nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒07‒08
29 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. The effectiveness of monetary policy in China: Evidence from a Qual VAR By Hongyi Chen; Kenneth Chow; Peter Tillmann
  3. Does one size fit all in the Euro Area? Some counterfactual evidence By Destefanis, Sergio; Fragetta, Matteo; Gasteiger, Emanuel
  4. Banking Crises, Bail-ins and Money Holdings By Martin Brown; Ioanna S. Evangelou; Helmut Stix
  5. Monetary Policy and Macroeconomic Stability Revisited By Hirose, Yasuo; Van Zandweghe, Willem; Kurozumi, Takushi
  6. Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy By Bordo, Michael D.; Prescott, Edward Simpson
  7. Financial Stability Implications of Policy Mix in a Small Open Commodity-Exporting Economy By Irina Kozlovtceva; Alexey Ponomarenko; Andrey Sinyakov; Stas Tatarintsev
  8. Inflation Expectations and Monetary Policy Surprises By Snezana Eminidou; Marios Zachariadis; Elena Andreou
  9. Inflation and Social Welfare in a New Keynesian Model: The Case of Japan and the U.S. By Tomohide Mineyama; Wataru Hirata; Kenji Nishizaki
  10. Fiat Money as a Public Signal, Medium of Exchange, and Punishment By Gomis-Porqueras, Pedro; Sun, Ching-jen
  11. Quantities and Prices in China’s Monetary Policy Transmission From Window Guidance to Interbank Rates By Naoyuki Yoshino; Stefan Angrick
  12. Economic Uncertainty and Subjective Inflation Expectations By Rossmann, Tobias
  13. Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s? By Qazi Haque; Nicolas Groshenny; Mark Weder
  14. What does peer-to-peer lending evidence say about the risk-taking channel of monetary policy? By Huang, Yiping; Li, Xiang; Wang, Chu
  15. Does a Big Bazooka Matter? Central Bank Balance-Sheet Policies and Exchange Rates By Luca Dedola; Georgios Georgiadis; Johannes Gräb; Arnaud Mehl
  16. Measuring euro area monetary policy By Altavilla, Carlo; Brugnolini, Luca; Gürkaynak, Refet S.; Motto, Roberto; Ragusa, Giuseppe
  17. The determination of the money supply: flexibility versus control By Goodhart, C. A. E.
  18. Public Support for the Euro and Trust in the ECB. The First Two Decades of the Common Currency By Roth, Felix; Jonung, Lars
  19. Monetary Policy, Inflation Target and the Great Moderation: An Empirical Investigation By Qazi Haque
  20. A Factor Model Analysis of the Australian Economy and the Effects of Inflation Targeting By Hartigan, Luke; Morley, James
  21. Monetary policy, inflation target and the great moderation: An empirical investigation By Qazi Haque
  22. Announcement-Specific Decompositions of Unconventional Monetary Policy Shocks and Their Macroeconomic Effects By Lewis, Daniel J.
  23. Analysing monetary policy statements of the Reserve Bank of India By Aakriti Mathur; Rajeswari Sengupta
  24. The Reversal Interest Rate By Markus K. Brunnermeier; Yann Koby
  25. The Asset Purchase Programmes of the ESCB - an interdisciplinary evaluation By Siekmann, Helmut
  26. Bank asset quality and monetary policy pass-through By Kelly, Robert; Byrne, David
  27. Monetary Policy in Perspective Conventional Economy and Islamic Economics By Mujahidin, Muhamad
  28. Flexible Majority Rules for Cryptocurrency Issuance By Hans Gersbach
  29. Investigating Fiscal and Monetary Policies Coordination and Public Debt in Kenya: Evidence from regime-switching and self-exciting threshold autoregressive models By William Ng'ang'a; Julien Chevallier; Simon Ndiritu

  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
    Date: 2019
  2. By: Hongyi Chen (Hong Kong Institute for Monetary Research); Kenneth Chow (Hong Kong Monetary Authority); Peter Tillmann (Justus Liebig University Giessen)
    Abstract: Analyzing monetary policy in China is not straightforward because the People's Bank of China (PBoC) implements policy by using more than one instrument. In this paper we use a Qual VAR, a conventional VAR system augmented with binary policy announcements, to extract a latent indicator of tightening and easing pressure, respectively, for China. The model acknowledges that policy announcements are endogenous and summarizes policy by a single indicator. The Qual VAR allows us to study the impact of monetary policy in terms of unexpected changes in these latent variables, which we identify using sign restrictions. We show that the transmission of monetary policy impulses to the rest of the economy is similar to the transmission process in advanced economies in terms of both output growth and inflation despite a very different monetary policy framework. We find that bank loans are not sensitive to policy changes, which implies that window guidance is still a necessary policy tool. We also find that the impact of monetary policy shocks is asymmetric in terms of asset prices, that is, the asset price reactions differ in their sensitivity to tightening shocks and easing shocks, respectively. In particular, an easing of monetary conditions boosts stock prices while a tightening shock leaves stock prices unaffected. This shows that monetary policy is not a suitable tool to stabilize asset prices, which raises implications for financial stability and macroprudential policy.
