nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒06‒24
24 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Perspectives on U.S. Monetary Policy Tools and Instruments By James D. Hamilton
  2. Vehicle Currency Pricing and Exchange Rate Pass-Through By Natalie Chen; Wanyu Chung; Dennis Novy
  3. Is there a zero lower bound? The effects of negative policy rates on banks and firms By Altavilla, Carlo; Burlon, Lorenzo; Giannetti, Mariassunta; Holton, Sarah
  4. Households' Liquidity Constraint, Optimal Attention Allocation, and Inflation Expectations By Hibiki Ichiue; Maiko Koga; Tatsushi Okuda; Tatsuya Ozaki
  5. Bayesian Combination for Inflation Forecasts: The Effects of a Prior Based on Central Banks’ Estimates By Melo-Velandia, Luis Fernando; Loaiza, Rubén; Villamizar-Villegas, Mauricio
  6. The distributional effects of conventional monetary policy and quantitative easing: Evidence from an estimated DSGE model By Hohberger, Stefan; Priftis, Romanos; Vogel, Lukas
  7. Forward Guidance and the private forecast disagreement – case of Poland By Rybacki, Jakub
  8. An analysis of the Eurosystem/ECB projections By Kontogeorgos, Georgios; Lambrias, Kyriacos
  9. Employment and the collateral channel of monetary policy By Bahaj, Saleem Abubakr; Foulis, Angus; Pinter, Gabor; Surico, Paolo
  10. How Does Unconventional Monetary Policy Affect the Global Financial Markets?: Evaluating Policy Effects by Global VAR Models By INOUE Tomoo; OKIMOTO Tatsuyoshi
  11. Interbank Connections, Contagion and Bank Distress in the Great Depression By Charles W. Calomiris; Matthew S. Jaremski; David C. Wheelock
  12. On a Globalized Exchange Rate Model and Currency Unions: A Note By Odedoyin, Stephen
  13. Inflation Dynamics in the Age of Robots: Evidence and Some Theory By Takuji Fueki; Kohei Maehashi
  14. The Monetary and Fiscal History of Brazil, 1960-2016 By Ayres, JoaÞo; García, Marcio; Guillen, Diogo; Kehoe, Patrick
  15. Time-Varying Exchange Rate Risk Premium By D.M.Nguyen, Anh; Dai Hung, Ly
  16. The price of demography By Barbiellini Amidei, Federico; Gomellini, Matteo; Piselli, Paolo
  17. Optimal Inflation and the Identification of the Phillips Curve By Michael McLeay; Silvana Tenreyro
  18. Real consequences of open market operations: the role of limited commitment By Carli, Francesco; Gomis Porqueras, Pedro
  19. Understanding Inflation Dynamics in the kingdom of Eswantini: A Univariate Approach By Hapanyengwi, Hamadziripi Oscar; Mutongi, Chipo; Nyoni, Thabani
  20. Cryptocurrency, Imperfect Information, and Fraud By Li, Yiting; Wang, Chien-Chiang
  21. Generational War on Inflation: Optimal Inflation Rates for the Young and the Old By FUJIWARA Ippei; HORI Shunsuke; WAKI Yuichiro
  22. Monetary policy and bank profitability in a low interest rate environment: a follow-up and a rejoinder By Goodhart, C. A. E.; Kabiri, Ali
  23. The slope of the term structure and recessions:: evidence from the UK, 1822 – 2016 By Mills, Terence C.; Capie, Forrest; Goodhart, C. A. E.
  24. The Regulation of Private Money By Gary B. Gorton

  1. By: James D. Hamilton
    Abstract: The Federal Reserve characterizes its current policy decisions in terms of targets for the fed funds rate and the size of its balance sheet. The fed funds rate today is essentially an administered rate that is heavily influenced by regulatory arbitrage and divorced from its traditional role as a signal of liquidity in the banking system. The size of the Fed’s balance sheet is at best a very blunt instrument for influencing interest rates. In this paper I compare the current operating system with the historical U.S. system and the procedures of other central banks. I then examine strategies for transitioning from the current system to one that would give the Federal Reserve more accurate tools with which to achieve its strategic objective of influencing inflation and output.
