nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒08‒12
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Complexity of ECB Communication and Financial Market Trading By Bernd Hayo; Kai Henseler; Marc Steffen Rapp
  2. Trump Pressuring the Fed By Peter Tillmann
  3. Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates By Georgios Georgiadis; Feng Zhu
  4. Monetary policy, macroprudential policy, and financial stability By Martinez-Miera, David; Repullo, Rafael
  5. Has globalization changed the inflation process? By Kristin Forbes
  6. Time-Varying Money Demand and Real Balance Effects By Jonathan Benchimol; Irfan Qureshi
  7. The Impact of Mobile Money in Developing Countries By Jana Hamdan
  9. Inflation and deflationary biases in inflation expectations By Michael J. Lamla; Damjan Pfajfar; Lea Rendell
  10. Special Drawing Rights in a New Decentralized Century By Andreas Veneris; Andreas Park
  11. Inflation, Inflation Expectations, and the Phillips Curve: Working Paper 2019-07 By Yiqun Gloria Chen
  12. Unregulated and regulated free banking. The case of Switzerland reinterpreted By Nils Herger
  13. Time-Variant Safe-Haven Currency Status and Determinants By MASUJIMA Yuki
  14. Substitutability of Monetary Policy Instruments By Cynthia L. Doniger; James Hebden; Luke Pettit; Arsenios Skaperdas
  15. Inflation Co-Movement in Emerging and Developing Asia: The Monsoon Effect By Patrick Blagrave
  16. Do SVARs with sign restrictions not identify unconventional monetary policy shocks? By Jef Boeckx; Maarten Dossche; Alessandro Galesi; Boris Hofmann; Gert Peersman
  17. Breakeven Inflation Rate Estimation: an alternative approach considering indexation lag and seasonality By Flávio de Freitas Val; Gustavo Silva Araujo
  18. On the Equivalence of Private and Public Money By Markus K. Brunnermeier; Dirk Niepelt
  19. East Asian Value Chains, Exchange Rates, and Regional Exchange Rate Arrangements By Willem THORBECKE
  20. The Role of Central Banks and the Political Environment in Financial Stability: A Literature Review By Zoe Venter
  21. Medium-term asymmetric fluctuations and EMU as an optimum currency area By Jeroen Hessel
  22. Dinar and Dirham As One Alternative Inflation Control Solution in Indonesia By Martono, Budi
  23. Monetary policy shocks and the health of banks By Jung, Alexander; Uhlig, Harald
  24. Winter is possibly not coming : mitigating financial instability in an agent-based model with interbank market By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  25. Macroprudential Regulation and Leakage to the Shadow Banking Sector By Stefan Gebauer; Falk Mazelis
  26. Exchange Rate Driven Balance Sheet Effect and Capital Flows to Emerging Market Economies By Can Kadirgan
  27. A new approach to estimation of actively managed component of foreign exchange reserves By Dąbrowski, Marek A.
  28. Digital Currencies and Central Banking: A Sense of Déjà Vu By Sigitas Siaudinis
  29. Expectations-driven liquidity traps: implications for monetary and fiscal policy By Nakata, Taisuke; Schmidt, Sebastian
  30. Is there any theory that explains the SEK? By Papahristodoulou, Christos
  31. Analyse du pass-through du taux d’intérêt au Maroc By harraou, Khalid
  32. Does the Bank of Thailand have the control over the money supply? By Jiranyakul, Komain

  1. By: Bernd Hayo (Philipps-Universitaet Marburg); Kai Henseler (Philipps-Universitaet Marburg); Marc Steffen Rapp (Philipps-Universitaet Marburg)
    Abstract: We examine how the verbal complexity of ECB communications affects financial market trading based on high-frequency data from European stock index futures trading. Studying the 34 events between May 2009 and June 2017, during which the ECB Governing Council press conferences covered unconventional monetary policy measures, and using the Flesch-Kincaid Grade Level to measure the verbal complexity of introductory statements to the press conferences, we find that more complex communications are associated with a lower level of contemporaneous trading. Increasing complexity of introductory statements leads to a temporal shift of trading activity towards the subsequent Q&A session, which suggests that Q&A sessions facilitate market participants’ information processing.
