nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒06‒10
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Should Central Banks Issue Digital Currency? By Keister, Todd; Sanches, Daniel R.
  2. Estimating monetary policy rules in small open economies By Michael S. Lee-Browne
  3. Central Bank Digital Currency and Banking By Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Yu Zhu
  4. Structural Factor Analysis of Interest Rate Pass Through in Four Large Euro Area Economies By Anindya Banerjee; Victor Bystrov; Paul Mizen
  5. Do sterilized foreign exchange interventions create money? By Alexey Ponomarenko
  6. On the Equivalence of Private and Public Money By Markus K. Brunnermeier; Dirk Niepelt
  7. Unemployment and the demand for money By Samuel Huber; Jaehong Kim; Alessandro Marchesiani
  8. State-dependent Monetary Policy Regimes By Zakipour-Saber, Shayan
  9. Owner Occupied Housing in the CPI and Its Impact On Monetary Policy During Housing Booms and Busts By Robert J. Hill; Miriam Steurer; Sofie R. Waltl
  10. Monetary policy transmission to Russia & Eastern Europe By Stann, Carsten M.; Grigoriadis, Theocharis
  11. Echo over the Great Wall: Spillover Effects of QE Announcements on Chinese Yield Curve By Mucai Lin; Linlin Niu
  12. A computational algorithm to analyze unobserved sequential reactions of the central banks: Inference on complex lead-lag relationship in evolution of policy stances By Chakrabarti, Anindya S.; Kumar, Sudarshan
  13. The Economic and Monetary Union: Past, Present and Future By Marek Dabrowski
  14. Foreign exchange reserves and money supply By Alexey Ponomarenko
  15. Monetary Policy and Bank Profitability in a Low Interest Rate Environment By Carlo Altavilla; Miguel Boucinha; José-Luis Peydró
  16. Fixed Wage Contracts and Monetary Non-Neutrality By Björklund, Maria; Carlsson, Mikael; Nordström Skans, Oskar
  17. Monetary policy and financial conditions: a cross-country study By Adrian, Tobias; Duarte, Fernando M.; Grinberg, Federico; Mancini-Griffoli, Tommaso
  18. Two Measures of Core Inflation: A Comparison By Dolmas, James; Koenig, Evan F.
  19. Monetary Equilibrium and the Cost of Banking Activity By Paola Boel; Gabriele Camera
  20. Monetary Stabilization in Cryptocurrencies - Design Approaches and Open Questions By Ingolf G. A. Pernice; Sebastian Henningsen; Roman Proskalovich; Martin Florian; Hermann Elendner; Bj\"orn Scheuermann
  21. The Czech Exchange Rate Floor: Depreciation without Inflation? By Jaromir Baxa; Tomas Sestorad
  22. Euro Area Government Bond Yield and Liquidity Dependence during different Monetary Policy Accommodation Phases By Linas Jurksas; Hector Carcel
  23. Designing Robust Monetary Policy Using Prediction Pools By Deak, S.; Levine, P.; Mirza, A.; Pearlman, J.
  24. Trading and arbitrage in cryptocurrency markets By Makarov, Igor; Schoar, Antoinette
  25. The Gold Standard and the Great Depression: a Dynamic General Equilibrium Model By Luca Pensieroso; Romain Restout
  26. Testing the Asymmetric Effects of Exchange Rate and Oil Price Pass-Through in BRICS Countries: Does the state of the economy matter? By Mehmet Balcilar; David Roubaud; Ojonugwa Usman; Mark E. Wohar
  27. Regulatory effects on short-term interest rates By Ranaldo, Angelo; Schaffner, Patrick; Vasios, Michalis

  1. By: Keister, Todd (Rutgers University); Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: We study how the introduction of a central bank-issued digital currency affects interest rates, the level of economic activity, and welfare in an environment where both central bank money and private bank deposits are used in exchange. Banks in our model are financially constrained, and the liquidity premium on bank deposits affects the level of aggregate investment. We study the optimal design of a digital currency in this setting, including whether it should pay interest and how widely it should circulate. We highlight an important policy tradeoff: while a digital currency tends to promote efficiency in exchange, it can also crowd out bank deposits, raise banksfunding costs, and decrease investment. Despite these effects, introducing a central bank digital currency often raises welfare.
