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

  1. Monetary Policy Rules and Macroeconomic Stability By Jayawickrema, Vishuddhi
  2. Facing the Quadrilemma: Taylor Rules, Intervention Policy and Capital Controls in Large Emerging Markets By Fernando Chertman; Michael Hutchison; David Zink
  3. Central bank digital currencies: The case of universal central bank reserves By Paolo Fegatelli
  4. Exposure to Daily Price Changes and Inflation Expectations By Francesco D'Acunto; Ulrike M. Malmendier; Juan Ospina; Michael Weber
  5. On the Effects of the ECB’s Funding Policies on Bank Lending and the Demand for the Euro as an International Reserve By Heather D. Gibson; Stephen G. Hall; Pavlos Petroulas; George S. Tavlas
  6. Alternatives to Inflation Targeting in Low Interest Rate Environments By Carl E. Walsh
  7. Cryptocurrencies, Currency Competition, and the Impossible Trinity By Pierpaolo Benigno; Linda M. Schilling; Harald Uhlig
  8. Modeling the Dynamics of Inflation in India By Pulapre Balakrishnan; M. Parameswaran
  9. The Role of Global and Domestic Shocks for Inflation Dynamics: Evidence from Asia By David Finck; Peter Tillmann
  10. Anchored Inflation Expectations By Eusepi, Stefano; Moench, Emanuel; Preston, Bruce; Viana de Carvalho, Carlos
  11. Imperfect Information, Shock Heterogeneity, and Inflation Dynamics By Tatsushi Okuda; Tomohiro Tsuruga; Francesco Zanetti
  12. What Does Peer-To-Peer Lending Evidence Say about the Risk-Taking Channel of Monetary Policy? By Yiping Huang; Xiang Li; Chu Wang
  13. Monetary Growth and Financial Sector Wages By Michael Patrick Curran; Matthew J. Fagerstrom
  14. Shocking aspects of monetary policy on income inequality in the euro area By Jérôme Creel
  15. Who Gained from India’s Demonetization? Insights from Satellites and Surveys By Chanda, Areendam; Cook, Justin
  16. What does peer-to-peer lending evidence say about the risk-taking channel of monetary policy? By Huang, Yiping; Li, Xiang; Wang, Chu
  17. The Effects of Asset Purchases and Normalization of US Monetary Policy By Naoko Hara; Ryuzo Miyao; Tatsuyoshi Okimoto
  18. Geographic spread of currency trading: the renminbi and other EM currencies By Yin-Wong Cheun; Robert N McCauley
  19. Negative interest rates, excess liquidity and retail deposits: Banks’ reaction to unconventional monetary policy in the euro area By Selva Demiralp; Jens Eisenschmidt; Thomas Vlassopoulos
  20. International Bank Lending Channel of Monetary Policy By Silvia Albrizio; Sangyup Choi; Davide Furceri; Chansik Yoon
  21. Does Inflation Targeting Reduce the Dispersion of Price Setters’ Inflation Expectations? By Paulie, Charlotte
  22. Is Inflation Fiscally Determined? By Bazzaoui, Lamia; Nagayasu, Jun
  23. Long-term inflation expectations and inflation dynamics By Thórarinn G. Pétursson
  24. Uncertainty, Financial Markets, and Monetary Policy over the Last Century By Sangyup Choi; Chansik Yoon
  25. China's Monetary Policy and the Loan Market: How Strong is the Credit Channel in China? By Max Breitenlechner; Riikka Nuutilainen