    JEL: E4 E5
    Date: 2019–05
  2. By: Natalie Chen; Wanyu Chung; Dennis Novy
    Abstract: Using detailed firm-level transactions data for UK imports, we find that invoicing in a vehicle currency is pervasive, with more than half of transactions in our sample invoiced in neither sterling nor the exporter's currency. We then study the relationship between invoicing currency choices and the response of import prices to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import prices are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Pass-through therefore substantially increases once we account for vehicle currencies. Our results help to explain the higher-than-expected pass-through into import prices during the Great Recession and after the EU referendum. Finally, within a theoretical framework we conceptualize an omitted variable bias arising in estimating pass-through with only bilateral exchange rates under vehicle currency pricing. Overall, our results contribute to understanding the disconnect between exchange rates and prices.
    Keywords: CPI, Dollar, Euro, exchange rate pass-through, inflation, invoicing, Sterling, UK, vehicle currency pricing
    JEL: F14 F31 F41
    Date: 2019–06
  3. By: Altavilla, Carlo; Burlon, Lorenzo; Giannetti, Mariassunta; Holton, Sarah
    Abstract: Exploiting confidential data from the euro area, we show that sound banks can pass negative rates on to their corporate depositors without experiencing a contraction in funding. These pass-through effects become stronger as policy rates move deeper into negative territory. Banks offering negative rates provide more credit than other banks suggesting that the transmission mechanism of monetary policy is not hampered. The negative interest rate policy (NIRP) provides further stimulus to the economy through firms’ asset rebalancing. Firms with high current assets linked to banks offering negative rates appear to increase their investment in tangible and intangible assets and to decrease their cash holdings to avoid the costs associated with negative rates. Overall, our results challenge the commonly held view that conventional monetary policy becomes ineffective when policy rates reach the zero lower bound. JEL Classification: E52, E43, G21, D22, D25
    Keywords: corporate channel, lending channel, monetary policy, negative rates
    Date: 2019–06
  4. By: Hibiki Ichiue (Bank of Japan); Maiko Koga (Bank of Japan); Tatsushi Okuda (Bank of Japan); Tatsuya Ozaki (Bank of Japan)
    Abstract: We theoretically and empirically investigate the implications of heterogeneity in households' inflation expectations formation within an economy. We develop a rational inattention model in which households attempt to minimize the expected loss from insufficient bargain-hunting and inefficient inter-temporal consumption allocation. The model focuses on households' allocation of attention to two variables: the cheapest price of a particular product they can find, and the inflation rate the central bank aims to achieve in the long run. The model yields the clear prediction that households with a tighter liquidity constraint will allocate more attention to finding the cheapest price of a good by visiting different stores and less attention to information on the inflation rate the central bank aims to achieve in the long run including messages sent out by the central bank. Using a unique and rich micro dataset of Japanese households, we find empirical support for the testable prediction of our model. The model provides the important policy implication that households pay more attention to messages emitted by the central bank if monetary easing successfully relieves households' liquidity constraints.
    Keywords: Rational inattention; inflation expectations; anchoring; liquidity constraints; Euler equation
    JEL: E50 E21 E61
    Date: 2019–06–21
  5. By: Melo-Velandia, Luis Fernando; Loaiza, Rubén; Villamizar-Villegas, Mauricio
    Abstract: Typically, central banks use a variety of individual models (or a combination of models) when forecasting inflation rates. Most of these require excessive amounts of data, time, and computational power; all of which are scarce when monetary authorities meet to decide over policy interventions. In this paper we use a rolling Bayesian combination technique that considers inflation estimates by the staff of the Central Bank of Colombia during 2002-2011 as prior information. Our results show that: 1) the accuracy of individual models is improved by using a Bayesian shrinkage methodology, and 2) priors consisting of staff's estimates outperform all other priors that comprise equal or zero-vector weights. Consequently, our model provides readily available forecasts that exceed all individual models in terms of forecasting accuracy at every evaluated horizon.