    Keywords: Monetary policy; liquidity premium; collateral constraint; aggregate investment; cryptocurrency
    JEL: E32 E42 E52 G28
    Date: 2019–06–03
  2. By: Michael S. Lee-Browne (The George Washington University)
    Abstract: This paper presents an approach for empirically estimating long-run monetary policy rules in small open economies. The approach utilizes the cointegrated VAR methodology and statistical tests on long- and short-run relations, and investigates policy responses. An application is presented for the case of Trinidad and Tobago. The analysis reveals an empirically supported long-run monetary policy rule for the nominal exchange rate, and provides empirical evidence that oil price shocks are transmitted through the TT economy in part via the effects on US prices. Dynamic specification of the nominal exchange rate reveals significant adjustment towards the target equilibrium level, and significant effects from foreign and domestic variables save for the exchange rate. Forecast analysis reveals the significance of oil-price forecasts, and forecast-errors, on monetary policy. The parsimonious model and its parameter estimates are empirically constant and generate reliable forecasts that provide important implications for using estimated policy rules.
    Keywords: Cointegration, exogeneity, Fisher open parity, forecast-encompassing, monetary policy, PPP, small open economies, Trinidad and Tobago, UIP
    JEL: C51 C52 E52 E58 F31 F41
    Date: 2019–05
  3. By: Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Yu Zhu
    Abstract: Many central banks are considering whether to issue a new form of electronic money that would be accessible to the public. This new form is usually called a central bank digital currency (CBDC). Issuing a CBDC would have implications on the financial system and more broadly on the wider economy. The effects of a CBDC on the banking sector, output and welfare depend crucially on the level of competition in the market for bank deposits. We show that when banks have no market power, issuing a deposit-like CBDC (that people can use like a debit card in transactions) would crowd out private banking. It would shift deposits away from the banking system, reducing bank lending. However, in a more realistic scenario, when banks have market power in the deposit market, issuing a deposit-like CBDC with a proper interest rate would encourage banks to pay higher interest or offer better services to keep their customers. They can do so because they earn a positive profit. As a result, banks would attract more deposits and extend more loans. In this case, issuing a CBDC would not necessarily crowd out private banking. In fact, the CBDC would serve as an outside option for households, thus limiting banks’ market power, and improve the efficiency of bank intermediation. We show quantitatively that the effects of a CBDC on lending, deposits, output and welfare can be sizable. We also analyze how different designs of a CBDC affect our results, including whether the CBDC is deposit-like or cash-like and whether the CBDC can be used to satisfy banks’ reserve requirements.
    Keywords: Digital Currencies and Fintech; Market structure and pricing; Monetary Policy; Monetary policy framework
    JEL: E50 E58
    Date: 2019–05
  4. By: Anindya Banerjee (University of Birmingham); Victor Bystrov (University of Lodz); Paul Mizen (University of Nottingham)
    Abstract: In this paper we examine the influence of monetary policy at the ECB on mortgage and business lending rates offered by banks in the major euro area countries (Germany, France, Italy and Spain). Since there are many different policy measures that have been undertaken, we utilise a dynamic factor model, which allows examination of impulse responses to policy shocks conditioned by structurally identified latent factors. The distinct feature of this paper is that it explores the effects of three channels of policy transmission - short-term rates, long-term rates and perceived risk - ultimately directed towards bank lending rates. The analysis of the pass through is carried out in pre-crisis and post-crisis sub-samples after the financial crisis to demonstrate the changing influence of different policy measures on lending rates.
