nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒07‒29
24 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The ECB’s monetary pillar after the financial crisis By T. Philipp Dybowski; Bernd Kempa
  2. Evaluating Central Banks' Tool Kit: Past, Present, and Future By Eric R. Sims; Jing Cynthia Wu
  3. Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default)* By Cristina Arellano; Yan Bai
  4. Vehicle Currency Pricing and Exchange Rate Pass-Through By Natalie Chen; Wanyu Chung; Dennis Novy
  5. Central Bank Reforms and Institutions By Oana Peia; Romelli Davide
  6. The Four Equation New Keynesian Model By Eric R. Sims; Jing Cynthia Wu
  7. Inflation after the Crisis: What’s the Story? By Jeremy Kronick; Farah Omran
  8. Monetary Policy, Housing Rents and Inflation Dynamics By Daniel A. Dias; Joao B. Duarte
  9. The Mundell-Fleming Model: A dirty float version By Waldo Mendoza Bellido
  10. Global Capital Flows and the Role of Macroprudential Policy By Sudipto Karmakar; Diogo Lima
  11. Bounded Rationality, Monetary Policy, and Macroeconomic Stability By Francisco Ilabaca; Greta Meggiorini; Fabio Milani
  12. Going Dutch: The management of monetary policy in the Netherlands during the interwar gold standard By Colvin, Christopher L.; Fliers, Philip
  13. Sticky Price versus Sticky Information Price: Empirical Evidence in the New Keynesian Setting By Drissi, Ramzi; Ghassan, Hassan B.
  14. Barter and the Origin of Money and Some Insights from the Ancient Palatial Economies of Mesopotamia and Egypt By Svizzero, Serge; Tisdell, Clement
  15. Is inflation driven by survey-based, VAR-based or myopic expectations? By Frédérique Bec; Patrick Kanda
  16. Evolution and Characteristics of the Exchange Rate Pass Through to Prices in Mexico By Angeles Galvan Daniel; Cortés Espada Josué Fernando; Sámano Daniel
  17. Measuring Euro Area Monetary Policy By Carlo Altavilla; Luca Brugnolini; Refet S. Gürkaynak; Roberto Motto; Giuseppe Ragusa
  18. Maintaining financial stability in Asia and the Pacific By Zhenqian Huang
  19. Inflation and the Current Account in the Euro Area By Galstyan, Vahagn
  20. The Founding of the Federal Reserve, the Great Depression and the Evolution of the U.S. Interbank Network By Matthew S. Jaremski; David C. Wheelock
  21. Another Look at Cryptocurrency Bubbles By Marc Gronwald
  22. Growing and collapsing bubbles By Keiichiro Kobayashi
  23. Distributional impacts of low for long interest rates By Kronick, Jeremy M.; Villarreal, Francisco G.
  24. A New Look at Historical Monetary Policy and the Great Inflation through the Lens of a Persistence-Dependent Policy Rule By Ashley, Richard; Tsang, Kwok Ping; Verbrugge, Randal

  1. By: T. Philipp Dybowski; Bernd Kempa
    Abstract: We apply a structural topic model (STM) to analyze European Central Bank (ECB) communication regarding the monetary pillar of its monetary policy strategy. We do so by quantifying the transcripts of the ECB Presidents introductory statements at the press conferences that accompany the regular meetings of the ECB Governing Council. Our evidence shows that, within its monetary pillar, the ECB has gradually shifted its focus away from a genuine monetary analysis towards monitoring the stability of the European financial system. We go on to augment a standard Taylor rule by quantitative indicators obtained from the STM to assess whether the monetary pillar in general, and the shift in focus in particular, has had a measurable impact on the ECBs monetary policy stance. We find weak evidence that the monetary analysis has had a bearing on the ECBs interest rate setting in the early years of the ECB's existence, but this influence completely disappears in the latter years of the sample. We also find that after the financial crisis, the monetary policy response to its financial sentiment communication has been accommodative rather than "leaning against the wind".
    Keywords: ECB, monetary policy, central bank communication, topic models
    JEL: C11 E52 E58
    Date: 2019–07
  2. By: Eric R. Sims; Jing Cynthia Wu
    Abstract: We develop a structural DSGE model to systematically study the principal tools of unconventional monetary policy – quantitative easing (QE), forward guidance, and negative interest rate policy (NIRP) – as well as the interactions between them. To generate the same output response, the requisite NIRP and forward guidance interventions are twice as large as a conventional policy shock, which seems implausible in practice. In contrast, QE via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound. Quantitatively, QE1-QE3 can account for two thirds of the observed decline in the “shadow” Federal Funds rate. In spite of its usefulness, QE does not come without cost. A large balance sheet has consequences for different normalization plans, the efficacy of NIRP, and the effective lower bound on the policy rate.