    Keywords: Bayesian shrinkage; Inflation forecast combination; Internal forecasts; Rolling window estimation
    JEL: C22 C53 C11 E31
    Date: 2019–06
  6. By: Hohberger, Stefan (European Commission – JRC); Priftis, Romanos (Bank of Canada); Vogel, Lukas (European Commission)
    Abstract: This paper compares the distributional effects of conventional monetary policy and quantitative easing (QE) within an estimated open-economy DSGE model of the euro area. The model includes two groups of households: (i) wealthier households, who own financial assets and are able to smooth consumption over time, and (ii) poorer households, who only receive labor and transfer income and live ‘hand to mouth’. We use the model to compare the impact of policy shocks on constructed measures of income and wealth inequality (net disposable income, net asset position, and relative per-capita income). Except for the short term, expansionary conventional policy and QE shocks tend to mitigate income and wealth inequality between the two population groups. In light of the coarse dichotomy of households that abstracts from richer income and wealth dynamics at the individual level, the analysis emphasizes the functional distribution of income.
    Keywords: Bayesian estimation; distributional effects; open-economy DSGE model; portfolio rebalancing; quantitative easing
    JEL: E44 E52 E53 F41
    Date: 2018–12
  7. By: Rybacki, Jakub
    Abstract: During the period of policy easing in 2013 and prospective tightening in 2017-2019 the National Bank of Poland (NBP) applied the forward guidance to manage expectations of market participants. The goal of such a policy was to lower the uncertainty related to the future decisions of the Monetary Policy Council. We attempt to verify whether the central bank’s communication indeed reduced disagreement, based on the results of the professional forecasters’ survey. We found that the forward guidance policy introduced in 2013 lowered the perceived interest rate risk in both one-year and two-year horizons. On the other hand, abandoning the policy in 2014 increased the disagreement in the disproportionately large manner. The more pronounced forward guidance reintroduced in 2017 again allowed to reduce short-term uncertainty. However, it took over a year to strengthen the impact reducing the disagreement especially in case of two-year forecasts. The forward guidance most likely prevented increase of disagreement during the so called NBP image crisis in the late 2018 and in the first quarter of 2019. Overall our research highlights that it is relatively easy to lose confidence with ill-considered communication, but building credibility requires systematic long work.
    Keywords: forward guidance, density forecasts, survey of professional forecasters
    JEL: E52 E58
    Date: 2019–06–13
  8. By: Kontogeorgos, Georgios; Lambrias, Kyriacos
    Abstract: The Eurosystem/ECB staff macroeconomic projection exercises constitute an important input to the ECB's monetary policy. This work marks a thorough analysis of the Eurosystem/ECB projection errors by looking at criteria of optimality and rationality using techniques widely employed in the applied literature of forecast evaluation. In general, the results are encouraging and suggest that Eurosystem/ECB staff projections abide to the main characteristics that constitute them reliable as a policy input. Projections of GDP - up to one year - and inflation are optimal - in the case of inflation they are also rational. A main finding is that GDP forecasts can be substantially improved, especially at long horizons. JEL Classification: C53, E37, E58
    Keywords: Eurosystem/ECB forecasts, forecast errors, forecast evaluation
    Date: 2019–06
  9. By: Bahaj, Saleem Abubakr; Foulis, Angus; Pinter, Gabor; Surico, Paolo
    Abstract: This paper uses a detailed firm-level dataset to show that monetary policy propagates via asset prices through corporate debt collateralised on real estate. Our research design exploits the fact that many small and medium sized firms use the homes of the firm’s directors as a key source of collateral, and directors’ homes are typically not in the same region as their firm. This spatial separation of firms and firms’ collateral allows us to separate the propagation of monetary policy via fluctuations in collateral values from that via demand channels. We find that younger and more levered firms who have collateral values that are particularly sensitive to monetary policy show the largest employment response to monetary policy. The collateral channel explains a sizeable share of the aggregate employment response.
