nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒09‒02
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Global factors and trend inflation By Gunes Kamber; Benjamin Wong
  2. Inspecting the Mechanism of Quantitative Easing in the Euro Area By Ralph S. J. Koijen; Francois Koulischer; Benoit Nguyen; Motohiro Yogo
  3. Invoicing Currency, Exchange Rate Pass-through and Value-Added Trade: An Emerging Country Case By Hulya Saygili
  4. The Formation of Consumer Inflation Expectations: New Evidence From Japan's Deflation Experience By Jess Diamond; Kota Watanabe; Tsutomu Watanabe
  5. Financial Frictions, Durable Goods and Monetary Policy By Ugochi Emenogu; Leo Michelis
  6. ECB, BoE and Fed Monetary-Policy announcements: price and volume effects on European securities markets By Eurico Ferreira; Ana Paula Serra
  7. Improving U.S. Monetary Policy Communications By Cecchetti, Stephen G; Schoenholtz, Kermit
  8. Optimal Monetary Policy when Information is Market-Generated By Benhima, Kenza; Blengini, Isabella
  9. Monetary Policy, Crisis and Capital Centralization in Corporate Ownership and Control Networks: a B-Var Analysis By Emiliano Brancaccio; Raffaele Giammetti; Milena Lopreite; Michelangelo Puliga
  10. Change of Monetary Regime, Contracts, and Prices: Lessons from the Great Depression, 1932-1935 By Sebastian Edwards
  11. REVISITING THE ECONOMIC CASE FOR FISCAL UNION IN THE EURO AREA By Berger, Helge; DellAriccia, Giovanni; Obstfeld, Maurice
  12. Invoice Currency Choice in Malawi's Imports from Asia: Is there any evidence of Renminbi Internationalization? By Angella Faith LAPUKENI; SATO Kiyotaka
  13. Monetary Policy and Money Market Funds By Bua, Giovanna; Dunne, Peter G.
  14. Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment By Philippe Bacchetta; Eric van Wincoop
  15. Monetary Policy for a Bubbly World By Asriyan, Vladimir; Fornaro, Luca; Martín, Alberto; Ventura, Jaume
  16. The Neutrality of Nominal Rates: How Long is the Long Run? By João Ritto; João Valle e Azevedo; Pedro Teles
  17. Interbank rate uncertainty and bank lending By Altavilla, Carlo; Carboni, Giacomo; Lenza, Michele; Uhlig, Harald
  18. Safe U.S. Assets and U.S. Capital Flows By Charles Engel
  19. The Effect of Unconventional Monetary Policy on Cross‐Border Bank Loans: Evidence from an Emerging Market By Koray Alper; Fatih Altunok; Tanju Çapacıoğlu; Steven Ongena
  20. In Fed Watchers’ Eyes: Hawks, Doves and Monetary Policy By Klodiana Istrefi
  21. Prudential Monetary Policy By Caballero, Ricardo; Simsek, Alp
  22. "Evolving International Monetary and Financial Architecture and the Development Challenge: A Liquidity Preference Theoretical Perspective" By Jorg Bibow
  23. Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy By Alisdair McKay; Johannes F. Wieland
  24. Macroeconomic Policies and the Iranian Economy in the Era of Sanctions By Magda Kandil; Ida A. Mirzaie
  25. Past meets present in policymaking: The Federal Reserve and the U.S. money market, 1913-1929 By O'Sullivan, Mary
  26. Towards a political economy of monetary dependency: The case of the CFA franc in West Africa By Koddenbrock, Kai; Sylla, Ndongo Samba
  27. Monetary Policy Announcements and Expectations: Evidence from German Firms By Enders, Zeno; Hünnekes, Franziska; Müller, Gernot

  1. By: Gunes Kamber; Benjamin Wong
    Abstract: We develop an empirical model to study the influence of global factors in driving trend inflation and the inflation gap. We apply our model to 7 developed economies and 21 emerging market economies. Our results suggest that while global factors can have a sizeable influence on the inflation gap, they play only a marginal role in driving trend inflation. Much of the influence of global factors in the inflation gap may be reflecting commodity price shocks. Finally, we find that the effect of global factors to be greater in our sample of emerging market economies relative to the developed economies. There is some evidence which suggest propagation mechanisms, which may reflect institutional structures or policy choices, can explain the greater role for global factors in driving trend inflation in emerging market economies.