    Keywords: ECB, central bank communication, textual analysis, linguistic complexity, readability, financial markets, European stock markets
    JEL: D83 E52 E58 G12 G14
    Date: 2019
  2. By: Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: After appointing Federal Reserve Chairman Powell, President Trump steadily put pressure on the Fed to cut interest rates. We show that, on average, a statement from Trump led to lower long-term interest rates, consistent with expectations of lower expected future short rates. However, the impact of Trump's statements declined over time.
    Keywords: Federal Reserve, monetary policy, yield curve, political economy, central bank independence
    Date: 2019
  3. By: Georgios Georgiadis; Feng Zhu
    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 policy 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 sensitivity 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 financial stability is put at risk.
    Keywords: Trilemma, financial globalisation, monetary policy autonomy, spillovers
    JEL: F42 E52 C50
    Date: 2019–07
  4. By: Martinez-Miera, David; Repullo, Rafael
    Abstract: This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms financing that banks’ equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in fostering financial stability and leads to higher social welfare. JEL Classification: G21, G28, E44, E52
    Keywords: bank monitoring, capital requirements, financial stability, intermediation margin, macroprudential policy, monetary policy
    Date: 2019–07
  5. By: Kristin Forbes
    Abstract: The relationship central to most inflation models, between slack and inflation, seems to have weakened. Do we need a new framework? This paper uses three very different approaches - principal components, a Phillips curve model, and trend-cycle decomposition - to show that inflation models should more explicitly and comprehensively control for changes in the global economy and allow for key parameters to adjust over time. Global factors, such as global commodity prices, global slack, exchange rates, and producer price competition can all significantly affect inflation, even after controlling for the standard domestic variables. The role of these global factors has changed over the last decade, especially the relationship between global slack, commodity prices, and producer price dispersion with CPI inflation and the cyclical component of inflation. The role of different global and domestic factors varies across countries, but as the world has become more integrated through trade and supply chains, global factors should no longer play an ancillary role in models of inflation dynamics.
    Keywords: inflation, Phillips curve, trend-cycle, price dynamics, globalization
    JEL: E31 E37 E52 E58
    Date: 2019–07
  6. By: Jonathan Benchimol (Bank of Israel, Research Department, Jerusalem, Isreal); Irfan Qureshi (Asian Development Bank, Macroeconomics Division, Metro Manila, Philippines)
    Abstract: This paper presents an analysis of the stimulants and consequences of money demand dynamics. By assuming that household?s money holdings and consumption preferences are not separable, we demonstrate that the interest-elasticity of demand for money is a function of the household?s preference to hold real balances, the extent to which these preferences are not separable in consumption and real balances, and trend infl?ation. An empirical study of U.S. data revealed that there was a gradual fall in the interest elasticity of money demand of approximately one-third during the 1970s due to high trend in?flation. A further decline in the interest-elasticity of the demand for money was observed in the 1980s due to the changing household preferences that emerged in response to ?financial innovation. These developments led to a reduction in the welfare cost of infl?ation that subsequently explains the rise in monetary neutrality observed in the data.
    Keywords: Time-Varying Money Demand, Real Balance Effect, Welfare Cost of Infl?ation, Monetary Neutrality
    JEL: E31 E41 E52
    Date: 2019–07
  7. By: Jana Hamdan
    Abstract: Mobile money is a success story in terms of facilitating account ownership and payments in developing and emerging countries. Today, telecommunication companies offer mobile money services across more than 90 countries. The most popular services are deposits and instant digital money transfers between users. Widespread mobile money adoption is boosting financial inclusion, reducing in transaction costs and facilitating successful consumption smoothing and risk sharing among users. Nonetheless, mobile money is also associated with heterogeneous effects and risks among the poor and vulnerable populations. This article reviews the recent literature on the impact of mobile money in developing countries.
    Date: 2019
  8. By: Donato Masciandaro; Davide Romelli
    Abstract: This chapter reviews the evolution of the theory of monetary policy design since the 1980s, highlighting the emerging role of central banker psychology. Three subsequent stages are evident. First, the central bank was considered as an independent institution (modern economics). Second, central bankers were assumed to be delegated bureaucrats (advanced political economy). Third, a link with psychology was established (behavioural economics).
