nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒09‒23
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The e-monetary theory By Ngotran, Duong
  2. The limits of forward guidance By Jeffrey Campbell; Filippo Ferroni; Jonas Fisher; Leonardo Melosi
  3. Three decades of inflation targeting By Magda Ciżkowicz-Pękała; Witold Grostal; Joanna Niedźwiedzińska; Elżbieta Skrzeszewska-Paczek; Ewa Stawasz-Grabowska; Grzegorz Wesołowski; Piotr Żuk
  4. ECB policy consistency – loss of independence and the real estate bubble? By Rybacki, Jakub
  5. Inflation and Welfare in the Laboratory By Janet Hua Jiang; Cathy Zhang; Daniela Puzzello
  6. Monetary Policy and Durable Goods By robert barsky; Christoph Boehm; Christopher House; Miles Kimball
  7. Optimal Policy Implications of Financial Uncertainty By Kantur, Zeynep; Özcan, Gülserim
  8. Human Frictions to the Transmission of Economic Policy By Francesco D'Acunto; Daniel Hoang; Maritta Paloviita; Michael Weber
  9. Imperfect Information, Shock Heterogeneity, and Inflation Dynamics By Tatsushi Okuda; Tomohiro Tsuruga; Francesco Zanetti
  10. Innovations in emerging markets: the case of mobile money By Pelletier, Adeline; Khavul, Susanna; Estrin, Saul
  11. Pegging the Interest Rate on Bank Reserves: A Resolution of New Keynesian Puzzles and Paradoxes By Behzad Diba; Olivier Loisel
  12. On Processing Central Bank Communications: Can We Account for Fed Watching? By Joseph Haslag
  13. Learning, Heterogeneity, and Complexity in the New Keynesian Model. By Robert Calvert Jump; Cars Hommes; Paul Levine
  14. Mussa Puzzle Redux By Oleg Itskhoki; Dmitry Mukhin
  15. Bank intermediation activity in a low interest rate environment By Michael Brei; Claudio Borio
  16. The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy By Ernesto Pasten; Raphael Schoenle; Michael Weber
  17. Modelling and forecasting the dollar-pound exchange rate in the presence of structural breaks By Jennifer Castle; Takamitsu Kurita
  18. Do we really know that U.S. monetary policy was destabilizing in the 1970s? By Haque, Qazi; Groshenny, Nicolas; Weder, Mark
  19. A Monetary Search Model with Non-unitary Discounting By Daiki Maeda
  20. Sticky prices and the transmission mechanism of monetary policy: A minimal test of New Keynesian models By Guido Ascari; Timo Haber
  21. Monetary Policy and Inequality: How Does One Affect the Other? By Eunseong Ma
  22. The Effects of Imposing a Central Counterparty in a Network By Pablo D'Erasmo; Guillermo Ordonez; Selman Erol
  23. Asset Pricing with Fading Memory By Stefan Nagel; Zhengyang Xu
  24. Foreign Currency Debt and the Exchange Rate Pass-Through By Salih Fendoglu; Mehmet Selman Colak; Yavuz Selim Hacihasanoglu
  25. Exchange Rate and Interest Rate Disconnect: The Role of Capital Flows, Currency Risk and Default Risk By Sebnem Kalemli-Ozcan; Liliana Varela
  26. Heterogeneous Price Rigidities and Monetary Policy By Christopher Clayton; Andreas Schaab; Xavier Jaravel
  27. How Do Private Digital Currencies Affect Government Policy? By Max Raskin; Fahad Saleh; David Yermack
  28. Introducing ECB-BASE: The blueprint of the new ECB semi-structural model for the euro area By Angelini, Elena; Bokan, Nikola; Christoffel, Kai; Ciccarelli, Matteo; Zimic, Srečko
  29. Disinflation and reliability of underlying inflation measures By Elena Deryugina; Alexey Ponomarenko
  30. Assessing reliability of aggregated inflation views in the European Commission Consumer Survey By Ewa Stanisławska; Maritta Paloviita; Tomasz Łyziak
  32. Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873 By Haelim Anderson; Kinda Hachem; Simpson Zhang
  33. Fiscal Policy in Monetary Unions: State Partisanship and its Macroeconomic Effects By Gerald Carlino; Nicholas Zarra; Robert Inman; Thorsten Drautzburg
  34. Oil prices, exchange rates, and interest rates By Lutz Kilian; Xiaoqing Zhou
  35. Privacy and Money: It Matters By Emanuele Borgonovo; Stefano Caselli; Alessandra Cillo; Donato Masciandaro; Giovanni Rabitti

  1. By: Ngotran, Duong
    Abstract: The author develops a dynamic model with two types of electronic money: reserves for transactions between bankers and zero-maturity deposits for transactions in the non-bank private sector. Using this model, he assesses the efficacy of unconventional monetary policy since the Great Recession. After quantitative easing, keeping the interest on reserves near zero too long might create deflation. The central bank can safely get out of the "low rate-cum-deflation" trap by "raising rate and raising money supply".