    JEL: J1
    Date: 2018–12–16
  10. By: INOUE Tomoo; OKIMOTO Tatsuyoshi
    Abstract: This paper examines the effects of unconventional monetary policies (UMPs) by the Bank of Japan (BOJ) and the Federal Reserve (Fed) on the financial markets, taking international spillovers and a possible regime change into account. To this end, we apply the smooth-transition global VAR model to a set of major financial variables for 10 countries and one Euro zone. Our results suggest that the BOJ and the Fed's expansionary UMPs have had significant positive effects on domestic financial markets, particularly in more recent years. Our results also indicate that the BOJ's UMPs have rather limited effects on international financial markets and that the effect of the Fed's UMPs is approximately ten times larger.
    Date: 2019–04
  11. By: Charles W. Calomiris; Matthew S. Jaremski; David C. Wheelock
    Abstract: Liquidity shocks transmitted through interbank connections contributed to bank distress during the Great Depression. New data on interbank connections reveal that banks were much more likely to close when their correspondents closed. Further, after the Federal Reserve was established, banks’ management of cash and capital buffers was less responsive to network liquidity risk, suggesting that banks expected the Fed to reduce that risk. Because the Fed’s presence removed the incentives for the most systemically important banks to maintain capital and cash buffers that had protected against liquidity risk, it likely contributed to the banking system’s vulnerability to contagion during the Depression.
    JEL: G21 L14 N22
    Date: 2019–05
  12. By: Odedoyin, Stephen
    Abstract: The paper considered a global exchange rate system as well as a currency union incorporating the new emerging economies especially those in the BRIC (Brazil-Russia-India-China) group. This mechanism is viewed however to be a buildup on the existing exchange rate system in place before and after the structural transformation of the global financial architecture and landscape. Descriptive and analytical techniques were employed in the examination of the issues involved.
    Keywords: optimum currency area; currency union; fixed exchange rate system; crawling peg; law of one price
    JEL: F31 F33
    Date: 2019–05–31
  13. By: Takuji Fueki (Bank of Japan); Kohei Maehashi (Bank of Japan)
    Abstract: Over the past decade, one of the central questions in macroeconomics has been the missing link observed between inflation and fluctuations in economic activity. We approach this issue with a particular focus on advances in robots, or what are essentially autonomous machines. The contributions of the paper are twofold. First, using a country level balanced panel dataset, we provide significant evidence to show that advances in robots are one factor behind the missing link. Second, we ask a standard New-Keynesian model to rationalize this fact. The distinguishing feature is the introduction of capital which is substituted for human labor, and can therefore be interpreted as the use of robots. Due to this feature and developments in robot, firms can adjust their production by using robots, whose efficiency is getting higher, instead of employing human labor. Hence, the responsiveness of marginal costs to changes in economic activity becomes weakened, and thus, our model supports the empirical fact that advances in robots are one factor behind the missing link.
    Keywords: Robot; Labor-substitute capital; Phillips curve; Missing inflation
    JEL: E12 E22 E31
    Date: 2019–06–21
  14. By: Ayres, JoaÞo; García, Marcio; Guillen, Diogo; Kehoe, Patrick
    Abstract: Brazil has had a long period of high inflation. It peaked around 100 percent per year in 1964, decreased until the first oil shock (1973), but accelerated again afterward, reaching levels above 100 percent on average between 1980 and 1994. This last period coincided with severe balance of payments problems and economic stagnation that followed the external debt crisis in the early 1980s. We show that the high-inflation period (1960-1994) was characterized by a combination of fiscal deficits, passive monetary policy, and constraints on debt financing. The transition to the low-in inflation period (1995-2016) was characterized by improvements in all of these features, but it did not lead to significant improvements in economic growth. In addition, we document a strong positive correlation between inflation rates and seignior age revenues, although in inflation rates are relatively high for modest levels of seignior age revenues. Finally, we discuss the role of the weak institutional framework surrounding the scale and monetary authorities and the role of monetary passiveness and in inflation indexation in accounting for the unique features of inflation dynamics in Brazil.