    JEL: E52 E58
    Date: 2019
  9. By: Michael J. Lamla; Damjan Pfajfar; Lea Rendell
    Abstract: We explore the consequences of losing confidence in the price-stability objective of central banks by quantifying the inflation and deflationary biases in inflation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that both inflation bias and deflationary bias can exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inflation expectations data across nine countries that allow for a direct identification of these biases. Both inflation and deflationary biases are present and sizable, but different across countries. Even among the euro-area countries, perceptions of the European Central Bank's objectives are very distinct.
    Keywords: inflation bias, deflationary bias, confidence in central banks, trust, effective lower bound, inflation expectations, microdata
    JEL: E31 E37 E58 D84
    Date: 2019–06
  10. By: Andreas Veneris; Andreas Park
    Abstract: Unfulfilled expectations from macro-economic initiatives during the Great Recession and the massive shift into globalization echo today with political upheaval, anti-establishment propaganda, and looming trade/currency wars that threaten domestic and international value chains. Once stable entities like the EU now look fragile and political instability in the US presents unprecedented challenges to an International Monetary System (IMS) that predominantly relies on the USD and EUR as reserve currencies. In this environment, it is critical for an international organization mandated to ensure stability to plan and act ahead. This paper argues that Decentralized Ledger-based technology (DLT) is key for the International Monetary Fund (IMF) to mitigate some of those risks, promote stability and safeguard world prosperity. Over the last two years, DLT has made headline news globally and created a worldwide excitement not seen since the internet entered the mainstream. The rapid adoption and open-to-all philosophy of DLT has already redefined global socioeconomics, promises to shake up the world of commerce/finance and challenges the workings of central governments/regulators. This paper examines DLT core premises and proposes a two-step approach for the IMF to expand Special Drawing Rights (SDR) into that sphere so as to become the originally envisioned numeraire and reserve currency for cross-border transactions in this new decentralized century.
    Date: 2019–06
  11. By: Yiqun Gloria Chen
    Abstract: This paper studies the current state of inflation dynamics using a Phillips curve model, assesses the degree of anchoring of inflation expectations, and analyzes the sensitivity of inflation to cyclical fluctuations of economic conditions.
    JEL: E17 E31 E37
    Date: 2019–08–02
  12. By: Nils Herger (Study Center Gerzensee)
    Abstract: The free-banking history of Switzerland is commonly subdivided into a period with unfettered competition (1826 - 1881) and strong banknote regulation (1881 - 1907). This paper suggests that unrestricted competition between private note-issuing banks gave rise to a fragmented paper-money system, which suffered from a lack of standard- ised, and commonly accepted, banknotes. Minimum-reserve requirements and mutual- acceptance rules were introduced to standardise banknotes. Rather than overissuing, these regulatory interventions restricted the exibility (or \elasticity") of the paper- money supply. It turned out that a central note-issuing bank was needed to supply adequate amounts of standardised banknotes.
    Date: 2019–08
  13. By: MASUJIMA Yuki
    Abstract: This paper investigates what factors are the determinants of a safe haven currency's ability to appreciate during the risk-off episodes. I assess how the safe-haven status and related determinants of 14 currencies changed over time from 2002 until 2017, using a safe-haven index that shows the time-variant tendency of exchange rate movement in response to changes in market uncertainty, measured using the CBOE volatility index (VIX). The panel regression results suggest safe-haven determinants shifted from external sustainability factors (current account surplus) to market driven factors (carry trade opportunity and high liquidity) during and after the Global Financial Crisis. The results highlight the increasing effects that changes in monetary policy stance and market risk appetites have on a currency's safe-haven status. That said, in addition to affecting the exchange rate, the shift between monetary tightening and easing by the Federal Reserve and local central banks may also change the interaction between the appetite for market risk and a currency's safe-haven status.
    Date: 2019–07
  14. By: Cynthia L. Doniger; James Hebden; Luke Pettit; Arsenios Skaperdas
    Date: 2019–07–17
  15. By: Patrick Blagrave
    Abstract: Co-movement (synchronicity) in inflation rates among a set of 13 emerging and developing countries in Asia is shown to be strongest for the food component, partly due to common rainfall shocks—a result which the paper terms the ‘monsoon effect.’ Economies with higher trade integration and co-movement in nominal effective exchange rates also experience greater food-inflation co-movement. By contrast, cross-country co-movement in core inflation is weak and the aforementioned determinants have little explanatory power, suggesting a prominent role for idiosyncratic domestic factors in driving core inflation. In the context of the growing literature on the globalization of inflation, these results suggest that common weather patterns are partly responsible for any role played by a so-called ‘global factor’ among inflation rates in emerging and developing economies, in Asia at least.