    JEL: E10 E32 E5 E52 E58
    Date: 2019–07
  3. By: Cristina Arellano; Yan Bai
    Abstract: This paper develops a New Keynesian model with sovereign debt and default. We focus on domestic interest rules governing monetary policy and external foreign currency government debt that is defaultable. Monetary policy and default risk interact as they both impact domestic consumption and production. We find that default risk generates monetary frictions, which amplify the monetary response to shocks. Large sovereign default risk depresses domestic consumption and production. These monetary frictions in turn discipline sovereign borrowing, resulting in slower debt accumulation and lower spreads. Our framework replicates the positive co-movements of sovereign spreads with domestic nominal rates and inflation, a salient feature of emerging markets data, and can rationalize the experience of Brazil during the 2015 downturn, with high inflation, nominal rates, and sovereign spreads. A counterfactual experiment shows that, by raising the domestic rate, the Brazilian central bank not only reduced inflation but also alleviated the debt crisis.
    Date: 2019
  4. By: Natalie Chen; Wanyu Chung; Dennis Novy
    Abstract: Using detailed firm-level transactions data for UK imports, we find that invoicing in a vehicle currency is pervasive, with more than half of transactions in our sample invoiced in neither sterling nor the exporter’s currency. We then study the relationship between invoicing currency choices and the response of import prices to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import prices are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Pass-through therefore substantially increases once we account for vehicle currencies. Our results help to explain the higher-than-expected pass-through into import prices during the Great Recession and after the EU referendum. Finally, within a theoretical framework we conceptualize an omitted variable bias arising in estimating pass-through with only bilateral exchange rates under vehicle currency pricing. Overall, our results contribute to understanding the disconnect between exchange rates and prices.
    Keywords: CPI, dollar, euro, exchange rate pass-through, inflation, invoicing, sterling, UK, vehicle currency pricing
    JEL: F14 F31 F41
    Date: 2019
  5. By: Oana Peia; Romelli Davide
    Abstract: “Monetary policy independence remains of the highest importance, and it is important that we preserve monetary policy independence to help foster desirable macroeconomic outcomes and financial stability.” Stanley Fisher (November 2015) “The only problem our economy has is the Fed. They don’t have a feel for the market.” Donald Trump (December 2018) Prior to the global financial crisis, there had been much agreement about the optimal institutional design of monetary policy authorities. Economists and policy observers alike would have acknowledged that monetary policy is best left in the hands of independent central banks with a clear mandate of price stability. These inflation-targeting central banks were seen as the solution to the problem of high inflation and were credited with the period of great moderation that saw low levels of inflation and moderate output fluctuations (Alesina and Stella 2010).
    Keywords: Monetary policy; Inflation; 2008 global financial crisis; Central Bank independence; Central Bank legislative reforms; Institutional design
    Date: 2019–05
  6. By: Eric R. Sims; Jing Cynthia Wu
    Abstract: This paper develops a New Keynesian model featuring financial intermediation, short and long term bonds, credit shocks, and scope for unconventional monetary policy. The log-linearized model reduces to four key equations – a Phillips curve, an IS equation, and policy rules for the short term nominal interest rate and the central bank's long bond portfolio (QE). The four equation model collapses to the standard three equation New Keynesian model under a simple parameter restriction. Credit shocks and QE appear in both the IS and Phillips curves. Optimal monetary policy entails adjusting the short term interest rate to offset natural rate shocks, but using QE to offset credit market disruptions. The ability of the central bank to engage in QE significantly mitigates the costs of a binding zero lower bound.
    JEL: E1 E50 E52
    Date: 2019–07
  7. By: Jeremy Kronick (C.D. Howe Institute); Farah Omran (C.D. Howe Institute)
    Keywords: Monetary Policy; Central Banking;Inflation and Inflation Control
    JEL: E31 E52 E58
    Date: 2019–07
  8. By: Daniel A. Dias; Joao B. Duarte
    Keywords: Monetary policy ; Housing rents ; Inflation dynamics ; “Price puzzle” ; Housing tenure
    JEL: E31 E43 R21
    Date: 2019–05–23
  9. By: Waldo Mendoza Bellido (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: A popular model in the teaching of macroeconomics of open economies at the undergraduate level is the Mundell-Fleming (MF). This model assumes that there is free capital mobility and takes into account two extreme exchange rate regimes: fixed and freely floating. But there is a third regime, currently of relevance to many central banks, which is not addressed in the MF: one in which the central bank sets the short-term interest rate and maintains a dirty-float exchange-rate regime. In this paper, an MF with these characteristics is presented. It is a simple, practical and user-friendly model that can be used to address contemporary issues, making it suitable for central banks or the teaching of macroeconomics at undergraduate level as a complement –or even a substitute– for the traditional MF. JEL Classification-JEL: E42, E52, E58, f41
    Keywords: Dirty float, Mundell-Fleming Model, Imperfect capital mobility.