    Keywords: interest on reserves,quantitative easing,unwinding QE,e-money,excess reserves,raise rate raise money supply
    JEL: E4 E5
    Date: 2019
  2. By: Jeffrey Campbell (Federal Reserve Bank of Chicago); Filippo Ferroni (Chicago FED); Jonas Fisher (Federal Reserve Bank of Chicago); Leonardo Melosi (Federal Reserve Bank of Chicago)
    Abstract: Forward guidance allows the Fed to influence private-sector expectations and thereby potentially improve macroeconomic outcomes. This tool's viability depends on the horizon over which the Fed is able to communicate its intentions and its influence on expectations over that horizon. We develop a tractable model of imperfect central bank communications and use it to measure how effectively the Fed has managed private-sector expectations about the future path of the federal funds rate and how its imperfect communications have influenced macroeconomic outcomes. Standard models assume the central bank has perfect control over the private sector's expectations about the policy rate up to an arbitrarily long horizon and this is the source of the so-called ``forward guidance puzzle.'' Our estimated model suggests that the Fed's ability to affect expectations at horizons that are sufficiently long to give rise to the forward guidance puzzle is substantially limited. We also find that imperfect communication has influenced the propagation of forward guidance and is a source of macroeconomic volatility.
    Date: 2019
  3. By: Magda Ciżkowicz-Pękała (Narodowy Bank Polski); Witold Grostal (Narodowy Bank Polski); Joanna Niedźwiedzińska (Narodowy Bank Polski); Elżbieta Skrzeszewska-Paczek (Narodowy Bank Polski); Ewa Stawasz-Grabowska (University of Lodz); Grzegorz Wesołowski (Narodowy Bank Polski); Piotr Żuk (Narodowy Bank Polski)
    Abstract: Over the last three decades, inflation targeting has become one of the most widespread monetary policy frameworks used in economies striving to conduct independent monetary policy. However, the recent global financial crisis provoked criticism of the way monetary policies had been conducted, including under an inflation targeting strategy, and called for some adjustments to the monetary policy regimes. Against this background, the report is aimed at showing that introducing changes to inflation targeting has been an ongoing process. This is illustrated by discussing the key modifications that have been applied to the inflation targeting framework over the last decades, as well as by pointing to some less commonly reviewed adjustments of the strategy as practiced by some central banks in the past. While quite a number of more recent studies on inflation targeting emphasise lessons learnt from the global financial crisis, this report looks at the full 30 years of experiences with the regime and covers rather diversified array of issues relevant for understanding the strategy, reaching also for more distant examples of its modifications. Importantly, the focus is put on strategic elements of the framework, and consequently the topics related to macroprudential policy and monetary policy instruments are discussed rather briefly.