  26. Risk-Free Interest Rates By Diamond, William; Grotteria, Marco; van Binsbergen, Jules H.
  27. Dollarization in Montenegro: evidence after two decades of experience By Maja Bacovic
  28. The macroeconomic impact of the euro By Akhmadieva, Veronika; Smith, Ron P
  29. Optimal Monetary and Fiscal Policy Rules, Welfare Gains and Exogenous Shocks in an Economy with Default Risk By Okano Eiji; Masataka Eguchi
  30. Expectations Anchoring Indexes for Brazil using Kalman Filter: exploring signals of inflation anchoring in the long term By Fernando Nascimento de Oliveira; Wagner Piazza Gaglianone

  1. By: Jayawickrema, Vishuddhi
    Abstract: This paper attempts to characterize the monetary policy regimes in the United States and analyze their effects on macroeconomic stability. It does so by estimating Taylor-type forward-looking monetary policy reaction functions for the pre- and post-1979 periods, and simulating the resultant coefficients in a basic New Keynesian business cycle model. The feedback coefficient on inflation in the estimated policy reaction function is found to be less than unity for the 1960-1979 period, suggesting an accommodative monetary policy stance of the Federal Reserve. However, for the 1979-2017 period, the feedback coefficient on inflation is estimated to be substantially greater than unity, implying that the Federal Reserve adopted a proactive policy stance towards controlling inflation. It is also found that in recent times, the Federal reserve has shifted its focus from short one period ahead inflation targets to longer target horizons such as one year ahead inflation targets. Meanwhile, the model simulations show that the economy exhibits greater stability under a model with post-1979 calibration than a model with a combination of pre-1979 parameters and `sunspot' shocks.
    Keywords: Monetary Policy, Monetary Policy Rules, Taylor Rule, Macroeconomic Stability
    JEL: E32 E43 E52
    Date: 2019–01
  2. By: Fernando Chertman (University of California, Santa Cruz); Michael Hutchison (University of California, Santa Cruz); David Zink (University of California, Santa Cruz)
    Abstract: This paper investigates extended Taylor rules and foreign exchange intervention functions in large Emerging Markets (EM), measuring the extent to which policies are designed to stabilize output, inflation, exchange rates and accumulate international reserves. We focus on two large emerging markets--India and Brazil. We also consider the impact of greater capital account openness and which rules dominate when policy conflicts arise. We find that output stabilization is a dominant characteristic of interest rate policy in India, as is inflation targeting in Brazil. Both countries actively use intervention policy to achieve exchange rate stabilization and, at times, stabilizing reserves around a target level tied to observable economic fundamentals. Large unpredicted intervention purchases (sales) accommodate low (high) interest rates, suggesting that external operations are subordinate to domestic policy objectives. We extend the work to Chile and China for purposes of comparison. Chile’s policy functions are similar to Brazil, while China pursues policies that substantially diverge from other EMs.
    Date: 2019–08–10
  3. By: Paolo Fegatelli
    Abstract: We analyse several motivations for the introduction of a widely accessible central bank digital currency (CBDC). If a central bank decided to offer a CBDC, its design would have to consider different areas of central bank activity, taking into account multiple policy principles, objectives and constraints. In addition, the introduction of a CBDC on a large scale may have a non-trivial impact on the architecture of the financial system. From this perspective, some common arguments in favour of CBDC may seem simplistic and the field of feasible options may be narrower than often believed. We reconsider Tobin’s idea to establish a system of universal access to central bank reserves, and clarify its feasibility and advantages as an account-based CBDC.
    Keywords: Central bank digital currency, universal central bank reserves, deposited currency accounts, cash, central bank, central bank policies, monetary policy, financial stability, payment systems, deposit insurance, bank deposits, inside money, collateral, virtual currencies
    JEL: E41 E42 E43 E51 E52 E58
    Date: 2019–07
  4. By: Francesco D'Acunto; Ulrike M. Malmendier; Juan Ospina; Michael Weber
    Abstract: We show that, to form aggregate inflation expectations, consumers rely on the price changes they face in their daily lives while grocery shopping. Specifically, the frequency and size of price changes, rather than their expenditure share, matter for individuals’ inflation expectations. To document these facts, we collect novel micro data for a representative US sample that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. Our results suggest that the frequency and size of grocery-price changes to which consumers are personally exposed should be incorporated in models of expectations formation. Central banks' focus on core inflation - which excludes grocery prices - to design expectations-based policies might lead to systematic mistakes.
    Keywords: beliefs formation, rational inattention, realized inflation, transmission of monetary policy
    JEL: C90 D14 D84 E31 E52 G11
    Date: 2019
  5. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (University of Leicester, Bank of Greece and University of Pretoria); Pavlos Petroulas (Bank of Greece); George S. Tavlas (Bank of Greece and University of Leicester)
    Abstract: The euro-area financial crisis that erupted in 2009 was marked by negative confidence effects that had both domestic and international ramifications. Domestically, bank lending declined sharply. Internationally, the demand for the euro as a reserve currency fell precipitously. We investigate the effects of ECB policies on banks’ lending, taking account of national and regional spillovers. We also assess the effects of ECB policies on euro reserve holdings. The results suggest that those policies were important for rebuilding confidence, thus supporting both bank lending and the use of the euro as a reserve asset.
