nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒05‒13
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary policy, firms’ inflation expectations and prices: causal evidence from firm-level data By Marco Bottone; Alfonso Rosolia
  2. Tying Down the Anchor: Monetary Policy Rules and the Lower Bound on Interest Rates By Mertens, Thomas M.; Williams, John C.
  3. Uncertainty shocks, monetary policy and long-term interest rates By Amisano, Gianni; Tristani, Oreste
  4. Three Dimensions of Central Bank Credibility and Inferential Expectations: The Euro Zone By Timo Henckel; Gordon D. Menzies; Peter Moffat; Daniel J. Zizzo
  5. 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
  6. The causal relationship between short- and long-term interest rates: an empirical assessment of the United States By Levrero, Enrico Sergio; Deleidi, Matteo
  7. Market-based monetary policy uncertainty By Michael D. Bauer; Aeimit Lakdawala; Philippe Mueller
  8. Market power and monetary policy By Aquilante, Tommaso; Chowla, Shiv; Dacic, Nikola; Haldane, Andrew; Masolo, Riccardo; Schneider, Patrick; Seneca, Martin; Tatomir, Srdan
  9. The non-standard monetary policy measures of the ECB: motivations, effectiveness and risks By Stefano Neri; Stefano Siviero
  10. Macroprudential and Monetary Policy: Loan-Level Evidence from Reserve Requirements By Cecilia Dassatti Camors; José-Luis Peydró; Francesc R Tous
  11. On Money as a Medium of Exchange in Near-Cashless Credit Economies By Ricardo Lagos; Shengxing Zhang
  12. Credit rating dynamics: evidence from a natural experiment By Abidi, Nordine; Falagiarda, Matteo; Miquel-Flores, Ixart
  13. Targeting financial stability: macroprudential or monetary policy? By Aikman, David; Giese, Julia; Kapadia, Sujit; McLeay, Michael
  14. Exchange rate volatility and cooperation in an incomplete markets' economy By Sara Eugeni
  15. Identifying monetary policy rules in South Africa with inflation expectations and unemployment By Harris Laurence; Bold Shannon
  16. Monetary policy, credit institutions and the bank lending channel in the euro area By Altavilla, Carlo; C. Andreeva, Desislava; Boucinha, Miguel; Holton, Sarah
  17. Less of a puzzle: a new look at the forward forex market By Maurice J. Roche; Michael J. Moore
  18. Inflation expectations and firms’ decisions: new causal evidence By Olivier Coibion; Yuriy Gorodnichenko; Tiziano Ropele
  19. 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
  20. The International Monetary and Financial System By Gourinchas, Pierre-Olivier; Rey, Hélène; Sauzet, Maxime
  21. Interest rates, inflation, and exchange rates in fragile EMEs: A fresh look at the long-run interrelationships By Hüseyin Şen; Ayşe Kaya; Savaş Kaptan; Metehan Cömert
  22. Uncertainty, Financial Markets, and Monetary Policy over the Last Century By Sangyup Choi; Chansik Yoon
  23. What Caused the Asian Currency? By Kirrane, Chris
  24. Co-jumping of Treasury Yield Curve Rates By Jozef Barunik; Pavel Fiser
  25. Forecasting Japanese inflation with a news-based leading indicator of economic activities By Keiichi Goshima; Hiroshi Ishijima; Mototsugu Shintani; Hiroki Yamamoto
  26. Negative interest rate policy in a permanent liquidity trap By Murota, Ryu-ichiro
  27. The information content of the yield spread about future inflation in South Africa By Harris Laurence; Ntshakala Manqoba
  28. Oil Price Pass-Through into Core Inflation By Cristina Conflitti; Matteo Luciani
  29. Did the euro change the nature of FDI flows among member states? By Sondermann, David; Vansteenkiste, Isabel
  30. The politics of finance: How capital sways African central banks By Dafe, Florence
  31. The Fiscal Roots of Inflation By John H. Cochrane
  32. State-dependent pricing and its implications for monetary policy By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  33. Prospects for Inflation in a High Pressure Economy: Is the Phillips Curve Dead or is It Just Hibernating? By Peter Hooper; Frederic S. Mishkin; Amir Sufi
  34. A world of low interest rates By Claude Bismut; Ismael Ramajo

  1. By: Marco Bottone (Bank of Italy); Alfonso Rosolia (Bank of Italy)
    Abstract: We empirically explore the direct and immediate response of firms’ inflation expectations to monetary policy shocks. We use the Bank of Italy’s quarterly Survey of Inflation and Growth Expectations, in operations since 2000, and compare average point inflation expectations of firms interviewed in the days following scheduled ECB Governing Council meetings with those of firms interviewed just before them; we then relate the difference we find to the change in the nominal market interest rates recorded on Governing Council meeting days, a gauge of the unanticipated component of monetary policy communications. We find that unanticipated changes in market rates are negatively correlated in a statistically significant way with the differences in inflation expectations between the two groups of firms and that this effect has become stronger since 2009. We do not find evidence that firms’ pricing plans are affected by these monetary policy shocks nor that firms perceive significant changes in the main determinants of their pricing choices.