    JEL: H62 E42 E63 H63
    Date: 2019–06
  15. By: D.M.Nguyen, Anh; Dai Hung, Ly
    Abstract: We characterize the exchange rate risk premium on the context of a small open economy with controlled floating exchange rate regime. The data set includes 100 observations on case of Vietnam over 01/2011-04/2019. The risk premium is varying over time. And it is determined by output growth rate, inflation rate, foreign capital inflows and liquidity supply. As one application, the existence of time varying risk premium reduces the effectiveness of foreign exchange market intervention by forward contract.
    Keywords: Exchange Rate Premium, Foreign Exchange Intervention, Forward Contract
    JEL: F15 F36 F43
    Date: 2019–06
  16. By: Barbiellini Amidei, Federico; Gomellini, Matteo; Piselli, Paolo
    Abstract: A few studies lately explored the relationship between changes in the demographic structure and inflation using mainly cross-country analyses. In this paper we investigate how the evolution in the age structure of the population affected price dynamics in Italy, using annual data for a panel of provinces in the period 1982-2016. The within-country approach allows us to wipe out the effects of supranational shocks, as well as to better take into account the effects of monetary policy, main common driver of price dynamics over the medium-term. We use a set of indicators, namely young age, old age and overall dependency ratios, and the share of working age population. Our results suggest that the ongoing ageing process likely contributed to dampening price dynamics.
    Keywords: Demographic change, price dynamics, panel cointegration
    JEL: E31 J11
    Date: 2019–02
  17. By: Michael McLeay; Silvana Tenreyro
    Abstract: Several academics and practitioners have pointed out that inflation follows a seemingly exogenous statistical process, unrelated to the output gap, leading some to argue that the Phillips curve has weakened or disappeared. In this paper we explain why this seemingly exogenous process arises, or, in other words, why it is difficult to empirically identify a Phillips curve, a key building block of the policy framework used by central banks. We show why this result need not imply that the Phillips curve does not hold – on the contrary, our conceptual framework is built under the assumption that the Phillips curve always holds. The reason is simple: if monetary policy is set with the goal of minimising welfare losses (measured as the sum of deviations of inflation from its target and output from its potential), subject to a Phillips curve, a central bank will seek to increase inflation when output is below potential. This targeting rule will impart a negative correlation between inflation and the output gap, blurring the identification of the (positively sloped) Phillips curve. We discuss different strategies to circumvent the identification problem and present evidence of a robust Phillips curve in US data.
    JEL: E31 E52
    Date: 2019–05
  18. By: Carli, Francesco; Gomis Porqueras, Pedro
    Abstract: We study how limited commitment in credit markets affects the implementation of open market operations and characterize when they result in real indeterminacies and when they have real effects. To do so, we consider a frictional and incomplete market framework where agents face stochastic trading opportunities and limited commitment in some markets. When limited commitment does not constraint agents’ choices, we find necessary and sufficient conditions for the existence of a unique monetary equilibrium. However, real indeterminacies are possible when buyers face a binding no-default constraint. We also show that when the no-default constraint binds and bonds are not priced fundamentally, open market operations generically have real effects. A sale of government bonds can increase or decrease interest rates, depending on the nature of equilibria. The direction of the interest rate effects critically depend on the size of the liquidity premium on government bonds. Finally, government bonds purchases can be used to rule out real indeterminacies, thus finding another rationale for such policy.
    Keywords: taxes; inflation; liquidity premium.
    JEL: E26 E40 E61 H21
    Date: 2019–05–21
  19. By: Hapanyengwi, Hamadziripi Oscar; Mutongi, Chipo; Nyoni, Thabani
    Abstract: This research uses annual time series data on inflation rates in the Kingdom of Eswatini from 1966 to 2017, to model and forecast inflation using the Box – Jenkins ARIMA technique. Diagnostic tests indicate that the H series is I (1). The study presents the ARIMA (0, 1, 1) model for predicting inflation in the Kingdom of Eswatini. The diagnostic tests further imply that the presented optimal model is actually stable and acceptable for predicting inflation in the Kingdom of Eswatini. The results of the study apparently show that inflation in the Kingdom of Eswatini is likely to continue on an upwards trajectory in the next decade. The study basically encourages policy makers to make use of tight monetary and fiscal policy measures in order to control inflation in the Kingdom of Eswatini.