    Keywords: China, monetary policy, Qual VAR, transmission mechanism, asset prices, financial stability
    JEL: E4 E5 C3
  3. By: Destefanis, Sergio; Fragetta, Matteo; Gasteiger, Emanuel
    Abstract: This paper examines whether Euro Area countries would have faced a more favorable inflation output variability tradeoff without the Euro. We provide evidence that this claim is true for the periods of the Great Recession and the European Sovereign Debt Crisis. For the Euro Area as a whole, the deterioration of the tradeoff becomes insignificant with Draghi's "whatever it takes" announcement onwards. However, a more detailed analysis shows that the detrimental effect of the Euro is more severe and long-lasting for peripheral countries, pointing to structural differences among Euro Area countries as a key element of the detrimental effect of the Euro. We base our results on a novel empirical strategy that, consistently with monetary theory, models the joint determination of the variability of inflation and output conditional on structural supply shocks. Moreover, our findings are robust to potential endogeneity concerns related to adoption of the Euro.
    Keywords: Euro Area,Monetary Policy,Difference-in-Differences
    JEL: C32 E50
    Date: 2019
  4. By: Martin Brown (University of St.Gallen); Ioanna S. Evangelou (Central Bank of Cyprus); Helmut Stix (Oesterreichische Nationalbank)
    Abstract: We study changes in deposit and cash holdings by households following the 2013 banking crisis in Cyprus. During this crisis the two largest banks in the country were resolved involving a bail-in of uninsured depositors and debt holders. Our analysis is based on anonymized survey data covering households with differential exposures to the resolved banks: uninsured deposits, subordinated debt and equity holdings. In line with the portfolio theory of money demand, we find that in the intermediate aftermath of the crisis households significantly reduced their holding of bank deposits and increased their cash holdings. This flight to cash was much stronger for clients which experienced a bail-in of deposits or subordinated debt than for households which held equity in the resolved banks or did not suffer any financial loss. In the medium term, however, there was no difference in depositor confidence or money holdings between households which suffered a bail-in and those which did not.
    Keywords: Financial crises, bank resolution, bail-in, deposits, cash, money demand.
    JEL: E41 G01 G11 G21 G28
    Date: 2018–01
  5. By: Hirose, Yasuo (Keio University); Van Zandweghe, Willem (Federal Reserve Bank of Cleveland); Kurozumi, Takushi (Bank of Japan)
    Abstract: A large literature has established that the Fed’ change from a passive to an active policy response to inflation led to US macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature’s view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The model empirically outperforms canonical New Keynesian models that confirm the literature’s view. Our estimated model shows an active policy response to inflation even during the Great Inflation. More importantly, a more active policy response to inflation alone does not suffice for explaining the US macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. This extends the literature by emphasizing the importance of the changes in other aspects of monetary policy in addition to its response to inflation.