    Keywords: monetary policy, dynamic factor models, interest rates, pass through
    JEL: C32 C53 E43 E4
    Date: 2019–05–15
  5. By: Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: When a central bank accumulates foreign reserves, there are two possible ways of balance of payments adjustment: (1) decreasing commercial banks’ net foreign assets and (2) decreasing the non-banking sector’s net foreign assets and/or increasing the current account surplus. In the latter case, money is created. It does not matter whether the central bank sterilizes the bank reserves that it supplied to the money market and prevents the interest rate change – money will be created anyway (although sterilization may prevent further money creation through credit extension). Our empirical analysis shows that for emerging markets the type (2) adjustment is more common than type (1). Therefore, the accumulation of foreign reserves is likely to create money even when sterilized (i.e. it does not lead to lower money market interest rates).
    Keywords: Money supply, credit, foreign exchange interventions, foreign exchange reserves, emerging markets.
    JEL: E51 E58 F31 G21
    Date: 2019–05
  6. By: Markus K. Brunnermeier; Dirk Niepelt
    Abstract: We develop a generic model of money and liquidity that identifies sources of liquidity bubbles and seignorage rents. We provide sufficient conditions under which a swap of monies leaves the equilibrium allocation and price system unchanged. We apply the equivalence result to the "Chicago Plan,'' cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC). In particular, we show why CBDC need not undermine financial stability.
    JEL: E40 E41 E42 E44 E51 E52 E58 G21
    Date: 2019–05
  7. By: Samuel Huber; Jaehong Kim; Alessandro Marchesiani
    Abstract: We develop a dynamic general equilibrium model to analyze the relationship between monetary policy, money demand, and unemployment. Our model succeeds in replicating the empirical fact of a downward sloping Phillips curve for low infl ation rates and an upward sloping curve for high inflation rates. The reason is that low in flation rates make saving, as opposed to consumption, more attractive. Less consumption is associated with less output and therefore higher unemployment. To the contrary, when inflation exceeds a certain threshold, money is too costly to hold, which results in a decrease in output and an increase in unemployment.
    Keywords: Money, infl ation, overlapping generations, unemployment
    JEL: D90 E31 E41 E50
    Date: 2019–05
  8. By: Zakipour-Saber, Shayan (Central Bank of Ireland)
    Abstract: Are monetary policy regimes state-dependent? To answer the question this paper estimates New Keynesian general equilibrium models that allow the state of the economy to influence the monetary authority’s stance on inflation. I take advantage of recent developments in solving rational expectations models with state-dependent parameter drift to estimate three models on U.S. data between 1965-2009. In these models, the probability of remaining in a monetary policy regime that is relatively accommodative towards inflation, varies over time and depends on endogenous model variables; in particular, either deviations of inflation or output from their respective targets or a monetary policy shock. The main contribution of this paper is that it finds evidence of state-dependent monetary policy regimes. The model that allows inflation to influence the monetary policy regime in place, fits the data better than an alternative model with regime changes that are not state-dependent. This finding points towards reconsidering how changes in monetary policy are modeled.
    Keywords: Markov-Switching DSGE, State-dependence, Bayesian Estimation
    JEL: C13 C32 E42 E43
    Date: 2019–04
  9. By: Robert J. Hill (University of Graz, Austria); Miriam Steurer (University of Graz, Austria); Sofie R. Waltl (Luxembourg Institute of Socio-Economic Research, Luxembourg)
    Abstract: The treatment of owner-occupied housing (OOH) is probably the most important unresolved issue in inflation measurement. How - and whether - it is included in the Consumer Price Index (CPI) affects inflation expectations, the measured level of real interest rates, and the behavior of governments, central banks and market participants. We show that none of the existing treatments of OOH are fit for purpose. Hence, we propose a new simplified user cost method with better properties. Using a micro-level dataset, we then compare the empirical behavior of eight different treatments of OOH. Our preferred user cost approach pushes up the CPI during housing booms (by 2 percentage points or more). Our findings relate to the following important debates in macroeconomics: the behavior of the Phillips curve in the US during the global financial crisis, and the response of monetary policy to housing booms, secular stagnation, and globalization.
