nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒08‒19
37 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. A Unified Measure of Fed Monetary Policy Shocks By Chunya Bu; John Rogers; Wenbin Wu
  2. Tight Money-Tight Credit: Coordination Failure in the Conduct of Monetary and Financial Policies By Julio A. Carrillo; Enrique G. Mendoza; Victoria Nuguer; Jessica Roldán-Peña
  3. Do Old Habits Die Hard? Central Banks and the Bretton Woods Gold Puzzle By Eric Monnet; Damien Puy
  4. Inflation and Deflationary Biases in Inflation Expectations By Michael J. Lamla; Damjan Pfajfar; Lea Rendell
  5. From cash to central bank digital currencies and cryptocurrencies: A balancing act between modernity and monetary stability By Belke, Ansgar; Beretta, Edoardo
  6. Optimal Monetary Policy Under Bounded Rationality By Jonathan Benchimol; Lahcen Bounader
  7. Introducing dominant currency pricing in the ECB's global macroeconomic model By Georgiadis, Georgios; Mösle, Saskia
  8. Expectations-Driven Liquidity Traps: Implications for Monetary and Fiscal Policy By Taisuke Nakata; Sebastian Schmidt
  9. (Un)conventional policy and the effective lower bound By Fiorella De Fiore; Oreste Tristani
  10. Danger To The Old Lady Of Threadneedle Street? The Bank Restriction Act And The Regime Shift To Paper Money, 1797-18211 By Patrick K. O’Brien; Nuno Palma
  11. Monetary policy surprises and employment: evidence from matched bank-firm loan data on the bank lending-channel By Rodrigo Barbone Gonzalez
  12. Forecasting ECB policy rates with different monetary policy rules By Belke, Ansgar; Klose, Jens
  13. Time-Varying Money Demand and Real Balance Effects By Benchimol, Jonathan; Qureshi, Irfan
  14. Optimal Inflation Target with Expectations-Driven Liquidity Traps By Philip Coyle; Taisuke Nakata
  15. Growth Dynamics, Multiple Equilibria, and Local Indeterminacy in an Endogenous Growth Model of Money, Banking and Inflation Targeting By Rangan Gupta; Philton Makena
  16. How does the interaction of macroprudential and monetary policies affect cross-border bank lending? By Előd Takáts; Judit Temesvary
  17. Banks' business model and credit supply in Chile: the role of a state-owned bank By Miguel Biron; Felipe Córdova; Antonio Lemus
  18. A Model of Intermediation, Money, Interest, and Prices By Saki Bigio; Yuliy Sannikov
  19. Global Factors Driving Inflation and Monetary Policy: A Global VAR Assessment By Martin Feldkircher; Elizaveta Lukmanova; Gabriele Tondl
  20. Taming the Global Financial Cycle: Central Banks and the Sterilization of Capital Flows in the First Era of Globalization (1891-1913) By Bazot, Guillaume; Monnet, Eric; Morys, Matthias
  21. The Role of U.S. Monetary Policy in Global Banking Crises By Ceyhun Bora Durdu; Alex Martin; Ilknur Zer
  22. Covered Interest Parity Deviations: Macrofinancial Determinants By Eugenio M. Cerutti; Maurice Obstfeld; Haonan Zhou
  23. Global Factors Driving Inflation and Monetary Policy: A Global VAR Assessment By Feldkircher, Martin; Lukmanova, Elizaveta; Tondl, Gabriele
  24. International Bank Lending Channel of Monetary Policy By Silvia Albrizio; Sangyup Choi; Davide Furceri; Chansik Yoon
  25. Capital flows in the euro area and TARGET2 balances By Hristov, Nikolay; Hülsewig, Oliver; Wollmershäuser, Timo
  26. The Long Run Stability of Money Demand in the Proposed West African Monetary Union By Simplice A. Asongu; Oludele E. Folarin; Nicholas Biekpe
  27. A loan-level analysis of bank lending in Mexico By Carlos Cantú; Roberto Lobato; Calixto López; Fabrizio Lopez-Gallo
  28. Central Bank Announcements: Big News for Little People? By Lamla, Michael J; Vinogradov, Dmitri V
  29. The costs and benefits of liquidity regulations: Lessons from an idle monetary policy tool By Christopher Curfman; John Kandrac
  30. Interest rate bands of inaction and play-hysteresis in domestic investment: Evidence for the euro area By Belke, Ansgar; Frenzel Baudisch, Coletta; Göcke, Matthias
  31. Revisiting the Anomalous Relationship between Inflation and REIT Returns in Presence of Structural Breaks: Empirical Evidence from the USA and the UK By Das, Mahamitra; Sarkar, Nityananda
  32. A Tale of Two Countries: Cash Demand in Canada and Sweden By Walter Engert; Ben Fung; Björn Segendorf
  33. The internationalization of domestic banks and the credit channel: an empirical assessment By Paola Morales; Daniel Osorio; Juan Sebastian Lemus-Esquivel
  34. Covered interest rate parity, relative funding liquidity and cross-currency repos By Daniel Kohler; Benjamin Müller