    Keywords: Monetary policy; Great Inflation; Indeterminacy; Trend inflation; Sequential Monte Carlo;
    JEL: C11 C52 C62 E31 E52
    Date: 2019–06–27
  6. By: Bordo, Michael D. (Rutgers University); Prescott, Edward Simpson (Federal Reserve Bank of Cleveland)
    Abstract: The decentralized structure of the Federal Reserve System is evaluated as a mechanism for generating and processing new ideas on monetary and financial policy. The role of the Reserve Banks starting in the 1960s is emphasized. The introduction of monetarism in the 1960s, rational expectations in the 1970s, credibility in the 1980s, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System is documented. Contributions by Reserve Banks to policy on bank structure, bank regulation, and lender of last resort are also discussed. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s. Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure, a structure set up in 1913 for a highly decentralized Federal Reserve System, but which survived the centralization of the System in the Banking Act of 1935. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve’s decentralized structure and contributes to better policy by allowing for more competition in ideas and reducing groupthink.
    Keywords: Federal Reserve System; monetary policy; financial regulation; governance;
    JEL: B0 E58 G28 H1
    Date: 2019–06–21
  7. By: Irina Kozlovtceva (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation); Andrey Sinyakov (Bank of Russia, Russian Federation); Stas Tatarintsev (Bank of Russia, Russian Federation)
    Abstract: In this paper, we study how systematic monetary policy under inflation targeting in a commodity-exporting economy not fully isolated from commodity price volatility by fiscal policy may contribute to financial instability by fueling the credit cycle when commodity prices increase or by amplifying the credit crunch when commodity prices decline. We report several empirical observations that illustrate the potential procyclicality (relative to credit developments) of inflation targeting policy where commodity price fluctuations are the main drivers of macroeconomic developments. Namely, we find that relative prices in commodity-exporting economies are much more volatile than in other countries. The length of periods when relative prices grow or decline is comparable to the monetary policy horizon of most inflation targeters (2-3 years). Note that the central banks that target inflation, including those of the commodity-exporting countries, usually target the headline CPI. This index accommodates relative price changes by design. We proceed with formal statistical testing using panel structural VARs and local projection models. The tests support the procyclicality of inflation targeting, but only in a group of emerging market economies, which in practice have more procyclical fiscal policy than advanced economies: monetary policy eases in response to a higher price of an exported commodity while real credit grows. Counterfactual exercises show that endogenous monetary policy responses to commodity shocks explain around 20% on average of the real credit growth in a group of commodity exporting countries for which the reaction of policy rates to commodity shocks is statistically significant. We cross-check the empirical findings by reviewing a collection of papers with estimated DSGE models and analysing impulse responses of real policy rates to commodity price changes. We also conduct a theoretical analysis and compare stabilization properties (while accounting for financial stability risks) of the inflation-targeting policy rule and the ‘leaning against the wind’ policy rules. Notably, we do this exercise conditionally on the role of commodity price shocks for the economy. For this purpose, we use the DSGE with financial frictions and a banking sector estimated basing for the Russian economy and measure the efficiency of policy results with different sensitivity to credit developments (the ‘leaning against the wind’ rules) under different variance of oil price shocks (which may be interpreted also as different efficiency of fiscal policy in insulating the economy from a given oil price volatility). Results show that when commodity price volatility is relatively high (fiscal policy is not countercyclical), leaning against the wind outperforms pure inflation targeting, thus supporting our empirical findings. Interestingly, even when the financial stability risks associated with the volatility of credit developments are negligible, a moderate leaning against the wind policy is still preferable. As policy implication, we point that a commodity-exporting economy should have countercyclical fiscal policy for inflation targeting to become countercyclical in a commodity cycle.
    Keywords: systematic monetary policy, optimal central bank policy, inflation targeting, macroprudential policy, relative prices, credit cycle, financial frictions, leaning against the wind, commodity prices
    JEL: E31 E52 E58 F41 F47
    Date: 2019–06
  8. By: Snezana Eminidou (University of Cyprus); Marios Zachariadis (University of Cyprus); Elena Andreou (University of Cyprus)
    Abstract: We use monthly data across 15 euro area economies for the period 1985:1-2015:3 to obtain monetary policy changes that can be regarded as surprises for different types of consumers. A novel feature of our empirical approach is the estimation of monetary policy surprises based on changes in monetary policy that were unanticipated according to consumers’ stated beliefs about the economy. We look at how these surprises affect consumers’ inflation expectations. We find that such monetary policy surprises can have the opposite impact on inflation expectations to those obtained under the assumption that consumers are well-informed about a set of macroeconomic variables describing the state of the economy. When we relax the latter assumption and focus instead on consumers’ stated beliefs about the economy, unanticipated increases in the interest rate raise inflation expectations before the crisis. This is consistent with imperfect information theoretical settings where unanticipated increases in interest rates are interpreted as positive news about the state of the economy by consumers that know policymakers have relatively more information. This impact changes sign since the crisis and varies, e.g. across low versus high-income consumers in a manner consistent with the latter becoming rationally attentive in a period during which signal extraction is presumably more difficult and the incentive to extract information greater.