    Keywords: Measurement of inflation; Owner occupied housing; User cost; Rental equivalence; Quantile regression; Hedonic imputation; Housing booms and busts; Inflation targeting; Leaning against the wind; Phillips curve; Disinflation puzzle; Secular stagnation
    JEL: C31 C43 E01 E31 E52 R31
    Date: 2019–05
  10. By: Stann, Carsten M.; Grigoriadis, Theocharis
    Abstract: In this paper, we argue that the ECB's unconventional monetary policy announcements have generated significant spillover effects in Russia and Eastern Europe. The hypothesis is tested using OLS estimations of event-based regressions on monetary policy event dummies and seven financial variables in eleven East European countries including Russia. Overall, the empirical results associate the ECB's unconventional policy announcements with the appreciation of East European currencies, rising stock market indices as well as falling long-term government bond yields and lower sovereign CDS spreads in Eastern Europe and Russia. Notably, bilateral integration with the eurozone is a key determinant of the strength of spillovers, with spillovers strongest in non-euro EU countries and weakest in non-EU East European countries. Interestingly, we find differentiated strength of spillovers to Russia compared to other non-EU East European countries, which we attribute to its fixed exchange rate regime. Lastly, we test for the presence of the portfolio rebalancing and confidence transmission channels.
    Keywords: monetary policy transmission,spillovers,European Central Bank,transmission channels,Eastern Europe,Russia
    JEL: E52 E58 F34 F37 F42 P51
    Date: 2019
  11. By: Mucai Lin; Linlin Niu
    Abstract: This paper examines the spillover effects of announcements of quantita- tive easing (QE) conducted by the central banks of U.S., U.K., Eurozone, and Japan on Chinese Treasury yield curve. Despite China’s firewall of cap- ital control and managed exchange rate regime, the QE announcements of U.S. move the Chinese yield curve immediately with significance, through the channels of signaling as well as portfolio balancing. The U.S. QE impact is particularly strong. The results are robust across a variety of event analy- sis methods. Using the heteroskedasticity assumption for identification and allowing for existence of alternative sources of shocks, we find the U.S. QE impact is sizable even compared to China’s own monetary policy shocks.
    Keywords: QE announcements, Spillover, Signaling Effects, Portfolio Balancing Effects, Yield Curve
    JEL: E43 E52
    Date: 2019–05–17
  12. By: Chakrabarti, Anindya S.; Kumar, Sudarshan
    Abstract: Central banks of different countries are some of the largest economic players at the global scale and they are not static in their monetary policy stances. They change their policies substantially over time in response to idiosyncratic or global factors affecting the economies. A very prominent and empirically documented feature arising out of central banks’ actions, is that the relative importance assigned to inflation vis-a-vis output fluctuations evolve substantially over time. We analyze the leading and lagging behavior of central banks of various countries in terms of adopting low inflationary environment vis-a-vis high weight assigned to counteract output fluctuations, in a completely data-driven way. To this end, we propose a new methodology by combining complex Hilbert principle component analysis with state-space models in the form of Kalman filter. The CHPCA mechanism is non-parametric and provides a clean identification of leading and lagging behavior in terms of phase differences of time series in the complex plane. We show that the methodology is useful to characterize the extent of coordination (or lack thereof), of monetary policy stances taken by central banks in a cross-section of developed and developing countries. In particular, the analysis suggests that US Fed led other countries central banks in the pre-crisis period in terms of pursuing low-inflationary regimes.
    Date: 2019–06–03
  13. By: Marek Dabrowski
    Abstract: Twenty years of euro history confirms the euro’s stability and position as the second global currency. It also enjoys the support of majority of the euro area population and is seen as a good thing for the European Union. The European Central Bank has been successful in keeping inflation at a low level. However, the European debt and financial crisis in the 2010s created a need for deep institutional reform and this task remains unfinished.