    Keywords: inflation expectations, firm surveys, monetary policy, high frequency identification
    JEL: D22 E3 E5
    Date: 2019–04
  2. By: Mertens, Thomas M. (Federal Reserve Bank of San Francisco); Williams, John C. (Federal Reserve Bank of New York)
    Abstract: This paper uses a standard New Keynesian model to analyze the effects and implementation of various monetary policy frameworks in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will be anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can eliminate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained. Second, dynamic strategies that raise inflation expectations by keeping interest rates “lower for longer” after periods of low inflation can both anchor expectations at the target level and further reduce the effects of the lower bound on the economy.
    JEL: E52
    Date: 2019–05–01
  3. By: Amisano, Gianni; Tristani, Oreste
    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 inflation expectations induced by conventional, autoregressive shocks. Long-term inflation expectations implied by our model are in line with those based on survey data over the 1980s and 1990s, but less strongly anchored in the 2000s. JEL Classification: C11, C34, E40, E43, E52
    Keywords: Bayesian estimation, monetary policy rules, regime switches, term structure of interest rates, uncertainty shocks
    Date: 2019–05
  4. By: Timo Henckel (Australian National University & Centre for Applied Macroeconomic Analysis); Gordon D. Menzies (University of Technology Sydney & Centre for Applied Macroeconomic Analysis); Peter Moffat (University of East Anglia); Daniel J. Zizzo (University of Queensland & Centre for Applied Macroeconomic Analysis)
    Abstract: We use the behavior of inflation among Eurozone countries to provide information about the degree of credibility of the European Central Bank (ECB) since 2008. We define credibility along three dimensions-official target credibility, cohesion credibility and anchoring credibility - and show in a new econometric framework that the latter has deteriorated in recent history; that is, price setters are less likely to rely on the ECB target when forming inflation expectations.
    Keywords: credibility; infl?ation; expectations; anchoring; monetary union; inferential expectations
    JEL: C51 D84 E31 E52
    Date: 2019–02–21
  5. 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
  6. By: Levrero, Enrico Sergio; Deleidi, Matteo
    Abstract: This paper addresses one of the central aspects of the transmission mechanism of monetary policy, namely the ability of central banks to affect the structure of interest rates. To shed light on this issue, we assess the causal relationship between short- and long-term interest rates, that is, the Effective Federal Funds Rate (FF), the Moody's Seasoned Aaa Corporate Bond Yield (AAA), and the 10-Year Treasury Constant Maturity Rate (GB10Y). We apply Structural Vector Autoregressive (SVAR) models to monthly data provided by the Federal Reserve Economic Data (FRED). Our findings – estimated for the 1954-2018 period – outline an asymmetry in the relationship between short- and long-term interest rates. In particular, although we found a bidirectional relationship when the 10-year treasury bond GB10Y was included as the long-run rate, a unidirectional relationship that moves from short- to long-term interest rates is estimated when the interest rate on corporate bonds ranked AAA is taken into consideration. Furthermore, the conclusions drawn by the impulse response functions (IRFs) are confirmed and strengthened by the Forecast Error Variance Decomposition (FEVD) which shows that monetary policy is able to permanently affect long-term interest rates over a long temporal horizon, i.e., not only in the short run but also in the long run. In this way, following the Keynesian tradition, long-term interest rates appear to be strongly influenced by the central bank. Finally, despite the fact that the Federal Fund rate (FF) is weakly affected by long-term interest rate shocks, the estimated FEVD shows that FF is mainly determined by its own shock allowing us to assume that the central bank has a certain degree of freedom in setting the levels of short-run interest rates.