    Keywords: Imperfect information, rational inattention, shocks, beliefs, crisis
    Date: 2018–03
  9. By: Tomohide Mineyama (Bank of Japan); Wataru Hirata (Bank of Japan); Kenji Nishizaki (Bank of Japan)
    Abstract: In this paper, we investigate the steady-state inflation rate that maximizes social welfare in a New Keynesian model. We calibrate the model on the Japanese and the U.S. economies, and we solve the model employing a computation method that addresses the non-linear dynamics associated with four major factors affecting the costs and benefits of inflation: (i) nominal price rigidity; (ii) money holdings; (iii) downward nominal wage rigidity (DNWR); and (iv) the zero lower bound of the nominal interest rates (ZLB). The calibrated model suggests the steady-state inflation rate that maximizes social welfare is close to two percent for both Japan and the U.S., though the main driver differs by country: the ZLB for Japan, but the DNWR for the U.S. In addition, around one percentage point absolute deviation from the close-to-two-percent rate induces only a minor change in social welfare. We also find that the lower-end of the range that is acceptable in terms of welfare losses is reduced when we introduce forward guidance in monetary policy through which private agents anticipate a prolonged zero interest rate once the ZLB binds. The estimates of the steady-state inflation rate are subject to a considerable margin of error due to parameter uncertainty in ZLB parameterization.
    Keywords: Inflation; Social welfare; New Keynesian model; Downward nominal wage rigidity; Zero lower bound; Forward guidance
    JEL: E31 E43 E52
    Date: 2019–06–27
  10. By: Gomis-Porqueras, Pedro; Sun, Ching-jen
    Abstract: This paper studies different welfare-enhancing roles that fiat money can have. To do so, we consider an indivisible monetary framework where agents are randomly and bilaterally matched and the government has weak enforcement powers. Within this environment, we analyze state contingent monetary policies and characterize the resulting equilibria under different government record-keeping technologies. We show that a threat of injecting fiat money, conditional on private actions, can improve allocations and achieve efficiency. This type of state contingent policy is effective even when the government cannot observe any private trades and agents can only communicate with the government through cheap talk. In all these equilibria fiat money and self-enforcing credit are complements in the off equilibrium. Finally, this type of equilibria can also emerge even when the injection of fiat money is not a public signal.
    Keywords: cheap talk; record-keeping; fiat money.
    JEL: E40 E52
    Date: 2019–05–30
  11. By: Naoyuki Yoshino (Asian Development Bank Institute); Stefan Angrick (Keio University)
    Abstract: Whereas monetary policy in most major economies is conducted by an independent central bank manipulating the interbank overnight interest rate to achieve a price stability target, monetary policy in China is influenced by multiple actors and char- acterised by both quantity-based and price-based instruments and targets. Chinese monetary policy is further exercised through non-public practices such as “window guidance”, a policy by which authorities seek to guide commercial banks’ lending volumes by persuasion. The resulting complex interplay of these different factors is the subject of this study, which investigates the transmission mechanism of Chinese monetary policy for the period 2000–2015 in order to determine the effectiveness of different policy instruments and, subsequently, the effect of bank financing on the broader macroeconomy. Towards this end, a qualitative institutional analysis is con- ducted, followed by quantitative econometric analyses based on exogeneity tests and Structural Vector Autoregression models. The study explicitly accounts for the in- fluence of window guidance by incorporating information from a text-based analysis of People’s Bank of China reports in the tradition of Romer & Romer (1989). To trace the evolution of each instrument, estimations are also applied to subsamples as indicated by a Chow test for structural breaks. Results indicate that window guid- ance has played an important role in Chinese monetary policymaking in the period up to the Global Financial Crisis. Since then, the interbank overnight rate appears to have become more influential and exogenous. The study concludes by providing suggestions for further strengthening this interest rate channel, the stated goal of the People’s Bank of China.