    Keywords: Monetary Policy, Central Banking, Policy Design
    JEL: E31 E52 E58 E61
    Date: 2019
  4. By: Rybacki, Jakub
    Abstract: During the period 2015-2018 European Central Bank (ECB) has implemented a large-scale asset purchases program in order to revive inflation expectations and achieve sustainable annual HICP dynamics close to 2%. Furthermore, bank communicated that policy should remain accommodative for a long time in the foreseeable future. Based on an extended Taylor rule with Wu-Xia shadow rates and variable Holston-Laubach-Williams natural rates we analyzed discretionary deviation in policy of ECB, US Federal Reserve (Fed) and Bank of England. We identified a widening dovish bias in ECB Governing Council policy during the years 2015-2019. Such policy resulted in increase of real estate prices and the risk of market bubble measured by the UBS index. The likely consequence of this problem is a decrease in public trust in central banks and increase of support for populist movements.
    Keywords: forward guidance, large scale asset purchases, quantitative easing, time consistency, real estate bubbles
    JEL: E52 E58
    Date: 2019–09–05
  5. By: Janet Hua Jiang (Bank of Canada); Cathy Zhang (Purdue University); Daniela Puzzello (Indiana University)
    Abstract: We integrate theory and experimental evidence to study the effects of alternative inflationary monetary policies on allocations and welfare. The framework of our experiment is based on the Lagos and Wright (2005) model of monetary exchange that provides a role for money as a medium of exchange. We compare a baseline laissez-faire policy with constant money growth and three different inflationary policies where the government fixes the money growth rate. In the first scheme (Government Spending), the government adjusts expenditures financed through seigniorage; in the second scheme (Lump Sum Transfers), the government injects new money through lump-sum transfers; in the third scheme (Proportional Transfers), the government makes transfers proportional to individual money holdings. Theory predicts inflation is constant at the money growth rate in a stationary equilibrium under all inflationary policies. However, while the first two policies yield the same stationary equilibrium with lower welfare relative to the laissez-faire setting, the third policy is neutral. Consistent with theory, output and welfare in the experimental economies are significantly lower with Government Spending relative to baseline while there are no significant effects with Proportional transfers. Our findings have implications on monetary policy implementation and provide support for policies in line with the quantity theory.
    Date: 2019
  6. By: robert barsky (Federal Reserve Bank of Chicago); Christoph Boehm (UT Austin); Christopher House (University of Michigan); Miles Kimball (University of Colorado at Boulder)
    Abstract: We analyze monetary policy in a New Keynesian model with durable and non-durable goods each with a separate degree of price rigidity. The model behavior is governed by two New Keynesian Phillips Curves. If durable goods are sufficiently long-lived we obtain an intriguing variant of the well-known “divine coincidence.” In our model, the output gap depends only on inflation in the durable goods sector. We then analyze the optimal Taylor rule for this economy. If the monetary authority wants to stabilize the aggregate output gap, it places much more emphasis on stabilizing durable goods inflation (relative to its share of value-added in the economy). In contrast, if the monetary authority values stabilizing aggregate inflation, then it is optimal to respond to sectoral inflation in direct proportion to their shares of economic activity. Our results flow from the inherently high interest elasticity of demand for durable goods. We use numerical methods to verify the robustness of our analytical results for a broader class of model parameterizations.
    Date: 2019
  7. By: Kantur, Zeynep; Özcan, Gülserim
    Abstract: In addition to the stabilization of inflation and output gap, the responsibility of preventing financial crises and providing stable financial system is assumed by the central banks. In the aftermath of the Great Recession, the policymakers gave financial stability mandate more prominence to preemptively obliterate the fluctuations in the financial market. New models with alternative policy tools have emerged during this period to analyze the impact of financial shocks, and their linkages with the real economy. However, for the policymaker, it might not be possible to verify these models with existing information, which leads to uncertainty. This paper proposes robust optimal policy under uncertainty in response to financial and inflation shocks by acknowledging financial stability as an explicit objective of monetary policy. To do so, we extend the framework of De Paoli and Paustian (2017) by introducing model misspecification. We show that model ambiguity in the financial side requires a passive monetary policy stance. However, if the uncertainty originates from the supply side of the economy, an aggressive response of interest rate is required. We also show the contribution of an additional tool to the dynamics of the economy.
