nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒05‒20
twenty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Financial Stability and the Fed: Evidence from Congressional Hearings By Arina Wischnewsky; David-Jan Jansen; Matthias Neuenkirch
  2. Tying down the anchor: monetary policy rules and the lower bound on interest rates By Mertens, Thomas M.; Williams, John C.
  3. Shocking Interest Rate Floors By Fabio Canetg, Daniel Kaufmann
  4. Global Liquidity and the Impairment of Local Monetary Policy Transmission By Salih Fendoglu; Eda Gulsen; Josè-Luis Peydro
  5. Predicting China’s Monetary Policy with Forecast Combinations By Pauwels, Laurent
  6. Measuring Inflation Uncertainty in Turkey By Eda Gulsen; Hakan Kara
  7. Implications of the permanent-transitory confusion for New-Keynesian modeling, inflation forecasts and the post-crisis era By Cukierman, Alex
  8. Investigating the Relationship Between Loans Accessed Under Agricultural Credit Guarantee Scheme (ACGS) and Interest Rate Policy in Nigeria By Akpan, Umoren Aniefiok; Okon, Effiong Etim; Brownson, Akpan Sunday
  9. On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint By Davide Debortoli; Jordi Galí; Luca Gambetti
  10. The Stability of Demand for Money in the Proposed Southern African Monetary Union By Simplice A. Asongu; Oludele E. Folarin; Nicholas Biekpe
  11. Estimating the Effect of Exchange Rate Changes on Total Exports By Thierry Mayer; Walter Steingress
  12. Designing a Simple Loss Function for Central Banks: Does a Dual Mandate Make Sense? By Debortoli, Davide; Kim, Jinill; Lindé, Jesper; Nunes, Ricardo
  13. Updates to Household Inflation Expectations: Signal or Noise? By Yongchen Zhao
  14. Do Fundamentals Drive Cryptocurrency Prices? By Bhambhwani, Siddharth; Delikouras, Stefanos; Korniotis, George
  15. Improving Our Monetary Policy Strategy By Mester, Loretta J.
  16. Welfare and Political Economy Aspects of a Central Bank Digital Currency By Cukierman, Alex
  17. Inflation expectations and choices of households By Vellekoop, Nathanael; Wiederholt, Mirko
  18. The Interaction Between Fiscal and Monetary Policies: Evidence from Sweden By Ankargren, Sebastian; Shahnazarian, Hovick
  19. The Fed’s Balance Sheet: The 37th Annual Monetary and Trade Conference By Harker, Patrick T.
  20. Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries By Dąbrowski, Marek A.; Wróblewska, Justyna
  21. On the Bitcoin price dynamics: an augmented Markov-Switching model with Lévy jumps By Julien Chevallier; Stéphane Goutte; Khaled Guesmi; Samir Saadi

  1. By: Arina Wischnewsky; David-Jan Jansen; Matthias Neuenkirch
    Abstract: This paper retraces how financial stability considerations interacted with U.S. monetary policy before and during the Great Recession. Using text-mining techniques, we construct indicators for financial stability sentiment expressed during testimonies of four Federal Reserve Chairs at Congressional hearings. Including these text-based measures adds explanatory power to Taylor-rule models. In particular, negative financial stability sentiment coincided with a more accommodative monetary policy stance than implied by standard Taylor-rule factors, even in the decades before the Great Recession. These findings are consistent with a preference for monetary policy reacting to financial instability rather than acting pre-emptively to a perceived build-up of risks.
    Keywords: monetary policy, financial stability, Taylor rule, text mining
    JEL: E52 E58 N12
    Date: 2019
  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.