  35. Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s? By Qazi Haque; Nicolas Groshenny; Mark Weder
  36. How do bank-specific characteristics affect lending? New evidence based on credit registry data from Latin America By Carlos Cantú; Leonardo Gambacorta
  37. Missing Disinflation and Human Capital Depreciation By Abdoulaye Millogo; Jean-François Rouillard

  1. By: Chunya Bu; John Rogers; Wenbin Wu
    Abstract: Identification of Fed monetary policy shocks is complex, in light of the distinct policymaking regimes before, during, and after the ZLB period of December 2008 to December 2015. We develop a heteroscedasticity-based partial least squares approach, combined with Fama-MacBeth style cross-section regressions, to identify a US monetary policy shock series that usefully bridges periods of conventional and unconventional policymaking and is effectively devoid of the central bank information effect. Our series has moderately high correlation with the shocks identified by Nakamura and Steinsson (2018), Swanson (2018), and Jarocinski and Karadi (2018), but has crucially important differences. Following both the Nakamura-Steinsson and Jarocinski-Karadi empirical tests, we find scant evidence of the information effect in our measure. We attribute the source of these different findings to our econometric procedure and our use of the full maturity spectrum of interest rate instrume nts in constructing our measure. We then present evidence confirming an hypothesis in the literature that the information effect can lead to the result that shocks to monetary policy have transmission effects with signs that differ from traditional theory. We find that shocks to series that are devoid of (embody) the information effect display conventionally-signed (perverse) impulse responses of output and inflation. This provides evidence of first-order importance to staff at central banks undertaking quantitative theoretical modeling of the effects of monetary policy.
    Keywords: Federal Reserve Board And Federal Reserve System ; Information Effect
    JEL: E4 E5
    Date: 2019–06–07
  2. By: Julio A. Carrillo (Banco de México (E-mail:; Enrique G. Mendoza (University of Pennsylvania (E-mail:; Victoria Nuguer (Inter-American Development Bank (E-mail:; Jessica Roldán-Peña (Banco de México (E-mail:
    Abstract: Violations of Tinbergen's Rule and strategic interaction undermine monetary and financial policies significantly in a New Keynesian model with the Bernanke-Gertler accelerator. Welfare costs of risk shocks are large because of efficiency losses and income effects of costly monitoring, but they are larger under a simple Taylor rule (STR) and a Taylor rule augmented with credit spreads (ATR) than under a dual rules regime (DRR) with a Taylor rule and a financial rule targeting spreads, by 264 and 138 basis points respectively. ATR and STR are tight money-tight credit regimes that respond too much to inflation and not enough to spreads, and yield larger fluctuations in response to risk shocks. Reaction curves display shifts from strategic substitutes to complements in the choice of policy-rule elasticities. The Nash equilibrium is also a tight money-tight credit regime, with welfare 30 basis points lower than in Cooperative equilibria and the DRR, but still sharply higher than in the ATR and STR regimes.
    Keywords: Monetary policy, Financial frictions, Macroprudential policy, Leaning against the wind, Policy coordination
    JEL: E3 E44 E52 G18
    Date: 2019–07
  3. By: Eric Monnet; Damien Puy
    Abstract: Why did monetary authorities hold large gold reserves under Bretton Woods (1944–1971) when only the US had to? We argue that gold holdings were driven by institutional memory and persistent habits of central bankers. Countries continued to back currency in circulation with gold reserves, following rules of the pre-WWII gold standard. The longer an institution spent in the gold standard (and the older the policymakers), the stronger the correlation between gold reserves and currency. Since dollars and gold were not perfect substitutes, the Bretton Woods system never worked as expected. Even after radical institutional change, history still shapes the decisions of policymakers.
    Date: 2019–07–24
  4. 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 an inflation bias as well as a deflationary bias 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) in inflation expectations of these individuals. Among the euro-area countries in our sample, we can document significant differences in perceptions of the European Central Bank’s objectives, despite having a common monetary policy.