    Keywords: European Union, Economic and Monetary Union, common currency area, monetary policy, fiscal policy
    JEL: E58 E62 E63 F33 H62 H63
    Date: 2019
  14. By: Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: In this note we examine how changes in foreign exchange reserves and money supply are interrelated in the economy. We seek to demonstrate that even though foreign exchange reserve purchasing by a central bank has no direct effect on the dynamics of money supply or credit as long as an efficient bank liquidity management mechanism is in place, its indirect effects may be substantial. They are reflected in changes in the balance of payments (an increase in current account surplus and (or) an inflow of capital into the non-banking sector) and an increase in risk taking in the banking sector. That said, money supply does not expand if foreign exchange reserve accumulation is accompanied by the comparable increase of sovereign wealth funds, e.g. as part of a formal fiscal rule. On the other hand, sovereign wealth fund spending stimulates money supply growth only if it is not accompanied by a commensurate decrease in foreign exchange reserves. The Bank of Russia has been actively accumulating foreign exchange reserves over the past few decades. Analyses of the implications of those steps are often limited to reviewing the effect of changes in the supply of bank reserves in the interbank market. Indeed, this effect may be important in terms of managing liquidity or short-term interest rates. Yet in this note we examine the implications of foreign exchange reserve accumulation by a central bank in a broader sense, and analyse the changes it causes in the banking system balance sheet and the balance of payments.
    Date: 2019–05
  15. By: Carlo Altavilla; Miguel Boucinha; José-Luis Peydró
    Abstract: We analyse the impact of standard and non-standard monetary policy on bank profitability. We use both proprietary and commercial data on individual euro area bank balance-sheets and market prices. Our results show that a monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Accommodative monetary conditions asymmetrically affect the main components of bank profitability, with a positive impact on loan loss provisions and non-interest income offsetting the negative one on net interest income. A protracted period of low monetary rates has a negative effect on profits that, however, only materialises after a long time period and is counterbalanced by improved macroeconomic conditions. Monetary policy easing surprises during the low interest rate period improve bank stock prices and CDS.
    Keywords: E52, E43, G01, G21, G28
    Date: 2019–05
  16. By: Björklund, Maria (Uppsala University); Carlsson, Mikael (Uppsala University and Sveriges Riksbank); Nordström Skans, Oskar (Uppsala University, UCLS and IZA)
    Abstract: We study the importance of wage rigidities for the monetary policy transmission mechanism. Using uniquely rich micro data on Swedish wage negotiations, we isolate periods when the labor market is covered by fixed wage contracts. Importantly, negotiations are coordinated in time but their seasonal patterns are far from deterministic. Using a two-regime VAR model, we document that monetary policy shocks have a larger impact on production during fixed wage episodes as compared to the average response. The results are not driven by the periodic structure, nor the seasonality, of the renegotiation episodes.
    Keywords: Monetary Policy; Wages; Nominal rigidities; Micro-data
    JEL: E23 E24 E58 J41
    Date: 2019–03–01
  17. By: Adrian, Tobias (International Monetary Fund); Duarte, Fernando M. (Federal Reserve Bank of New York); Grinberg, Federico (International Monetary Fund); Mancini-Griffoli, Tommaso (International Monetary Fund)
    Abstract: Loose financial conditions forecast high output growth and low output volatility up to six quarters into the future, generating time-varying downside risk to the output gap, which we measure by GDP-at-Risk (GaR). This finding is robust across countries, conditioning variables, and time periods. We study the implications for monetary policy in a reduced-form New Keynesian model with financial intermediaries that are subject to a Value at Risk (VaR) constraint. Optimal monetary policy depends on the magnitude of downside risk to GDP, as it impacts the consumption-savings decision via the Euler constraint, and financial conditions via the tightness of the VaR constraint. The optimal monetary policy rule exhibits a pronounced response to shifts in financial conditions for most countries in our sample. Welfare gains from taking financial conditions into account are shown to be sizable.
    Keywords: monetary policy; financial conditions; financial stability
    JEL: E52
    Date: 2019–06–01
  18. By: Dolmas, James (Federal Reserve Bank of Dallas); Koenig, Evan F. (Federal Reserve Bank of Dallas)
    Abstract: Trimmed-mean Personal Consumption Expenditure (PCE) inflation does not clearly dominate ex-food-and-energy PCE inflation in real-time forecasting of headline PCE inflation. However, trimmed-mean inflation is the superior communications and policy tool because it is a less-biased real-time estimator of headline inflation and because it more successfully filters out headline inflation’s transitory variation, leaving only cyclical and trend components.