    Keywords: monetary policy, China, SVAR, narrative approach, window guidance
    JEL: E52 E58
  12. By: Rossmann, Tobias (LMU Munich)
    Abstract: Measuring economic uncertainty is crucial for understanding investment decisions by individuals and firms. Macroeconomists increasingly rely on survey data on subjective expectations. An innovative approach to measure aggregate uncertainty exploits the rounding patterns in individuals\' responses to survey questions on inflation expectations (Binder, 2017). This paper uses the panel dimension of household surveys to study individual-level heterogeneity in this measure of individual uncertainty. The results provide evidence for the existence of considerable heterogeneity in individuals\' response behavior and inflation expectations.
    Keywords: uncertainty; inflation; expectations; mixture models;
    JEL: C10 D80 D83 D84 E31
    Date: 2019–06–25
  13. By: Qazi Haque (Centre for Applied Macroeconomic Analysis and The University of Western Australia); Nicolas Groshenny (Centre for Applied Macroeconomic Analysis and The University of Adelaide); Mark Weder (Aarhus University and Centre for Applied Macroeconomic Analysis)
    Abstract: The paper re-examines whether the Federal Reserves monetary policy was a source of instability during the Great Inflation by estimating a sticky-price model with positive trend inflation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and finds that the Federal Reserve responded aggressively to inflation but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era.
    Date: 2019
  14. By: Huang, Yiping; Li, Xiang; Wang, Chu
    Abstract: This paper uses loan application-level data from a Chinese peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
    Keywords: monetary policy,risk-taking,non-bank financial institution,search-for-yield,risk-shifting
    JEL: E52 G23
    Date: 2019
  15. By: Luca Dedola (European Central Bank); Georgios Georgiadis (European Central Bank); Johannes Gräb (European Central Bank); Arnaud Mehl (European Central Bank)
    Abstract: We estimate the effects of quantitative easing (QE) measures by the ECB and the Federal Reserve on the US dollar-euro exchange rate at frequencies and horizons rele- vant for policymakers. To do so, we derive a theoretically-consistent local projection regression equation from the standard asset pricing formulation of exchange rate de- termination. We then proxy unobserved QE shocks by future changes in the relative size of central banks’ balance sheets, which we instrument with QE announcements in two-stage least squares regressions in order to account for their endogeneity. We find that QE measures have large and persistent effects on the exchange rate. For example, our estimates imply that the ECB’s APP program which raised the ECB’s balance sheet relative to that of the Federal Reserve by 35 percentage points between September 2014 and the end of 2016 depreciated the euro vis-`a-vis the US dollar by 12%. Regarding transmission channels, we find that a relative QE shock that ex- pands the ECB’s balance sheet relative to that of the Federal Reserve depreciates the US dollar-euro exchange rate by reducing euro-dollar short-term money market rate differentials, by widening the cross-currency basis and by eliciting adjustments in currency risk premia. Changes in the expectations about the future monetary policy stance, reflecting the “signalling” channel of QE, also contribute to the exchange rate response to QE shocks.
    Keywords: Quantitative easing, interest rate parity condition, CIP deviations
    JEL: E5 F3
  16. By: Altavilla, Carlo; Brugnolini, Luca; Gürkaynak, Refet S.; Motto, Roberto; Ragusa, Giuseppe
    Abstract: We study the information flow from the ECB on policy dates since its inception, using tick data. We show that three factors capture about all of the variation in the yield curve but that these are different factors with different variance shares in the window that contains the policy decision announcement and the window that contains the press conference. We also show that the QE-related policy factor has been dominant in the recent period and that Forward Guidance and QE effects have been very persistent on the longer-end of the yield curve. We further show that broad and banking stock indices' responses to monetary policy surprises depended on the perceived nature of the surprises. We find no evidence of asymmetric responses of financial markets to positive and negative surprises, in contrast to the literature on asymmetric real effects of monetary policy. Lastly, we show how to implement our methodology for any policy-related news release, such as policymaker speeches. To carry out the analysis, we construct the Euro Area Monetary Policy Event- Study Database (EA-MPD). This database, which contains intraday asset price changes around the policy decision announcement as well as around the press conference, is a contribution on its own right and we expect it to be the standard in monetary policy research for the euro area.