    Keywords: ZLB ; Confidence in Central Banks ; Deflationary Bias ; Inflation Bias ; Inflation Expectations ; Microdata
    JEL: E58 E31 D84 E37
    Date: 2019–06–03
  5. By: Belke, Ansgar; Beretta, Edoardo
    Abstract: The paper explores the precarious balance between modernizing monetary systems by means of digital currencies (either issued by the central bank itself or independently) and safeguarding financial stability as also ensured by tangible payment (and saving) instruments like paper money. Which aspects of modern payments systems could contribute to improve the way of functioning of today's globalized economy? And, which might even threaten the above mentioned instable equilibrium? This survey-paper aims, precisely, at giving some preliminary answers to a complex - therefore, ongoing - debate at the scientific as well as the banking and the political level.
    Keywords: cash,central banks,cryptocurrencies,digital currencies,monetary systems
    JEL: E4 E5 G21 G23
    Date: 2019
  6. By: Jonathan Benchimol; Lahcen Bounader
    Abstract: The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses.
    Date: 2019–08–02
  7. By: Georgiadis, Georgios; Mösle, Saskia
    Abstract: A large share of global trade being priced and invoiced primarily in US dollar rather than the exporter's or the importer's currency has important implications for the transmission of shocks. We introduce this "dominant currency pricing" (DCP) into ECB-Global, the ECB's macroeconomic model for the global economy. To our knowledge, this is the first attempt to incorporate DCP into a major global macroeconomic model used at central banks or international organisations. In ECB-Global, DCP affects in particular the role of expenditure switching and the US dollar exchange rate for spillovers: In case of a shock in a non-US economy that alters the value of its currency multilaterally, expenditure switching occurs only through imports; in case of a US shock that alters the value of the US dollar multilaterally, expenditure switching occurs both in non-US economies' imports and - as these are imports of their trading partners - exports. Overall, under DCP the US dollar exchange rate is a major driver of global trade, even for transactions that do not involve the US. In order to illustrate the usefulness of ECB-Global and DCP for policy analysis, we explore the implications of the Euro rivaling the US dollar as a second dominant currency in global trade. According to ECB-Global, in such a scenario the global spillovers from US shocks are smaller, while those from euro area shocks are amplified; domestic euro area monetary policy effectiveness is hardly affected by the Euro becoming a second globally dominant currency in trade.
    Keywords: global macroeconomic modelling,dominant currency paradigm,spillovers
    JEL: F42 E52 C50
    Date: 2019
  8. By: Taisuke Nakata; Sebastian Schmidt
    Abstract: We study optimal monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. There is no straightforward recipe for enhancing welfare in this economy. Raising the inflation target or appointing an inflation-conservative central banker mitigates the inflation shortfall away from the lower bound but exacerbates deflationary pressures at the lower bound. Using government spending as an additional policy instrument worsens allocations at and away from the lower bound. However, appointing a policymaker who is sufficiently less concerned with government spending stabilization than society eliminates expectations-driven liquidity traps.
    Keywords: Effective Lower Bound ; Sunspot Equilibria ; Monetary Policy ; Fiscal Policy ; Discretion ; Policy Delegation
    JEL: E62 E61 E52
    Date: 2019–07–17
  9. By: Fiorella De Fiore; Oreste Tristani
    Abstract: We study the optimal combination of interest rate policy and unconventional monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that credit policy can be a powerful substitute for interest rate policy. In the face of shocks that negatively affect banks' monitoring efficiency, unconventional measures insulate the real economy from further deterioration in financial conditions and it may be optimal for the central bank not to cut rates to zero. Thus, credit policy lowers the likelihood of hitting the zero bound constraint. Reductions in the policy rates without non-standard measures are suboptimal as they inefficiently force savers to change their intertemporal consumption patterns.
    Keywords: optimal monetary policy, unconventional policies, zero-lower bound, asymmetric information
    JEL: E44 E52 E61
    Date: 2019–08
  10. By: Patrick K. O’Brien; Nuno Palma
    Abstract: The Bank Restriction Act of 1797 was the unconventional monetary policy of its time. It suspended the convertibility of the Bank of England's notes into gold, a policy which lasted until 1821. The current historical consensus is that it was a result of the state's need to finance the war, France’s remonetization, a loss of confidence in the English country banks, and a run on the Bank of England’s reserves following a landing of French troops in Wales. We argue that while these factors help us understand the timing of the suspension, they cannot explain its success. We deploy new long-term data which leads us to a complementary explanation: the policy succeeded thanks to the reputation of the Bank of England, achieved through a century of prudential collaboration between the Bank and the Treasury.