    Date: 2019–07–11
  16. By: Jef Boeckx; Maarten Dossche; Alessandro Galesi; Boris Hofmann; Gert Peersman
    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, shock identification
    JEL: C32 E52
    Date: 2019–06
  17. By: Flávio de Freitas Val; Gustavo Silva Araujo
    Abstract: The breakeven inflation rate (BEIR) is the difference between nominal and real interest rates. This measure can be obtained from fixed-rate and inflation-indexed government bonds. However, this task has two difficulties: a) inflation-indexed securities have an indexation lag in respect to inflation; and b) the seasonality of inflation implies seasonality of the real rate. The objective of this paper is to propose an alternative method for BEIR estimation using only government bonds, as well as to determine if this measure contains information on future short-term inflation. A good measure of BEIR estimated directly from bonds is relevant since these are the inflation-linked instruments with the highest liquidity. The empirical results show that the proposed BEIR is superior to the BEIR that do not take into account the problems of lag-indexation and seasonality and is statistically equal to or better than survey-based inflation expectations and the BEIR extracted from the future market when forecasting short-term inflation. Furthermore, the results show the lag and seasonal adjustments are more important for the estimation of the BEIR in the short term. An advantage of the proposed BEIR in relation to survey-based inflation expectations is that it allows for real-time monitoring, since it is continually updated
    Date: 2019–04
  18. By: Markus K. Brunnermeier; Dirk Niepelt
    Abstract: When does a swap between private and public money leave the equilibrium allocation and price system unchanged? To answer this question, the paper sets up a generic model of money and liquidity which identifies sources of seignorage rents and liquidity bubbles. We derive sufficient conditions for equivalence and apply them in the context of the “Chicago Plan”, cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC). Our results imply that CBDC coupled with central bank pass-through funding need not imply a credit crunch nor undermine financial stability.
    Keywords: money creation, monetary system, inside money, outside money, equivalence, CBDC, Chicago Plan, sovereign money
    JEL: E40 E50 G10 H60
    Date: 2019
  19. By: Willem THORBECKE
    Abstract: Tariffs and trade wars threaten East Asian economies. Exchange rate appreciations would be less disruptive than protectionism. This paper reports dynamic ordinary least squares findings indicating that appreciations in Asian supply chain countries reduce exports and increase imports. However, despite large current account surpluses, there has been little exchange rate appreciation outside of China. Modified Frankel-Wei (1994) regressions indicate that Asian countries focus on the U.S. dollar in their implicit currency baskets. These high weights on the dollar imply that regional exchange rates are in a Nash Equilibrium. No Asian country wants its exchange rate to appreciate against the dollar for fear of losing price competitiveness relative to its neighbors. A better equilibrium would occur if they assigned more weight to regional currencies and less to the dollar. This would facilitate a concerted appreciation of Asian currencies against the dollar.
    Date: 2019–06
  20. By: Zoe Venter
    Abstract: Financial instability and the subsequent credit crunches experienced by a number of countries following two decades of global structural reforms highlighted the importance of stabilizing credit supply and assigning a higher importance to financial stability. In this paper, I look at the independence of the Central Bank, the political environment and the impact of these factors on financial stability. I substantiate the literature review discussion with a brief empirical analysis of the effect of Central Bank independence on credit growth using an existing database created by Romelli (2018). The empirical results show that fluctuations in credit growth are larger for higher levels of Central Bank Independence and hence, in periods of financial instability or ultimately financial crises, Central Bank Independence would be reined back in an effort to reestablish financil stability.
