nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒07‒22
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Forward Guidance: Is It Useful Away from the Lower Bound? By Lilia Maliar; John B. Taylor
  2. Disinflation in Closed and Small Open Economies By Oleksandr Faryna; Magnus Jonsson; Nadiia Shapovalenko
  3. The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-Yield, and Real Effects By Bernardo Morais; José-Luis Peydró; Jessica Roldán-Peña; Claudia Ruiz-Ortega
  4. The Third Round of the Euro Area Enlargement: Are the Candidates Ready? By Milan Deskar-Škrbić; Karlo Kotarac; Davor Kunovac
  5. Money Market Funds and Unconventional Monetary Policy By Bua, Giovanna; Dunne, Peter G.; Sorbo, Jacopo
  6. On the Credit and Exchange Rate Channels of Central Bank Asset Purchases in a Monetary Union By Matthieu Darracq Paries; Niki Papadopoulou
  7. The Effects of Inflation Targeting for Financial Development By Geoffrey R. Dunbar; Amy (Qijia) Li
  8. Can The Chinese Bond Market Facilitate A Globalizing Renminbi? By Guonan Ma; Wang Yao
  9. Empowering Central Bank Asset Purchases: The Role of Financial Policies By Matthieu Darracq Paries; Jenny Korner; Niki Papadopoulou
  10. Tapering Talk on Twitter and the Transmission to Emerging Economies By Peter Tillmann
  11. Monetary policy expectations and risk-taking among U.S. banks By Byrne, David; Kelly, Robert
  12. U.S. Macroeconomic Policy Evaluation in an Open Economy Context using Wavelet Decomposed Optimal Control Methods By Crowley, Patrick M.; Hudgins, David
  13. A Classical View of the Business Cycle By Michael T. Belongia; Peter N. Ireland
  14. Effects of the ECB’s Unconventional Monetary Policy on Real and Financial Wealth By Clara De Luigi; Martin Feldkircher; Philipp Poyntner; Helene Schuberth
  15. Cost-benefit Analysis of Leaning against the Wind By Trent Saunders; Peter Tulip
  16. Owner Occupied Housing in the CPI and its Impact on Monetary Policy during Housing Booms and Busts By Robert J. Hill; Miriam Steurer; Sofie R. Waltl
  17. The Bond Lending Channel of Monetary Policy By Darmouni, Olivier; Geisecke, Oliver; Rodnyanky, Alexander
  18. Currency Wars? Unconventional Monetary Policy Does Not Stimulate Exports By Andrew K. Rose
  19. Tracing the impact of the ECB’s asset purchase programme on the yield curve By Eser, Fabian; Lemke, Wolfgang; Nyholm, Ken; Radde, Sören; Vladu, Andreea Liliana
  21. Credible Forward Guidance By Taisuke Nakata; Takeki Sunakawa
  22. Liquidity and Borrowing from a Lender of Last Resort during the Crisis of 1884 By Christopher Hoag
  23. Costs and Benefits of Inflation: A Model Analysis of Japan and the U.S. By Tomohide Mineyama; Wataru Hirata; Kenji Nishizaki
  24. Reserve Accumulation and Bank Lending: Evidence from Korea By Youngjin Yun
  25. Exchange Rate Reconnect By Andrew Lilley; Matteo Maggiori; Brent Neiman; Jesse Schreger
  26. Forecasting and Trading Monetary Policy Switching Nelson-Siegel Models By Massimo Guidolin; Manuela Pedio
  27. The Stability of Demand for Money in the Proposed Southern African Monetary Union By Simplice A. Asongu; Oludele E. Folarin; Nicholas Biekpe
  28. Global Dimensions of U.S. Monetary Policy By Maurice Obstfeld
  29. Real Exchange Rate Convergence: The Roles of Price Stickiness and Monetary Policy By Charles Engel
  30. The demand for Swiss banknotes: some new evidence By Katrin Assenmacher; Franz Seitz; Jörn Tenhofen
  31. International Evidence on Long-Run Money Demand By Benati, Luca; Lucas, Robert E.; Nicolini, Juan Pablo; Weber, Warren E.
  32. On the (in)efficiency of cryptocurrencies: Have they taken daily or weekly random walks? By Apopo, Natalay; Phiri, Andrew
  33. Anatomy of Sudden Yen Appreciations By Fei Han; Niklas J Westelius

  1. By: Lilia Maliar; John B. Taylor
    Abstract: During the recent economic crisis, when nominal interest rates were at their effective lower bounds, central banks used forward guidance announcements about future policy rates to conduct their monetary policy. Many policymakers believe that forward guidance will remain in use after the end of the crisis; however, there is uncertainty about its effectiveness. In this paper, we study the impact of forward guidance in a stylized new Keynesian economy away from the effective lower bound on nominal interest rates. Using closed-form solutions, we show that the impact of forward guidance on the economy depends critically on a specific monetary policy rule, ranging from non-existing to immediate and unrealistically large, the so-called forward guidance puzzle. We show that the size of the smallest root (or eigenvalue) captures model dynamics better than the underlying parameters. We argue that the puzzle occurs under very special empirically implausible and socially sub-optimal monetary policy rules, whereas empirically relevant Taylor rules lead to sensible implications.