    Keywords: Bank of England, financial revolution, fiat money, money supply, monetary policy commitment, reputation, time-consistency, regime shift
    Date: 2019–08
  11. By: Rodrigo Barbone Gonzalez
    Abstract: This paper investigates the bank lending-channel of monetary policy (MP) surprises. To identify the effects of MP surprises on credit supply, I take the changes in interest rate derivatives immediately after each MP announcement and bring this high-frequency identification strategy to comprehensive and matched bank-firm data from Brazil. The results are robust and stronger than those obtained with Taylor residuals or the reference rate. Consistently with theory, heterogeneities across financial intermediaries, e.g. bank capital, are relevant. Firms connected to stronger banks mitigate about one third of the effects of contractionary MP on credit and about two thirds on employment.
    Keywords: employment, monetary policy, surprises, loan-level, lending channel
    JEL: E52 E51 G21 G28
    Date: 2019–07
  12. By: Belke, Ansgar; Klose, Jens
    Abstract: This article compares two types of monetary policy rules - the Taylor-Rule and the Orphanides-Rule - with respect to their forecasting properties for the policy rates of the European Central Bank. In this respect the basic rules, results from estimated models and augmented rules are compared. Using quarterly real-time data from 1999 to the beginning of 2019, we find that an estimated Orphanides-Rule performs best in nowcasts, while it is outperformed by an augmented Taylor-Rule when it comes to forecasts. However, also a no-change rule delivers good results for forecasts, which is hard to beat for most policy rules.
    Keywords: Taylor-Rule,Orphanides-Rule,monetary policy rates,forecasting,European Central Bank
    JEL: E43 E52 E58 C53
    Date: 2019
  13. By: Benchimol, Jonathan (Bank of Israel); Qureshi, Irfan (Asian Development Bank)
    Abstract: This paper presents an analysis of the stimulants and consequences of money demand dynamics. By assuming that households’ money holdings and consumption preferences are not separable, we demonstrate that the interest-elasticity of demand for money is a function of the households’ preference to hold real balances, the extent to which these preferences are not separable in consumption and real balances, and trend inflation. 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 inflation. 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 inflation that subsequently explains the rise in monetary neutrality observed in the data.
    Keywords: Time-Varying Money Demand; Real Balance Effect; Welfare Cost of Inflation; Monetary Neutrality
    JEL: E31 E41 E52
    Date: 2019–06–11
  14. By: Philip Coyle; Taisuke Nakata
    Abstract: In expectations-driven liquidity traps, a higher inflation target is associated with lower inflation and consumption. As a result, introducing the possibility of expectations-driven liquidity traps to an otherwise standard model lowers the optimal inflation target. Using a calibrated New Keynesian model with an effective lower bound (ELB) constraint on nominal interest rates, we find that even a very small probability of falling into an expectations-driven liquidity trap lowers the optimal inflation target nontrivially. Our analysis provides a reason to be cautious about the argument that central banks should raise their inflation targets in light of a higher likelihood of hitting the ELB.
    Keywords: Liquidity Traps ; Optimal Inflation Target ; Sunspot Shock ; Zero Lower Bound
    JEL: E52 E63 E32 E62 E61
    Date: 2019–05–17
  15. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Philton Makena (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: We develop an overlapping generations monetary endogenous growth (generated by productive public expenditures) model with inflation targeting, characterized by relocation shocks for young agents, which in turn generates a role for money (even in the presence of the return-dominating physical capital) and financial intermediaries. Based on this model, we show that two distinct growth paths emerge conditional on a threshold value of the share of physical capital in the production function. Along one path, we find convergence to a single stable equilibrium, and on the other path, we find multiple equilibria: a stable low-growth and an unstable high-growth, with the stable low-growth equilibrium found to be locally indeterminate. Since, government expenditure is productive in our model, a higher inflation-target would translate into higher growth, but under multiple equilibria, this is not necessarily always the case.
    Keywords: Endogenous Growth, Inflation Targeting, Growth Dynamics
    JEL: C62 O41 O42
    Date: 2019–08
  16. By: Előd Takáts; Judit Temesvary
    Abstract: We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant.