    Keywords: euro area financial crisis, monetary policy operations, European banks, spatial panel model
    JEL: E3 G01 G14 G21
    Date: 2019–08–08
  6. By: Carl E. Walsh (Distinguished Professor of Economics, University of California, Santa Cruz (E-mail:
    Abstract: The challenges of a low interest rate, low inflation environment have led to calls to re-examine the basic framework of flexible inflation targeting (IT). Interest in alternatives such as price-level targeting (PLT) and average inflation targeting (AIT) arises from the way in which these policy regimes cause inflation expectations to work as automatic stabilizers, a factor that can be of major importance if the central bank is constrained at the ELB. I show that the performance of PLT deteriorates significantly relative to IT and AIT in the presence of wage rigidities, shocks to productivity, and deviations from rational expectations. A central bank able to credibly commit to the optimal policy consistent with PLT is likely to face a much higher probability of needing balance sheet policies to implement policy than would be the case under IT or AIT. These results suggest it is too early to count IT out in the competition over policy design.
    Keywords: Optimal monetary policy, Inflation targeting, Price-level targeting, Average inflation targeting
    JEL: E52 E58
    Date: 2019–08
  7. By: Pierpaolo Benigno; Linda M. Schilling; Harald Uhlig
    Abstract: We analyze a two-country economy with complete markets, featuring two national currencies as well as a global (crypto)currency. If the global currency is used in both countries, the national nominal interest rates must be equal and the exchange rate between the national currencies is a risk- adjusted martingale. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). Deviating from interest equality risks approaching the zero lower bound or the abandonment of the national currency. If the global currency is backed by interest-bearing assets, additional and tight restrictions on monetary policy arise. Thus, the classic Impossible Trinity becomes even less reconcilable.
    JEL: D53 E4 F31 G12
    Date: 2019–08
  8. By: Pulapre Balakrishnan (Ashoka University, Sonipat); M. Parameswaran (Centre for Development Studies, Thiruvananthapuram)
    Abstract: In mainstream macroeconomics today inflation is related to the ‘output gap’, defined as the deviation of output from its ‘natural’ level. This view of inflation has been adopted by the leading central banks, including India’s, underpinning the move to ‘inflation targeting’ as the sole objective of monetary policy. We present an alternative model of inflation based on features that would be considered typical of the Indian economy and a specific understanding of what drives the inflationary process here. We then test both the models across data from India over different periods and at differing frequencies. The exercise is conclusive, and bears significance for what will constitute an appropriate antiinflationary policy.
    Keywords: Inflation in India, New Keynesian Phillips Curve, Structuralist macroeconomics
    Date: 2019–08
  9. By: David Finck (Justus-Liebig-University Gießen, Germany); Peter Tillmann (Justus-Liebig-University Gießen, Germany)
    Abstract: This paper studies the changing nature of inflation dynamics in small open economies and the shifting output-inflation trade-off. We estimate a series of VAR models for a set of six Asian emerging market economies, in which we identify a battery of domestic and global shocks using sign restrictions. We find that global shocks ex- plain large parts of inflation and output dynamics. The global shocks are procycli- cal with respect to the domestic components of economic activity. We estimate Phillips curve regressions based on alternative decompositions of output into global and domestic components. For the domestic component of GDP we find a positive and significant Phillips curve slope. While including the output component driven by oil prices ’flattens’ the Phillips curve, the component driven by global demand shocks ’steepens’ the trade-off. Hence, whether or not global shocks flatten the Phillips curve crucially depends on the nature of these global shocks. A series of counterfactuals supports these findings and suggests that the role of monetary pol- icy and exchange rate shocks is limited.
    Keywords: inflation targeting, business cycle, open economy, monetary policy, Phillips curve
    JEL: E3 E5 F4
    Date: 2019–08–16
  10. By: Eusepi, Stefano; Moench, Emanuel; Preston, Bruce; Viana de Carvalho, Carlos
    Abstract: Because of policy uncertainty long-run inflation beliefs are a state-contingent function of short-run inflation surprises. Expectations are well anchored only when the central bank is credible and long-run beliefs display small and declining sensitivity to short-run forecast errors. Nominal rigidities mean shifts in beliefs induce an endogenous inflation trend, with time-varying persistence and volatility. This feature of our theory of the nominal anchor distinguishes it from common explanations of low-frequency movements in inflation. The model, estimated using only US inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations for the US and other countries, including several episodes of poorly anchored expectations.
