nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒07‒15
39 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. ECB vs Bundesbank: Diverging Tones and Policy Effectiveness By Peter Tillmann; Andreas Walter
  2. Inflation and monetary policy: What South African newspapers report in an era of policy transparency By Monique Reid; Zinette Bergman; Stan Du Plessis; Manfred Max Bergman; Pierre L. Siklos
  3. The RMB Central Parity Formation Mechanism: August 2015 to December 2016 By Yin-Wong Cheung; Cho-Hoi Hui; Andrew Tsang
  4. Cryptocurrencies, central bank digital cash, traditional money: does privacy matter? By Emanuele Borgonovo; Stefano Caselli; Alessandra Cillo; Donato Masciandaro; Giovanno Rabitti
  5. Leaning Against Housing Prices As Robustly Optimal Monetary Policy By Klaus Adam; Michael Woodford
  6. On the Equivalence of Private and Public Money By Brunnermeier, Markus K; Niepelt, Dirk
  7. Preparing for uncertainty By Grégory Claeys; Maria Demertzis; Francesco Papadia
  8. Financial Inequality, group entitlements and populism By Federico Faveretto; Donato Masciandaro
  9. Remittance Inflows and State-Dependent Monetary Policy Transmission in Developing Countries By Immaculate Machasio; Peter Tillmann
  10. Inflation and Exchange Rate Targeting Challenges Under Fiscal Dominance By Rashad Ahmed; Joshua Aizenman; Yothin Jinjarak
  11. Reserve requirements and the bank lending channel in China By Zuzana Fungacova; Riikka Nuutilainen; Laurent Weill
  12. Does monetary policy affect income inequality in the euro area? By Anna Samarina; Anh D.M. Nguyen
  13. Geographic spread of currency trading: The renminbi and other EM currencies By Yin-Wong Cheung; Robert N McCauley; Chang Shu
  14. Assessment of interest rate and credit transmission channels in a context of banking heterogeneity By Sinda Morsi Fattoum
  15. Teaching International Monetary Economics. Two different views By Luca Fantacci; Lucio Gobbi; Stefano Lucarelli
  16. The Currency Composition of International Reserves, Demand for International Reserves, and Global Safe Assets By Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
  17. A Macro-Model to Monetary Transmission Analysis in Tunisia By Aymen Makni
  18. Effects of monetary and macroprudential policies – evidence from inflation targeting economies in the Asia-Pacific region and potential implications for China By Soyoung Kim; Aaron Mehrotra
  19. US Monetary Policy and International Bond Markets By Simon Gilchrist; Vivian Yue; Egon Zakrajšek
  20. Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control By Michael Funke; Petar Mihaylovski; Haibin Zhu
  21. China’s Capital Flight: Pre- and Post-Crisis Experiences By Yin-Wong Cheung; Sven Steinkamp; Frank Westermann
  22. International financial flows and the risk-taking channel By Pietro Cova; Filippo Natoli
  23. The Exchange Rate Effects of Macro News after the Global Financial Crisis By Yin-Wong Cheung; Rasmus Fatum; Yohei Yamamoto
  24. Monetary Policy Uncertainty and the Response of the Yield Curve to Policy Shocks By Peter Tillmann
  25. Financial Globalisation, Monetary Policy Spillovers and Macro-modelling: Tales from 1001 Shocks By Georgios Georgiadis; Martina Jancokova
  26. Is the Renminbi a safe haven? By Rasmas Fatum; Yohei Yamamoto; Guozhong Zhu
  27. Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates By Georgios Georgiadis; Feng Zhu
  28. International Coordination of Economic Policies in the Global Financial Crisis: Successes, Failures, and Consequences By Edwin M. Truman
  29. Do SVARs with sign restrictions not identify unconventional monetary policy shocks? By Jef Boeckx; Maarten Dossche; Alessandro Galesi; Boris Hofmann; Gert Peersman
  30. Setting the Stage for RMB Internationalisation - Liberalizing the Capital Account and Strengthening the Domestic Bond Market By Michel Aglietta; Camille Macaire
  31. Was the US Great Depression a credit boom gone wrong? By Postel-Vinay, Natacha
  32. Prudential Monetary Policy By Ricardo J. Caballero; Alp Simsek
  33. Business Cycle Synchronisation in a Currency Union: Taking Stock of the Evidence By Nauro F. Campos; Jarko Fidrmuc; Iikka Korhonen
  34. The Federal Reserve’s Current Framework for Monetary Policy: A Review and Assessment By Janice C. Eberly; James H. Stock; Jonathan H. Wright
  35. Divisia monetary aggregates for a heterogeneous euro area By Brill, Maximilian; Nautz, Dieter; Sieckmann, Lea
  36. Sudden stops inside and outside the euro area - what a difference TARGET2 makes By Lena Kraus; Juergen Beier; Bernhard Herz
  37. Demographics and Monetary Policy Shocks By Kimberly A. Berg; Chadwick C. Curtis; Steven Lugauer; Nelson C. Mark
  38. Slack and Cyclically Sensitive Inflation By James H. Stock; Mark W. Watson
  39. Quest for robust optimal macroprudential policy By Pablo Aguilar; Samuel Hurtado; Stephan Fahr; Eddie Gerba

  1. By: Peter Tillmann (Justus-Liebig-University Giessen, Germany); Andreas Walter (Justus-Liebig-University Giessen, Germany)
    Abstract: The present paper studies the consequences of conflicting narratives for the transmission of monetary policy shocks. We focus on conflict between the presidents of the ECB and the Bundesbank, the main protagonists of monetary policy in the euro area, who often disagreed on policy over the past two decades. This conflict received much attention on financial markets. We use over 900 speeches of both institutions’ presidents since 1999 and quantify the tone conveyed in speeches and the divergence of tone among both both presidents. We find (i) a drop towards more negative tone in 2009 for both institutions and (ii) a large divergence of tone after 2009. The ECB communication becomes persistently more optimistic and less uncertain than the Bundesbank’s after 2009, and this gap widens after the SMP, OMT and APP announcements. We show that long-term interest rates respond less strongly to a monetary policy shock if ECB-Bundesbank communication is more cacophonous than on average, in which case the ECB loses its ability to drive the slope of the yield curve. The weaker transmission under high divergence reflects a muted adjustment of the expectations component of long-term rates.