    Date: 2019
  10. By: Sudipto Karmakar; Diogo Lima
    Abstract: Can countercyclical bank capital requirements reduce the negative effects ofglobal liquidity shocks? We use the Lehman Brothers bankruptcy as a natural experiment to document the role of the banking system as a transmission channel of global financial disturbances to domestic economies. Using granular and confidential data from the Bank of Portugal, our results suggest that in the aftermath of the Lehman collapse, domestic firms cut investment by 14% and employment by 2.3%.In order to evaluate the effectiveness of macroprudential regulation, we model an open-economy with a banking sector borrowing from domestic and in-ternational depositors. We show that, during a financial crises, in an economy with counter cyclical bank capital requirements(compared with an economy with constant capital requirements):(i) gross domestic product falls 5 p.p. less and (ii)the fall in investment is 3 p.p. lower. We show that imposing countercyclical capital requirements entails a trade-off between lower volatility and lower economic activity.Overall, we find that countercyclical bank capital requirements may not be welfare improving for the Portuguese economy.
    Date: 2019–07
  11. By: Francisco Ilabaca; Greta Meggiorini; Fabio Milani
    Abstract: This paper estimates a Behavioral New Keynesian model to revisit the evidence that passive US monetary policy in the pre-1979 sample led to indeterminate equilibria and sunspot-driven fluctuations, while active policy after 1982, by satisfying the Taylor principle, was instrumental in restoring macroeconomic stability. The model assumes “cognitive discounting”, i.e., consumers and firms pay less attention to variables further into the future. We estimate the model allowing for both determinacy and indeterminacy. The empirical results show that determinacy is preferred both before and after 1979. Even if monetary policy is found to react only mildly to inflation pre-Volcker, the substantial degrees of bounded rationality that we estimate prevent the economy from falling into indeterminacy.
    Keywords: Behavioral New Keynesian model, cognitive discounting, estimation under determinacy and indeterminacy, Taylor principle, active vs passive monetary policy
    JEL: E31 E32 E52 E58
    Date: 2019
  12. By: Colvin, Christopher L.; Fliers, Philip
    Abstract: Under what conditions can policymakers make demonstrably poor policy choices? By providing a new account of monetary policy management in the Netherlands during the interwar gold standard, we show how policymakers can fail to escape their long-held beliefs and refuse to consider available policy alternatives. Using high-frequency macroeconomic data, we are the first to document that the Netherlands' policymakers were able to conduct an independent monetary policy in the 1930s. We then show how this independence was squandered on fixing the guilder's exchange rate, a policy which led only to deflation, trade deficits, corporate bankruptcies and mass unemployment. We explain the government's policy stance by documenting the beliefs of politicians and central bankers, and then by investigating how business leaders and public intellectuals attempted to influence these beliefs.
    Keywords: monetary policy,exchange rate policy,gold standard,interwar period,the Netherlands
    JEL: N14 E42 E52 E58
    Date: 2019
  13. By: Drissi, Ramzi; Ghassan, Hassan B.
    Abstract: In order to model the inflation dynamics, we investigated various combinations of nominal rigidities. For this purpose, we analyze two adjustment-of-prices hypotheses as in the new Keynesian literature, namely the price stickiness and the sticky information, within a Dynamic Stochastic General Equilibrium (DSGE) model. For each model, we compare the responses of inflation and output to shocks. We found that sticky information modeling correctly reproduces some important stylized facts after monetary shocks, but with hump-shaped responses. The sticky price model, considering that some fixed prices lead to that Phillips curve, does not correctly reproduce the dynamic inflation response to monetary shocks. We show that single indexation does not add persistence to the two specifications, and the choice of rigidity structure appears to be more important than the presence or absence of lagged values of inflation in the dynamics.