    Keywords: Anchored expectations; Inflation expectations; survey data
    JEL: D83 D84 E32
    Date: 2019–07
  11. By: Tatsushi Okuda (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, Research and Statistics Department), Bank of Japan (E-mail:; Tomohiro Tsuruga (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, International Monetary Fund, E-mail:; Francesco Zanetti (University of Oxford (E-mail: francesco.zanetti@
    Abstract: We establish important empirical regularities on firms' expectations about aggregate and idiosyncratic components of sectoral demand using industry-level survey data for the universe of Japanese firms. Expectations about the idiosyncratic component of demand differ across sectors, and they positively co-move with those about aggregate component. To study the implications for firms' price setting, we develop a theoretical framework that captures systematic features in firms' expectation formation based on inference of different shocks from a common signal |a chief modelling approach to imperfect information. We show that the sensitivity of inflation to changes in demand decreases with the volatility of idiosyncratic component of demand that proxies the degree of shock heterogeneity. We use principal component analysis on Japanese sectoral-level data to estimate the degree of shock heterogeneity, and we establish that the observed increase in shock heterogeneity plays a significant role for the reduced sensitivity of inflation to movements in real activity since the late 1990s.
    Keywords: Imperfect information, Shock heterogeneity, Inflation dynamics
    JEL: E31 D82 C72
    Date: 2019–08
  12. By: Yiping Huang; Xiang Li; Chu Wang
    Abstract: This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
    Keywords: monetary policy, risk-taking, nonbank financial institution, peer-to-peer lending, search-for-yield, risk-shifting
    JEL: E52 G23
    Date: 2019
  13. By: Michael Patrick Curran (Department of Economics, Villanova School of Business, Villanova University); Matthew J. Fagerstrom (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: We investigate the relation between monetary growth and the growth of and compensation in the financial industry since the end of the Bretton Woods system. Estimating structural vector autoregressions, we find that the growth of the monetary base is positively associated with a higher di erential between financial and average wages, but not with a larger financial industry.
    Keywords: Cantillon Effect; Inequality; Money Non-neutrality; Financial Industry
    JEL: D31 E31 E52
    Date: 2019–08
  14. By: Jérôme Creel (Observatoire français des conjonctures économiques)
    Abstract: This paper examines the distributional effects of monetary policy, either standard, nonstandard or both, on income inequality in 10 EA countries over the period 2000-2015. We use three different indicators of income inequality in a Panel VAR setting in order to estimate IRFs of inequality to a monetary policy shock. Results suggest that: (i) the distributional effects of ECB’s monetary policy have been modest and (ii) mainly driven in times of conventional monetary policy measures, especially in peripheral countries, while, overall, (iii) standard and non-standard monetary policies do not significantly differ in terms of impact on income inequality.terms of impact on income inequality.
    Keywords: Euro area; Monetary policy; Income distribution; Panel Var
    JEL: E62 E64 D63
    Date: 2019–09
  15. By: Chanda, Areendam; Cook, Justin
    Abstract: On November 8, 2016, the Indian government abruptly demonetized 86% of its currency in circulation in an attempt to reduce black money, corruption, and counterfeiting. Yet, 99% of the currency was eventually returned to banks. We exploit large regional variations in deposit growth as a result of demonetization to study the medium-term effects of this policy. Using night-light data, we show that districts which experienced higher deposit growth during the demonetization period recorded higher levels of economic activity in the year and a half that followed. We estimate a one standard deviation increase in deposits is associated with a 5% increase in district GDP per capita. Further, districts with larger rural population, agricultural and non-agricultural informal labor shares also recorded an increase in nighttime light activity. The results are also supported by household-level surveys on income and expenditures.