    Keywords: inflation; trimmed mean; labor market slack; real-time data;
    JEL: E31 E37 E52
    Date: 2019–02–25
  19. By: Paola Boel (Sveriges Riksbank); Gabriele Camera (Economic Science Institute, Chapman University & University of Bologna)
    Abstract: We investigate the effects of banks’ operating costs on allocations and welfare in a low interest rate environment. We introduce an explicit production function for banks in a microfounded model where banks employ labor resources, hired on a competitive market, to run their operations. In equilibrium, this generates a spread between interest rates on loans and deposits, which naturally reflects the underlying monetary policy and the efficiency of financial intermediation. In a deflation or low inflation environment, equilibrium deposits yield zero returns. Hence, banks end up soaking up labor resources to offer deposits that do not outperform idle balances, thus reducing aggregate efficiency.
    Keywords: banks; frictions; matching
    JEL: C70 D40 E30 J30
    Date: 2019
  20. By: Ingolf G. A. Pernice; Sebastian Henningsen; Roman Proskalovich; Martin Florian; Hermann Elendner; Bj\"orn Scheuermann
    Abstract: The price volatility of cryptocurrencies is often cited as a major hindrance to their wide-scale adoption. Consequently, during the last two years, multiple so called stablecoins have surfaced---cryptocurrencies focused on maintaining stable exchange rates. In this paper, we systematically explore and analyze the stablecoin landscape. Based on a survey of 24 specific stablecoin projects, we go beyond individual coins for extracting general concepts and approaches. We combine our findings with learnings from classical monetary policy, resulting in a comprehensive taxonomy of cryptocurrency stabilization. We use our taxonomy to highlight the current state of development from different perspectives and show blank spots. For instance, while over 91% of projects promote 1-to-1 stabilization targets to external assets, monetary policy literature suggests that the smoothing of short term volatility is often a more sustainable alternative. Our taxonomy bridges computer science and economics, fostering the transfer of expertise. For example, we find that 38% of the reviewed projects use a combination of exchange rate targeting and specific stabilization techniques that can render them vulnerable to speculative economic attacks - an avoidable design flaw.
    Date: 2019–05
  21. By: Jaromir Baxa; Tomas Sestorad
    Abstract: After the introduction of an exchange rate commitment and an immediate 7% depreciation of the Czech koruna of in 2013, output growth resumed but inflation remained low. Consequently, the Czech National Bank did not return policy to normal for more than three years. Using a time-varying parameter VAR model with stochastic volatility, we show that this was not surprising. The exchange rate pass-through to prices had been rather low and gradually decreasing since the early 2000s, suggesting limited potential effects of the exchange rate commitment on inflation. On the other hand, the pass-through to output growth increased. These results hold even when the period of the exchange rate floor and the zero lower bound is excluded from the sample, and they are robust to other sensitivity checks. Our results are consistent either with a flattened Phillips curve, or rising quality of the Czech exports and participation in global value chains, or a small effect of the exchange rate commitment on inflation expectations when not paired with temporary price-level targeting. Moreover, we highlight the usefulness of models accounting for time variation of parameters for policy analysis.
    Keywords: Exchange rate commitment, exchange rate pass-through, time-varying parameters, VAR, zero lower bound
    JEL: C32 E52 F41
    Date: 2019–02
  22. By: Linas Jurksas (Vilnius University & Bank of Lithuania); Hector Carcel (Bank of Lithuania)
    Abstract: In this paper, we analyze the relationship between various risk factors and euro area government bond yield spreads, focusing particularly on the monetary policy stance. Our results show that credit and common risk factors are consistently priced in government bond yield spreads, while liquidity differentials are relevant especially during periods of stressed market conditions. We demonstrate that the liquidity component has been more prominent during periods of declining interest rates and increasing reserves, while it has diminished on announcement days of monetary policy decisions related to PSPP. Overall, the liquidity component has been statistically insignificant since the announcement of accommodative non-standard monetary policy measures.