    Keywords: Cross-Border Claims ; Diff-In-Diff Analysis ; Macroprudential Policy ; Monetary Policy
    JEL: F34 F42 G38 G21
    Date: 2019–06–21
  17. By: Miguel Biron; Felipe Córdova; Antonio Lemus
    Abstract: During the Global Financial Crisis, banks suffered losses on a scale not witnessed since the Great Depression, partly due to two major structural developments in the banking industry; deregulation combined with financial innovation. In the aftermath of the financial crisis, the regulatory response concentrated on the Basel III recommendations, raising core capital requirements for banking institutions, which affected their business models and funding patterns. Consequently, these changes have had significant implications for how banks grant loans, how they react to monetary policy shocks, and how they respond to external shocks. We find evidence of significant interactions between the bank lending channel and both monetary and global shocks in Chile. These links have changed significantly after the Global Financial Crisis. In particular, they have been shaped by the counter-cyclical behavior of a state-owned bank.
    Keywords: bank lending channel, global factors, Banco Estado
    JEL: E40 E44 E51 E52 E58 G21
    Date: 2019–07
  18. By: Saki Bigio (University of California, Los Angeles and NBER); Yuliy Sannikov (Stanford Business School and NBER)
    Abstract: A model integrates a modern implementation of monetary policy (MP) into an incomplete markets monetary economy. Policy sets corridor rates and conducts open-market operations and fiscal transfers. These tools grant independent control over credit spreads and inflation. We study the implementation of spreads and inflation via different MP instruments. Through its influence on spreads, MP affects the evolution of real credit, interests, output, and wealth distribution (both in the long and the short run). We decompose effects through different transmission channels. We study the optimal spread management and find that the active management of spreads is a desirable target.
    Keywords: Monetary Economics, Monetary Policy, Credit Channel
    JEL: E31 E32 E41 E44 E52
    Date: 2019–08
  19. By: Martin Feldkircher (Oesterreichische Nationalbank); Elizaveta Lukmanova (KU Leuven); Gabriele Tondl (Department of Economics, Vienna University of Economics and Business)
    Abstract: In this paper, we examine international linkages in inflation and short-term interest rates using a global sample of OECD and emerging economies. Using a Bayesian global vector autoregression (GVAR) model, we show that for short-term interest rates both movements in inflation and output play an important role. In advanced countries, however, international factors such as foreign interest rates appear as an important driver of local interest rates. For inflation, we also find evidence for the importance of global factors, such as price developments in other countries, oil prices and the exchange rate. Again, this impact of global factors appears predominately in advanced countries.
    Keywords: Monetary policy, Inflation, Global VAR
    JEL: E40 E43 E44
    Date: 2019–08
  20. By: Bazot, Guillaume; Monnet, Eric; Morys, Matthias
    Abstract: Are central banks able to isolate their domestic economy by offsetting the effects of foreign capital flows? We provide an answer for the First Age of Globalisation based on an exceptionally detailed and standardized database of monthly balance sheets of all central banks in the world (i.e. 21) over 1891-1913. Investigating the impact of a global interest rate shock on the exchange-rate, the interest rate and the central bank balance sheet, we find that not a single country played by the "rules of the game." Core countries fully sterilized capital flows, while peripheral countries also relied on convertibility restrictions to avoid reserve losses. In line with the predictions of the trilemma, the exchange rate absorbed the shock fully in countries off the gold standard (floating exchange rate): the central bank's balance sheet and interest rate were not affected. In contrast, in the United States, a gold standard country without a central bank, the reaction of the money market rate was three times stronger than that of interest rates in countries with a central bank. Central banks' balance sheets stood as a buffer between domestic economy and global financial markets.
    Keywords: central banking; Federal Reserve System; gold standard; rules of the game; Sterilization; trilemma
    JEL: E42 E50 F30 F44 N10 N20
    Date: 2019–07
  21. By: Ceyhun Bora Durdu; Alex Martin; Ilknur Zer
    Abstract: We examine the role of U.S. monetary policy in global financial stability by using a cross-country database spanning the period from 1870-2010 across 69 countries. U.S. monetary policy tightening increases the probability of banking crises for those countries with direct linkages to the U.S., either in the form of trade links or significant share of USD-denominated liabilities. Conversely, if a country is integrated globally, rather than having a direct exposure, the effect is ambiguous. One possible channel we identify is capital flows: If the correction in capital flows is disorderly (e.g., sudden stops), the probability of banking crises increases. These findings suggest that the effect of U.S. monetary policy in global banking crises is not uniform and largely dependent on the nature of linkages with the U.S.