    Keywords: Trend inflation, foreign shocks, Beveridge-Nelson decomposition
    JEL: C32 E31 F41
    Date: 2019–08
  2. By: Ralph S. J. Koijen; Francois Koulischer; Benoit Nguyen; Motohiro Yogo
    Abstract: Using new data on security-level portfolio holdings by investor type and across countries in the euro area, we study portfolio rebalancing during the European Central Bank’s (ECB) purchase programme that started in March 2015. To quantify changes in risk concentration, we estimate the evolution of the distribution of duration, government, and corporate credit risk exposures across investor sectors and regions until the last quarter of 2017. Using these micro data, we show that 60% of ECB purchases are sold by non-euro area investors, and we do not find evidence that risks get concentrated in certain sectors or geographies. We estimate a sector-level asset demand system using instrumental variables to connect the dynamics of portfolio rebalancing to asset prices. Our estimates imply that government yields declined by 47bp, on average, but the estimates range from -28bp to -57bp across countries.
    JEL: E52 F21 G11 G12
    Date: 2019–08
  3. By: Hulya Saygili
    Abstract: We explore the role of invoicing currency and global production integration on exchange rate pass-through to import and export prices, using 3-digit product level data classified by end-use and 2-digit sector level data displaying varying integration to global value-added trade from an emerging country, Turkey. The results show that, overall, rates of exchange rate pass-through to export prices are higher than those to import prices. The rare of pass-through is significantly higher for local currency-priced goods. The pass-through to the US dollar and euro-priced goods depends on the type of products traded and value-added trade. For consumption and capital goods, pass-through rates are significant and relatively high when they are priced in the US dollars. For intermediate goods the pass-through to euro-priced goods are higher than those to the US dollar-priced goods. In addition, sectors displaying a low or high association with global value chains tend to have a higher exchange rate pass-through than those placing in the middle range and the rate is slightly higher for sectors having lower global linkage.
    Keywords: Exchange rate pass-through, Currency of invoicing, Imported input, Value-added trade
    JEL: F1 F3 F4
    Date: 2019
  4. By: Jess Diamond (Department of Economics, Hosei University); Kota Watanabe (Canon Institute for Global Studies and University of Tokyo); Tsutomu Watanabe (Graduate School of Economics, University of Tokyo)
    Abstract: Using a new micro-level dataset we investigate the relationship between the inflation experience and inflation expectations of households in Japan. We focus on the period after 1995, when Japan began its era of deflation. Our key findings are fourfold. Firstly, we find that inflation expectations tend to increase with age. Secondly, we find that measured inflation rates of items purchased also increase with age. However, we find that age and inflation expectations continue to have a positive correlation even after controlling for the household-level rate of inflation. Further analysis suggests that the positive correlation between age and inflation expectations is driven to a significant degree by the correlation between cohort and inflation expectations, which we interpret to represent the effect of historical inflation experience on expectations of future inflation rates.
    Keywords: Inflation Expectations; Deflation; Monetary Policy; Household Level Inflation Data; Japan
    Date: 2019–08–19
  5. By: Ugochi Emenogu; Leo Michelis
    Abstract: Financial frictions affect how much consumers spend on durable and non-durable goods. Borrowers can face both loan-to-value (LTV) constraints and payment-to-income (PTI) constraints. In this setting, a monetary contraction drastically reduces the amount consumers can borrow to purchase durable goods. We examine these effects in a dynamic stochastic general equilibrium (DSGE) model. DSGE models with durables predict that when monetary policy tightens, non-durable consumption will fall and durable consumption will rise. But this prediction contradicts empirical evidence, which shows that both types of consumption fall, and durables fall more than non-durables. Studies have tried to resolve this puzzle by integrating LTV constraints into the model, but without much success. In our model, we use a broader set of financial frictions that includes PTI limits on borrowing. We show that using both LTV and PTI constraints in the model solves the counterfactual increase in durables following a contractionary monetary shock and delivers the correct correlation. Including the PTI limit in the model leads to a decrease in labour supply. This reduces output, which, in turn, makes it more likely that total durable expenditures will fall.