    Keywords: monetary policy; inflation expectations; lower bound; inflation target
    JEL: E52
    Date: 2019–05–01
  3. By: Fabio Canetg, Daniel Kaufmann
    Abstract: We identify the dynamic causal effects of interest rate floor shocks, exploiting regular auctions of Swiss central bank debt securities (SNB Bills). A theoretical model shows that variation in the volume of, and yield on, central bank debt changes the interest rate floor. In addition, the model establishes the equivalence between central bank debt and interest-bearing reserves when reserves are ample. Based on these insights, the empirical analysis identifies an interest rate floor shock in a dynamic event study of SNB Bill auctions. A restrictive interest rate floor shock causes an increase in the money market rate, a persistent appreciation of the Swiss franc, a decline in long-term interest rates, and a decline in stock prices. We then perform policy experiments under various identifying assumptions in which the central bank raises the interest rate floor from 0% to 0.25%. Such a policy change causes a 3-6% appreciation of the Swiss franc and a 5-20% decline in stock prices
    Keywords: Exit strategies, interest rate floors, central bank debt securities, interest on reserves, monetary policy shocks, identification through heteroscedasticity
    JEL: E41 E43 E44 E52 E58 C32
    Date: 2019–05
  4. By: Salih Fendoglu; Eda Gulsen; Josè-Luis Peydro
    Abstract: We show that global liquidity limits the transmission of local monetary policy on credit markets. For identification, we exploit global liquidity shocks in conjunction with monetary policy changes and exhaustive loan-level data (the credit and international interbank market registers) from a large emerging market, Turkey. We show that softer global liquidity conditions —proxied by lower VIX or expansionary US monetary policy— attenuate the pass-through of local monetary policy tightening on loan rates, especially for banks that borrow ex-ante more from international wholesale markets. Effects are also important for other credit margins and for bank risk-taking —especially for risky borrowers in FX loans. The mechanism at work is via a bank carry trade from international markets when local monetary conditions tighten.
    Keywords: Global liquidity, Global financial cycle, Monetary policy transmission, Emerging markets, Banks
    JEL: E52 F30 G01 G15 G21
    Date: 2019
  5. By: Pauwels, Laurent
    Abstract: China’s monetary policy is unconventional and constantly evolving as a result of its rapid economic development. This paper proposes to use forecast combinations to predict the People’s Bank of China’s monetary policy stance with a large set of 73 macroeconomic and financial predictors covering various aspects of China’s economy. The multiple instruments utilised by the People’s Bank of China are aggregated into a Monetary Policy Index (MPI). The intention is to capture the overall monetary policy stance of the People’s Bank of China into a single variable that can be forecasted. Forecast combination assign weights to predictors according to their forecasting performance to produce a consensus forecast. The out-of-sample forecast results demonstrate that optimal forecast combinations are superior in predicting the MPI over other models such as the Taylor rule and simple autoregressive models. The corporate goods price index and the US nominal effective exchange rate are the most important predictors.
    Keywords: Monetary policy indicators; China; forecast combination; optimal weights
    Date: 2019–05–14
  6. By: Eda Gulsen; Hakan Kara
    Abstract: Measuring and monitoring inflation uncertainty is an essential ingredient of monetary policy analysis. This study constructs survey measures of inflation uncertainty for the Turkish economy. Using density and point inflation forecasts in the CBRT Survey of Expectations, we derive various uncertainty measures through standard deviation, entropy, and disagreement among forecasters. Our results suggest that survey-based inflation uncertainty measures are broadly consistent with market-implied indicators of inflation risk. Moreover, we find that an increase in observed inflation is associated with higher inflation uncertainty across all empirical specifications.
    Keywords: Inflation uncertainty, Inflation, Survey data, Density forecasts, Disagreement
    JEL: C53 E31 E37 E58
    Date: 2019
  7. By: Cukierman, Alex
    Abstract: Decisions about consumption, work, leisure, pricing, investment and other private and public policy decisions rely on forecasts of the future. The permanent-transitory confusion (PTC) refers to the fact that even when they know all past and current information individuals are uncertain about the persistence of the current state. This all pervasive informational limitation makes it optimal, in general, to use all past information when forecasting the future even under rational expectations. The objective of this paper is to remind the profession of this basic fact and point out some of its implications by showing at both the theoretical and the empirical levels that forecasts of the future are generally adaptive in the sense that they depend on available past information even when information is utilized efficiently. This is done along the following dimensions. First by briefly surveying the literature on rational-adaptive expectations from Muth (1960) to Coibion-Gorodnichenko (2015). Second, by showing that the PTC injects the past even into purely forward looking New-Keynesian such as that of Clarida, Gali & Gertler (1999). Third, by showing empirically that inflationary expectations in the US Survey of Professional Forecasters rely on past inflation. The paper concludes with reflections on the persistence of economic and policy changes induced by the global financial crisis.