    Keywords: banking crises ; financial stability ; monetary policy shocks ; sudden stop
    JEL: G15 E44 E52 F42
    Date: 2019–05–28
  22. By: Eugenio M. Cerutti; Maurice Obstfeld; Haonan Zhou
    Abstract: For several decades until the Global Financial Crisis (GFC), Covered Interest Parity (CIP) appeared to hold quite closely—even as a broad macroeconomic relationship applying to daily or weekly data. Not only have CIP deviations significantly increased since the GFC, but potential macrofinancial drivers of the variation in CIP deviations have also become significant. The variation in CIP deviations seems to be associated with multiple factors, not only regulatory changes. Most of these do not display a uniform importance across currency pairs and time, and some are associated with possibly temporary drivers (such as asynchronous monetary policy cycles).
    JEL: F31 G15
    Date: 2019–08
  23. By: Feldkircher, Martin; Lukmanova, Elizaveta; Tondl, Gabriele
    Abstract: In this paper, we examine international linkages in inflation and short-term interest rates using a global sample of OECD and emerging economies. Using a Bayesian global vector autoregression (GVAR) model, we show that for short-term interest rates both movements in inflation and output play an important role. In advanced countries, however, international factors such as foreign interest rates appear as an important driver of local interest rates. For inflation, we also find evidence for the importance of global factors, such as price developments in other countries, oil prices and the exchange rate. Again, this impact of global factors appears predominately in advanced countries.
    Keywords: Monetary policy, Inflation, Global VAR
    Date: 2019–08
  24. By: Silvia Albrizio (Bank of Spain); Sangyup Choi (Yonsei University); Davide Furceri (IMF); Chansik Yoon (Princeton University)
    Abstract: How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel.
    Keywords: Monetary policy spillovers; International bank lending channel; Cross-border banking flows; Global financial cycles; Local projections
    JEL: E52 F21 F32 F42
    Date: 2019–08
  25. By: Hristov, Nikolay; Hülsewig, Oliver; Wollmershäuser, Timo
    Abstract: We estimate a panel VAR model for the euro area to quantitatively assess how the uneven recourse of national banking systems in the euro area to the ECB's unconventional refinancing operations that led to the accumulation of large TARGET2 balances, has contributed to the propagation of different types of structural economic shocks as well as to the historical evolution of aggregate economic activity in euro area member countries in the period 2008-2014. Our results suggest that the built-up of TARGET2 balances was mainly driven by capital flow shocks while being barely responsive to other aggregate shocks. Furthermore, on basis of counterfactual experiments we find that the ability to build-up sizable TARGET2 liabilities has contributed substantially to avoid deeper recessions in the distressed euro area member countries like Spain, Italy, Ireland and Portugal, while to a smaller extent depressing aggregate economic activity in core member states, such as Germany, the Netherlands and Finland.
    Keywords: Euro area,TARGET2 balances,capital in flow shocks,panel vector autoregressive model
    JEL: E42 F32 F41
    Date: 2019
  26. By: Simplice A. Asongu (Yaoundé/Cameroon); Oludele E. Folarin (University of Ibadan, Ibadan, Nigeria); Nicholas Biekpe (Cape Town, South Africa)
    Abstract: This study examines the stability of money demand in the proposed West African Monetary Union (WAMU). The study uses annual data for the period 1981 to 2015 from thirteen of the fifteen countries making-up the Economic Community of West African States (ECOWAS). A standard money demand function is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across ECOWAS member states in the stability of money demand. This divergence is informed by differences in cointegration, stability, short run and long term determinants, and error correction in event of a shock.
    Keywords: Stable; demand for money; bounds test
    JEL: E41 C22
    Date: 2018–01
  27. By: Carlos Cantú; Roberto Lobato; Calixto López; Fabrizio Lopez-Gallo
    Abstract: We use loan-level data from the Mexican credit registry to study how bank-specific characteristics in influence credit supply. We explore how these characteristics affect the transmission of monetary policy and their role in building banks' resilience to external shocks. Then, we compare the response of the credit supply of foreign subsidiaries to that of domestic banks. Finally, we study the impact of other micro characteristics on the credit supply and their influence on the transmission of shocks. Our results highlight the importance of banks' strong balance sheets and stable sources of funding for the provision of credit in Mexico. In general, these characteristics shelter banks from shocks.
    Keywords: credit registry, credit supply, bank-speci c characteristics, bank lending channel
    JEL: E44 E51 E52 E58 G21
    Date: 2019–07
  28. By: Lamla, Michael J; Vinogradov, Dmitri V
    Abstract: Little is known on how and whether central bank announcements affect consumers' beliefs about policy relevant economic figures. This paper focuses on consumers' perceptions and expectations of inflation and interest rates and confidence therein. Based on a sound identification (running surveys shortly before and after communication events), and relying on above 15 000 observations, spanning over 12 FOMC press conferences between December 2015 and June 2018, we document the impact of the central bank communication on ordinary people. While announcement events have little measurable direct effect on average beliefs, they make people more likely to receive news about the central bank's policy. In general, informed consumers tend to have lower perceptions and expectations, higher confidence and, to an extent, better quality beliefs.