    Keywords: Financial system regulation and policies; Monetary Policy
    JEL: E44 E52
    Date: 2019–08
  6. By: Eurico Ferreira; Ana Paula Serra
    Abstract: As a response to the recent global financial crisis, the main central banks implemented several programs of unconventional monetary policies. This paper assesses the announcement effects of the policy measures taken by the European Central Bank, the Bank of England and the Federal Reserve on European securities markets. We measure the impact of these announcements on government bond and stock prices and trading volumes. Using the event study methodology, we evaluate the reaction of some of the major European market indices around the announcement dates of unconventional monetary policies, over the period between 2008 and 2016. Our results show that the overall impact of the announcements of unconventional monetary policy measures is significant for European stock markets. Further, results suggest that the impact was more significant with the announcement of “Forward Guidance” and “Asset Purchases” policy measures, respectively, on stock prices and trading volumes. If events are categorized using a narrow definition of “Forward Guidance”, the effects for this category are positive but not always statistically significant.
    JEL: E52 E58 G12 G14
    Date: 2019
  7. By: Cecchetti, Stephen G; Schoenholtz, Kermit
    Abstract: The Federal Open Market Committee (FOMC) publishes vast amounts of information regarding monetary policy, including its goals, strategy and outlook. By reinforcing the commitment to price stability and maximum sustainable employment, this transparency has helped improve U.S. economic performance in recent decades. Based on two dozen interviews with policy experts, we identify three objectives that guide our search for further improvements in communications practices: simplifying public statements, clarifying how policy will react to changing conditions, and highlighting uncertainty and risks. As examples, we propose a simpler post-meeting policy statement and the introduction of a concise Report on Economic Projections, the elements of which are mostly available in existing publications. A broader, systematic application of these objectives could also help the FOMC streamline other aspects of its communications framework.
    Keywords: central bank accountability; central bank communication; Federal Reserve; forward guidance; monetary policy; Monetary policy credibility; Policy Transparency; Reaction functions
    JEL: E50 E58 E61
    Date: 2019–08
  8. By: Benhima, Kenza; Blengini, Isabella
    Abstract: The nature of the private sector's information changes the optimal conduct of monetary policy. When firms observe their individual demand and use it as a signal of real shocks, the optimal policy consists in maximizing the information content of that signal. When real shocks are deflationary (like labor supply shocks), the optimal policy is countercyclical and magnifies price movements, which contrasts with the exogenous information case, where optimal monetary policy is procyclical and stabilizes prices. When the central bank communicates its information to the public, this policy is still optimal if firms pay limited attention to central bank announcements.
    Keywords: central bank communication; endogenous information; Expectations; Information Frictions; Optimal monetary policy
    JEL: D83 E32 E52 F32
    Date: 2019–06
  9. By: Emiliano Brancaccio; Raffaele Giammetti; Milena Lopreite; Michelangelo Puliga
    Abstract: Based on a connection between network analysis and B-VAR models, this paper provides a first empirical evidence of the relationships between capital centralization expressed in terms of network control on one hand and monetary policy guidelines and business cycles on the other. Our findings suggest that a tightening monetary policy leads to a decrease in the fraction of top shareholders of network control which results in a higher centralization of capital; and that a higher centralization of capital, in turn, leads to a reduction of GDP with respect to its trend. These relations are confirmed both for the United States and the Euro Area.
    Keywords: network analysis; ownership and control networks; centralization of capital; monetary policy; business cycle; financial crisis; B-VAR models.
    Date: 2019–08–22
  10. By: Sebastian Edwards
    Abstract: In this paper I analyze the process leading to the abandonment of the gold standard in the U.S. in1933, and the devaluation of the dollar in 1934. I argue that most changes of monetary regime have an impact on contracts. In this specific case, contracts that were written in terms of gold, or “gold equivalent,” were rewritten in paper dollars. Congress did this on June 5 1933, when it abrogated the “gold clause” retroactively. The Supreme Court validated the move in February 1935. The result was a very large transfer of wealth from creditors to debtors. I use daily data on commodity prices to investigate the extent to which these policies contributed to ending deflation. I find that commodity prices reacted strongly to the announcement of policy changes, and to legal procedures involving contracts. These results are consistent with the “change in regime” hypothesis of Sargent.