    JEL: C5 E4 E5
    Date: 2019–07
  2. By: Oleksandr Faryna (National Bank of Ukraine); Magnus Jonsson (Sveriges Riksbank); Nadiia Shapovalenko (National Bank of Ukraine)
    Abstract: This paper examines the cost of disinflation as measured by the sacrifice ratio and the central bank loss function in closed and small open economies. We show that the sacrifice ratio is slightly higher in the small open economy if monetary policy in both economies follow identical Taylor rules. However, if monetary policies follow optimized simple rules the sacrifice ratio becomes slightly lower in the small open economy. The cost in terms of the central bank loss is higher in the small open economy irrespective of monetary policies. Imperfect central bank credibility changes the results quantitatively, but not qualitatively. Finally, in both economies, the optimal implementation horizon is approximately two quarters in advance and approximately four quarters if central bank credibility is imperfect.
    Keywords: disinflation, small open economy, new Keynesian model, imperfect credibility, implementation
    JEL: E31 E5 F41
    Date: 2019–03
  3. By: Bernardo Morais; José-Luis Peydró; Jessica Roldán-Peña; Claudia Ruiz-Ortega
    Abstract: We identify the international credit channel by exploiting Mexican supervisory data sets and foreign monetary policy shocks in a country with a large presence of European and U.S. banks. A softening of foreign monetary policy expands credit supply of foreign banks (e.g., U.K. policy affects credit supply in Mexico via U.K. banks), inducing strong firm-level real effects. Results support an international risk-taking channel and spill overs of core countries’ monetary policies to emerging markets, both in the foreign monetary softening part (with higher credit and liquidity risk-taking by foreign banks) and in the tightening part (with negative local firm-level real effects).
    Keywords: monetary policy, financial globalization, quantitative easing (QE), credit supply, risk-taking, foreign banks
    JEL: E52 E58 G01 G21 G28
    Date: 2018–10
  4. By: Milan Deskar-Škrbić (The Croatian National Bank, Croatia); Karlo Kotarac (The Croatian National Bank, Croatia); Davor Kunovac (The Croatian National Bank, Croatia)
    Abstract: In this paper, we study the readiness of Bulgaria, Croatia and Romania to adopt the common monetary policy of the ECB in the context of the third round of euro area enlargement. Following the later stages of the optimal currency area (OCA) theory we focus on the coherence of economic shocks between candidate countries and the euro area and analyse the relevance of euro area shocks for key macroeconomic variables in these countries. Our results, based on a novel empirical approach, show that the overall importance of those shocks that are relevant for the ECB is fairly similar in candidate countries and the euro area. The cost of joining the euro area should, therefore, not be pronounced, at least from the aspect of the adoption of the common counter-cyclical monetary policy. This conclusion holds for all three candidates, despite important differences in monetary and exchange rate regimes.
    Keywords: euro area enlargement, economic shocks, BVAR, common monetary policy, Mundellian trilemma
    JEL: E32 E52
    Date: 2019–07
  5. By: Bua, Giovanna (Central Bank of Ireland); Dunne, Peter G. (Central Bank of Ireland); Sorbo, Jacopo (Unipol Gruppo S.p.A.)
    Abstract: Using a unique dataset, covering more than 40 percent of euro area money market funds by asset value, we assess monetary policy effects on fund behaviour and performance.We find a strong but heterogeneous association between fund performance and the policy rate of the currency in which funds report and from this we ascertain how different combinations of conventional and unconventional monetary policies affect fund behaviour. Evidence from the speed of response to policy changes indicates a shortening of investment term when policy is easing and vice versa. This has supply-offunding implications across the first two years of the term structure. When euro area monetary policy is at its limit and when policy is expanded to include the use of unconventional measures, the gap between the rate earned at the ECB’s deposit facility and the yield on short term debt securities widens. In these conditions euro-reporting funds make indirect recourse to the deposit facility and raise their investments in euro-denominated tradable certificates of deposits. This behaviour progressively reduces the impact of unconventional measures on MMF performance. Otherwise, heterogeneity in fund responses to the monetary policy mix can be attributed to differential mandates and involves some combination of increased risktaking and diversification into assets issued by foreign entities.