    Keywords: Eswatini, Forecasting, Inflation
    JEL: E31
    Date: 2019–06–18
  20. By: Li, Yiting; Wang, Chien-Chiang
    Abstract: We study cryptocurrency in a monetary economy with imperfect information. The network imperfection provides traders opportunities to engage in double spending fraud, but the trackability of transaction messages allows us to impose proof-of-work (PoW), proof-of-stake (PoS), and currency exclusion to mitigate fraud incentives. However, PoW consumes energy, and PoS requires extra cryptocurrency to be held as deposits, so deterring fraud may not be optimal. We find that forks can serve as signals to detect double spending fraud and to trigger punishments. If the probability is high that forks appear under double spending, imposing PoW and PoS to deter fraud is optimal; otherwise, it is optimal to save the cost but allow for double spending. Finally, by endogenizing the incentives to double spend and the size of PoW and PoS, we show that cryptocurrency economy can achieve efficient allocation as the imperfectness of the internet is sufficiently low.
    Keywords: cryptocurrency, money, search, imperfect information, fraud
    JEL: D80 E40 G10
    Date: 2019–05
  21. By: FUJIWARA Ippei; HORI Shunsuke; WAKI Yuichiro
    Abstract: How does a grayer society affect the political decision making regarding inflation rates? Is deflation preferred as society ages? In order to answer these questions, we compute the optimal inflation rates for the young and the old respectively and explore how they change with demographic factors, by using a New Keynesian model with overlapping generations. According to our simulation results, there indeed exists a tension between the young and the old on the optimal inflation rates. The optimal inflation rates are different between the young and the old. Also, they can be significantly different from zero, in particular, when heterogeneous impacts from inflation via nominal asset holdings are considered. The optimal inflation rates for the old can be largely negative, reflecting their positive nominal asset holdings as well as lower effective discount factor. Societal aging may exert downward pressure on inflation rates through a politico-economic mechanism.
    Date: 2019–03
  22. By: Goodhart, C. A. E.; Kabiri, Ali
    Abstract: There is a debate about the effect of the extremely low, or even negative, interest rate regime on bank profitability. On the one hand it raises demand and thereby adds to bank profits, while on the other hand it lowers net interest margins, especially at the Zero Lower Bound. In this paper we review whether the prior paper by Altavilla, Boucinha and Peydro (2018) on this question for the Eurozone can be generalized to other monetary blocs, i.e. USA and UK. While our findings have some similarity with their earlier work, we are more concerned about the possible negative effects of this regime, not only on bank profitability but also on bank credit extension more widely.
    Keywords: Bank profitability; Low interest rates; Net interest margin; credit extension
    JEL: E52 G18 G21 G28
    Date: 2019–05–23
  23. By: Mills, Terence C.; Capie, Forrest; Goodhart, C. A. E.
    Abstract: It is well known that the slope of the term structure of interest rates contains information for forecasting the likelihood of a recession in the US. This column examines whether the same is true for the UK. Focusing on three periods – the pre-WWI era, the inter-war years, and the post-WWII period – it finds strong support for the inverted yield curve being a predictor of UK recessions for both the pre-WWI and post-WWII periods, but the evidence is less conclusive for the inter-war years.
    Keywords: economic history; monetary policy; yield curve; recessions; UK; term structure
    JEL: N0 E6
    Date: 2019–04–18
  24. By: Gary B. Gorton
    Abstract: Financial crises are bank runs. At root the problem is short-term debt (private money), which while an essential feature of market economies, is inherently vulnerable to runs in all its forms (not just demand deposits). Bank regulation aims at preventing bank runs. History shows two approaches to bank regulation: the use of high quality collateral to back banks’ short-term debt and government insurance for the short-term debt. Also, explicit or implicit limitations on entry into banking can create charter value (an intangible asset) that is lost if the bank fails. This can create an incentive for the bank to abide by the regulations and not take too much risk.
    JEL: G2 G21
    Date: 2019–05

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