    Keywords: Demonetization, Regional Economic Growth, Monetary Policy, Indian Economy, Difference in Difference, Informal Economy, Agriculture, Credit
    JEL: E21 E26 E51 E65 O11 O13 O16 O17 O18 O5
    Date: 2019–08–23
  16. By: Huang, Yiping; Li, Xiang; Wang, Chu
    Abstract: This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
    JEL: E52 G23
    Date: 2019–08–29
  17. By: Naoko Hara (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Ryuzo Miyao (Professor, Faculty of Economics, University of Tokyo (E-mail:; Tatsuyoshi Okimoto (Associate Professor, Crawford School of Public Policy, Australian National University, and Visiting Fellow, Research Institute of Economy, Trade and Industry (RIETI) (E-mail: tatsuyoshi.
    Abstract: This paper examines changes in the effects of unconventional monetary policies in the US. To this end, we estimate a Markov-switching VAR model with absorbing regimes to capture possible structural changes. Our results detect regime changes around the beginning of 2011 and the middle of 2013. Before 2011, the US large-scale asset purchases (LSAPs) had relatively large impacts on the real economy and prices, but after the middle of 2013, their effects were weaker and less-persistent. In addition, after the middle of 2013, which includes the monetary policy normalization period, the asset purchase (or balance sheet) shocks had slightly weaker effects than during the early stage of the LSAPs but stronger effects than during the late stage of the LSAPs, while interest rate shocks had insignificant effects on the real economy and prices. Finally, our results suggest that the positive responses of durables and capital goods expenditures to interest rate shocks weakened the negative impacts of interest rate hikes after the middle of 2013 including the period of monetary policy normalization.
    Keywords: Quantitative easing, Unconventional monetary policy, LSAP, MSVAR
    JEL: C32 E21 E52
    Date: 2019–08
  18. By: Yin-Wong Cheun; Robert N McCauley
    Abstract: This paper studies the ongoing diffusion of renminbi trading across the globe, the first such research of an international currency. It analyses the distribution in offshore renminbi trading in 2013 and 2016, using comprehensive data from the Triennial Central Bank Survey of Foreign Exchange and Over-the-Counter Derivatives Market Activity. In 2013, Asian centres favoured by the policy of renminbi internationalisation had big shares in global renminbi trading. In the following three years, renminbi trading seemed to converge to the spatial pattern of all currencies, with a half-life of seven to eight years. The previously most traded emerging market currency, the Mexican peso, shows a similar pattern, although it is converging to the global norm more slowly. Three other major emerging market currencies show a qualitatively similar evolution in the geography of their offshore trading. Overall the renminbi's internationalisation is tracing an arc from the influence of administrative measures to the working of market forces.
    Keywords: international currency, FX turnover, renminbi internationalisation, international financial centre
    JEL: C24 F31 F33 G15 G18
    Date: 2019–08
  19. By: Selva Demiralp (Koç University); Jens Eisenschmidt (European Central Bank); Thomas Vlassopoulos (European Central Bank)
    Abstract: Negative interest rate policy (NIRP) is associated with a particular friction. The remuneration of banks´ retail deposits tends to be floored at zero, which limits the typical transmission of policy rate cuts to bank funding costs. We investigate whether this friction affects banks’ reactions under NIRP compared to a standard rate cut in the euro area. We argue that reliance on retail deposit funding and the level of excess liquidity holdings may increase banks’ responsiveness to NIRP. We find evidence that banks highly exposed to NIRP tend to grant more loans. This confirms studies pointing to higher risk taking by banks under NIRP and contrasts results that associate NIRP with a contraction in bank loans. Broader coverage of our loan data and the explicit consideration of banks’ excess liquidity holdings are likely reasons for this different result compared to some earlier literature. We are the first to document the importance of banks’ excess liquidity holdings for the effectiveness of NIRP, pointing to a strong complementarity of NIRP with central bank liquidity injections, e.g. via asset purchases.
    Keywords: Negative rates, bank balance sheets, monetary transmission mechanism
    JEL: E43 E52 G11 G21
    Date: 2019–09
  20. 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: 2019–08–10
  21. By: Paulie, Charlotte (Uppsala University)
    Abstract: Using detailed Swedish micro data on prices and costs, this paper documents a decrease in the dispersion of changes in prices and markups following the introduction of an official inflation target of 2 percent. Using a structural model to decompose the change in the price-change distribution by potential explanatory factors, about 63 percent of the decrease in the price-change dispersion can be attributed to a decrease in the cross-sectional variance of inflation expectations. The lower dispersion of inflation expectations results in a lower markup dispersion and a welfare gain equivalent to a 0.79 percent increase in consumption.