    Keywords: Money Market Funds; Monetary Policy; Negative Interest Rates.
    JEL: E52 G15 G23 G28
    Date: 2019–06
  6. By: Matthieu Darracq Paries (European Central Bank); Niki Papadopoulou (Central Bank of Cyprus)
    Abstract: Through the euro area crisis, financial fragmentation across jurisdictions became a prime concern for the single monetary policy. The ECB broadened the scope of its instruments and enacted a series of non-standard measures to engineer an appropriate degree of policy accommodation. The transmission of these measures through the currency union remained highly dependent on the financial structure and conditions prevailing in various regions. This paper explores the country-specific macroeconomic transmission of selected non-standard measures from the ECB using a global DSGE model with a rich financial sector: we extend the six-region multi-country model of Darracq Paries et al. (2016), introducing credit and exchange rate channels for central bank asset purchases. The portfolio rebalancing frictions are calibrated to match the sovereign yield and exchange rate responses after ECB's Asset Purchase Programme (APP) first announcement. The domestic transmission of the APP through the credit intermediation chain is significant and quite heterogeneous across the largest euro area countries. The introduction of global portfolio frictions on euro area government bond holdings by international investors opens up for a larger depreciation of the euro. The interaction between international and domestic channels affect the magnitude and the cross-country distribution of the APP impact.
    Keywords: DSGE models; banking; financial regulation; cross-country spillovers; bank lending rates; non-standard measures
    JEL: E4 E5 F4
    Date: 2019–03
  7. By: Geoffrey R. Dunbar; Amy (Qijia) Li
    Abstract: The adoption of inflation targeting (IT) by central banks leads to an increase of 10 to 20 percent in measures of financial development, with a lag. We also find evidence that the financial sector benefits of IT adoption were higher for early-adopting central banks. Our results suggest that roughly 12 to 14 years after the Reserve Bank of New Zealand adopted inflation targeting in 1989, the benefits for financial development for new adopters of inflation targeting may have been negligible.
    Keywords: Financial Institutions; Inflation targets; Transmission of monetary policy
    JEL: E44 E58
    Date: 2019–07
  8. By: Guonan Ma (Bruegel University); Wang Yao (Fung Business Intelligence Centre)
    Abstract: A global renminbi needs to be backed by a large, deep and liquid renminbi bond market with a world-class Chinese government bond (CGB) market as its core. China’s CGB market is the seventh largest in the world while sitting alongside a huge but non-tradable and captive central bank liability in the form of required reserves. By transforming the non-tradable central bank liabilities into homogeneous and tradable CGBs through halving the high Chinese reserve requirements, the size of the CGB market can easily double. This would help overcome some market impediments and elevate the CGBs to a top three government bond market globally, boosting market liquidity while trimming distortions to the banking system. With a foreign ownership similar to that of the JGBs, CGBs held by foreign investors may increase ten-fold by 2020, approaching 5 percent of the 2014 global foreign reserves and facilitating a potential global renminbi, especially in the wake of the renminbi’s inclusion into the basket of the IMF Special Drawing Rights.
    Keywords: Renminbi internationalization, global currency, disintermediation, Chinese bond market, bond market liquidity, reserve requirement, public sector liabilities, and foreign ownership
  9. By: Matthieu Darracq Paries (European Central Bank); Jenny Korner (d-fine - analytical. quantitative. tech.); Niki Papadopoulou (Central Bank of Cyprus)
    Abstract: This paper contributes to the debate on the macroeconomic effectiveness of expansionary non-standard monetary policy measures in a regulated banking environment. Based on an estimated DSGE model, we explore the interactions between central bank asset purchases and bank capital-based financial policies (regulatory, supervisory or macroprudential) through its influence on bank risk-shifting motives. We find that weakly-capitalised banks display excessive risk-taking which reinforces the credit easing channel of central bank asset purchases, at the cost of higher bank default probability and risks to financial stability. In such a case, adequate bank capital demand through higher minimum capital requirements curtails the excessive credit origination and restores a more efficient propagation of central bank asset purchases. As supervisors can formulate further capital demands, uncertainty about the supervisory oversight provokes precautionary motives for banks. They build-up extra capital buffer attenuating non-standard monetary policy. Finally, in a weakly-capitalised banking system, countercyclical macroprudential policy attenuates banks risk-taking and dampens the excessive persistence of the non-standard monetary policy impulse. On the contrary, in a well-capitalised banking system, the macroeconomic stabilisation with central bank asset purchases outweigh the marginal financial stability benefits with macroprudential policy.