    JEL: B22 F31 F33 N1 N82
    Date: 2019–07
  11. By: Berger, Helge; DellAriccia, Giovanni; Obstfeld, Maurice
    Abstract: After significant progress as an immediate result of the euro crisis, the drive to complete Europe's Economic and Monetary Union (EMU) has decelerated. While there is a broad consensus in Europe that EMU needs further development, the exact nature and timing of the reform agenda remains controversial. This paper makes an analytical contribution to the ongoing discussion about the euro area's institutional setup. An in-depth look at the remaining gaps in the euro's architecture, and the trade-offs that repairing them would present, suggests the need for long-run progress along three mutually supportive tracks. First is more fiscal risk sharing, which will help enhance the credibility of the sovereign "no bailout" rule. Second is complementary financial sector reforms to delink sovereigns and banks. Third is more effective rules to discourage moral hazard. Helpfully, this evolution would ensure that financial markets provide more incentives for fiscal discipline than they do now. Introducing more fiscal union comes with myriad legal, technical, operational, and political problems, however, raising questions well beyond the domain of economics. These difficulties notwithstanding, without decisive progress to foster fiscal risk sharing, EMU will continue to face existential risks.
    Keywords: Banking Union; ESM; Euro Area; Optimal Currency Area; Risk Sharing
    Date: 2019–06
  12. By: Angella Faith LAPUKENI; SATO Kiyotaka
    Abstract: This is the first study that presents detailed information on the Chinese renminbi (RMB) invoiced trade between Malawi and Asian countries. By processing the unpublished customs level data on Malawi's imports at the HS8-digit level, we show that the RMB is rarely used in Malawi's imports from China, while more than 20% of Malawi's imports from Japan are invoiced in the yen. This evidence suggests that the internationalization of the RMB lags far behind yen internationalization. The U.S. dollar and, to a lesser extent, the South African Rand are used as a vehicle currency in Malawi's imports from Asian countries. By estimating a panel logit model, we demonstrate that product differentiation and market share of imported products have positive influences on yen invoiced imports from Japan, while bilateral nominal exchange rate volatility has negative effects on exporter currency invoicing in imports from Asian countries. Thus, we may say that stable exchange rates will be able to promote the exporter's currency invoicing instead of vehicle currency invoicing in Malawi's imports from Asian countries.
    Date: 2019–08
  13. By: Bua, Giovanna (Central Bank of Ireland); Dunne, Peter G. (Central Bank of Ireland)
    Abstract: We explore how recent unconventional monetary policies have affected money market fund behaviour. This category of investment funds is important from a monetary policy perspective because its members provide investment opportunities that are expected to be safe and highly liquid while they are actively involved in short term interbank funding markets. Crucially, they do not have access to the ECB’s deposit facility. At its extreme, unconventional monetary policy puts money market funds under pressure by depressing the yields available on the assets they typically hold. This could cause excessive risk taking by funds, outflows of investment and unintended intermediation between banks and funds.We consider whether these concerns are well-grounded and reveal other unintended side-effects.
    Date: 2019–08
  14. By: Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Eric van Wincoop (University of Virginia - Department of Economics; National Bureau of Economic Research (NBER))
    Abstract: The objective of this paper is to show that the proposal by Froot and Thaler (1990) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all targeted moments related to these puzzles.
    Date: 2019–07
  15. By: Asriyan, Vladimir; Fornaro, Luca; Martín, Alberto; Ventura, Jaume
    Abstract: What is the role of monetary policy in a bubbly world? To address this question, we study an economy in which financial frictions limit the supply of assets. The ensuing scarcity generates a demand for "unbacked" assets, i.e., assets that are backed only by the expectation of their future value. We consider two types of unbacked assets: bubbles, which are created by the private sector, and money, which is created by the central bank. Bubbles and money share many features, but they also differ in two crucial respects. First, while the rents from the creation of bubbles accrue to entrepreneurs and foster investment, the rents from money creation accrue to the central bank. Second, while bubbles are driven by market psychology, and can rise and fall according to the whims of the market, money is under the control of the central bank. We characterize the optimal monetary policy and show that, through its ability to supply assets, monetary policy plays a key role in the bubbly world. The model sheds light on the recent expansion of central bank liabilities in response to the bursting of bubbles.