    Keywords: inflationary expectations; Permanent-transitory confusion; rationally adaptive expectations â?? implications for New-Keynesian framework
    JEL: D84 E12 E31
    Date: 2019–05
  8. By: Akpan, Umoren Aniefiok; Okon, Effiong Etim; Brownson, Akpan Sunday
    Abstract: Instability in interest rate policy created interest rate volatility. The study investigated the relationship between the value of guaranteed loans and interest rate policy on the growth of Agricultural Credit Guarantee Scheme activities in Nigeria. Time series data collected from the staiistical bulletin of Central Bank of Nigeria were used for the analysis. Multiple regression models were used in estimating the effects of interest rate policy on the value of loans/advances accessed by agro-entrepreneurs under ACGS over the years. The results showed that value of loans/advances accessed by the loan beneficiaries under ACGS was inversely related to interest rate policy and directly influenced by outreach, loan repayment and liquidity over the years. It is recommended that incentive be created in form of increased rate for interest drawback scheme. This would assist to rebate high lending rates by the banking system
    Keywords: Agribusiness
    Date: 2017–10
  9. By: Davide Debortoli; Jordi Galí; Luca Gambetti
    Abstract: The zero lower bound (ZLB) irrelevance hypothesis implies that the economy's performance is not affected by a binding ZLB constraint. We evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. We can reconcile our empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule.
    JEL: E44 E52
    Date: 2019–05
  10. By: Simplice A. Asongu (Yaoundé/Cameroon); Oludele E. Folarin (University of Ibadan, Ibadan, Nigeria); Nicholas Biekpe (University of Cape Town, Cape Town, South Africa)
    Abstract: This study investigates the stability of demand for money in the proposed Southern African Monetary Union (SAMU). The study uses annual data for the period 1981 to 2015 from ten countries making-up the Southern African Development Community (SADC). A standard function of demand for money is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across countries in the stability of money. This divergence is articulated in terms of differences in cointegration, CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long-term determinants and error correction in event of a shock. Policy implications are discussed in the light of the convergence needed for the feasibility of the proposed SAMU. This study extends the debate in scholarly and policy circles on the feasibility of proposed African monetary unions.
    Keywords: Stable; demand for money; bounds test
    JEL: E41 C22
    Date: 2019–01
  11. By: Thierry Mayer; Walter Steingress
    Abstract: This paper shows that real effective exchange rate (REER) regressions, the standard approach for estimating the response of aggregate exports to exchange rate changes, imply biased estimates of the underlying elasticities. We provide a new aggregate regression specification that is consistent with bilateral trade flows micro-founded by the gravity equation. This theory-consistent aggregation leads to unbiased estimates when prices are set in an international currency as postulated by the dominant currency paradigm. We use Monte-Carlo simulations to compare elasticity estimates based on this new “ideal-REER” regression against typical regression specifications found in the REER literature. The results show that the biases are small (around 1 percent) for the exchange rate and large (around 10 percent) for the demand elasticity. We find empirical support for this prediction from annual trade flow data. The difference between elasticities estimated on the bilateral and aggregate levels reduces significantly when applying an ideal-REER regression rather than a standard REER approach.
    Keywords: Econometric and statistical methods; Exchange rates; International topics
    JEL: F11 F12 F31 F32
    Date: 2019–05
  12. By: Debortoli, Davide (UPF, CREI and Barcelona GSE); Kim, Jinill (Korea University); Lindé, Jesper (Research Department, Central Bank of Sweden); Nunes, Ricardo (University of Surrey and CIMS)
    Abstract: Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare-relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when imposing a moderate degree of interest rate volatility.