    Keywords: non-standard monetary policy; asset purchases; bank capital regulation; risk-taking; regulatory uncertainty; effective lower bound
    JEL: E44 E52 E58
    Date: 2019–02
  10. By: Peter Tillmann (Justus Liebig University Giessen)
    Abstract: When in 2013 the Federal Reserve started to discuss unwinding its asset purchases and exiting unconventional monetary policy (”tapering talk”), markets adjusted expectations and asset prices dropped sharply, in particular in emerging markets. In this paper we quantify the effect of the tapering talk on emerging financial markets. We use the entire stream of tapering-related messages sent on, the social media network, to build a series of market participants’ beliefs of an early tapering. This series is then included in a VAR system, in which a tapering belief shock is identified using sign restrictions. We find that the tapering shock has significant effects on emerging financial market and explains almost the entire dynamics of bond prices, stock prices, exchange rates and CDS-spreads during the ”taper tantrum”. The results remain robust if we exclude retweets and control for major policy events.
    Keywords: Tapering, unconventional monetary policy, emerging mar- kets, quantitative easing, Twitter
    JEL: E32 E44 E52
  11. By: Byrne, David (Central Bank of Ireland); Kelly, Robert (Central Bank of Ireland)
    Abstract: We investigate the role that monetary policy plays in influencing the riskiness of bank lending via the “risk-taking channel” of the transmission mechanism. This affects banks’ perception of, and preference for, extendingnewrelatively risky lending. Using data on the lending of US banks to different risk categories of borrowers, we show that unanticipated increases in expected future interest rates, as measured by the term spread, induce banks to increase the riskiness of their lending. They do this both on an intensive margin, decreasing their lending to less risky borrowers in favour of riskier borrowers, and on an extensive margin also. We show that a one percentage point increase in the term spread leads banks to increase the relative share of riskier lending by 12.6 percent. Our results are relevant for understanding the channels of the monetary policy transmission mechanism and for thinking about the linkages between monetary policy and financial stability.
    Keywords: Monetary Policy, Risk Taking, Bank Lending
    JEL: E51 E52 E58 G21
    Date: 2019–06
  12. By: Crowley, Patrick M.; Hudgins, David
    Abstract: It is widely recognized that the policy objectives of fiscal and monetary policymakers usually have different time horizons, and this feature may not be captured by traditional econometric techniques. In this paper, we first decompose U.S macroeconomic data using a time-frequency domain technique, namely discrete wavelet analysis. We then model the behavior of the U.S. economy over each wavelet frequency range and use our estimated parameters to construct a tracking model. To illustrate the usefulness of this approach, we simulate jointly optimal fiscal and monetary policy with different short-term targets: an inflation target, a money growth target, an interest rate target, and a real exchange rate target. The results determine the reaction in fiscal and monetary policy that is required to achieve an inflation target in a low inflation environment, and when both fiscal and monetary policy are concerned with meeting certain economic growth objectives. The combination of wavelet decomposition in an optimal control framework can also provide a new approach to macroeconomic forecasting.
    JEL: C61 C63 C88 E52 E61 F47
    Date: 2019–07–10
  13. By: Michael T. Belongia; Peter N. Ireland
    Abstract: In the 1920s, Irving Fisher extended his previous work on the Quantity Theory to describe, through an early version of the Phillips Curve, how changes in the money stock could be associated with cyclical movements in output, employment, and inflation. At the same time, Holbrook Working designed a quantitative rule for achieving price stability through control of the money supply. This paper develops a structural vector autoregressive time series model that allows these "classical" channels of monetary transmission to operate alongside the now-more-familiar interest rate channel of the New Keynesian model. Even with Bayesian priors that intentionally favor the New Keynesian view, the United States data produce posterior distributions for the model's key parameters that are consistent with the ideas of Fisher and Working. Changes in real money balances enter importantly into the model's aggregate demand relationship, while growth in Divisia M2 appears in the estimated monetary policy rule. Contractionary monetary policy shocks reveal themselves through persistent declines in nominal money growth instead of rising nominal interest rates and account for important historical movements in output and inflation.
    JEL: B12 E31 E32 E41 E43 E52
    Date: 2019–07
  14. By: Clara De Luigi (Foreign Research Division, Oesterreichische Nationalbank); Martin Feldkircher (Foreign Research Division, Oesterreichische Nationalbank); Philipp Poyntner (Department of Economics, Vienna University of Economics and Business); Helene Schuberth (Foreign Research Division, Oesterreichische Nationalbank)
    Abstract: We assess the impact of the ECB’s unconventional monetary policy (UMP) on the wealth distribution of households in ten euro area countries. For this purpose, we estimate the effects of an ECB balance sheet expansion on financial asset and housing prices by means of vector autoregressions. We then use the estimates to carry out micro simulations based on data from the Household Finance and Consumption Survey (HFCS). We find that the overall effect of UMP on the net wealth distribution of households differs depending on which wealth inequality indicators we use. There is an inequality-increasing effect for the majority of the countries under review when we use wealth inequality indicators that are sensitive to changes at the tails of the wealth distribution. The effect is more equalizing when we base our assessment on the Gini coefficient. It is also important to note that one-third of the households in our sample does not hold financial or housing wealth and is thus not directly affected by UMP measures via the asset price channel.