    Keywords: bubbles; Financial Frictions; liquidity trap; Optimal monetary policy
    JEL: E32 E44 O40
    Date: 2019–06
  16. By: João Ritto; João Valle e Azevedo; Pedro Teles
    Abstract: How can inflation be raised in economies such as Japan and the euro area where it has been below the objective for quite some time? We estimate an empirical model aimed at identifying the effects of permanent and temporary monetary shocks for the U.S., Japan, France, the U.K., Germany and the euro area. We find that the permanent monetary shock leads to a permanent rise in nominal rates and inflation. Importantly, the short-run effects of this permanent shock are similar to the long-run effects: inflation responds positively and immediately to a permanent rise in nominal rates, confirming the results in Uribe (2017, 2018). We also reinvestigate the long-run relation between inflation and nominal short interest rates. Using data for 41 developed countries covering the last 50 years, we document a strong, yet below one-for-one relationship between nominal rates and inflation, that tends to be less visible over the more recent period, characterized by inflation targeting at low common levels.
    JEL: E31 E32 E52 E58
    Date: 2019
  17. By: Altavilla, Carlo; Carboni, Giacomo; Lenza, Michele; Uhlig, Harald
    Abstract: This paper investigates the effects of interbank rate uncertainty on lending rates to euro area firms. We introduce a novel measure of interbank rate uncertainty, computed as the cross-sectional dispersion in interbank market rates on overnight unsecured loans. Using proprietary bank-level data, we find that interbank rate uncertainty significantly raises lending rates on loans to firms, with a peak effect of around 100 basis points during the 2007-2009 global financial crisis and the 2010-2012 European sovereign crisis. This effect is attenuated for banks with lower credit risk, sounder capital positions and greater access to central bank funding. JEL Classification: E44, D80, G21
    Keywords: bank lending, interbank market, uncertainty
    Date: 2019–08
  18. By: Charles Engel (University of Wisconsin – Madison)
    Abstract: The “exorbitant privilege” of the U.S. – the ability of the U.S. to earn positive net income on its international portfolio even though it is a net debtor – may be linked to the “convenience yield” on U.S. government bonds. The convenience yield refers to the low pecuniary return on U.S. Treasuries associated with the non-pecuniary yield on those assets arising from their liquidity and safety. A simple model shows how the convenience yield can lead to current account deficits, an appreciated currency in real terms, and positive net factor income. Empirically, we find evidence associating the convenience yield with a strong dollar in real terms, and, in turn, evidence linking the real exchange rate to the U.S. current account. We calculate that this channel may account for approximately 40% of the U.S. current account deficit. We then discuss factors that might influence the convenience yield, and discuss possible drawbacks to the exorbitant privilege.
    Date: 2019–08–18
  19. By: Koray Alper (Government of the Republic of Turkey - Central Bank of the Republic of Turkey); Fatih Altunok (Central Bank of the Republic of Turkey); Tanju Çapacıoğlu (Central Bank of Turkey); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: We analyze the impact of quantitative easing by the Federal Reserve, European Central Bank and Bank of England on cross‐border credit flows. Relying on comprehensive loan‐level data, we find that Fed QE strongly boosts cross‐border credit granted to Turkish banks by banks located in the US, Euro Area and UK, while ECB and BoE QEs work only moderately through banks in the EA and UK, respectively. In general QE works at short maturities across bank locations and loan currencies, more strongly for weaker lenders and borrowers, and may have resulted in maturity mismatches in Turkish banks searching for yield.
    Keywords: bank lending channel; bank borrowing channel; monetary transmission; quantitative easing (QE); cross‐border bank loans, micro‐level data, capital requirements, financial de‐globalization
    JEL: E44 E52 F42 G15 G21
    Date: 2019–07
  20. By: Klodiana Istrefi
    Abstract: I construct a novel measure of policy preferences of the Federal Open Market Committee (FOMC) as perceived in public. This measure is based on newspaper and financial media coverage of 130 FOMC members serving during 1960-2015. Narratives reveal that about 70percent of these FOMC members are perceived to have had persistent policy preferences over time, as either inflation-fighting hawks or growth-promoting doves. The rest are perceived as swingers, switching between types, or remained an unknown quantity to markets. Hawk and Dove perceptions capture "true" tendencies as expressed in preferred rates, forecasts and dissents of these FOMC members well. At the FOMC level the composition of hawks and doves varies significantly, featuring slow- and fast-switching hawkish and dovish regimes, due to the rotation of voting rights each year, members’ turnover and swings in preferences.