    Keywords: Central bank communication, diverging tones, speeches, text analysis, monetary transmission
    JEL: E52 E43 E32
  2. By: Monique Reid; Zinette Bergman; Stan Du Plessis; Manfred Max Bergman; Pierre L. Siklos
    Abstract: Inflation is a monetary policy outcome, but in the short to medium term, price and wage decisions are co-determined by the public and private sectors. Many central banks have adopted transparency as a strategic policy approach, whereby communication of monetary policy goals is used as a public anchor. While the central bank’s strategy involves carefully crafted, deliberately simplified messages, most of the public tends to access inflation-related information through the media. In this paper, we examine South African newspaper articles to identify how inflation is presented in the media and the role of the media, through this presentation, in the process of shaping public opinion around inflation expectations. We do this in two ways. First, we examine how inflation is presented in the media and then we identify the various actors presented in the media, their positions on inflation, and how these relate to each other. The systematic analysis of the media’s presentation of inflation allows us to identify some challenges to the central bank’s communication strategy.
    Keywords: inflation, inflation expectation, South African Reserve Bank, content configuration analysis, newspaper, media
    JEL: E31 E52 E58 Z13
    Date: 2019–07
  3. By: Yin-Wong Cheung (City University of Hong Kong); Cho-Hoi Hui (Hong Kong Monetary Authority); Andrew Tsang (Hong Kong Monetary Authority)
    Abstract: We study the renminbi (RMB) central parity formation mechanism following the August 2015 reform using statistical models. We identify the roles of the onshore and offshore RMB exchange rates and the US dollar index in determining the central parity in a linear regression framework. The effect of the RMB currency basket index, however, is revealed after controlling for multiplicative offshore RMB volatility effects. The offshore RMB volatility exerts a dampening effect on the links between the central parity and its determinants. In the prediction comparison exercise, the three selected models statistically outperform the random walk benchmark. Among these four models, the selected multiplicative specification yields the smallest root-mean squared prediction error and mean absolute prediction error.
    Keywords: China’s Exchange Rate Policy, Currency Basket, Multiplicative Interaction Model, Onshore and Offshore RMB Rates, Volatility
    JEL: F31 F33
  4. By: Emanuele Borgonovo; Stefano Caselli; Alessandra Cillo; Donato Masciandaro; Giovanno Rabitti
    Abstract: The aim of this paper is to analyze the demand of both traditional and new media of exchange – as cryptocurrencies and central bank digital currencies – proposing a novel specification of the demand for money. In this specification, the medium of payment (MOP) has three properties: the first two are the MOP’s standard functions as a medium of exchange and as a store of value, while the third is a novel function as a store of privacy (anonymity value). The proposed framework is tested using a laboratory experiment. Our results show that anonymity matters, but less of the other two properties; at the same time, the presence of anonymity increases the overall appeal of a MOP, particularly if the individuals are risk prone; given anonymity, the sacrifice ratio between liquidity risk and opportunity cost are relatively high.
    Keywords: Money, Cryptocurrencies, Central bank Digital Currency, Cash, Baumol, Friedman, Experimental economics
    JEL: B22 D72 E41 E42 E52 E58 G38 K42
    Date: 2018
  5. By: Klaus Adam; Michael Woodford
    Abstract: We analytically characterize optimal monetary policy for an augmented New Key- nesian model with a housing sector. In a setting where the private sector has rational expectations about future housing prices and inflation, optimal monetary policy can be characterized without making reference to housing price developments: commitment to a 'target criterion' that refers to inflation and the output gap only is optimal, as in the standard model without a housing sector. When the policymaker is concerned with po- tential departures of private sector expectations from rational ones and seeks to choose a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. In the empirically realistic case where housing is subsidized and where monopoly power causes output to fall short of its optimal level, the robustly optimal target criterion requires the central bank to 'lean against' housing prices: following unexpected housing price increases, policy should adopt a stance that is projected to undershoot its normal targets for inflation and the output gap, and simi- larly aim to overshoot those targets in the case of unexpected declines in housing prices. The robustly optimal target criterion does not require that policy distinguish between 'fundamental' and 'non-fundamental' movements in housing prices.
    JEL: D81 D84 E52
    Date: 2018–05
  6. By: Brunnermeier, Markus K; Niepelt, Dirk
    Abstract: We develop a generic model of money and liquidity that identites 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.