    Keywords: Central banksobjectives; simple loss function; monetary policy design; sticky prices and sticky wages; DSGE models
    JEL: C32 E58 E61
    Date: 2018–07–01
  13. By: Yongchen Zhao (Department of Economics, Towson University)
    Abstract: Using data from the New York Fed's Survey of Consumer Expectations, we examine the information content of the updates to household inflation expectations. We find that, although consumers frequently revise their expectations, the adjustments are largely uninformative.
    Keywords: Inflation expectations, revisions to expectations, household surveys, rational inattention.
    JEL: E31 D82 D84
    Date: 2019–05
  14. By: Bhambhwani, Siddharth; Delikouras, Stefanos; Korniotis, George
    Abstract: We test the theoretical prediction that blockchain trustworthiness and transaction benefits determine cryptocurrency prices. Measuring these fundamentals with computing power and adoption levels, we find a significant long-run relationship between them and the prices of five prominent cryptocurrencies. Conducting factor analysis, we find that the returns of the five cryptocurrencies are exposed to aggregate fundamental-based factors related to computing power and adoption levels, even after accounting for Bitcoin returns and cryptocurrency momentum. These factors have positive risk premia and Sharpe ratios comparable to those of the U.S. equity market. They further explain return variation in an out-of-sample set of cryptocurrencies.
    Keywords: Asset Pricing Factors; Bitcoin; cointegration; Computing Power; Dash; ethereum; Hashrate; Litecoin; Monero; network
    JEL: E4 G12 G14
    Date: 2019–05
  15. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: The FOMC currently uses what has been called a flexible inflation-targeting framework to set monetary policy. It is briefly described in the FOMC’s statement on longer-run goals and monetary policy strategy.1 In my view, this framework has served the FOMC well in effectively promoting our policy goals. A milestone was reached in January 2012 when the U.S. adopted an explicit numerical inflation goal. I am certain that Charles remembers very well the careful analysis and discussions that helped the FOMC reach a consensus on the explicit 2 percent goal and the statement that describes the FOMC’s approach to setting policy to promote its congressionally mandated goals of price stability and maximum employment. The FOMC is currently reviewing its policy framework. I am very supportive of this initiative.
    Date: 2019–05–03
  16. By: Cukierman, Alex
    Abstract: The point of departure of this paper is that, in order to preserve the effectiveness of monetary policy in a world increasingly flooded by private digital currencies, central banks will eventually have to issue their own digital currencies. Although a non-negligible number of central banks (CBs) are actively considering the pros and cons of a central bank digital currency (CBDC) there is yet no CB that has issued such a currency on a full scale. Following a brief survey of current CBs positions on the issuance of a CBDC the paper presents two proposals for the implementation of such a currency: A moderate proposal in which only the banking sector continues to have access to deposits at the CB and a radical one in which the entire private sector is allowed to hold digital currency deposits at the CB. The paper compares and contrasts the implications of those two polar paths to a CBDC for the funding of banks, the allocation of credit to the economy and their implications for welfare as well as for political feasibility. One section of the paper shows that the radical implementation may pave the way toward a narrow banking system and dramatically reduce the need for deposit insurance in the long run. The paper evaluates the relative merits of issuing a currency on a blockchain using a permissionless distributed ledger technology in comparison to a centralized (permissioned) blockchain ledger operated by the CB and concludes that the latter dominates the former in more than one dimension. But it does acknowledge that distributed ledger technologies have many actual and potential cost savings benefits in other segments of the financial and real sectors.