    Keywords: DSGE model; Phillips curve; Sticky information; Sticky prices; Inflation
    JEL: C11 E31 E32
    Date: 2018–03
  14. By: Svizzero, Serge; Tisdell, Clement
    Abstract: The "Metallist" origin of money, used as a medium of exchange, is based on the presumed low efficiency of barter. However, barter is usually ill-defined and archaeological evidence about it is inconclusive. Moreover, the transaction costs associated with barter seem to have been exaggerated by metallists. Indeed, the introduction of a unit of account reduces the complexity of the relative prices system usually associated with barter. Similarly, in-kind transactions have timing constraints which are often labeled as "the double coincidence of wants"; with a system of debt and credit, delayed exchange, that is lending, is possible. Such adaptability of barter is confirmed by the study of Mesopotamian and ancient Egyptian palatial economies. They provide evidence that non-monetary transactions have persisted during millennia, challenging the metallist vision about the origin of money.
    Keywords: Financial Economics, International Relations/Trade
    Date: 2019–07–22
  15. By: Frédérique Bec (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique); Patrick Kanda (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The relative importance of survey-based, VAR-based or myopic expectations is evaluated in accounting for US inflation dynamics in a New Keynesian Phillips Curve (NKPC) setting. Our contribution is threefold. First, we estimate the NKPC with both final and real-time vintage data in order to control for large revisions in the real GDP data. Second, we distinguish between two different series for VAR-based inflation forecasts-derived by a recursive or rolling-window method-to account for changes in the conduct and transmission mechanisms of US monetary policy after World War II. Third, joint restrictions are tested in the NKPC to assess whether one of the expectational variables is able, on its own, to capture inflation dynamics. On a statistical basis, we find that there is no clear-cut winner between VAR-and survey-based inflation expectations. Most of our estimated NKPC variants conclude that survey inflation expectations tend to have the largest numerical weight. Nevertheless, the difference between VAR-and survey-based expectations' estimated coefficients is not statistically significant. Moreover, myopic expectations do not play any significant role in the majority of the estimated NKPC variants.
    Keywords: VAR-based expectations,Myopic expectations,Survey forecasts,New Keynesian Phillips Curve,Inflation
    Date: 2019–07–06
  16. By: Angeles Galvan Daniel; Cortés Espada Josué Fernando; Sámano Daniel
    Abstract: This paper analyzes the exchange rate pass through to consumer prices in Mexico using different methodologies. First, we estimate Vector Autoregressive Models (VAR). Subsequently, we estimate Autoregressive Distributed Lags Models (ARDL) in order to make a long run analysis. In particular, we find that the exchange rate pass through to consumer prices is low and has barely changed in relation with the findings in previous studies. We also estimate that when the economy grows above its long-run trend, the point estimation of the exchange rate pass through is larger on average. Finally, we provide some evidence of asymmetry in the exchange rate pass through, that is, the point estimation of the exchange rate pass through is greater when there is a depreciation than when there is a currency appreciation. It should be noted that in the long run analysis these results are preserved.
    Keywords: Depreciation;Inflation;Exchange Rate Pass Through;Asymmetries
    JEL: C22 C32 E31 F31 F41
    Date: 2019–07
  17. By: Carlo Altavilla; Luca Brugnolini; Refet S. Gürkaynak; Roberto Motto; Giuseppe Ragusa
    Abstract: We study the information flow from the ECB on policy dates since its inception, using tick data. We show that three factors capture about all of the variation in the yield curve but that these are different factors with different variance shares in the window that contains the policy decision announcement and the window that contains the press conference. We also show that the QE-related policy factor has been dominant in the recent period and that Forward Guidance and QE effects have been very persistent on the longer-end of the yield curve. We further show that broad and banking stock indices' responses to monetary policy surprises depended on the perceived nature of the surprises. We find no evidence of asymmetric responses of financial markets to positive and negative surprises, in contrast to the literature on asymmetric real effects of monetary policy. Lastly, we show how to implement our methodology for any policy-related news release, such as policymaker speeches. To carry out the analysis, we construct the Euro Area Monetary Policy Event-Study Database (EA-MPD). This database, which contains intraday asset price changes around the policy decision announcement as well as around the press conference, is a contribution on its own right and we expect it to be the standard in monetary policy research for the euro area.
    Keywords: ECB policy surprise, event-study, intraday, persistence, asymmetry
    JEL: E43 E44 E52 E58 G12 G14
    Date: 2019
  18. By: Zhenqian Huang (Macroeconomic Policy and Financing for Development Division, United Nations Economic and Social Commission for Asia and the Pacific)
    Abstract: Most Asia-Pacific economies have maintained a largely accommodative monetary policy stance in the past decade. However, lower policy rates have not been fully translated into stronger growth, but contributed to financial instability in terms of higher private debt, which harms long-term economic growth. A prudent approach to monetary policy would be needed to focus on maintaining price and financial stability. Policy makers shall accompany traditional monetary policies with macroprudential policies and regulations to strike a balance between supporting short-term growth prospects while containing the build-up of financial risks.