    Keywords: Inflation targeting; price setting; misallocation; welfare
    JEL: D84 E52 L11
    Date: 2019–04–01
  22. By: Bazzaoui, Lamia; Nagayasu, Jun
    Abstract: This paper examines the relationship between fiscal variables and inflation for 46 countries from 1960–2017 using a linear identity that links inflation to fiscal and monetary variables and economic growth. The results indicate that inflation is affected by both monetary and fiscal policies. However, the relation between inflation and fiscal variables disappears when monetary policy is based on commitment strategies. We conclude that fiscal determinacy of inflation is only possible when central banks practice poorly structured discretion.
    Keywords: inflation, fiscal policy, monetary policy, public debt, panel VAR GMM
    JEL: E31 E43 E63 H63
    Date: 2019–08
  23. By: Thórarinn G. Pétursson
    Abstract: After rising sharply following the Global Financial Crisis, inflation in Iceland has been low and stable in recent years despite a strong cyclical recovery. This not only reflects favourable external conditions but also coincides with a significant decline in long-term inflation expectations in financial markets. It is argued, however, that this market-based measure of inflation expectations actually underestimates the true decline in long-term inflation expectations of price setters. To extract this unobserved wedge between inflation expectations of price setters and financial agents, we estimate a time-varying parameter Phillips curve model for the inflation-targeting period since 2001, adjusting also for an unobserved risk premium in market-based inflation expectations. The empirical results suggest that the expectations wedge was significantly positive until early 2012, after which it starts to gradually decline towards zero. The true decline in long-term inflation expectations of actual price setters is therefore much steeper than is captured by the market-based measure and taking this into account results in a stable and plausible specification of the Phillips curve that can explain key features of the recent inflation developments in Iceland.
    JEL: E31 E32 E37 E52
    Date: 2019–08
  24. By: Sangyup Choi (Yonsei University); Chansik Yoon (Princeton University)
    Abstract: What has been the effect of uncertainty shocks in the U.S. economy over the last century? What are the historical roles of the financial channel and monetary policy channel in propagating uncertainty shocks? Our empirical strategies enable us to distinguish between the effects of uncertainty shocks on key macroeconomic and financial variables transmitted through each channel. A hundred years of data further allow us to answer these questions from a novel historical perspective. This paper finds robust evidence that financial conditions have played a crucial role in propagating uncertainty shocks over the last century, supporting many theoretical and empirical studies emphasizing the role of financial frictions in understanding uncertainty shocks. However, heightened uncertainty does not amplify the adverse effect of financial shocks, suggesting an asymmetric interaction between uncertainty and financial shocks. Interestingly, the stance of monetary policy seems to play only a minor role in propagating uncertainty shocks, which is in sharp contrast to the recent claim that binding zero-lower-bound amplifies the negative effect of uncertainty shocks. We argue that the contribution of constrained monetary policy to amplifying uncertainty shocks is largely masked by the joint concurrence of binding zero-lower-bound and tightened financial conditions.
    Keywords: uncertainty shocks; financial channel; counterfactual VARs; local projections; zero-lower- bound
    JEL: E31 E32 E44 G10
    Date: 2019–08–14
  25. By: Max Breitenlechner (University of Innsbruck); Riikka Nuutilainen (Bank of Finland)
    Abstract: We study the credit channel of Chinese monetary policy in a structural vector autoregressive framework. Using combinations of zero and sign restrictions, we identify monetary policy shocks linked to supply and demand responses in the loan market. Our results show that policy shocks coinciding with loan supply effects account for roughly 10 percent of output dynamics after two years, while loan demand effects represent up to 7 percent of output dynamics depending on the policy measure. The credit channel thus constitutes an important and economically relevant transmission channel for monetary policy in China. Monetary policy in China also accounts for a relatively high share of business cycle dynamics.