    Keywords: Monetary policy, short- and long-term interest rates, yield curve, SVAR analysis
    JEL: B26 E11 E43 E52
    Date: 2019–04–29
  7. By: Michael D. Bauer; Aeimit Lakdawala; Philippe Mueller
    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.
    Keywords: monetary policy uncertainty, Federal Reserve, event study, monetary transmission, implied volatility
    JEL: E43 E44 E47
    Date: 2019
  8. By: Aquilante, Tommaso (Bank of England); Chowla, Shiv (Bank of England); Dacic, Nikola (Bank of England); Haldane, Andrew (Bank of England); Masolo, Riccardo (Bank of England); Schneider, Patrick (Bank of England); Seneca, Martin (Bank of England); Tatomir, Srdan (Bank of England)
    Abstract: In this paper we explore the link between monetary policy and market power. We start by establishing several facts on market power in UK markets using micro data. First, while no clear trend emerges for market concentration, market power measured by markups estimated at the firm level have clearly increased in recent years, with the rise being reasonably broad-based across sectors. Second, we show that the increase is heavily concentrated in the upper tail of the distribution — companies whose mark-ups are in, say, the top quartile. Third, internationally-oriented firms are the driving force behind the rise in markups. Fourth, following Díez et al (2018), we find some reduced-form evidence of a non-monotonic relation between markups and investment at the firm level, with high levels of markups being associated with lower investment. Having established these facts, we show that the Phillips curve becomes steeper in the textbook New Keynesian model when firms tend to have more market power, reducing the sacrifice ratio for monetary policy. As inflation becomes less costly in an economy with high market power, however, the optimal targeting rule for monetary policy also changes. A rise in both the trend and volatility of mark-ups may lead to a significant rise in inflation variability. But a secular rise in mark-ups by itself improves monetary policy’s ability to stabilise inflation without inducing large movements in output.
    Keywords: Markups; market power; secular trends; monetary policy; DSGE
    JEL: D20 D40 E31 E52
    Date: 2019–05–03
  9. By: Stefano Neri (Bank of Italy); Stefano Siviero (Bank of Italy)
    Abstract: This paper examines the challenges faced by the European Central Bank since the outbreak of the global financial crisis. From 2008 to 2014, the need to preserve the correct functioning of the monetary policy transmission mechanism and ensure the supply of credit to the private sector stretched the limits of conventional monetary policy. In 2015, the risk of deflation led the ECB to start a large scale asset purchase programme. The analysis is largely based on a review of the many studies that Banca d’Italia staff has produced on the factors that have brought inflation to unprecedented low levels in 2014 and on the effects of the asset purchase programme.
    Keywords: monetary policy, global financial crisis, sovereign debt crisis, deflation, asset purchases
    JEL: I31 I32 D63 D31
    Date: 2019–03
  10. By: Cecilia Dassatti Camors; José-Luis Peydró; Francesc R 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
  11. By: Ricardo Lagos; Shengxing Zhang
    Abstract: We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that—in contrast to current conventional wisdom in policy-oriented research in monetary economics—the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable—even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations—even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances.
    JEL: E31 E4 E41 E42 E43 E44 E5 E51 E52 E58
    Date: 2019–05
  12. By: Abidi, Nordine; Falagiarda, Matteo; Miquel-Flores, Ixart
    Abstract: This paper investigates the behaviour of credit rating agencies (CRAs) using a natural experiment in monetary policy. Specifically, we exploit the corporate QE of the Eurosystem and its rating-based specific design which generates exogenous variation in the probability for a bond of becoming eligible for outright purchases. We show that after the launch of the policy, rating upgrades were mostly noticeable for bonds initially located below, but close to, the eligibility frontier. In line with the theory, rating activity is concentrated precisely on the territory where the incentives of market participants are expected to be more sensitive to the policy design. Complementing the evidence on the effectiveness of non-standard measures, our findings contribute to better assessing the consequences of the explicit (but not exclusive) reliance on CRAs ratings by central banks when designing monetary policy. JEL Classification: E44, E52, E58, G24, G30
    Keywords: Credit Rating Agencies, Monetary Policy
    Date: 2019–04
  13. By: Aikman, David; Giese, Julia; Kapadia, Sujit; McLeay, Michael
    Abstract: This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance and a risk-taking channel of monetary policy affect our results. JEL Classification: E52, E58, G01, G28
    Keywords: countercyclical capital buffer, credit boom, financial crises, financial stability, macroprudential policy, monetary policy
    Date: 2019–05
  14. By: Sara Eugeni (Durham University Business School)
    Abstract: In this paper, we contribute to the debate on whether exchange rate volatility is detrimental or not for welfare by characterizing optimal monetary policies in a two-country OLG model where markets are incomplete. The equilibrium nominal exchange rate is volatile as a result of shocks against which agents are not able to insure. In a non-cooperative environment, central banks have an incentive to devaluate the domestic currency by giving monetary transfers to domestic agents. However, such policies result in higher exchange rate volatility. We show that cooperation reduces exchange rate volatility as: (1) the negative spillover effects due to the expansionary monetary policies are internalized; (2) cooperative policies smooth the effects of shocks to fundamentals on the exchange rate. For standard parameter values, the gains from cooperation are not negligible. However, for cooperation to be Pareto improving countries should be weighted differently in the social welfare function. This could explain the lack of cooperation across countries, instead of the negligible gains as previously argued.