    Keywords: Monetary Policy, Inequality, Wealth, Quantitative Easing
    JEL: D14 D31 E44 E52 E58
    Date: 2019–07
  15. By: Trent Saunders (Reserve Bank of Australia); Peter Tulip (Reserve Bank of Australia)
    Abstract: Setting interest rates higher than macroeconomic conditions would warrant due to concerns about financial stability is called 'leaning against the wind'. Many recent papers have attempted to quantify and evaluate the effects of this policy. This paper summarises this research and applies the approach to Australia. The papers we survey see the benefit of leaning against the wind as avoiding financial crises, such as those that affected Australia in 1990 or other countries in 2008. Most of the international research finds that interest rates have too small an effect on the probability of a crisis for this benefit to be worth higher unemployment. Using Australian data, we find similar results. We estimate the costs of leaning against the wind to be three to eight times larger than the benefit of avoiding financial crises. However, research has not yet quantified the increased resilience of household balance sheets, which may be an extra benefit of leaning against the wind.
    Keywords: financial stability; monetary policy; evidence-based policy
    JEL: E52 E58 G18
    Date: 2019–07
  16. By: Robert J. Hill (Department of Economics, University of Graz); Miriam Steurer (Department of Economics, University of Graz); Sofie R. Waltl (Department of Economics, Vienna University of Economics and Business)
    Abstract: The treatment of owner-occupied housing (OOH) is probably the most important unresolved issue in inflation measurement. How -- and whether -- it is included in the Consumer Price Index (CPI) affects inflation expectations, the measured level of real interest rates, and the behavior of governments, central banks and market participants. We show that none of the existing treatments of OOH are fit for purpose. Hence we propose a new simplified user cost method with better properties. Using a micro-level dataset, we then compare the empirical behavior of eight different treatments of OOH. Our preferred user cost approach pushes up the CPI during housing booms (by 2 percentage points or more). Our findings relate to the following important debates in macroeconomics: the behavior of the Phillips curve in the US during the global financial crisis, and the response of monetary policy to housing booms, secular stagnation, and globalization.
    Keywords: Measurement of inflation, Owner occupied housing, User cost, Rental equivalence, Quantile regression, Hedonic imputation, Housing booms and busts, Inflation targeting, Leaning against the wind, Phillips curve, Disinflation puzzle, Secular stagnation
    JEL: C31 C43 E01 E31 E52 R31
    Date: 2019–07
  17. By: Darmouni, Olivier; Geisecke, Oliver; Rodnyanky, Alexander
    Abstract: An increasing share of firms' borrowing occurs through bond markets. We present high-frequency evidence from the Eurozone that bond-reliant firms are more responsive to monetary shocks: in contrast to standard bank lending channel predictions, unexpected ECB policy changes affect their stock prices by more, even conditional on total debt and industry fixed-effects. We develop an organizing framework to decompose the stock price, credit risk and investment response of large firms. We emphasize the role of corporate liquidity management: firms react to rate hikes by being prudent in good times, reducing investment in favor of hoarding liquid assets. Since bond financing is less flexible in bad times than relationship banking, this effect can rationalize why the mix of bank and bond financing matters for monetary transmission. A mitigating force is that bonds generally have longer duration and lower interest-rate pass-through relative to loans. Our findings suggest that the recent global growth in bond debt following quantitative easing could interact with conventional interest rate policy going forward.
    Keywords: Monetary policy, ECB, Debt Structure, Bank loans, Corporate bonds
    JEL: E44
    Date: 2019–07
  18. By: Andrew K. Rose (University of California, Berkeley)
    Abstract: I investigate whether countries that use unconventional monetary policy (UMP) experience export booms. I use a popular gravity model of trade which requires neither the exogeneity of UMP, nor instrumental variables for UMP. In practice, countries that engage in UMP experience a drop in exports vis-à-vis countries that are not engaged in such policies, holding other things constant. Quantitative easing is associated with exports that are about 10% lower to countries not engaged in UMP; this amount is significantly different from zero and similar to the effect of negative nominal interest rates. Thus there is no evidence that countries have gained export markets through unconventional monetary policy; any currency wars launched have been lost.