    Keywords: China, Monetary Policy, Transmission Effects, Structural Vector Autoregression, Zero and Sign Restrictions
    JEL: C32 E44 E52
    Date: 2019–08–22
  26. By: Diamond, William; Grotteria, Marco; van Binsbergen, Jules H.
    Abstract: We estimate risk-free interest rates unaffected by convenience yields on safe assets. We infer them from risky asset prices without relying on any specific model of risk. We obtain a term structure of convenience yields with maturities up to 2.5 years at a minutely frequency. The convenience yield on treasuries equals about 40 basis points, is larger below 3 months maturity, and quadruples during the financial crisis. In high-frequency event studies, conventional and unconventional monetary stimulus reduce convenience yields, particularly during the crisis. We further study convenience-yield-free CIP deviations, and we show significant bond return predictability related to convenience yields.
    Keywords: Convenience Yield; Demand for Safe Assets; monetary policy; Quantitative easing
    JEL: E41 E43 E44 G12 G21
    Date: 2019–07
  27. By: Maja Bacovic (University of Montenegro, Faculty of Economics)
    Abstract: Montenegro has started transition process from centrally planned to market oriented economy in late nineties of the XX century. Being still part of the Federal Republic of Yugoslavia, official currency was dinar in that period. Dinar, inherited currency from the Social Federal Republic of Yugoslavia, was not convertible currency (except for short period from 1990-1992), after which then actual monetary policy resulted in hyperinflation during 1992-1993. Afterword, although it was only legal tender until 1999, dinar was not used as currency in full capacity and in all transactions, but often replaced with Deutsche mark (DM), although unofficially. As result of such practice, in 1999, Montenegro introduced ?double currency? regime, officially allowing use of both, dinar and DM as legal tenders. In November 2000, dollarization regime has officially become implemented in Montenegro, introducing DM and later EURO (since January 2002) as only legal tender in Montenegro. Two decades later, we may summarize effects of such choice, and see whether decision to implement dollarization instead to issue national currency (perper was the one which was proposed) or remain using dinar was appropriate. We will make comparisons of selected indicators with Serbia, as it has decided to use dinar as national currency. Although there are many differences between Montenegrin and Serbian economy, both have many elements in common, which make reasonable to make comparisons. In addition, we did empirical analysis and analyzed economic performance of European countries that belongs to different monetary regimes, for period from 2000-2016.
    Keywords: Dollarization, EURO, National currency
    JEL: E50 E00
    Date: 2019–07
  28. By: Akhmadieva, Veronika (Birkbeck, University of London); Smith, Ron P (Birkbeck, University of London)
    Abstract: This paper examines whether the establishment of the euro caused structural breaks in the main macroeconomic relationships of member countries. It compares eight original members of the common currency with four European countries that did not join. The analysis constructs counterfactuals using both single equation models and a six equation vector autoregression with foreign exogenous variables, VARX*, explaining output, inflation, equity prices, exchange rates and short and long interest rates. It considers which equations changed the most and the most likely dates for any structural break.
    Keywords: euro, structural-breaks, GVAR
    JEL: C5 E5 F4
    Date: 2019–08
  29. By: Okano Eiji (Nagoya City University); Masataka Eguchi (Komazawa University)
    Abstract: We develop a class of dynamic stochastic general equilibrium models with nominal rigidities and we introduce default risk in the model. We find that if productivity changes are observed, policy authorities should be aware of default risk, although being aware of such risk is not very important following government expenditure changes. Welfare gains from awareness of default risk are nonnegligible if productivity changes, although welfare gains from awareness of default risk are tiny following government expenditure changes.
    Keywords: Sovereign Risk; Optimal Monetary Policy; Fiscal Theory of the Price Level
    JEL: E52 E60
    Date: 2019–07
  30. By: Fernando Nascimento de Oliveira; Wagner Piazza Gaglianone
    Abstract: Our objective in this paper is to build expectations anchoring indexes for inflation in Brazil that are fundamentally driven by the monetary authority’s capacity to anchor long-term inflation expectations vis-à-vis short-run inflation expectations. The expectations anchoring indexes are generated from a Kalman filter, based on a state-space model that also takes into account fiscal policy dynamics. The model’s signals are constructed using inflation expectations from the Focus survey of professional forecasters, conducted by the Central Bank of Brazil, and from the swap and federal government bond markets, which convey daily information of long-term inflation expectations. Although varying across specifications, the expectations anchoring indexes that we propose tend to display a downward trajectory, more clearly in 2009, and show a recovery starting in 2016 until the end of the sample (mid-2017).
    Date: 2019–08

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