    Keywords: ECB policy surprise,event-study,intraday,persistence,asymmetry
    JEL: E43 E44 E52 E58 G12 G14
    Date: 2019
  17. By: Goodhart, C. A. E.
    Abstract: During the last two centuries there have been four main approaches to analysing the determination of the money supply, to wit: (1) Deposits cause Loans, (2) The Monetary Base Multiplier, (3) The Credit Counterparts Approach and (4) Loans cause Deposits. All four approaches are criticized, especially (2) which used to be the standard academic model, and (4) which is now taking over as the consensus approach. Instead, I argue that banking is a service industry, which sets the terms and conditions whereby the private sector can create additional money for itself. The problem is that such money creation tends to be highly procyclical, so the question then becomes finding the best trade-off between official control of that process and allowing sufficient flexibility for the private sector. I conclude by reviewing how Lord King's reform proposals, in his book on The End of Alchemy, might fit into this broader analysis.
    JEL: F3 G3
    Date: 2017–09
  18. By: Roth, Felix (Department of Economics, University of Hamburg); Jonung, Lars (Department of Economics, Lund University)
    Abstract: This chapter examines the evolution of public support for the euro and public trust in the European Central Bank (ECB) during the new currency’s first two decades. Using a unique set of opinion poll data that is not available for any other currency, we find that a majority of citizens in every member country of the euro area (EA) support the euro. The economic crisis in the EA following the Great Recession and the euro crisis led to a slight decline in public support for the euro but a sharp fall in trust in the ECB. The recent economic recovery has strengthened support for the euro as well as trust in the ECB. We suggest that support for the euro as a medium of exchange was not strongly affected by the crisis, while trust in the ECB, as the framer of monetary policy, was measurably weakened by the crisis. Our econometric work demonstrates that unemployment is a key driver of support for the euro and its governance. Given these developments, we discuss whether the present levels of support for the euro equip the currency to weather populist challenges in the coming decade.
    Keywords: Euro; public support; trust; unemployment; optimum currency area; monetary union; ECB; EU
    JEL: E42 E52 E58 F33
    Date: 2019–06–14
  19. By: Qazi Haque (The University of Western Australia and Centre for Applied Macroeconomic Analysis)
    Abstract: This paper estimates a New Keynesian model with trend inflation and contrasts Taylor rules featuring fixed versus time-varying inflation target while allowing for passive monetary policy. The estimation is conducted over the Great Inflation and the Great Moderation periods. Time-varying inflation target empirically fits better and active monetary policy prevails in both periods, thereby ruling out sunspots as an explanation of the Great Inflation episode. Counterfactual simulations suggest that the decline in inflation volatility since the mid-1980s is mainly driven by monetary policy, while the reduction in output growth variability is explained by the reduced volatility of technology shocks.
    Date: 2019
  20. By: Hartigan, Luke; Morley, James
    Abstract: We conduct factor model analysis to investigate how inflation targeting has affected the Australian economy. Estimating a dynamic factor model for a dataset with more than one hundred variables, we find that Australia has a similar factor structure to other economies, with a sizeable portion of macroeconomic fluctuations accounted for by two common factors that have clear "real'' and "nominal" interpretations based on their links to different types of variables. The factor structure appears to have changed soon after the introduction of inflation targeting, corresponding to a large reduction in the volatility of common movements in macroeconomic variables compared to idiosyncratic movements. Estimates from a block exogenous factor augmented vector autoregressive model suggest that the transmission and responsiveness of monetary policy have also changed, with monetary policy becoming more effective and responsive to foreign shocks following the introduction of inflation targeting.