    Keywords: perceptions, expectations, central bank communication, consumers.
    Date: 2019–08–08
  29. By: Christopher Curfman; John Kandrac
    Abstract: We investigate how liquidity regulations affect banks by examining a dormant monetary policy tool that functions as a liquidity regulation. Our identification strategy uses a regression kink design that relies on the variation in a marginal high-quality liquid asset (HQLA) requirement around an exogenous threshold. We show that mandated increases in HQLA cause banks to reduce credit supply. Liquidity requirements also depress banks' profitability, though some of the regulatory costs are passed on to liability holders. We document a prudential benefit of liquidity requirements by showing that banks subject to a higher requirement before the financial crisis had lower odds of failure.
    Keywords: Monetary Policy ; Bank Failure ; Bank Lending ; Liquidity Regulation ; Required Reserves
    JEL: G21 E58 E51 G28 E52
    Date: 2019–05–28
  30. By: Belke, Ansgar; Frenzel Baudisch, Coletta; Göcke, Matthias
    Abstract: The interest rate represents an important monetary policy tool to steer investment in order to reach price stability. Therefore, implications of the exact form and magnitude of the interest rate-investment nexus for the European Central Bank's effectiveness in a low interest rate environment gain center stage. We first present a theoretical framework of the hysteretic impact of changes in the interest rate on macroeconomic investment under certainty and under uncertainty to investigate whether uncertainty over future interest rates in the Euro area hampers monetary policy transmission. In this non-linear model, strong reactions in investment activity occur as soon as changes of the interest rate exceed a zone of inaction, that we call 'play' area. Second, we apply an algorithm describing path-dependent play-hysteresis to estimate investment hysteresis using data on domestic investment and interest rates on corporate loans for 5 countries of the Euro area in the period ranging from 2001Q1 to 2018Q1. We find hysteretic effects of interest rate changes on investment in most countries. However, their shape and magnitude differ widely across countries which poses a challenge for a unified monetary policy. By introducing uncertainty into the regressions, the results do not change much which may be due to the interest rate implicitly incorporating uncertainty effects in investment decisions, e.g. by risk premia.
    Keywords: European Central Bank,interest rate,investment,monetary policy,nonideal relay,pathdependence,play-hysteresis,uncertainty
    JEL: C32 E44 E49 E52 F21
    Date: 2019
  31. By: Das, Mahamitra; Sarkar, Nityananda
    Abstract: In this paper we have re-investigated the frequently observed anomalous negative relationship between inflation and REIT returns for two most important economies viz., the USA and the UK by addressing two aspects of misspecification: inappropriate functional form and omission of relevant variable. We have found that the anomalous relationship between REIT and inflation appear to proxy for the significant effect of relative price variability on REIT returns in both the countries. Further, it is evidenced that the effect of relative price variability on real estate investment trust (REIT) returns is not stable over time in case of the USA while in the UK there is no structural change in the relationship.
    Keywords: REITs; Relative price variability; Inflation; Structural breaks
    JEL: C58 E3 E31 R33
    Date: 2019–07–19
  32. By: Walter Engert; Ben Fung; Björn Segendorf
    Abstract: Cash use for payments has been steadily decreasing in many countries, including Canada and Sweden. This might suggest an evolution toward a cashless society. But in Canada, cash in circulation relative to GDP has been stable for decades and has even increased in recent years. By contrast, the cash-to-GDP ratio in Sweden has been falling steadily. What has caused this difference? Are there lessons to be learned from comparing the Canadian and Swedish experiences?