    Keywords: CBDC; Chicago Plan; equivalence; Inside money; monetary system; money creation; outside money; sovereign money
    Date: 2019–06
  7. By: Grégory Claeys; Maria Demertzis; Francesco Papadia
    Abstract: Monetary policy must reinvent itself in the wake of the crisis. Reinvention is particularly important because the system is riddled with uncertainties and the scope for applying both conventional and unconventional instruments is limited. The architecture of Economic and Monetary Union makes the challenge even greater because alignment of preferences and policies can only go so far. The European Central Bank will have to be clearer on what it can do, while remaining flexible in order to manage current uncertainties and unknowns. While the ECB’s main objective is price stability, it will also have to contribute to the identification of, and response to, financial imbalances, while preserving its independence.
    Date: 2019–07
  8. By: Federico Faveretto; Donato Masciandaro
    Abstract: This paper offers a theoretical framework that explains how financial inequality and misbeliefs about group entitlements among voters foster voting in favour of populist parties. When a banking shock occurs in an economy with heterogeneous agents, the central bank independently chooses the optimal degree of monetization to balance financial and monetary instability, while agents choose between a populist party and a classical party to select the degree of bank bailout, which is paid through a proportional tax. Agents vote according to a behavioural mechanism that we call “democratic rioting”: “aggrieved” agents benefit psychologically from voting for the populist party. The banking shock triggers a higher probability of voting for a populist party in the presence of financial inequality and misbeliefs about group entitlements.
    Keywords: Financial inequality, monetary policy, populism, banking policy, fiscal policy, central bank independence, political economics
    JEL: D72 D78 E31 E52 E58 E62
    Date: 2018
  9. By: Immaculate Machasio (Justus-Liebig-University Giessen, Germany); Peter Tillmann (Justus-Liebig-University Giessen, Germany)
    Abstract: Remittance inflows from overseas workers are an important source of for- eign funding for developing and emerging economies. The literature is in- conclusive about the cyclical nature of remittance inflows. To the extent remittances are procyclical they pose a challenge to monetary policy: a tight- ening of policy will be less effective if at the same time remittances increase strongly. The same is true for a policy easing under exceptionally weak remit- tance inflows. This paper estimates a series of nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under differ- ent remittance inflows regimes. The model is able to provide state-dependent impulse response functions. We show that for Kenya, Mexico, Colombia and the Philippines monetary policy indeed has a smaller domestic effect under strong inflows of remittances. These results have important implications for the design of inflation targeting in developing countries.
    Keywords: Remittance inflows, monetary policy, inflation targeting, smooth- transition model, local projections
    JEL: E52 E32 O16
  10. By: Rashad Ahmed; Joshua Aizenman; Yothin Jinjarak
    Abstract: Countries have increased significantly their public-sector borrowing since the Global Financial Crisis. In this context, we document several potential fiscal dominance effects during 2000-2017 under Inflation Targeting (IT), and non IT regimes. Higher ratio of public debt to GDP are associated with lower policy interest rates in advanced economies. In Emerging Market economies under non-IT regimes, composed mostly of exchange rate targeters, the interest rate effect of higher public debt is non-linear, and depends both on the ratio of foreign-currency to local-currency debt, and on the ratio of hard-currency debt to GDP. For these Emerging Market economies under non-IT regimes, real exchange rate depreciations and a higher international reserves to GDP ratio are significantly associated with higher interest rates. Sorting countries into low, medium and high nominal exchange rate volatility bins, we find that the high nominal exchange rate volatility group of Emerging Market economies, composed mostly of commodity intensive countries, show the most persuasive evidence of debt levels influencing policy interest rates.
    JEL: F31 F33 F34 F36 F41
    Date: 2019–06
  11. By: Zuzana Fungacova (Bank of Finland); Riikka Nuutilainen (Bank of Finland); Laurent Weill (EM Strasbourg Business School)
    Abstract: This paper examines how reserve requirements influence the transmission of monetary policy through the bank lending channel in China while also taking into account the role of bank ownership. The implementation of Chinese monetary policy is characterized by the reliance on the reserve requirements as a regular policy tool with frequent adjustments. Using a large dataset of 170 Chinese banks for the period 2004–2013, we analyze the reaction of loan supply to changes in reserve requirements. We find no evidence of the bank lending channel through the use of reserve requirements. We observe, nonetheless, that changes in reserve requirements influence loan growth of banks. The same findings hold true for other monetary policy instruments. Further, we show that the bank ownership format influences transmission of monetary policy.
    Keywords: Chinese banks, bank lending channel, bank ownership
    JEL: E52 G21
  12. By: Anna Samarina (De Nederlandsche Bank & University of Groningen); Anh D.M. Nguyen (Bank of Lithuania & Vilnius University)
    Abstract: This paper examines how monetary policy affects income inequality in 10 euro area countries over the period 1999–2014. We distinguish macroeconomic and financial channels through which monetary policy may have distributional effects. The macroeconomic channel is captured by wages and employment, while the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The macroeconomic channel leads to these equalizing effects: monetary easing reduces income inequality by raising wages and employment. However, there is some indication that the financial channel may weaken the equalizing effect of expansionary monetary policy.