    Keywords: Financial Uncertainty, Financial Stability, Optimal Monetary Policy, Robust Control
    JEL: D81 E44 E52 E58
    Date: 2019–08–15
  8. By: Francesco D'Acunto (Boston College); Daniel Hoang (Karlsruhe Institute of Technology); Maritta Paloviita (Bank of Finland); Michael Weber (University of Chicago)
    Abstract: Intertemporal substitution is at the heart of modern macroeconomics and finance as well as economic policymaking, but a large fraction of a representative population of men -- those below the top of the distribution by cognitive abilities (IQ) -- do not change their consumption propensities with their inflation expectations. Low-IQ men are also less than half as sensitive to interest-rate changes when making borrowing decisions. Our microdata include unique administrative information on cognitive abilities, as well as economic expectations, consumption and borrowing plans, and total household debt from Finland. Heterogeneity in observables such as education, income, other expectations, and financial constraints do not drive these patterns. Costly information acquisition and the ability to form accurate forecasts are channels that cannot fully explain these results. Limited cognitive abilities could be human frictions in the transmission and effectiveness of fiscal and monetary policies that operate through household consumption and borrowing decisions.
    Date: 2019
  9. By: Tatsushi Okuda (Bank of Japan); Tomohiro Tsuruga (International Monetary Fund); Francesco Zanetti (University of Oxford; Centre for Macroeconomics (CFM))
    Abstract: We establish novel 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 of the idiosyncratic component of demand differ across sectors, and they positively co-move with expectations about the aggregate component of demand. To study the implications for inflation, we develop a model with firms that form expectations based on the inference of distinct shocks from a common signal. 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 apply 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: C72 D82 E31
    Date: 2018–09
  10. By: Pelletier, Adeline; Khavul, Susanna; Estrin, Saul
    Abstract: Mobile money is a financial innovation that provides transfers, payments, and other financial services at a low or zero cost to individuals in developing countries where banking and capital markets are deficient and financial inclusion is low. We use transaction costs and institutional theories to explain the growth and impact of mobile money. Having developed a new archival dataset that tracks mobile money deployment across 90 emerging economies during 16 years between 2000 and 2015, we address the question of relative economic impact of the banking and telecoms sectors in the provision of mobile money. We show that telecom groups and not banks are more likely to launch mobile money in countries where legal rights are weaker and credit information less prevalent. However, it is when mobile money is offered via a banking channel that the spillover effects on the economy are greater. Findings have significant implications for policy and strategy.
    JEL: G21 M13 O33
    Date: 2019–09–09
  11. By: Behzad Diba (Department of Economics, Georgetown University); Olivier Loisel (CREST (ENSAE))
    Abstract: We develop a model of monetary policy with a simple departure from the basic New Keynesian (NK) model. In this model, the central bank sets independently the interest rate on bank reserves and the nominal stock of bank reserves. As long as demand for real reserves is not fully satiated, the model delivers local-equilibrium determinacy under permanently exogenous monetary-policy instruments. As a result, it does not share the puzzling and paradoxical implications of the basic NK model under a temporary interest rate peg (e.g., in the context of a liquidity trap). More specifically, it offers a resolution of the “forward-guidance puzzle,” a related puzzle about fiscal multipliers, and the “paradox of flexibility,” even for an arbitrarily small departure from the basic NK model. It still solves or attenuates these puzzles and that paradox for a vanishingly small departure, and also solves the “paradox of toil” in that case. We argue that our non-satiation assumption is reasonable for analyzing the role of monetary policy during the Great Recession.