    Keywords: monetary policy, liquidity, government bonds, yield spreads, panel analysis
    JEL: C23 E62 H50
    Date: 2019–05–27
  23. By: Deak, S.; Levine, P.; Mirza, A.; Pearlman, J.
    Abstract: How should a forward-looking policy maker conduct monetary policy when she has a finite set of models at her disposal, none of which are believed to be the true data generating process? In our approach, the policy makerfirst assigns weights to models based on relative forecasting performance rather than in-sample fit, consistent with her forward-looking objective. These weights are then used to solve a policy design prob-lem that selects the optimized Taylor-type interest-rate rule that is robust to model uncertainty across a set of well-established DSGE models with and without financial frictions. We find that the choice of weights has a significant impact on the robust optimized rule which is more inertial and aggressive than either the non-robust single model counterparts or the optimal robust rule based on backward-looking weights asin the common alternative Bayesian Model Averaging. Importantly, we show that a price-level rule has excellent welfare and robustness properties, and therefore should be viewed as a key instrument for policy makers facing uncertainty over the nature offinancial frictions.
    JEL: H
    Date: 2019
  24. By: Makarov, Igor; Schoar, Antoinette
    Abstract: Cryptocurrency markets exhibit periods of large, recurrent arbitrage opportunities across exchanges. These price deviations are much larger across than within countries, and smaller between cryptocurrencies, highlighting the importance of capital controls for the movement of arbitrage capital. Price deviations across countries co-move and open up in times of large bitcoin appreciation. Countries with higher bitcoin premia over the US bitcoin price see widening arbitrage deviations when bitcoin appreciates. Finally, we decompose signed volume on each exchange into a common and an id- iosyncratic component. The common component explains 80% of bitcoin returns. The idiosyncratic components help explain arbitrage spreads between exchanges.
    Keywords: cryptocurrencies; bitcoin; arbitrage; price impact; capital controls
    JEL: F3 G3
    Date: 2019
  25. By: Luca Pensieroso (IRES, Universite catholique de Louvain); Romain Restout (Universite de Lorraine, Université de Strasbourg, CNRS, BETA, 54000, Nancy and IRES, Universite catholique de Louvain.)
    Date: 2019
  26. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, North Cyprus); David Roubaud (Montpellier Business School, Montpellier, France); Ojonugwa Usman (Department of Economics, Eastern Mediterranean University, North Cyprus); Mark E. Wohar (Department of Economics, University of Nebraska-Omaha, USA)
    Abstract: This paper investigates not only the question of whether there is exchange rate and oil price pass-through (EROPPT) but also the extent to which the pass-through is asymmetric or state dependent in the BRICS countries. Using monthly data and the nonlinear Vector Smooth Transition Autoregressive (VSTAR) model, we find evidence of period specific pass-through between the upper and lower regime periods, governed by the selected transition variables. We also find asymmetric pass-through in all the countries with strong evidence of higher pass-through when the size of the shocks to the transition variable moves the system above a threshold level. The result further divulges that output growth asymmetrically reacts to the shocks. The implication of these findings is that the pass-through is strongly affected by the state of the economy.
    Keywords: Exchange rate pass-through, Oil price pass-through, Inflation, VSTAR
    JEL: C22 C58 E31
    Date: 2019–07
  27. By: Ranaldo, Angelo (University of St. Gallen); Schaffner, Patrick (Bank of England); Vasios, Michalis (Norges Bank Investment Management)
    Abstract: We analyse the effects of EMIR and Basel III regulations on short-term interest rates. EMIR requires central clearing houses (CCP) to continually acquire safe assets, thus expanding the lending supply of repurchase agreements (repo). Basel III, in contrast, disincentivises the borrowing demand by tightening banks’ balance sheet constraints. Using unique datasets of repo transactions and CCP activity, we find compelling evidence for both supply and demand channels. The overall effects are decreasing short-term rates and increasing market imbalances in various forms, all of which entail unintended consequences originated from the new regulatory framework.
    Keywords: Repo; central clearing; financial infrastructure; leverage ratio; EMIR; regulatory effects
    JEL: G28
    Date: 2019–05–31

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