    Keywords: quantitative; easing; negative; nominal; interest; trade; gravity; bilateral; data; empirical
    JEL: F14 E58
  19. By: Eser, Fabian; Lemke, Wolfgang; Nyholm, Ken; Radde, Sören; Vladu, Andreea Liliana
    Abstract: We trace the impact of the ECB’s asset purchase programme (APP) on the sovereign yield curve. Exploiting granular information on sectoral asset holdings and ECB asset purchases, we construct a novel measure of the “free-float of duration risk” borne by price-sensitive investors. We include this supply variable in an arbitrage-free term structure model in which central bank purchases reduce the free-float of duration risk and hence compress term premia of yields. We estimate the stock of current and expected future APP holdings to reduce the 10y term premium by 95 bps. This reduction is persistent, with a half-life of five years. The expected length of the reinvestment period after APP net purchases is found to have a significant impact on term premia. JEL Classification: C5, E43, E52, E58, G12
    Keywords: central bank asset purchases, European Central Bank, non-standard monetary policy measures, term premia, term structure of interest rates
    Date: 2019–07
  20. By: Daniela Marconi (Bank of Italy)
    Abstract: The economic and political influence of China in the Asia-Pacific region is growing; the internationalization of the Chinese currency, the renminbi (RMB), add an additional channel of influence. This paper assesses the evolution of exchange rate co-movements against the US dollar within the region and finds that the RMB has been exerting a growing influence. The degree of influence varies considerably across currencies. On the one hand, the Indonesian rupiah, the Korean Won, the Malaysian ringgit, the Singaporean dollar, and the Taiwanese dollar show very strong co-movements with the RMB, while, on the other hand, the Australian dollar and the New Zealand dollar are not affected. Furthermore, the study confirms that Asian currencies move as if driven by an objective to stabilize the effective exchange rate, avoiding excessive appreciation against the USD.
    Keywords: exchange rates, Asia-Pacific, renminbi, China
    JEL: F31 F33
  21. By: Taisuke Nakata; Takeki Sunakawa
    Abstract: We analyze credible forward guidance policies in a sticky-price model with an effective lower bound (ELB) constraint on nominal interest rates by solving a series of optimal sustainable policy problems indexed by the duration of reputational loss. Lower-for-longer policies---while effective in stimulating the economy at the ELB---are potentially time-inconsistent, as the associated overheating of the economy in the aftermath of a crisis is undesirable ex post. However, if reneging on a lower-for-longer promise leads to a loss of reputation and prevents the central bank from effectively using lower-for-longer policies in future crises, these policies can be time-consistent. We find that, even without an explicit commitment technology, the central bank can still credibly keep the policy rate at the ELB for an extended period---though not as extended under the optimal commitment policy---and meaningfully mitigate the adverse effects of the ELB constraint on economy activit y.
    Keywords: Credibility ; Effective Lower Bound ; Forward Guidance ; Sustainable Plan ; Time-Consistency
    JEL: E63 E52 E61 E62 E32
    Date: 2019–05–17
  22. By: Christopher Hoag (Department of Economics, Trinity College)
    Abstract: This paper investigates the relation between bank liquidity and borrowing from a lender of last resort on a high frequency basis during a financial crisis. The paper evaluates weekly observations of individual bank borrowing of clearinghouse loan certificates by a panel of New York Clearing House member banks during the crisis of 1884. Naturally, banks with higher reserve ratios borrowed lower amounts, but banks replaced a dollar of reserves with less than a dollar of borrowing from a lender of last resort.
    Keywords: banking crisis, lender of last resort, clearinghouse, loan certificates.
    JEL: G21 G28 N21
    Date: 2019–07
  23. By: Tomohide Mineyama (Bank of Japan); Wataru Hirata (Bank of Japan); Kenji Nishizaki (Bank of Japan)
    Abstract: Analyzing the costs and benefits of inflation has been a primary subject in monetary economics. This article presents a summary of Mineyama, Hirata, and Nishizaki (2019), which investigates the relationship between inflation and social welfare expressed as the economic satisfaction of households for Japan and the U.S. The authors' analysis employs a New Keynesian model which embeds the major factors affecting the costs and benefits of inflation. The analysis suggests (1) social welfare is maximized when the steady-state inflation rate, the level to which the inflation rate converges in the long run, is close to two percent for both Japan and the U.S.; and (2) around one percentage point absolute deviation from the close-to-two-percent rate induces only a minor change in social welfare. Note, however, that the estimates are subject to a considerable margin of error due to parameter uncertainty in the zero lower bound of nominal interest rates.