    Keywords: income inequality, monetary policy, euro area
    JEL: D63 E50 E52
    Date: 2019–06–14
  13. By: Yin-Wong Cheung (City University of Hong Kong); Robert N McCauley (Bank for International Settlements); Chang Shu (Bloomberg)
    Abstract: We study the ongoing diffusion of renminbi trading across the globe, the first such research for an international currency. We analyse the distribution in offshore renminbi trading in 2013 and 2016, using comprehensive data from the central bank triennial survey of foreign exchange markets. In 2013, Asian centres favoured by the policy of renminbi internationalisation had big shares in global renminbi trading. In the following three years, renminbi trading seemed to converge to the spatial pattern of all currencies, with a half-life of 7-8 years. The previously most traded emerging market currency, the Mexican peso, shows a similar pattern, although it is converging to the global norm more slowly. Three other emerging market currencies show a qualitatively similar evolution in the geography of their offshore trading. Overall the renminbi’s internationalisation is tracing an arc from the influence of administrative measures to the working of market forces.
    Keywords: international currency, FX turnover, renminbi internationalisation, international financial centre
    JEL: C24 F31 F33 G15 G18
  14. By: Sinda Morsi Fattoum (Central Bank of Tunisia)
    Abstract: This paper analyses monetary transmission mechanism in Tunisia based on two approaches, an aggregate data analysis by using a Structural Vector Auto regressive (SVAR) model to assess the impact and the delay of transmission of monetary policy decisions and to identify through which of the interest rate channel or credit channel, monetary policy stances’ changes could affect the economy; and, a bank panel data analysis by employing an ARDL model to measure the reaction of the banks’ pricing policy to monetary policy changes. For the SVAR model, a “recursive” system was used to uncover the dynamic effects of monetary policy shocks. The empirical results show that the interest rate channel was more effective than the credit channel and that’s from the 8th quarter. For the ARDL model, the empirical results show that, taken into consideration of the heterogeneity of the banking system landscape, the banks pricing’s policy are highly dependent upon money market rate’s changes. In other words, the transmission to lending rates applied to households as well as to firms is almost complete.
    Date: 2019–06–27
  15. By: Luca Fantacci; Lucio Gobbi; Stefano Lucarelli
    Abstract: This paper presents a critical analysis of the way in which international monetary economics is normally taught. The objective of this paper is twofold. On the one hand, we show how the most popular international economics manuals deal with exchange rate theory and its link with balance of payments equilibrium. In particular, we stress how the models proposed in these manuals cannot explain one of the biggest macroeconomic problems of our time, that of the imbalances of the balance of payments. On the other hand, we put forward an alternative Keynesian model. Assuming neither full employment nor balanced trade over the short or long run, the paper is intended as a new contribution to the post-Keynesian analysis of exchange rate theory. Finally, our model gives an original insight into the relationship between Liquidity Trap and structural economic imbalances in modern economies.
    Keywords: international monetary economics, exchange rate determination, endogenous money, global imbalances, post-Keynesian economics
    JEL: A20 B50 E12 F41
    Date: 2019
  16. By: Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
    Abstract: This paper examines determinants of the international reserves (IR) currency composition before and after the Global Financial Crisis (GFC). Applying the annual data of 58 countries, we confirm that countries that trade more with the US, euro zone, UK, and Japan, and issue more debt denominated in the big four currencies (US dollar, euro, pound, yen) hoard more IR in these currencies. We find scale effects in which countries tend to diversify from the big four currencies as they increase their IR/GDP and that a growing shortage of global safe assets (GSAs) induces countries to hold more big four currencies. Countries hold less big four currencies as IR after the 2008 GFC, while they hold more of such currencies since the tapering of the Fed’s quantitative easing. The 2008 GFC and QE tapering weakened and sometimes reversed the effect of several economic factors. We also find that TARGET2 balances matter for the currency composition in the euro zone; commodity-exporting countries tend to diversify their IR from the big four currencies when their terms of trade improve; and that the valuation effects induced by Euro/USD exchange rate changes diminish the significance of the GFC in explaining the currency composition of IR.
    JEL: F15 F3 F31
    Date: 2019–06
  17. By: Aymen Makni (Central Bank of Tunisia)
    Abstract: In this paper, we develop a gap model based on a reduced form of the New Keynesian Model. The model offers various scenario structure tools which analyze the dynamics of key macroeconomic variables under diverse shocks and depicts their properties and historical decompositions. This framework rationalizes the monetary transmission mechanism as well as the effects of major shocks influencing the macroeconomic variables and can assess the role of monetary policy in reacting to observed and anticipated changes in inflation and other economic variables. This model provides a useful framework detailing monetary policy and helping policymakers mainly to react strongly to inflation.
    Keywords: Monetary Policy, Central Banks and Their Policies, Macroeconomic Model, Monetary Transmission Mechanism
    JEL: E52 E58 E10 E50
    Date: 2019–06
  18. By: Soyoung Kim (Seoul National University); Aaron Mehrotra (Bank for International Settlements)
    Abstract: We examine the effects of monetary and macroprudential policies in the Asia-Pacific region, where many inflation targeting economies have adopted macroprudential policies in order to safeguard financial stability. Using structural panel vector autoregressions that identify both monetary and macroprudential policy actions, we show that tighter macroprudential policies used to contain credit growth have also had a significant negative impact on macroeconomic aggregates such as real GDP and the price level. The similar effects of monetary and macroprudential policies may suggest a complementary use of the two policies at normal times. However, they could also create challenges for policymakers, especially during times when low inflation coincides with buoyant credit growth.
