, and thus not subject to manipulation, a result hailed by the proponents of currency competition. The article also proposes some fixes for the classical problem of indeterminacy of exchange rates.
    Date: 2019
  32. By: Georgiadis, Georgios; Zhu, Feng
    Abstract: We assess the empirical validity of the trilemma (or impossible trinity) in the 2000s for a large sample of advanced and emerging economies. To do so, we estimate Taylor-rule type monetary policy reaction functions, relating the local policy rate to real-time forecasts of domestic fundamentals, global variables, as well as the base-country policy rate. In the regressions, we explore variations in the sensitivity of local to base-country policy rates across different degrees of exchange rate flexibility and capital controls. We find that the data are in general consistent with the predictions from the trilemma: Both exchange rate flexibility and capital controls reduce the sensitivity of local to base-country policy rates. However, we also find evidence that is consistent with the notion that the financial channel of exchange rates highlighted in recent work reduces the extent to which local policymakers decide to exploit the monetary autonomy in principle granted by flexible exchange rates in specific circumstances: The sensitivity of local to base-country policy rates for an economy with a flexible exchange rate is stronger when it exhibits negative foreign-currency exposures which stem from portfolio debt and bank liabilities on its external balance sheet and when base-country monetary policy is tightened. The intuition underlying this finding is that it may be optimal for local monetary policy to mimic the tightening of base-country monetary policy and thereby mute exchange rate variation because a depreciation of the local currency would raise the cost of servicing and rolling over foreign-currency debt and bank loans, possibly up to a point at which financial stability is put at risk. JEL Classification: F42, E52, C50
    Keywords: financial globalisation, monetary policy autonomy, spillovers, trilemma
    Date: 2019–04
  33. By: Jared Berry; Felicia Ionescu; Robert J. Kurtzman; Rebecca Zarutskie
    Abstract: In this note, we examine how U.S. banks' NIMs have varied over the most recent monetary policy tightening episode compared with the three previous monetary policy tightening episodes.
    Date: 2019–04–19
  34. By: Enrique Alberola-Ila; Carlos Urrutia
    Abstract: Informality is an entrenched structural trait in emerging market economies, despite of the progress achieved in macroeconomic management. Informality determines the behavior of labour markets, financial access and the productivity of the overall economy. Therefore it influences the transmission of shocks and also of monetary policy. This paper develops a simple general equilibrium closed economy model with nominal rigidities, labor and financial frictions. Informality is captured by a dual labour market where the share of informal workers is endogenous. Only formal sector firms have access to financing, which is instrumental in their production process. Informality has a buffering effect on the propagation of demand and supply shocks to prices; the financial feature of the model exacerbates the impact of financial shocks in the formal sector while the informal sector is in principle unaffected. As a result informality dampens the impact of demand and financial shocks on wages and inflation but heighten the impact of technology shocks. Informality also increases the sacrifice ratio of monetary policy actions. From a Central Bank perspective, the results imply that the presence of an informal sector mitigates inflation volatility for some type of shocks but makes monetary policy less effective.
    Keywords: informality, inflation, monetary policy
    JEL: E26 E31 E52
    Date: 2019–04

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