    Keywords: Inflation; Social welfare; New Keynesian model; Downward nominal wage rigidity; Zero lower bound; Forward guidance
    JEL: E31 E43 E52
    Date: 2019–07–09
  24. By: Youngjin Yun (Bank of Korea)
    Abstract: Reserve accumulation is funded by the central bank’s domestic borrowing as it al- ways sterilizes reserve purchases by increasing domestic liabilities. The central bank borrowing could crowd out firms’ borrowing under imperfect international capital mo- bility. I present a model that illustrates the mechanism and examine monthly balance sheets of Korean banks from September 2003 to August 2008 to find that bank lending to firms did decline after reserve accumulation. Controlling for individual effects and time effects, it is estimated that bank lending declined by 50 cents after one addi- tional dollar of reserve accumulation. A causal relationship is verified by differences- in-differences identification. After one standard deviation reserve accumulation shock, primary dealer banks and foreign bank branches cut lending growth by 0.4 and 1.6 per- centage points more than non-primary dealer banks and domestic banks, respectively.
    Keywords: Foreign Exchange Reserves, Sterilization, Crowding-out, Bank Loans
    JEL: E22 E58 F31
  25. By: Andrew Lilley; Matteo Maggiori; Brent Neiman; Jesse Schreger
    Abstract: The failure to find fundamentals that co-move with exchange rates or forecasting models with even mild predictive power – facts broadly referred to as “exchange rate disconnect” – stands among the most disappointing, but robust, facts in all of international macroeconomics. In this paper, we demonstrate that U.S. purchases of foreign bonds, which did not co-move with exchange rates prior to 2007, have provided significant in-sample, and even some out-of-sample, explanatory power for currencies since then. We show that several proxies for global risk factors also start to co-move strongly with the dollar and with U.S. purchases of foreign bonds around 2007, suggesting that risk plays a key role in this finding. We use security-level data on U.S. portfolios to demonstrate that the reconnect of U.S. foreign bond purchases to exchange rates is largely driven by investment in dollar-denominated assets rather than by foreign currency exposure alone. Our results support the narrative emerging from an active recent literature that the US dollar’s role as an international and safe-haven currency has surged since the global financial crisis.
    JEL: E44 E47 F31 F32 F37 G11 G15 G23
    Date: 2019–07
  26. By: Massimo Guidolin; Manuela Pedio
    Abstract: We use monthly data on the US riskless yield curve for a 1982-2015 sample to show that mixing simple regime switching dynamics with Nelson-Siegel factor forecasts from time series models extended to encompass variables that summarize the state of monetary policy, leads to superior predictive accuracy. Such spread in forecasting power turns out to be statistically significant even controlling for parameter uncertainty and sample variation. Exploiting regimes, we obtain evidence that the increase in predictive accuracy is stronger during the Great Financial Crisis in 2007-2009, when monetary policy underwent a significant, sudden shift. Although more caution applies when transaction costs are accounted for, we also report that the increase in predictive power owed to the combination of regimes and of monetary variables that capture the stance of unconventional monetary policies is tradeable. We devise and test butterfly strategies that trade on the basis of the forecasts from the models and obtain evidence of riskadjusted profits both per se and in comparisons to simpler models.
    Keywords: Term structure of interest rates, Dynamic Nelson-Siegel factors, regime switching, butterfly strategies, unconventional monetary policy
    Date: 2019
  27. By: Simplice A. Asongu (Yaoundé/Cameroon); Oludele E. Folarin (University of Ibadan, Ibadan, Nigeria); Nicholas Biekpe (Cape Town, South Africa)
    Abstract: This study investigates the stability of demand for money in the proposed Southern African Monetary Union (SAMU). The study uses annual data for the period 1981 to 2015 from ten countries making-up the Southern African Development Community (SADC). A standard function of demand for money is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across countries in the stability of money. This divergence is articulated in terms of differences in cointegration, CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long-term determinants and error correction in event of a shock. Policy implications are discussed in the light of the convergence needed for the feasibility of the proposed SAMU. This study extends the debate in scholarly and policy circles on the feasibility of proposed African monetary unions.
    Keywords: Stable; demand for money; bounds test
    JEL: E41 C22
    Date: 2019–01
  28. By: Maurice Obstfeld
    Abstract: This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that U.S. monetary policy faces. It considers three main channels. The first is the determination of domestic inflation in a context where international prices and global competition play a role, alongside domestic slack and inflation expectations. The second channel is the determination of asset returns (including the natural real safe rate of interest, r*) and financial conditions, given integration with global financial markets. The third channel, which is particular to the United States, is the potential spillback onto the U.S. economy from the disproportionate impact of U.S. monetary policy on the outside world. In themselves, global factors need not undermine a central bank's ability to control the price level over the long term -- after all, it is the monopoly issuer of the numeraire in which domestic prices are measured. Over shorter horizons, however, global factors do change the tradeoff between price-level control and other goals such as low unemployment and financial stability, thereby affecting the policy cost of attaining a given price path.