    Keywords: inflation targeting; monetary policy; factor modelling; structural change; impulse response functions
    Date: 2019–07
  21. By: Qazi Haque
    Abstract: This paper estimates a New Keynesian model with trend inflation and contrasts Taylor rules featuring fixed versus time-varying inflation target while allowing for passive monetary policy. The estimation is conducted over the Great Inflation and the Great Moderation periods. Time-varying inflation target empirically fits better and active monetary policy prevails in both periods, thereby ruling out sunspots as an explanation of the Great Inflation episode. Counterfactual simulations suggest that the decline in inflation volatility since the mid-1980s is mainly driven by monetary policy, while the reduction in output growth variability is explained by the reduced volatility of technology shocks.
    Keywords: Monetary policy, Trend Inflation, Inflation Target, Indeterminacy, Great Inflation, Great Moderation, Sequential Monte Carlo
    JEL: C11 C52 C62 E31 E32 E52
    Date: 2019–06
  22. By: Lewis, Daniel J. (Federal Reserve Bank of New York)
    Abstract: I propose to identify announcement-specific decompositions of asset price changes into monetary policy shocks based on intraday time-varying volatility. This approach is the first to accommodate changes in both the nature of shocks and the state of the economy across announcements. I compute daily historical decompositions with respect to three monetary policy shocks for the United States from 2007 to 2018. I derive expressions for the asymptotic variance of such historical decompositions and apply them to assess the statistical significance of notable announcements. Only a handful spark significant shocks, and I discuss the characteristics of those announcements in detail. For many announcements, asset purchase shocks lower corporate borrowing costs, but spreads increase in response to both asset purchases and forward guidance. Turning to the real economy, I find that the asset purchase shock has significant effects on consumer and professional expectations of inflation and GDP growth. I compute dynamic responses of inflation and GDP growth; asset purchases have significant expansionary effects, while fed funds shocks and forward guidance do not.
    Keywords: high-frequency identification; time-varying volatility; monetary policy shocks; forward guidance; quantitative easing
    JEL: C32 C58 E44 E52 E58
    Date: 2019–06–01
  23. By: Aakriti Mathur (The Graduate Institute of International and Development Studies, Geneva); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: In this paper we quantitatively analyse monetary policy statements of the Reserve Bank of India (RBI) from 1998 to 2017, across the regimes of five governors. We first ask whether the content and focus of the statements have changed with the adoption of inflation-targeting as a framework for conducting monetary policy. Next, we study the influence of various aspects of monetary policy communication on structural complexity that capture governor-specific trends in communication. We find that while RBI's monetary policy communication is linguistically complex on average, the length of monetary policy statements has gone down and readability has improved significantly in the recent years. We also find that there has been a persistent semantic shift in RBI's monetary policy communication since the adoption of inflation-targeting. Finally, using a simple regression model we find that lengthier and less readable statements are linked to both higher trading volumes and higher returns volatility in the equity markets, though the effects are not persistent.
    Keywords: Monetary policy, central bank communication, linguistic complexity, financial markets, textual analysis, natural language processing
    JEL: E52 E58 G12 G14
    Date: 2019–05
  24. By: Markus K. Brunnermeier (Department of Economics, Princeton University (E-mail:; Yann Koby (Department of Economics, Princeton University (E-mail:
    Abstract: The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. Its determinants are 1) banks' fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of pass-through to deposit rates, and 4) the initial capitalization of banks. Quantitative easing increases the reversal interest rate and should only be employed after interest rate cuts are exhausted. Over time the reversal interest rate creeps up since asset revaluation fades out as fixed-income holdings mature while net interest income stays low. We calibrate a New Keynesian model that embeds our banking frictions.
    Keywords: Monetary Policy, Lower Bound, Negative Rates, Banking
    JEL: E43 E44 E52 G21
    Date: 2019–06
  25. By: Siekmann, Helmut
    Abstract: In the course of the crisis, the European System of Central Banks (ESCB) has acted several times to support the EU Member States and banking systems in financial distress by purchasing debt instruments: Covered Bonds Programmes (CBP), Securities Market Programmes (SMP), Long Term Refinancing Operations (LTRO), and Targeted Long Term Refinancing Operations (TLTRO), followed by the Outright Monetary Transactions (OMT) and then the Extended Asset Purchase Programmes (EAPP) - colloquially labelled as Quantitative Easing (QE). Initially, the support measures of the ESCB might have to be judged as monetary policy but the selectivity of OMT and - even more - SMP in conjunction with the transfer of risks to the ESCB speak against it.