    Keywords: Central Banks, Central BankIndependence, Financial Stability,Reform, Political Environment
    JEL: E58 F36 N14 N16
    Date: 2019–07
  21. By: Jeroen Hessel
    Abstract: Recent studies find that short-term fluctuations in EMU have been symmetric. This finding leads to benign views on the functioning of EMU as an optimum currency area (OCA), that are difficult to reconcile with the sovereign debt crisis. We try to solve this puzzle by looking at medium-term fluctuations instead, and reach five conclusions. First, medium-term fluctuations in EMU are much larger and less symmetric than short-term fluctuations. Second, medium-term fluctuations have become larger and less symmetric over time, while short-term fluctuations have become smaller and more symmetric. Third, medium-term fluctuations in EMU are less symmetric than in the US, while short-term fluctuations are more symmetric. Fourth, medium-term fluctuations in the euro area have become more strongly correlated with financial variables like credit and house prices, and less strongly correlated with real variables like productivity. Finally, medium-term fluctuations are more closely related to imbalances in price competitiveness, current accounts and budget deficits than short-term fluctuations. We conclude that our medium-term perspective has become relevant in the monetary union, due to the increasing importance of financial factors. It leads to less benign views on the functioning of EMU and on the endogenous OCA hypothesis.
    Keywords: EMU; optimum currency areas; economic fluctuations; financial cycle
    JEL: E44 E58 F36 G15 G21
    Date: 2019–07
  22. By: Martono, Budi
    Abstract: The phenomenon of soaring inflation and the depreciation of a country's currency has become a factual discussion on several discussions of economic disciplines. In the context of the rupiah exchange rate, an empirical fact explains that in some periods, the currency of the Republic of Indonesia, the rupiah, continued to weaken against the currencies that became references such as USD and Euro. It becomes interesting when you notice that some countries have the same profile as Indonesia, a currency issue becomes a global issue. Especially when we notice that the weakening of a country's currency will correlate in line with the soaring increase in inflation in a country. The economic growth of a country is influenced by several factors including the positive trade balance, significant GDP growth, and in some areas, a stable currency. It is common knowledge, that Indonesia as a country that has a high dependence on imports, always faces endless conditions when its import payments must be made using the dollar or euro. The amount issued by IDR to buy 1 USD is now almost reaching Rp. 15,000. Inevitably, the country's foreign exchange reserves as a barometer of a nation's economic strength when facing a crisis become a challenge. The need for a very high USD currency from large corporations and profit-seeking individuals from currency buying and selling transactions, adding to the burden of the IDR became even more severe which in turn also affected the soaring inflation.
    Keywords: Dinar and Dirham, Alternative, Inflation Control Solution.
    JEL: E25 E4 E41 E42 E52 G2
    Date: 2019–07–12
  23. By: Jung, Alexander; Uhlig, Harald
    Abstract: Based on high frequency identification and other econometric tools, we find that monetary policy shocks had a significant impact on the health of euro area banks. Information effects, which made the private sector more pessimistic about future prospects of the economy and the profitability of the banking sector, were strongly present in the post-crisis period. We show that ECB communications at the press conference were crucial for the market response and that bank health benefitted from surprises, which steepened the yield curve. We find that the effects of monetary policy shocks on banks displayed some persistence. Other bank characteristics, in particular bank size, leverage and NPL ratios, amplified the impact of monetary policy shocks on banks. After the OMT announcement, we detect that the response of bank stocks to monetary policy shocks normalised. We discover that, in the post-crisis episode, Fed monetary policy shocks influenced euro area bank stock valuations. JEL Classification: E40, E52, G14, G21
    Keywords: high-frequency identification, information effects, local projections, panel of individual banks
    Date: 2019–07
  24. By: Lilit Popoyan (Laboratory of Economics and Management); Mauro Napoletano (Observatoire français des conjonctures économiques); Andrea Roventini (Observatoire français des conjonctures économiques)
    Abstract: We develop a macroeconomic agent-based model to study how financial instability can emerge from the co-evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy. The model is populated by heterogenous firms, consumers, and banks that locally interact in dfferent markets. In particular, banks provide credit to firms according to a Basel II or III macro-prudential frameworks and manage their liquidity in the interbank market. The Central Bank performs monetary policy according to dfferent types of Taylor rules. We find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies, banking crises and the emergence of deep downturns. This requires the timely intervention of the Central Bank as a liquidity lender of last resort. Moreover, we find that the joint adoption of a three mandate Taylor rule tackling credit growth and the Basel III macro-prudential frame-work is the best policy mix to stabilize financial and real economic dynamics. However, as the Liquidity Coverage Ratio spurs financial instability by increasing the pro-cyclicality of banks’ liquid reserves, a new counter-cyclical liquidity buffer should be added to Basel III to improve its performance further. Finally, we find that the Central Bank can also dampen financial in- stability by employing a new unconventional monetarypolicy tool involving active management of the interest-rate corridor in the interbank market.