    JEL: E52 E58 F36 F41 G15
    Date: 2019–07
  29. By: Charles Engel (University of Wisconsin at Madison)
    Abstract: In many open-economy models based on Dornbusch (1976), the speed of convergence of the real exchange rate is tied to the stickiness of prices. The “purchasing power parity puzzle” concerns the empirical fact that real exchange rates appear to converge more slowly than nominal prices. In some New Keynesian models, when there is no interest-rate smoothing, the stickiness of prices does not matter at all for persistence, as Benigno (2004) showed. We show that in the presence of interest-rate smoothing, price stickiness does matter and endogenous real-exchange rate persistence is bounded above by the interest rate smoothing parameter and by the probability of a firm not changing prices under Calvo pricing. We also explain the relationship between the New Keynesian framework with Calvo pricing, and the Dornbusch framework where price stickiness is integral to real exchange rate convergence.
  30. By: Katrin Assenmacher; Franz Seitz; Jörn Tenhofen
    Abstract: Knowing the part of currency in circulation that is used for transactions is important information for a central bank. For several countries, the share of banknotes that is hoarded or circulates abroad is sizeable, which may be particularly relevant for large-denomination banknotes. We analyse the demand for Swiss banknotes over a period starting in 1950 to 2017 and use different methods to derive the evolution of the amount that is hoarded. Our findings indicate a sizeable amount of hoarding, in particular for large denominations. The hoarding shares increased around the break-up of the Bretton Woods system, were comparatively low in the mid-1990s and have increased significantly since the turn of the millennium and the recent financial and economic crises.
    Keywords: Currency in Circulation, Cash, Demand for Banknotes, Hoarding of Banknotes, Banknotes Held by Non-residents
    JEL: E41 E52
    Date: 2019
  31. By: Benati, Luca (University of Bern); Lucas, Robert E. (University of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Weber, Warren E. (University of South Carolina)
    Abstract: We explore the long-run demand for M1 based on a dataset comprising 38 countries and relatively long sample periods, extending in some cases to over a century. Overall, we find very strong evidence of a long-run relationship between the ratio of M1 to GDP and a short-term interest rate, in spite of a few failures. The standard log-log specification provides a very good characterization of the data, with the exception of periods featuring very low interest rate values. This is because such a specification implies that, as the short rate tends to zero, real money balances become arbitrarily large, which is rejected by the data. A simple extension imposing limits on the amount that households can borrow results in a truncated log-log specification, which is in line with what we observe in the data. We estimate the interest rate elasticity to be between 0.3 and 0.6, which encompasses the well-known squared-root specification of Baumol and Tobin.
    Keywords: Long-run money demand; Cointegration
    JEL: C32 E41
    Date: 2019–06–18
  32. By: Apopo, Natalay; Phiri, Andrew
    Abstract: The legitimacy of virtual currencies as an alternative form of monetary exchange has been the centre of an ongoing heated debated since the catastrophic global financial meltdown of 2007-2008. We contribute to the relative fresh body of empirical research on the informational market efficiency of cryptomarkets by investigating the weak-form efficiency of the top-five cryptocurrencies. In differing from previous studies, we implement random walk testing procedures which are robust to asymmetries and unobserved smooth structural breaks. Moreover, our study employs two frequencies of cryptocurrency returns, one corresponding to daily returns and the other to weekly returns. Our findings validate the random walk hypothesis for daily series hence validating the weak-form efficiency for daily returns. On the other hand, weekly returns are observed to be stationary processes which is evidence against weak-form efficiency for weekly returns. Overall, our study has important implications for market participants within cryptocurrency markets.
    Keywords: Efficient Market Hypothesis (EMH); Cryptocurrencies; Random Walk Model (RWM); Flexible Fourier Form (FFF) unit root tests; Smooth structural breaks.
    JEL: C22 C32 C51 E42 G14
    Date: 2019–06–26
  33. By: Fei Han; Niklas J Westelius
    Abstract: The yen is an important barometer for the Japanese economy. Depreciations are typically associated with favorable economic developments such as increased corporate profits, rising equity prices, and upward pressure on domestic consumer prices. On the other hand, large and sharp appreciations run the risk of lowering actual and expected inflation, squeezing corporate profits, generating a negative wealth effect through depressed equity prices, and reducing confidence in the Bank of Japan’s efforts to reflate the domestic economy and achieve the inflation target. This paper takes a closer look at underlying drivers of rapid yen appreciations, highlighting the key role of carry-trade and the zero lower bound as important amplifiers.
    Date: 2019–07–01

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