    Date: 2019–07
  19. By: Galstyan, Vahagn (Central Bank of Ireland)
    Abstract: The euro area current account was on average in balance over 1999-2010 period, while the average rate of inflation was close to the ECB target. In contrast, the post-2011 increase in the euro area current account surplus has been accompanied by a period of low inflation. This paper suggests that observed low inflation can be partly explained by the surplus in the external balance. I propose a version of an open-economy inflation Phillips curve showing that, in addition to output gap and inflationary expectations, inflation is also shaped by the trade balance. At an empirical level, I find a statistically significant and negative correlation between the two variables.
    Date: 2019–05
  20. By: Matthew S. Jaremski; David C. Wheelock
    Abstract: Financial network structure is an important determinant of systemic risk. This paper examines how the U.S. interbank network evolved over a long and important period that included two key events: the founding of the Federal Reserve and the Great Depression. Banks established connections to correspondents that joined the Federal Reserve in cities with Fed offices, initially reducing overall network concentration. The network became even more focused on Fed cities during the Depression, as survival rates were higher for banks with more existing connections to Fed cities, and as survivors established new connections to those cities over time.
    JEL: G21 L14 N22
    Date: 2019–07
  21. By: Marc Gronwald
    Abstract: This paper deals with cryptocurrency bubbles. First, it points out that a number of recent papers on cryptocurrency bubbles are awed due to an insufficient consideration of the fundamental value of cryptocurrencies. As even fiat money is said to exhibit features of bubbles, the same applies to cryptocurrencies. Thus, any empirical investigation into either the presence of cryptocurrency bubbles or the fundamental value of cryptocurrencies is needless. Second, the paper conducts a short empirical analysis into the relationship of the prices of Etherum and Bitcoin. Evidence of explosive periods is found in the price of Etherum even if this price is expressed in terms of Bitcoin rather than US Dollars. These periods, however, are found to be in the first half of 2016 and 2017, respectively, but not during the price peak period of Bitcoin witnessed end of 2017 and beginning of 2018.
    Keywords: cryptocurrencies, bubbles, bitcoin, Etherum, fundamental value, intrinsic value, fiat money
    JEL: C12 C22 E42 E52 G12
    Date: 2019
  22. By: Keiichiro Kobayashi
    Abstract: The large fluctuations of asset prices in financial crises are modeled as creditdriven bubbles, where agency problems in the banking sector raise the asset prices to unsustainable levels. The peak of a bubble and the timing of its collapse can be predictable because the bubble collapses when the price hits an endogenous threshold that is determined by structural parameters. Tighter monetary policy can dampen the size of the bubble, whereas tighter prudential regulations that cause credit rationing may exacerbate the bubble. Our theory recommends leaning against the bubbly wind, rather than screening the borrowers, as a stabilization policy.
    Date: 2019–04
  23. By: Kronick, Jeremy M.; Villarreal, Francisco G.
    Abstract: This paper asks whether tepid inflation in Canada since the financial crisis can in part be explained by the effects of monetary policy on inequality. Using different structural vector autoregression models we show that expansionary monetary policy post-crisis has offset otherwise falling inequality through the shifting of resources away from lower-income individuals, which in general have higher marginal propensities to consume. As a result, aggregate demand has not risen as much as it otherwise would have, leading to a more muted inflationary response. Our results suggest that failure to account for the heterogeneity of consumption responses across the income distribution could lead to an overestimation of the magnitude of inflation’s response to a monetary policy shock.
    Date: 2019–07–18
  24. By: Ashley, Richard (Virginia Tech); Tsang, Kwok Ping (Virginia Tech); Verbrugge, Randal (Federal Reserve Bank of Cleveland)
    Abstract: The origins of the Great Inflation, a central 20th century U.S. macroeconomic event, remain contested. Prominent explanations are poor forecasts or deficient activity gap estimates. An alternative view: the FOMC was unwilling to fight inflation, perhaps due to political pressures. Our findings, based on a novel approach, support the latter view. New econometric tools allow us to credibly identify the particular activity gap, if any, in use. Persistence-dependent unemployment (gap) responses in the 1970s were essentially the same pre- and post-Volcker. Conversely, FOMC behavior vis-à-vis inflation—also persistence-dependent—changed markedly starting with Volcker, consistent with (though not proving) the political pressures view.
    Keywords: Taylor Rule; Great Inflation; Intermediate Target; Natural Rate; Persistence Dependence;
    JEL: C22 C32 E52
    Date: 2019–07–18

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