    Keywords: New Keynesian puzzles, forward guidance, interest on reserves, price determinacy
    JEL: E52 E58
    Date: 2019–08–28
  12. By: Joseph Haslag (University of Missouri-Columbia)
    Abstract: Central bank communications need interpretation. We contribute to the communications literature by focusing on the effort expended on deciphering central bank communications. We build a model economy in which banks provide a deposit/insurance function for consumers subject to idiosyncratic liquidity shocks. Though ex ante identical, banks exhibit ex post heterogeneity by choosing different predictors that vary in terms of accuracy with respect to the expected future return on money. In the literature with heterogeneous forecasts, the modelling approach has relied on stochastic costs as the primary force accounting for the coexistence of different predictors in equilibrium. Here, model the problem as a willingness to pay for different predictors; each predictor has a different forecast accuracy with more accurate predictors resulting in higher expected utility. By the concavity of the consumer’s utility function, there exists a willingness-to-pay which satisfies an indifference condition. More accurate forecast predictors correspond with greater willingness-to-pay amounts. The resources expended to obtain a more accurate forecast correspond with the bank’s processing of the central bank’s communications. Hence, we interpret the willingness to pay as Fed watching. The model with Fed watching exhibits local stability, while we derive conditions in which no Fed watching results in local instability. We further apply this approach to a banking economy in which the returns to one asset are subject to a fractional externality; that is, the return to one asset is negatively related to the fraction of banks holding that asset. The approach is designed to capture how herding and the regulatory settings are related to what the central bank knows (and communicates) about bank operations.
    Date: 2019
  13. By: Robert Calvert Jump (University of the West of England, Bristol); Cars Hommes (University of Amsterdam); Paul Levine (University of Surrey)
    Abstract: We present a New Keynesian model in which a fraction n of agents are fully rational, and a fraction 1 − n of agents are bounded rational. After deriving a simple reduced form, we demonstrate that the Taylor condition is sufficient for determinacy and stability, both when the proportion of fully rational agents is held fixed, and when it is allowed to vary according to reinforcement learning. However, this result relies on the absence of persistence in the monetary policy rule, and we demonstrate that the Taylor condition is not sufficient for determinacy and stability in the presence of interest rate smoothing. For monetary policy rules that imply indeterminacy, we demonstrate the existence of limit cycles via Hopf bifurcation, and explore a rational route to randomness numerically. Our results support the broader literature on behavioural New Keynesian models, in which the Taylor condition is known to be a useful guide to monetary policy, despite not always being sufficient for determinacy and/or stability.
    Date: 2018–01–07
  14. By: Oleg Itskhoki (Princeton University); Dmitry Mukhin (Yale University)
    Abstract: The Mussa (1986) puzzle - a sharp and simultaneous increase in the volatility of both nominal and real exchange rates after the end of the Bretton Woods System of pegged exchange rates in early 1970s - is commonly viewed as a central piece of evidence in favor of monetary non-neutrality. Indeed, a change in the monetary regime has caused a dramatic change in the equilibrium behavior of a real variable - the real exchange rate. The Mussa fact is further interpreted as direct evidence in favor of models with nominal rigidities in price setting (sticky prices). We show that this last conclusion is not supported by the data, as there was no simultaneous change in the properties of the other macro variables - neither nominal like inflation, nor real like consumption, output or net exports. We show that the extended set of Mussa facts equally falsifies both flexible-price RBC models and sticky-price New Keynesian models. We present a resolution to this broader puzzle based on a model of segmented financial market - a particular type of financial friction by which the bulk of the nominal exchange rate risk is held by a small group of financial intermediaries and not shared smoothly throughout the economy. We argue that rather than discriminating between models with sticky versus flexible prices, and monetary versus productivity shocks, the Mussa puzzle provides sharp evidence in favor of models with monetary non-neutrality arising due to financial market segmentation. Sticky prices are neither necessary, nor sufficient for the qualitative success of the model.
    Date: 2019
  15. By: Michael Brei; Claudio Borio
    Abstract: This paper investigates how the prolonged period of low interest rates affects bank intermediation activity. We use data for 113 large international banks headquartered in 14 major advanced economies during the period 1994–2015. We find that low interest rates induce banks to shift their activities from interest-generating to fee-related and trading activities. This rebalancing is stronger for low capitalised banks. Banks also moderately adjust their funding structure, away from short-term market funding towards deposits. We observe a concomitant decline in the risk-weighted asset ratio and a reduction in loan-loss provisions, which is consistent with signs of evergreening.