    Keywords: Monetary Policy, Federal Reserve, FOMC, Policy Preferences, Inflation.
    JEL: E43 E47 E63 G12
    Date: 2019
  21. By: Caballero, Ricardo; Simsek, Alp
    Abstract: Should monetary policy have a prudential dimension? That is, should policymakers raise interest rates to rein in financial excesses during a boom? We theoretically investigate this issue using an aggregate demand model with asset price booms and financial speculation. In our model, monetary policy affects financial stability through its impact on asset prices. Our main result shows that, when macroprudential policy is imperfect, small doses of prudential monetary policy (PMP) can provide financial stability benefits that are equivalent to tightening leverage limits. PMP reduces asset prices during the boom, which softens the asset price crash when the economy transitions into a recession. This mitigates the recession because higher asset prices support leveraged, high-valuation investors' balance sheets. An alternative intuition is that PMP raises the interest rate to create room for monetary policy to react to negative asset price shocks. The policy is most effective when there is extensive speculation and leverage limits are neither too tight nor too slack.
    Keywords: aggregate demand; Business cycle; effective lower bound; leaning against the wind; leverage; macroprudential policies; monetary policy; regulation; Speculation
    JEL: E00 E12 E21 E22 E30 E40 G00 G01 G11
    Date: 2019–06
  22. By: Jorg Bibow
    Abstract: This paper investigates the peculiar macroeconomic policy challenges faced by emerging economies in today's monetary (non)order and globalized finance. It reviews the evolution of the international monetary and financial architecture against the background of Keynes's original Bretton Woods vision, highlighting the US dollar's hegemonic status. Keynes's liquidity preference theory informs the analysis of the loss of policy space and widespread instabilities in emerging economies that are the consequence of financial hyperglobalization. While any benefits promised by mainstream promoters remain elusive, heightened vulnerabilities have emerged in the aftermath of the global crisis.
    Keywords: Emerging Economies; Hyperglobalization; Liquidity; Liquidity Preference Theory; Reserve Accumulation; US Dollar Hegemony
    JEL: B22 E43 E44 F02 F36 G12
    Date: 2019–08
  23. By: Alisdair McKay; Johannes F. Wieland
    Abstract: In a fixed-cost model of durable consumption demand, we show that an important channel of monetary policy transmission is to prompt households to accelerate the timing of their adjustments. We highlight three ways in which the power of monetary policy is reduced relative to the standard New Keynesian model. First, there is an intertemporal trade-off in aggregate demand as encouraging households to adjust today leaves fewer households acquiring durables going forward. Second, households make a short-term decision—adjusting now rather than in the near future—so the short-term real interest rate is the opportunity cost of adjusting today. As a result, forward guidance is less effective at shifting aggregate demand than contemporaneous interest rate cuts. Third, monetary policy becomes less powerful in a recession. The literature has debated whether fixed-cost models generate state dependence in general equilibrium; we show that if one conditions on the magnitude of the recession, the model's state dependence is unaffected by general equilibrium attenuation.