    Date: 2019
  26. By: Kelly, Robert; Byrne, David
    Abstract: The funding mix of European firms is weighted heavily towards bank credit, which underscores the importance of efficient pass-through of monetary policy actions to lending rates faced by firms. Euro area pass-through has shifted from being relatively homogenous to being fragmented and incomplete since the financial crisis. Distressed loan books are a crisis hangover with direct implications for profitability, hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate. This paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass-through. Using bank-level data over the period 2008-2014, we empirically test the implications of the model. We show that a one percentage point increase in the impairment ratio lowering short run pass-through by 3 percent. We find that banks with severely impaired balance sheets do not adjust their loan pricing in response to changes in the policy rate at all. We derive a measure of the hidden bad loan problem, the NPL gap, which we define as the excess of non-performing loans over impaired loans. We show that it played a significant role in the fragmentation of euro area pass-through post-crisis. JEL Classification: D43, E51, E52, E58, G21
    Keywords: impaired loans, interest rates, monetary policy pass-through, non-performing loans
    Date: 2019–07
  27. By: Mujahidin, Muhamad
    Abstract: This article describes the perspective of differences between monetary policy in conventional economics and Islamic economics. By using a negation approach, this study concludes that Islamic monetary policy offers an economic system that is more resistant to monetary crises because the Islamic monetary system does not use an interest rate system so that it can stabilize prices more and be able to control inflation compared to the conventional monetary system.
    Keywords: Islamic Economics, Sharia Economy, Monetary, Islamic Monetary
    JEL: A10 B22 B26 E02 E44 E52 E58 F40
    Date: 2019–06–20
  28. By: Hans Gersbach (ETH Zurich, Switzerland)
    Abstract: We suggest that flexible majority rules for currency issuance decisions foster the stability of a cryptocurrency. With flexible majority rules, the voteshare needed to approve a particular currency issuance growth is increasing with this growth rate. By choosing suitable parameters for these flexible majority rules, we show that optimal growth rates can be achieved in simple settings. Moreover, with flexible majority rules, changes in the composition of growth-friendly and growth-adverse agents only have a comparatively moderate impact on growth rates, and extreme growth rates are avoided. Finally, we show that optimal money growth rates are realized if agents entering financial contracts anticipate ensuing inflation rates determined by these flexible majority rules.
    Keywords: Digital currency, central bank, voting, majority rule, flexible majority rules
    JEL: D72 E31 E42 E52 E58
    Date: 2019–06
  29. By: William Ng'ang'a (UP8 - Université Paris 8 Vincennes-Saint-Denis, Strathmore University); Julien Chevallier (IPAG Paris, UP8 - Université Paris 8 Vincennes-Saint-Denis); Simon Ndiritu (Strathmore University)
    Abstract: This study explored the nature of fiscal and monetary policy coordination and its impact on long-run sustainability in Kenya. The study employed annual time series data from 1963 to 2014. Two objectives were investigated. (i) The determinants of monetary and fiscal policy rules under different policy regimes. (ii) The nature of fiscal and monetary policy regimes coordination in Kenya. Markov switching models were used to determine fiscal and monetary policy regimes endogenously. Fiscal policy regime was regarded as passive if the coefficient of debt in the MS model was significant and negative. This fiscal policy regime is regarded as unsustainable since the rise in debt is associated with a deterioration of the fiscal balance. On the other hand, the active monetary policy is synonymous with contractionary monetary policy since real in interest rate reacts positively to an increase in inflation. Robust analysis conducted using self-exciting threshold models confirms that monetary and fiscal policy reaction functions are nonlinear. The study findings show that passive or unsustainable fiscal regime was more dominant over the study period. There is evidence to support coordination between fiscal and monetary policy. There is a tendency for monetary policy to actively and prudently respond to unsustainable fiscal policy. Secondly, monetary policy sequentially responds to fiscal policy. The study recommended the adoption of systematic monetary response to a periodic deviation of fiscal policy from a long-run sustainability path. JEL Codes: E62; F30; H61
    Keywords: Policy regimes,Fiscal and Monetary policy management,Markov-Switching,SETAR
    Date: 2019–06–14

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