    Keywords: exchange rate volatility, incomplete markets, international spillovers, gains from cooperation, OLG models
    JEL: D52 F31 F41 F42
    Date: 2019–03
  15. By: Harris Laurence; Bold Shannon
    Abstract: This paper investigates whether a Taylor rule accurately describes the South African Reserve Bank’s reaction function in setting interest rates using quarterly data, covering the period since inflation targeting was formally adopted in 2000. The classic Taylor rule is modified to determine whether the South African Reserve Bank takes into account inflation expectations and labour market conditions.Our findings indicate that a modified Taylor rule does describe the South African Reserve Bank’s policy rate adjustments. Our estimates of the modified rule yield two significant findings: the South African Reserve Bank’s policy rate decisions respond to expected inflation (rather than current inflation), and its relationship to real economy fluctuations is evident in measures of labour market conditions rather than output gap variables.We conclude that under inflation targeting, South Africa’s monetary policy has had a forward-looking inflation target that is pursued flexibly in the light of labour market conditions.
    Keywords: output gap,Taylor rule,Unemployment gap,Monetary policy,Employment,Labour
    Date: 2018
  16. By: Altavilla, Carlo; C. Andreeva, Desislava; Boucinha, Miguel; Holton, Sarah
    Abstract: As the euro area has a predominantly bank-based financial system, changes in the composition and strength of banks’ balance sheets can have very sizeable implications for the transmission of monetary policy. This paper provides an overview of developments in banks’ balance sheets, profitability and risk-bearing capacity and analyses their relevance for monetary policy. We show that, while the transmission of standard policy interest rate cuts to firms and households was diminished during the crisis, in a context of financial market stress and weak bank balance sheets, unconventional monetary policy measures have helped to restore monetary policy transmission and pass-through to interest rates. We also document the extent to which these non-standard measures were successful in stimulating lending and which bank business models were more strongly affected. Finally, we show that the estimated impact of recent monetary policy measures on bank profitability does not appear to be particularly strong when all the effects on the macroeconomy and asset quality are taken into account. JEL Classification: G21, G20, E52, E43
    Keywords: banks, credit, interest rates, monetary policy
    Date: 2019–05
  17. By: Maurice J. Roche (Department of Economics, Finance and Accounting, National University of Ireland, Maynooth, Ireland); Michael J. Moore (School of Management and Economics, The Queen's University of Belfast, Belfast, Northern Ireland)
    Abstract: The two-country monetary model is extended to include a consumption externality with habit persistence. This is set within a limited participation framework. The model is simulated using the artificial economy methodology. The 'puzzles' in the forward market are re-examined. The model is able to account for (a) the low volatility of the forward discount (b) the higher volatility of expected forward speculative profits (c) the even higher volatility of spot rate changes (d) the persistence in the forward discount and (e) the random walk in spot exchange rates The major innovation is that it is able to replicate some of the extent of the bias of the forward discount as a predictor of realised spot rate changes.