    Keywords: financial stability; price stability; macroprudential policy; monetary policy; panel VAR
    JEL: E58 E61
  19. By: Simon Gilchrist; Vivian Yue; Egon Zakrajšek
    Abstract: This paper uses high-frequency financial data to analyze the effects of US monetary policy—during the conventional and unconventional policy regimes—on international bonds markets. We focus on yields of dollar-denominated sovereign bonds issued by more than 90 countries since the early 1990s, which allows us to abstract from the policy-induced movements in exchange rates that otherwise confound the response of yields on foreign bonds denominated in local currencies. Our results show that yields on dollar-denominated sovereign debt are highly responsive to unanticipated changes in the stance of US monetary policy during both the conventional and unconventional policy regimes, and that the passthrough of unconventional policy actions to foreign bond yields is, on balance, comparable to that of conventional policy actions. In addition, a conventional US monetary easing leads to a significant narrowing of credit spreads on sovereign bonds issued by countries with a speculative-grade credit rating. During the unconventional policy regime, however, yields on speculative-grade sovereign debt move one-to-one with policy-induced fluctuations in yields on comparable US Treasuries. We also examine whether the response of sovereign credit spreads to US monetary policy differs between policy easings and policy tightenings and find no evidence of such asymmetry. This finding casts doubt on the notion that US monetary easings induce excessive risk-taking in international bond markets.
    JEL: E4 E5 F3
    Date: 2019–06
  20. By: Michael Funke (Hamburg University and CESifo); Petar Mihaylovski (Hamburg University); Haibin Zhu (JP Morgan Chase Bank)
    Abstract: The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.
    Keywords: DSGE model, monetary policy, financial market reform, shadow banking, China
    JEL: E32 E42 E52 E58
  21. By: Yin-Wong Cheung (City University of Hong Kong); Sven Steinkamp (Osnabrueck University); Frank Westermann (Osnabrueck University)
    Abstract: We study China’s illicit capital flow and document a change in its pattern. Specifically, we observe that China’s capital flight, especially the one measured by trade misinvoicing, exhibits a weakened response in the post-2007 period to the covered interest disparity, which is a theoretical determinant of capital flight. Further analyses indicate that the post-2007 behavior is influenced by quantitative easing and other factors including exchange rate variability, capital control policy and trade frictions. Our study confirms that China’s capital flight pattern and its determinants are affected by the crisis event. Further, both the canonical and additional explanatory variables have different effects on different measures of capital flight. These results highlight the challenges of managing China’s capital flight, which requires information on the period and the type of capital flight that the policy authorities would like to target.
    Keywords: World Bank Residual Method; Trade Misinvoicing; Quantitative Easing; Capital Controls; Covered Interest Disparity
    JEL: F3 F32 G15
  22. By: Pietro Cova (Banca d’Italia); Filippo Natoli (Banca d’Italia)
    Abstract: During the 1990s, the increased propensity to save in emerging market economies trig- gered massive inflows towards safe assets in the US; a few years later, rising dollar funding by global banks was concurrent to increasing inflows to high-yield US secu- rities. While it is well documented that foreign financial flows have eased financing conditions in the US through the compression of long-term yields, in this paper we also find significant negative effects on the credit spread and the VIX, suggesting a rele- vant risk appetite channel. Moreover, flows into the US corporate bond market, partly linked to the previous “saving glut” in emerging economies, also directly affected bank leverage, household indebtedness and the housing market. This evidence provides a new perspective on the “global banking glut”, complementary to the role of banks in the risk-taking channel of monetary policy.
    Keywords: saving glut, banking glut, capital flows, banking leverage, risk-taking channel
    JEL: F32 F33 F34
  23. By: Yin-Wong Cheung (City University of Hong Kong); Rasmus Fatum (University of Alberta); Yohei Yamamoto (Hitotsubashi University)
    Abstract: We explore whether the exchange rate effects of macro news are time- and state-dependent by analyzing and comparing the relative influence of US and Japanese macro news on the JPY/USD rate before, during, and after the Global Financial Crisis. A comprehensive set totaling 40 time-stamped US and Japanese news variables and preceding survey expectations along with 5-minute indicative JPY/USD quotes spanning the 1 January 1999 to 31 August 2016 period facilitate our analysis. Our results suggest that while US macro news are now more important than before the Crisis, the influence of Japanese macro news has waned to the point of near-irrelevance. These findings are of particular importance to exchange rate modeling of the New Era.
    Keywords: Foreign Exchange Rates; Macro News Surprises; Global Financial Crisis
    JEL: F31 G15
  24. By: Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: This paper studies the non-linear response of the term structure of interest rates to monetary policy shocks and presents a new stylized fact. We show that uncertainty about monetary policy changes the way the term structure responds to monetary policy. A policy tightening leads to a significantly smaller increase in long-term bond yields if policy uncertainty is high at the time of the shock. We also look at the decomposition of bond yields into expectations about future policy and the term premium. The weaker response of yields is driven by the fall in term premia, which fall even more if uncertainty about policy is high. These findings are robust to the measurement of monetary policy uncertainty, the definition of the monetary policy shock and to changing the model specification. Conditional on a monetary policy shock, higher uncertainty about monetary policy tends to make yields of longer maturities relatively more attractive. As a consequence, investors demand even lower term premia. This intuition is supported by long-term monetary pol- icy disagreement, which leads to opposite effects with term premia increasing even more after a policy shock.