    Keywords: Bank notes; Digital Currencies and Fintech; Financial services; Payment clearing and settlement systems
    JEL: E41 E42 E5
    Date: 2019–08
  33. By: Paola Morales; Daniel Osorio; Juan Sebastian Lemus-Esquivel
    Abstract: This paper analyses the extent to which the strength of the credit channel is affected by the expansion of domestic banks abroad, widely considered the most important structural change of Colombia banking system in recent years. Using loan-level quarterly data for the period between 2007 and 2016, we estimate panel specifications that relate changes in the loan amount and the loan interest rates to variations on the domestic policy rate, the number of foreign subordinates of the lender bank and the interaction between the two. The results suggest that the response of international banks (i.e., those that have significantly expanded abroad) in the face of changes to the domestic policy rate is not statistically different to that of purely local banks, while the cost of credit is found to be slightly higher. Even though in principle this could be interpreted to the effect that internationalization has had no significant effect on the potency of the credit channel, the results tend towards a more subtle conclusion. Specifically, in the face of increases in the domestic policy rate, international banks tend to switch more strongly from domestic to foreign sources of funding. Purely local banks are able thus to capture relatively more domestic funding under these conditions, which allows their credit activity to respond to monetary policy on a similar scale to that of international banks. This result supports the idea that banks switch funding activities between their operating jurisdictions depending on monetary policy conditions, and that the internationalization of domestic banks plays a cushioning role for the economy at times when the monetary policy stance changes significantly.
    Keywords: bank-lending channel, internationalization of banks, banks' business models, branches and subsidiaries
    JEL: E43 E52 F23 F34 F44
    Date: 2019–07
  34. By: Daniel Kohler; Benjamin Müller
    Abstract: Deviations from the covered interest rate parity (CIP) are considerably smaller or even zero when calculated based on a particular set of repo rates, so-called cross-currency repo rates, instead of standard interest rates, such as overnight indexed swap or Interbank Offered rates. We attribute this (partial) solution of the CIP puzzle to the nearly identical risk characteristics of foreign exchange swaps and cross-currency repos: both are virtually devoid of counterparty credit risk but incorporate a relative funding liquidity premium. In practice, CIP deviations can thus be exploited on a truly riskless basis using cross-currency repo transactions, which is not the case for other interest rates.
    Keywords: Covered interest rate parity, FX swap market, cross-currency repos, funding
    JEL: E43 F31 G12 G14 G15
    Date: 2019
  35. By: Qazi Haque (University of Western Australia and CAMA); Nicolas Groshenny (School of Economics, University of Adelaide and CAMA); Mark Weder (Aarhus University and CAMA)
    Abstract: The paper re-examines whether the Federal Reserves monetary policy was a source of instability during the Great Ination by estimating a sticky-price model with positive trend ination, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and nds that the Federal Reserve responded aggressively to ination but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era.
    Keywords: Trend ination, Monetary policy, Great Ination, Cost-push shocks, Indeterminacy, Wage sluggishnes, Sequential Monte Carlo algorithm
    JEL: E32 E52 E58
    Date: 2019–06
  36. By: Carlos Cantú; Leonardo Gambacorta
    Abstract: This paper focuses on the recent changes in banking systems and how bank-specific characteristics have affected credit supply in five Latin American countries (Brazil, Chile, Colombia, Mexico and Peru). We use detailed credit registry data and apply a common empirical strategy. Since data confidentiality prevents the pooling of the data, we use meta-analysis techniques to summarise the results. We find that large and well-capitalised banks with low risk indicators, stable sources of funding, and a commercial business model generally supply more credit. Such banks are also more sheltered from monetary and global shocks, with the role of specific characteristics varying by the type of shock.
    Keywords: bank business models, bank lending, credit registry data, meta-analysis
    JEL: E51 E58 G21
    Date: 2019–07
  37. By: Abdoulaye Millogo (Département d'économique, Université de Sherbrooke); Jean-François Rouillard (Département d'économique, Université de Sherbrooke)
    Abstract: In line with New-Keynesian predictions and certain historical trajectories that tracked by inflation during past crises, the context of the Great Recession should have spurred a sharp fall in inflation or even deflation. On the contrary, the sensitivity of inflation to changes in unemployment has diminished, giving rise to the paradox of missing disinflation. By investigating this paradox, this article develops a variant of the New-Keynesian models where mechanisms of depreciation of human capital are implemented. In the model, rising unemployment translates into a relatively large increase in long-term unemployment. Unemployed people with low levels of human capital become dominant and more workers are now likely to suffer from depreciation of human capital. The depreciation weakens the intensity with which the unemployed prospect new jobs and moderates the decline in wages and prices. Calibrated to the United States economy, model simulations show that this model variant compares relatively better the highlights of missing disinflation than a New-Keynesian without depreciation of human capital. In response to shocks of the same size, the response of inflation in the model with depreciation of human capital is 3 to 4-fold less than in standard New-Keynesian models.
    Keywords: Missing Disinflation, Deflation, Human Capital Depreciation, Unemployment, Great Recession
    JEL: E31 E32 J24
    Date: 2019–08

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