    Keywords: Artificial economy, Forward foreign exchange, Limited participation, Habit persistence
    JEL: F31 F41 G12
  18. By: Olivier Coibion (University of Texas, Austin); Yuriy Gorodnichenko (University of California, Berkeley); Tiziano Ropele (Bank of Italy)
    Abstract: We use a unique design feature of a survey of Italian firms to study the causal effect of inflation expectations on firms’ economic decisions. In the survey, a randomly chosen subset of firms is repeatedly treated with information about recent inflation whereas other firms are not. This information treatment generates exogenous variation in inflation expectations. We find that higher inflation expectations on the part of firms leads them to raise their prices, increase their utilization of credit, and reduce their employment. However, when policy rates are constrained by the effective lower bound, demand effects are stronger, leading firms to raise their prices more and no longer reduce their employment.
    Keywords: inflation expectations, surveys, inattention
    JEL: E2 E3
    Date: 2019–04
  19. 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: 2019–03
  20. By: Gourinchas, Pierre-Olivier; Rey, Hélène; Sauzet, Maxime
    Abstract: International currencies fulfill different roles in the world economy with important synergies across those roles. We explore the implications of currency hegemony for the external balance sheet of the United States, the process of international adjustment, and the predictability of the US dollar exchange rate. We emphasize the importance of international monetary spillovers, of the exorbitant privilege, and analyse the emergence of a new `Triffin dilemma'.
    Keywords: Exchange Rates; External assets and liabilities; Global financial cycle; International adjustment; International Currencies; Triffin dilemma
    JEL: E0 F3 F4 G1
    Date: 2019–05
  21. By: Hüseyin Şen (AYBU - Ankara Yıldırım Beyazıt University); Ayşe Kaya; Savaş Kaptan; Metehan Cömert
    Abstract: This study attempts to establish the possible existence of the long-run interrelationship between interest rates, inflation, and exchange rates in five fragile emerging market economies (Brazil, India, Indonesia, South Africa, and Turkey), what is so-called by Morgan Stanley ‘Fragile Five'. To do so, we utilize Li and Lee's (2010) Autoregressive Distributed Lag (ADL) test for threshold cointegration and apply it to sample countries' monthly time-series data from 2013:1 to 2018:12. Overall, our primary results are threefold: First, there seems to be a long-run positive relationship between inflation rates and nominal interest rates supporting the validity of the Fisher hypothesis for all the sample countries. Second, sample countries' data supports the existence of a cointegration relationship between interest rates and exchange rates for the case of Brazil, India, and Turkey but not for the case of Indonesia and South Africa. Lastly, without exception, exchange rates and inflation in all countries examined tend to co-move in the long-run, implying that increases in exchange rates affect inflation through raising the prices of foreign goods imported into the sample countries. The results above are widely compatible with theoretical expectations and with the results of the most previous empirical studies on the long-run interrelationships between interest rates, inflation, and exchange rates in the literature.
    Keywords: Macroeconomic policy,emerging market economies.,macroeconomic policy management,autoregressive distributed lag,threshold cointegration,emerging market economies
    Date: 2019–04–10
  22. By: Sangyup Choi (Yonsei University); Chansik Yoon (Yonsei University)
    Abstract: What has been the effect of uncertainty shocks in the U.S. economy over the last century? What are the historical roles of the financial channel and monetary policy channel in propagating uncertainty shocks? Our empirical strategies enable us to distinguish between the effects of uncertainty shocks on key macroeconomic and financial variables transmitted through each channel. A hundred years of data further allow us to answer these questions from a novel historical perspective. This paper finds robust evidence that financial conditions have played a crucial role in propagating uncertainty shocks over the last century, supporting many theoretical and empirical studies emphasizing the role of financial frictions in understanding uncertainty shocks. However, heightened uncertainty does not amplify the adverse effect of financial shocks, suggesting an asymmetric interaction between uncertainty and financial shocks Interestingly, the stance of monetary policy seems to play only a minor role in propagating uncertainty shocks, which is in sharp contrast to the recent claim that binding zero-lower-bound amplifies the negative effect of uncertainty shocks. We argue that the contribution of constrained monetary policy to amplifying uncertainty shocks is largely masked by the joint concurrence of binding zero-lower-bound and tightened financial conditions.
    Keywords: uncertainty shocks; financial channel; counterfactual VARs; local projections; zero-lowerbound
    JEL: E31 E32 E44 G10
    Date: 2019–04
  23. By: Kirrane, Chris
    Abstract: This particular paper attempts to answer a few questions: Does global finance in general and state and international monetary as well as financial institutions cause financial as well as economic instability for nations around the world? Is it possible to prevent the advantages of increased access to international funds markets from being reduced and even reversed by global and national monetary and financial crises. Are existing national currencies outdated?