    Keywords: Monetary policy uncertainty, term structure, term premium, unconventional monetary policy, local projections
    JEL: E43 E58 G12
  25. By: Georgios Georgiadis (European Central Bank); Martina Jancokova (European Central Bank)
    Abstract: Financial globalisation and spillovers have gained immense prominence over the last two decades. Yet, powerful cross-border financial spillover channels have not become a standard element of structural monetary models. Against this back- ground, we hypothesise that New Keynesian DSGE models that do not feature powerful financial spillover channels confound the effects of domestic and foreign disturbances when confronted with the data. We derive predictions from this hypothesis and subject them to data on monetary policy shock estimates for 29 economies obtained from more than 280 monetary models in the literature. Consistent with the predictions from our hypothesis we find: Monetary policy shock estimates obtained from New Keynesian DSGE models that do not account for powerful financial spillover channels are contaminated by a common global component; the contamination is more severe for economies that are more susceptible to financial spillovers in the data; and the shock estimates imply implausibly similar estimates of the global output spillovers from monetary policy in the US and the euro area. None of these findings applies to monetary policy shock estimates obtained from VAR and other statistical models, financial market expectations and the narrative approach.
    Keywords: Financial globalisation, spillovers, monetary policy shocks, New Keynesian DSGE models
    JEL: F42 E52 C50
  26. By: Rasmas Fatum (University of Alberta); Yohei Yamamoto (Hitotsubashi University); Guozhong Zhu (University of Alberta)
    Abstract: We investigate the relationship between market uncertainty and the relative value of the Renminbi in the offshore market against currencies that the safe haven literature typically considers as the traditional safe haven currency candidates. Our sample spans the February 2011 to May 2017 period. Band spectral regression models enable us to capture that the relationship between market uncertainty and the relative value of the Renminbi is frequency dependent. While we find evidence of some degree of safe haven currency behavior of the Renminbi during the early part of our sample, our findings do not support the suggestion that the Renminbi is currently a safe haven currency or that the Renminbi is progressing towards safe haven currency status.
    Keywords: Renminbi; Safe Haven Currencies
    JEL: F31 G15
  27. By: Georgios Georgiadis (European Central Bank); Feng Zhu (Bank for International Settlements)
    Abstract: We assess the empirical validity of the trilemma (or impossible trinity) in the 2000s for a large sample of advanced and emerging market economies. To do so, we estimate Taylor-rule type monetary policy reaction functions, relating the local policy rate to real-time forecasts of domestic fundamentals, global variables, as well as the base-country policy rate. In the regressions, we explore variations in the sensitivity of local to base-country policy rates across different degrees of exchange rate flexibility and capital controls. We find that the data are in general consistent with the predictions from the trilemma: Both exchange rate flexibility and capital controls reduce the sensitivity of local to base-country pol- icy rates. However, we also find evidence that is consistent with the notion that the financial channel of exchange rates highlighted in recent work reduces the extent to which local policymakers decide to exploit the monetary autonomy in principle granted by flexible exchange rates in specific circumstances: The sensi- tivity of local to base-country policy rates for an economy with a flexible exchange rate is stronger when it exhibits negative foreign-currency exposures which stem from portfolio debt and bank liabilities on its external balance sheet and when base-country monetary policy is tightened. The intuition underlying this finding is that it may be optimal for local monetary policy to mimic the tightening of base-country monetary policy and thereby mute exchange rate variation because a depreciation of the local currency would raise the cost of servicing and rolling over foreign-currency debt and bank loans, possibly up to a point at which finan- cial stability is put at risk.
    Keywords: Trilemma, financial globalisation, monetary policy autonomy, spillovers
    JEL: F42 E52 C50
  28. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: The global financial crisis dominated the international financial landscape during the first 20 years of the 21st century. This paper assesses the contribution of the international coordination of economic policies to contain the crisis. The paper evaluates international efforts to diagnose the crisis and decide on appropriate responses, the treatments that were agreed and adopted, and the successes and failures as the crisis unfolded. International economic policy coordination eventually contributed importantly to containing the crisis, but the authorities failed to agree on a diagnosis and the consequent need for joint action until the case was obvious. The policy actions that were adopted were powerful and effective, but they may have undermined prospects for coordinated responses to crises in the future.
    Keywords: international economic policy coordination, Group of Seven (G-7), Group of Twenty (G-20), Federal Reserve, central banks, swap arrangements, International Monetary Fund, multilateral development banks, special drawing rights, global financial crisis, banking crises, financial crises, Bank for International Settlements, Financial Stability Forum, Financial Stability Board
    JEL: E50 E60 F00 F02 F30 F33 F42 F55
    Date: 2019–07
  29. By: Jef Boeckx (National Bank of Belgium); Maarten Dossche (European Central Bank); Alessandro Galesi (Banco de España); Boris Hofmann (Bank for International Settlements); Gert Peersman (Ghent University)
    Abstract: A growing empirical literature has shown, based on structural vector autoregressions (SVARs) identified through sign restrictions, that unconventional monetary policies implemented after the outbreak of the Great Financial Crisis (GFC) had expansionary macroeconomic effects. In a recent paper, Elbourne and Ji (2019) conclude that these studies fail to identify true unconventional monetary policy shocks in the euro area. In this note, we show that their findings are actually fully consistent with a successful identification of unconventional monetary policy shocks by the earlier studies and that their approach does not serve the purpose of evaluating identification strategies of SVARs.