    JEL: E21 E43 E52
    Date: 2019–08
  24. By: Magda Kandil (Central Bank of the United Arab Emirates); Ida A. Mirzaie (Department of Economics, The Ohio State University)
    Abstract: This paper examines the impact of macroeconomic policies in the era of sanctions on the Iranian economy. The results illustrate the role of the money supply and government spending in supporting growth, but contributing to inflationary pressures in the long-run, attesting to supplyside constraints. In the short-run, policies have aimed to provide support to the economy in the face of continued fluctuations with the oil price and spillovers from the geopolitical tensions attributed to sanctions. The exchange rate has played a key role in absorbing, but at times magnifying the adverse effects of these tensions. Continued deterioration of the fundamentals of the Iranian economy forced an official devaluation as the exchange rate proved to be misaligned with the fundamentals of the economy against the backdrop of the limited capacity of the Central Bank to continue to intervene to defend it. In the meantime, a parallel exchange rate market has been flourishing to satisfy the market’s needs for foreign exchange as culminated in the spread between the market exchange rate and the official exchange rate. A wider spread between the parallel market rate and the official rate has signified overvaluation of the rial and proved to be a major source of inflationary expectations and pressures. Wider spread has demanded frequent interventions by the Central Bank to defend the official rate and ultimately has forced an official devaluation of the exchange rate, further increasing inflationary pressures with negative effects on the output supply given high dependency on imports for consumption and investment. As the Iranian economy continues to be challenged by the effects of the unfolding sanctions, policy priorities should be focused on easing structural bottlenecks and enhancing domestic production capacity to reduce the adverse effects of the exchange rate devaluation on output supply and inflationary pressures.
    Date: 2019–08–21
  25. By: O'Sullivan, Mary
    Abstract: This paper contributes to our understanding of how the past is invoked in the present in the realm of economic policy. It focuses on the systemic financial reform envisaged by the Federal Reserve Act of 1913, which was supposed to displace the powerful New York call market with a new discount or acceptance market as the centrepiece of the U.S. money market. The paper shows that the past was remembered and ignored in ways that were crucial in generating “lessons” about the necessity and possibility of radical financial reform in the United States. It reveals the strong commitment to these lessons by prominent officials in the Federal Reserve Bank of New York in designing and implementing policies for reform. Their commitment proved to be unwavering even in the face of mounting criticism that their policies were failing to promote the development of an acceptance market. By focussing on the anaemic demand for acceptances as a key obstacle to reform, I suggest that policymakers were so fixated on the past that they overlooked the potential implications of unexpected changes in the US money market since the enactment of the Federal Reserve Act. Thus, they responded with frustration to the failure of their efforts to achieve the financial reform envisaged by that Act without contemplating any serious alternative to it.
    Keywords: Financial history, Money markets, Call loans, Acceptances, Uses of the past, Monetary and financial reform, Federal Reserve Act.
    JEL: N00 N22
    Date: 2019
  26. By: Koddenbrock, Kai; Sylla, Ndongo Samba
    Abstract: This paper focuses on the most neglected case of monetary dependency: the CFA franc. This currency arrangement was born in 1945, during the colonial era, but it still operates in the same ways more than 70 years later in fourteen countries in Africa, mostly former French colonies. Engaging with the seminal African scholarship by Joseph Pouemi on internal and external monetary repression and the emergent literature on "financial subordination," we introduce the notion of the "chain of monetary dependency," consisting of an external and an internal part. We argue that the CFA franc provides an extreme but paradigmatic example of this chain. The CFA franc is paradigmatic because of the very strong external repression of monetary and financial policy through US dollar and euro dependence. Internally, the CFA franc arrangement radicalizes the constraints imposed on all central bank policies and bank-firm relations in the Global South and makes it more difficult to pursue growth strategies geared towards the well-being of the broader population.
    Keywords: CFA franc,colonialism,dependency,monetary sovereignty,money,West Africa
    Date: 2019
  27. By: Enders, Zeno; Hünnekes, Franziska; Müller, Gernot
    Abstract: We assess empirically whether monetary policy announcements impact firm expectations. Two features of our data set are key. First, we rely on a survey of production and price expectations of German firms, that is, expectations of actual price setters. Second, we observe the day on which firms submit their answers to the survey. We compare the responses of firms before and after monetary policy surprises and obtain two results. First, firm expectations respond to policy surprises. Second, the response becomes weaker as the surprise becomes bigger. A contractionary surprise of moderate size reduces firm expectations, while a moderate expansionary surprise raises them. Large surprises, both negative and positive, fail to alter expectations. Consistent with this result, we find that many of the ECB's announcements of non-conventional policies did not affect expectations significantly. Overall, our results are consistent with the notion that monetary policy surprises generate an information effect which is endogenous to the size of the policy surprise.
    Keywords: European Central Bank; Firm expectations; information effect; Monetary policy announcements; survey data
    JEL: E3 E52 E58
    Date: 2019–08

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