    Keywords: Financial crisis
    Date: 2018–04
  24. By: Jozef Barunik; Pavel Fiser
    Abstract: We study the role of co-jumps in the interest rate futures markets. To disentangle continuous part of quadratic covariation from co-jumps, we localize the co-jumps precisely through wavelet coefficients and identify statistically significant ones. Using high frequency data about U.S. and European yield curves we quantify the effect of co-jumps on their correlation structure. Empirical findings reveal much stronger co-jumping behavior of the U.S. yield curves in comparison to the European one. Further, we connect co-jumping behavior to the monetary policy announcements, and study effect of 103 FOMC and 119 ECB announcements on the identified co-jumps during the period from January 2007 to December 2017.
    Date: 2019–05
  25. By: Keiichi Goshima (Waseda University and Bank of Japan); Hiroshi Ishijima (Chuo University); Mototsugu Shintani (Corresponding author, The University of Tokyo and Bank of Japan); Hiroki Yamamoto (The University of Tokyo and Bank of Japan)
    Abstract: We construct business cycle indexes based on the daily Japanese newspaper articles and estimate the Phillips curve model to forecast inflation at a daily frequency. We find that the news-based leading indicator, constructed from the topic on future economic conditions, is useful in forecasting the inflation rate in Japan.
    Date: 2019–05
  26. By: Murota, Ryu-ichiro
    Abstract: Using a dynamic general equilibrium model, this paper theoretically analyzes a negative interest rate policy in a permanent liquidity trap. If the natural nominal interest rate is above the lower bound set by the presence of vault cash held by commercial banks, a reduction in the nominal rate of interest on excess bank reserves can get an economy out of the permanent liquidity trap. In contrast, if the natural nominal interest rate is below the lower bound, then it cannot do so, but instead a rise in the rate of tax on vault cash is useful for doing so.
    Keywords: aggregate demand, liquidity trap, negative nominal interest rate, unemployment
    JEL: E12 E31 E58
    Date: 2019–04–21
  27. By: Harris Laurence; Ntshakala Manqoba
    Abstract: The proposition that inflation expectations can be extracted as inflation predictions from the government bond yield curve has been tested, with partially positive results, using data from the United States and European countries. Despite the abundance of empirical studies of the proposition, relatively few of these studies relate to emerging markets, as most emerging markets lack bond markets with the liquidity, breadth, information availability, and range of maturities that would permit such studies. South Africa’s highly developed capital markets do have such characteristics, warranting this study’s examination of the proposition’s validity for South Africa.Using South African time series data, we find strong evidence for the proposition that the slope of the yield curve, measured as a long- to short-term spread, contains information on the future path of inflation. Examining the sub-periods separated by the adoption, in 2000, of inflation targeting, we find that the monetary policy regime shift strengthened the relationship between the yield spread and future inflation. The results suggest that the yield spread can be used by policy makers and the private sector to help forecast inflation in South Africa.
    Keywords: Monetary policy,Inflation (Finance),Rational expectations (Economic theory)
    Date: 2018
  28. By: Cristina Conflitti; Matteo Luciani
    Abstract: In this note we presented estimates of the oil price pass-through into consumer prices both in the US and in the euro area.
    Date: 2019–04–30
  29. By: Sondermann, David; Vansteenkiste, Isabel
    Abstract: In this paper we investigate the impact of the euro integration process on the drivers of FDI inflows. We show theoretically and empirically that the single currency alters the drivers of FDI inflows across its Member States. Estimating bilateral gravity models of FDI inflows into euro area countries, we show that the euro facilitates intra-euro area vertical FDI flows but reduces incentives for horizontal or market seeking FDI. Instead, horizontal FDI flows stemming from investor countries located outside the monetary union increase. Such flows are however not more likely be directed towards euro area countries with larger domestic markets but rather to countries that are close to large euro area markets and that have higher quality institutions. Overall, these results suggest that while the euro has been beneficial to FDI inflows into the monetary union, the impact differs significantly across countries. The global financial crisis does not change our main findings. Our results are robust to various economic specifications. JEL Classification: F21, F23, F45, O43
    Keywords: economic structures, euro, euro area countries, Foreign direct investment, institutions
    Date: 2019–04
  30. By: Dafe, Florence
    Abstract: While there is a large literature on the politics of central banking its insights are difficult to translate to Sub-Saharan Africa. This article addresses gaps in this literature by considering how the interests of those who control financial resources sway African central banks. Case studies of Kenya, Nigeria and Uganda demonstrate that variation in the sources of capital on which countries rely to finance investment helps to account for the pattern of variation in central bank policy stances. The analysis further develops and probes arguments about power derived from the control of capital in the context of developing countries.