    Keywords: Financial instability; Interbank market freezes; Monetary policy; Macro-prudential policy; Basel III regulation; Tinbergen principle; Agent - based models
    Date: 2019–07
  25. By: Stefan Gebauer; Falk Mazelis
    Abstract: Macroprudential policies for financial institutions have received increasing prominence since the global financial crisis. These policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. For this purpose, we develop a DSGE model that differentiates between regulated, monopolistically competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999-2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. Coordinating the macroprudential tightening with monetary easing can limit this leakage mechanism, while still bringing about the desired reduction in aggregate lending. We discuss how regulators that either do or do not consider credit leakage to shadow banks set policy in response to macroeconomic shocks. Lastly, in a counterfactual analysis, we then compare how a macroprudential policy implemented before the crisis on all financial institutions, or just on commercial banks, would have dampened the leverage cycle.
    Keywords: Macroprudential Regulation, Monetary Policy, Shadow Banking, Non-Bank Financial Institutions, Financial Frictions
    JEL: E58 G23 G28
    Date: 2019
  26. By: Can Kadirgan
    Abstract: Turkish firm-level data suggests that firms borrowing from domestic banks have, on average, a higher degree of currency mismatch than firms with direct access to international financial markets. Higher FX exposure for the former group implies that their balance sheet are more likely to deteriorate when the local currency depreciates. This risk might in turn spillover onto creditors, potentially affecting the financial health of domestic banks. In a set of emerging market economies, I indeed find that when global liquidity tightens, domestic banks are more adversely affected by the above described channel, than firms with direct access to international financial markets. When the US$ index is countercyclical over the global credit cycle, countries whose foreign currency liabilities are heavily weighted in US$ experience a larger valuation effect. Using this variation to identify the exchange rate driven balance sheet effect, I find that banking sectors in countries heavily indebted in US$ have more difficulties accessing foreign funds when global liquidity tightens. In the same countries, this additional hindrance is however absent for firms with direct access to international financial markets. I develop a partial equilibrium model whose predictions are consistent with these results. The results favor the implementation of FX-related macro prudential policies during periods of abundant global liquidity. These policies should reinforce the financial stability of the banking system at a potential reversal of global funds.
    Keywords: FX debt, Balance sheet effect, Capital flows, Banks, Systemic risk, Global liquidity
    JEL: E0 F0 F3
    Date: 2019
  27. By: Dąbrowski, Marek A.
    Abstract: Changes in foreign exchange (FX) reserves are difficult to measure in an economically meaningful way because central banks do not decompose reported data into passive and active components. Only the latter should be used when the usefulness of FX reserves in crisis management is assessed or symptoms of currency manipulations are looked for. The applicability of the existing approach to identification of active component of FX reserves is highly limited as it relies on data that are available for a relatively short timespan. To overcome these problems the new approach to estimation of active component of FX reserves is laid out. It makes use of a time-varying coefficient model estimated with Bayesian techniques. The empirical results are obtained for 20 countries over 1995-2017 period. The main finding is that the estimates from the new approach are highly correlated with those from the existing approach, but the timespan of the former is substantially larger than that of the latter. The estimates based on the new approach are cross-checked against the data on FX market interventions of the Czech National Bank. It is demonstrated that the estimates are in general superior to plain changes in FX reserves as a measure of FX interventions and are not worse than those from the existing approach.