    Keywords: unconventional monetary policy, SVARs
    JEL: C32 E30 E44 E51 E52
    Date: 2019–07
  30. By: Michel Aglietta; Camille Macaire
    Abstract: Internationalizing the Renminbi pertains to the new era of China’s reform, starting at the 19th Congress of the Communist Party. It is not a technical reform, but a political one. The objective is threefold: to match China’s autonomy in economic policy, to further Asian integration, and to safeguard worldwide multilateralism against by the rise of protectionist forces. The challenge has been aggravated by the protectionist policies pursued by the US, degrading ipso facto the functions assumed by the dollar in the international payment system. China’s authorities have drawn lessons from the Asian crisis of 1997-98 and the systemic crisis of 2008-09. They are now searching for a second-best option in advocating a multilateral international payment system based on the SDR. The process of currency internationalization is linked to the modernization of domestic capital markets. Studying the progress in both dimensions makes the first two parts of the paper We ask the following questions. In the first part: which steps has China taken, and should take in the future, to complete the gradual process of currency internationalization currently under way? In the second part: how can China build the deep and resilient bond market required to attract international investors? A shorter third part examines why emerging market countries are incentivized to issue their government debt in their own currencies to attract foreign investors in the lingering context of ultra-low interest rates in the main convertible currencies. The status of a freely usable currency, already reached by the Renminbi in its prudent internationalization, together with a reform of the huge domestic bond market, should make China able to attract foreign saving. This is compatible with the Belt and Road Initiative, which is bound to mobilize massive capital exports in the form of long-term loans.
    Keywords: China;Bond Markets;Local Governments;RMB Internationalization;International Monetary System
    JEL: F36 G15 G18 H70 H74
    Date: 2019–06
  31. By: Postel-Vinay, Natacha
    Abstract: The US Great Depression was preceded by almost a decade of credit growth. This review paper suggests that the 1920s credit boom went through two phases: one, up to around 1927, when credit grew in concert with money; another one, from around 1928 to 1929, when credit grew faster than money. Credit from commercial banks grew tremendously, but credit from savings institutions grew even more. The fact that money was relatively stable in the second phase fits Friedman and Schwartz’s finding that the 1920s were not an inflationary decade. Rather, the credit boom was reflected in asset price inflations which occurred in certain parts of the economy, such as the real estate and stock markets. As the literature tends to show, the growth of credit made households and financial institutions vulnerable to shocks. While a decoupling of credit growth from money growth in the post-1945 period has been previously noted (Schularick and Taylor 2012), this paper suggests that such a decoupling already occurred in 1920s America. Standard monetary policy tightening was not enough to quell the boom, which points to macro- and micro-prudential tools as potentially more successful alternative measures to keep credit under control.
    JEL: E44 E32 N11 N12
    Date: 2019–07
  32. By: Ricardo J. Caballero; Alp Simsek
    Abstract: Should monetary policy have a prudential dimension? That is, should policymakers raise interest rates to rein in financial excesses during a boom? We theoretically investigate this issue using an aggregate demand model with asset price booms and financial speculation. In our model, monetary policy affects financial stability through its impact on asset prices. Our main result shows that, when macroprudential policy is imperfect, small doses of prudential monetary policy (PMP) can provide financial stability benefits that are equivalent to tightening leverage limits. PMP reduces asset prices during the boom, which softens the asset price crash when the economy transitions into a recession. This mitigates the recession because higher asset prices support leveraged, high-valuation investors' balance sheets. An alternative intuition is that PMP raises the interest rate to create room for monetary policy to react to negative asset price shocks. The policy is most effective when there is extensive speculation and leverage limits are neither too tight nor too slack.
    JEL: E00 E12 E21 E22 E30 E40 G00 G01 G11
    Date: 2019–06
  33. By: Nauro F. Campos (Brunel University London and ETH Zurich); Jarko Fidrmuc (ZU Friedrichshafen, CESifo Munich and KTU Kaunas); Iikka Korhonen (Bank of Finland)
    Abstract: This paper offers a first systematic evaluation of the evidence on the effects of currency unions on the synchronisation of economic activity. Focusing on Europe, we construct a database of about 3,000 business cycles synchronisation coefficients and their design and estimation characteristics. We find that: (1) synchronisation increased from about 0.4 before the introduction of the euro in 1999 to 0.6 afterwards; (2) this increase occurred in both euro and non-euro countries (larger in former); (3) there is evidence of country-specific publication bias; (4) our differences-in-differences estimates suggest the euro accounted for approximately half of the observed increase in synchronisation.
    Keywords: business cycles synchronisation, optimum currency areas, EMU, euro, meta-analysis
    JEL: E32 F42
  34. By: Janice C. Eberly; James H. Stock; Jonathan H. Wright
    Abstract: We review and assess the monetary policy framework currently used by the Federal Reserve, with special focus on policies that operate through the slope of the term structure, including forward guidance and large scale asset purchases. These slope policies are important at the zero lower bound. We study the performance of counterfactual monetary policies since the Great Recession in the framework of a structural VAR, identified using high-frequency jumps in asset prices around FOMC meetings as external instruments. The intention is to give guidance to policymakers responding to future downturns. In our counterfactuals, we find that slope policies played an important role in supporting the recovery, but did not fully circumvent the zero lower bound. In our simulations, earlier and more aggressive use of slope policies support a faster recovery. The recovery would also have been faster, with the unemployment gap closing seven quarters earlier, if the Fed had inherited a higher level of inflation and nominal interest rates consistent with a higher inflation target coming into the financial crisis recession.