    JEL: F3 G3
    Date: 2017–10–08
  31. By: John H. Cochrane
    Abstract: Unexpected inflation devalues nominal government bonds. This change in value must correspond to a change in expected future surpluses, a change in their discount rates, or a contemporaneous change in nominal bond returns. I develop a linearized version of the government debt valuation equation, and I measure each component via a vector autoregression. I find that discount rate variation is important. Unexpected inflation corresponds entirely to a rise in discount rates, with no change in the sum of expected future surpluses. A recession shock, which lowers inflation and output, signals persistent deficits, but also lower interest rates, which raise the value of debt and account fully for the lower inflation. A monetary policy shock, defined here as a rise in interest rates with no change in expected future surpluses, raises inflation immediately and persistently. Nominal rates rise more than real rates, raising the discount factor and thus accounting for the inflation. In these calculations, the present value of surpluses changes by more than current inflation. Persistently higher inflation and nominal interest rates cause current long term bonds to fall in value, soaking up variation in the present value of surpluses. By this mechanism monetary policy spreads fiscal shocks to persistent inflation rather than price level jumps. I also decompose the value of government debt. Half of the value of debt corresponds to forecasts of future primary surpluses, and half to discount rates, driven by variation in bond expected returns.
    JEL: E31 E63
    Date: 2019–05
  32. By: Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: Strong evidence now exists both in macro and micro data that price/wage durations are depent on the state of the economy and especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching the economy's behaviour in the last three decades; it now also matches it over the whole post-war period. This finding implies a major role for monetary polic influencing the economy's price stickiness. We find that by targetin nominal GDP monetary policy can achieve high price stability while also preventing large cyclical output fluctuations.
    Keywords: state-dependence; New Keynesian; Rational Expectations crises; price stability; nominalGDP
    JEL: E2 E3
    Date: 2019–05
  33. By: Peter Hooper; Frederic S. Mishkin; Amir Sufi
    Abstract: This paper reviews a substantial range of empirical evidence on whether the Phillips curve is dead, i.e. that its slope has flattened to zero. National data going back to the 1950s and 60s yield strong evidence of negative slopes and significant nonlinearity in those slopes, with slopes much steeper in tight labor markets than in easy labor markets. This evidence of both slope and nonlinearity weakens dramatically based on macro data since the 1980s for the price Phillips curve, but not the wage Phillips curve. However, the endogeneity of monetary policy and the lack of variation of the unemployment gap, which has few episodes of being substantially below zero in tis sample period, makes the price Phillips curve estimates from this period less reliable. At the same time, state level and MSA level data since the 1980s yield significant evidence of both negative slope and nonlinearity in the Phillips curve. The difference between national and city/state results in recent decades can be explained by the success that monetary policy has had in quelling inflation and anchoring inflation expectations since the 1980s. We also review the experience of the 1960s, the last time inflation expectations became unanchored, and observe both parallels and differences with today. Our analysis suggests that reports of the death of the Phillips curve may be greatly exaggerated.
    JEL: E31 E52 E65
    Date: 2019–05
  34. By: Claude Bismut (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier); Ismael Ramajo (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - INRA - Institut National de la Recherche Agronomique - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier)
    Abstract: The interest rates have remained low in recent years, after long decline over the past thirty-five years in OECD countries. This evolution is associated to a slowdown of output growth, while inflation stabilized around its two percent target. In trying to provide a better understanding on how we got there, we review the macroeconomic developments during almost sixty years. Conventional analysis of the role of macroeconomic policy does not provide a satisfactory explanation of the observed long-term trends. In particular, large fiscal deficits and growing debt ratios did not lead to higher interest rates, except in a few countries, whose governments were facing serious fiscal troubles. Conservative monetary policy can explain the low level of inflation that have prevailed since the middle of the eighties, but not the continuous decline of the real interest rate. Based on a few stylized facts we suggest a direction for a plausible characterization of a low growth / low interest rate regime
    Keywords: interest rates,growth,inflation,macroeconomics,long term,public debt,fiscal policy,monetary policy
    Date: 2019

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