    Keywords: blockchain technology; Central bank digital currency; centralized versus decentralized currencies; narrow banking; permissioned; permissionless
    JEL: E4 E5 H41
    Date: 2019–05
  17. By: Vellekoop, Nathanael; Wiederholt, Mirko
    Abstract: Do household in ation expectations affect consumption-savings decisions? We link survey data on quantitative in ation expectations to administrative data on income and wealth. We document that households with higher in ation expectations save less. Estimating panel data models with year and household fixed effects, we find that a one percentage point increase in a household's in ation expectation over time is associated with a 250-400 euro reduction in the household's change in net worth per year on average. We also document that households with higher in ation expectations are more likely to acquire a car and acquire higher-value cars. In addition, we provide a quantitative model of household-level in ation expectations.
    Date: 2019
  18. By: Ankargren, Sebastian (Uppsala University); Shahnazarian, Hovick (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper estimates the interaction between monetary- and fiscal policy using a structural VAR model with time-varying parameters. For demand and supply shocks, the two policies are estimated to be complementary, while for monetary and fiscal policies shocks the two policies act as substitutes. The budget elasticity varies between 0.3–0.6, indicating that an economic downturn can get a non-negligible negative impact on public finances. The fiscal multiplier is estimated to be stable and higher than one suggesting that fiscal policy can be used to support monetary policy to stabilize the economy in case monetary policy is constrained by the lower effective bound.
    Keywords: Fiscal policy; monetary policy; time-varying parameter structural VAR; zero and sign restrictions; Bayesian estimation
    JEL: C11 C32 E52 E62 E63
    Date: 2019–02–01
  19. By: Harker, Patrick T. (Federal Reserve Bank of Philadelphia)
    Abstract: Fed’s Harker on Unwinding: “Walk, Don’t Run”. A slow and steady approach to unwinding the Fed’s balance sheet is Philadelphia Fed President Patrick T. Harker’s preference. “So in metaphorical terms, it is a dark and stormy night, to quote Peanuts, and we are walking in the direction of a wall,” he told a conference audience. "In that situation, most of us would give the advice of ‘walk, don’t run.’”
    Keywords: monetary policy; GDP; outlook
    Date: 2019–05–06
  20. By: Dąbrowski, Marek A.; Wróblewska, Justyna
    Abstract: We examine the insulating property of flexible exchange rate in CEE economies using the fact that they have adopted different regimes. A set of Bayesian structural VAR models with common serial correlations is estimated on data spanning 1998q1-2015q4. The long-term identifying restrictions are derived from a macroeconomic model. We find that irrespective of the exchange rate regime output is driven mainly by real shocks. Its reactions to these shocks, however, are substantially stronger under less flexible regimes, whereas the responses to nominal shocks are similar. Hence, the insulating property of flexible regimes can reduce the costs from economic shocks.
    Keywords: open economy macroeconomics; exchange rate regimes; real and nominal shocks; Bayesian structural VAR; common serial correlation
    JEL: C11 E44 F33 F41
    Date: 2019–05–09
  21. By: Julien Chevallier (IPAG Business School, UP8 - Université Paris 8 Vincennes-Saint-Denis); Stéphane Goutte (LED - Université Paris 8, PSB - Paris School of Business); Khaled Guesmi (IPAG Lab - IPAG Lab - Ipag, École de gestion Telfer / Université d'Ottawa - Université d'Ottawa); Samir Saadi (École de gestion Telfer / Université d'Ottawa - Université d'Ottawa)
    Abstract: This study contributes to the existing literature on the empirical characteristics of virtual currency allowing for a dynamic transition between different economic regimes and considering various crashes and rallies over the business cycle, that is captured by jumps. We combine Markov-switching models with Levy jump-diffusion offer a new model that captures the different sub-period of crises over the business cycle, that is captured by jumps. This method also enables to test the relevance of dynamic measures of regime switching concerning the independent pure-jump process, which are not frequently used in the literature. Bitcoin offers something different than a traditional currency; there is potential value of having a network that helps as a secure repository for the common knowledge of all transactions. Besides, the value of Bitcoin fluctuates so wildly that it may be too risky to serve as a credible store of value.
    Keywords: Bitcoin,Lévy process,Markov-switching model
    Date: 2019–05–06

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