    JEL: C22 E43 E52
    Date: 2019–06
  35. By: Brill, Maximilian; Nautz, Dieter; Sieckmann, Lea
    Abstract: We introduce a Divisia monetary aggregate for the euro area that accounts for the heterogeneity across member countries both, in terms of interest rates and the decomposition of monetary assets. In most of the euro area countries, the difference between the growth rates of the country-specific Divisia aggregate and its simple sum counterpart is particularly pronounced before recessions. The results obtained from a panel probit model confirm that the divergence between the Divisia and the simple sum aggregate has a significant predictive content for recessions in euro area countries.
    Keywords: Monetary aggregation,Euro area Divisia aggregate,Recessions
    JEL: E51 E32 C43
    Date: 2019
  36. By: Lena Kraus (Universitaet Bayreuth); Juergen Beier (Universitaet Bayreuth); Bernhard Herz (Universitaet Bayreuth)
    Abstract: During the Great Financial Crisis several European countries - both inside and out- side the euro area - suffered sharp reversals of private capital inflows. We examine how macroeconomic adjustments to sudden stops differ between members of the euro area and countries pegging the euro, the closest alternative to joining the euro. We focus on a key difference between a conventional euro peg and full euro membership: the quasi-automatic public financing of external deficits via the euro area payments system TARGET2. Our simulation results indicate that access to TARGET2 helps to mitigate the adverse effects of a sudden stop on output, consumption and investment, at least in the short run. As a drawback economic rebalancing is prolonged and accompanied by a considerable build-up of public debt. In contrast, euro peggers without access to public external finance suffer a sharp economic down- turn when subject to a sudden stop. On the upside, economic recovery is prompt and government debt remains stable. Estimation results for a group of euro area members and euro peggers are in line with our simulation results.
    Keywords: Sudden stops, TARGET2, collateral constraint, capital flows
    JEL: D53 E58 F32 F41 G15
  37. By: Kimberly A. Berg; Chadwick C. Curtis; Steven Lugauer; Nelson C. Mark
    Abstract: We decompose the response of aggregate consumption to monetary policy shocks into contributions by households at different stages of the life cycle. This decomposition finds that older households have a higher consumption response than younger households. Amongst older households, the consumption response is also increasing in income. This, along with data on age-related net wealth, presents evidence for a wealth effect playing a role in driving the response patterns. This mechanism is studied further in a partial-equilibrium life-cycle model of consumption, saving, and labor-supply decisions. The model qualitatively explains the empirical patterns. Understanding the heterogeneity in consumption responses across age groups is important for understanding the transmission of monetary policy, especially as the U.S. population grows older.
    JEL: E0 E21 E52 J1 J11
    Date: 2019–06
  38. By: James H. Stock; Mark W. Watson
    Abstract: We investigate the flattening Phillips relation by making two departures from standard specifications. First, we measure slack using real activity variables that are bandpass filtered or year-over-year changes in activity (these are similar), instead of gaps. Second, we study the components of inflation instead of the standard aggregates. We find that some inflation components have strong and stable correlations with the cyclical component of real activity; these components tend to be relatively well-measured and domestically determined. Other components, typically prices that are poorly measured or internationally determined, have weak and/or unstable correlations with cyclical activity. We construct a new inflation index, Cyclically Sensitive Inflation, that weights the components by their joint cyclical covariation with real activity. The index has strong and stable correlations with cyclical activity and provides a real-time measure of cyclical movements in inflation.
    JEL: E31 E32
    Date: 2019–06
  39. By: Pablo Aguilar (Banco de España); Samuel Hurtado (Banco de España); Stephan Fahr (European Central Bank); Eddie Gerba (Danmarks Nationalbank)
    Abstract: This paper contributes by providing a new approach to study optimal macroprudential policies based on economy wide welfare. Following Gerba (2017), we pin down a welfare function based on a first-and second order approximation of the aggregate utility in the economy and use it to determine the merits of different macroprudential rules for Euro Area. With the aim to test this framework, we apply it to the model of Clerc et al. (2015). We find that the optimal level of capital is 15.6 percent, or 2.4 percentage points higher tan the 2001-2015 value. Optimal capital reduces significantly the volatility of the economy while increasing somewhat the total level of welfare in steady state, even with a time-invariant instrument. Expressed differently, bank default rates would have been 3.5 percentage points lower while credit and GDP 5% and 0.8% higher had optimal capital level been in place during the 2011-2013 crisis. Further, using a model-consistent loss function, we find that the optimal Countercyclical Capital Buffer (CCyB) rule depends on whether observed or optimal capital levels are already in place. Conditional on optimal capital level, optimal CCyB rule should respond to movements in total credit and mortgage lending spreads. Gains in welfare from optimal combination of instruments is higher than the sum of their individual effects due to synergies and positive mutual spillovers.
    Keywords: optimal policy, global welfare analysis, financial stability, financial DSGE model, macroprudential policy
    JEL: G21 G28 G17 E58 E61
    Date: 2019–07

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