    Keywords: foreign exchange reserves, foreign exchange interventions, open economy macroeconomics, Czech National Bank, state space models
    JEL: C32 E58 F31 F41
    Date: 2019–07–22
  28. By: Sigitas Siaudinis (Bank of Lithuania)
    Abstract: This paper examines the implications of digital currencies – both private cryptocurrencies and central bank digital currencies (CBDCs) – for central banking. We discuss some déjà vu episodes from monetary history in order to obtain a clearer understanding the present and potential implications of these currencies. We find that not only the current limitations of private cryptocurrencies, but also their conceptual underpinnings, argue against their replacement of conventional money. The two main potential problems with broadly accessible (general purpose) CBDC are a digital run and an excessive involvement of a central bank in the funding of the real economy. Meanwhile, alternative reserve-backed accounts or tokens (an implicit CBDC known as Tobin’s alternative) would also be exposed to these problems, albeit in a less pronounced way. CBDC-related hopes for monetary policy to eliminate the effective lower bound constraint are found to be exaggerated, even in a cashless world. We argue that central banks’ response to the digitalisation trend should be an integrative solution which satisfies the public demand for a safe means of payment, safeguards private innovations, and ensures financial stability. We conclude that there is no observable form of CBDC that would serve as a best-choice central bank response in advanced economies. Such a response might be considered as a temporary solution (if any), however, in emerging economies with weak financial inclusion.
    Keywords: private cryptocurrencies, central bank digital currency (CBDC), fintechs, financial stability, monetary policy
    JEL: E51 E58 N20
    Date: 2019–08–06
  29. By: Nakata, Taisuke; Schmidt, Sebastian
    Abstract: We study optimal monetary and fiscal policy in a New Keynesian model where occasional declines in agents’ confidence can give rise to persistent liquidity trap episodes. Unlike in the case of fundamental-driven liquidity traps, there is no straightforward recipe for mitigating the welfare costs and the systematic inflation shortfall associated with expectations-driven liquidity traps. Raising the inflation target or appointing an inflation-conservative central banker improves inflation outcomes away from the lower bound but exacerbates the shortfall at the lower bound. Using government spending as an additional policy tool worsens stabilization outcomes both at and away from the lower bound. However, appointing a policymaker who is sufficiently less concerned with government spending stabilization than society can eliminate expectations-driven liquidity traps altogether. JEL Classification: E52, E61, E62
    Keywords: discretion, effective lower bound, fiscal policy, monetary policy, policy delegation, sunspot equilibria
    Date: 2019–08
  30. By: Papahristodoulou, Christos
    Abstract: This paper investigates if the value of the Swedish krona (SEK) against the US dollar ($) and the Euro (€) can be explained by some standard theories and fundamentals, such as the purchasing power parity, the interest rate parity, the debt-ratio and the trade balance ratio, using monthly data since Feb. 1993. All of them fail to explain why the SEK is so “weak”. The lower inflation rate in Sweden over the recent years has not strengthened the currency. Similarly, the theoretically stronger SEK implied by the lower interest rates in Sweden as the uncovered interest rate parity predicts, has not emerged yet. Finally, neither the persistent trade balance surpluses, nor the declining and very low debt ratio in Sweden have had any positive effects on the currency. It seems that the traders and investors ignore the fundamentals, speculate against the currency and keep it undervalued. Moreover, a number of simulated paths, predicted from various ARIMA-processes, based on the historic exchange rates, show that the worse exchange rates have already gone and by the end of 2020 the $ and the € will cost around 8 and 9.8 SEK respectively.
    Keywords: exchange rate, interest rate parity, purchasing power parity, forecasting
    JEL: E43 F31 F47
    Date: 2019–07–05
  31. By: harraou, Khalid
    Abstract: This article is devoted in particular to examining the relationship between the money market rate and bank rates through pass-through analysis and also to studying the presence of asymmetry in the transmission dynamics of the policy. at the level of the Moroccan banking system. For this, an Error Correction Model is used to measure the degree of responsiveness of bank rates following changes in monetary conditions.
    Keywords: Pass-through, monetary policy, transmission channels, lending rates, credit rates, interbank rate, Error Correction Model (ERM)
    JEL: E43
    Date: 2019–07–09
  32. By: Jiranyakul, Komain
    Abstract: This paper estimates the broad money multiplier for Thailand using monthly data from 1997M1 to 2017M12. It is found that there is nonlinear relationship between money supply and monetary base. An increase in monetary base causes the broad money supply to increase proportionally, and vice versa. This implies that the estimated money multiplier is stable during the period of investigation. This finding suggests that the Bank of Thailand has the ability to control the broad money supply. The finding also points to the soundness of the current monetary policy regime.
    Keywords: Money multiplier, exogeneity of money supply, cointegration
    JEL: E5 E51 E52
    Date: 2019–07

This nep-mon issue is ©2019 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.