    Keywords: monetary policy, bank business models, financial crisis
    JEL: C53 E43 E52 G21
    Date: 2019–08
  16. By: Ernesto Pasten; Raphael Schoenle; Michael Weber
    Abstract: We study the transmission of monetary policy shocks in a model in which realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages, and derive conditions under which these heterogeneities generate large real effects. Quantitatively, heterogeneity in the frequency of price adjustment is the most important driver behind large real effects. Heterogeneity in input-output linkages and consumption shares contribute only marginally to real effects but alter substantially the identity and contribution of the most important sectors to the transmission of monetary shocks. In the model and data, reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and for the real effects of nominal shocks and ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.
    Date: 2019–09
  17. By: Jennifer Castle; Takamitsu Kurita
    Abstract: We employ a newly-developed partial cointegration system allowing for level shifts to examine whether economic fundamentals form the long-run determinants of the dollar-pound exchange rate in an era of structural change. The paper uncovers a class of local data generation mechanisms underlying long-run and short-run dynamic features of the exchange rate using a set of economic variables that explicitly reflect the central banks’ monetary policy stances and the influence of a forward exchange market. The impact of the Brexit referendum is evaluated by examining forecasts when the dollar-pound exchange rate fell substantially around the vote.
    Keywords: Exchange rates, Monetary policy, General-to-speciï¬ c approach, Partial cointegrated vector autoregressive models, Structural breaks.
    JEL: C22 C32 C52 F31
    Date: 2019–01–07
  18. By: Haque, Qazi; Groshenny, Nicolas; Weder, Mark
    Abstract: The paper re-examines whether the Federal Reserve’s monetary policy was a source of instability during the Great Inflation by estimating a sticky-price model with positive trend inflation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and finds that the Federal Reserve responded aggressively to inflation 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.
    JEL: E32 E52 E58
    Date: 2019–09–11
  19. By: Daiki Maeda
    Abstract: Based on findings in the behavioral economics literature, we incorporate non-unitary discounting into a monetary search model to study optimal monetary policy. We apply non-unitary discounting, that is, discount rates that are different across goods. With this extension to the model, we find that there are cases where optimal monetary policy deviates from the Friedman rule.
    Date: 2019–09
  20. By: Guido Ascari; Timo Haber
    Abstract: This paper proposes a minimal test of two basic empirical predictions that ag-gregate data should exhibit if sticky prices were the key transmission mechanism of monetary policy, as implied by the benchmark DSGE-New Keynesian models. First, large monetary policy shocks should yield proportionally larger initial re-sponses of the price level and smaller real effects on output. Second, in a high trend inflation regime, prices should be more flexible, and thus the real effects of monetary policy shocks should be smaller and the response of the price level larger. Our analysis provides some statistically significant evidence in favor of a sticky price theory of the transmission mechanism of monetary policy shocks.
    Keywords: Sticky prices, local projections, smooth transition function, time-dependent pricing, state-dependent pricing
    JEL: E30 E52 C22
    Date: 2019–03–06
  21. By: Eunseong Ma (Texas A&M University)
    Abstract: This study investigates the relation between monetary policy and inequality by asking how one affects the other: the effect of monetary policy on inequality and the impact of the long-run level of inequality on the effectiveness of monetary policy. To this end, I incorporate nominal wage contracts and cash-in-advance constraints into a heterogeneous agent model economy with indivisible labor. I find that expansionary monetary policy reduces income, wealth, and consumption inequalities mainly due to a rise in employment from the bottom of the distributions. There are heterogeneous effects on income across the wealth distribution: in response to an unanticipated monetary easing, households in the bottom of the wealth distribution benefit from an increase in employment while rich households benefit from a rise in the real asset returns in a relative sense. An unexpected monetary expansion also has asymmetric responses of consumption between the poor and the rich: asset-poor households increase their consumption while it falls for wealthy households. This implies that inflation hurts the rich more. I also find that the long-run prevailing levels of inequality matter for the effectiveness of monetary policy by determining the shape of reservation wage distribution. All else being equal, a more equal economy is associated with more effective monetary policy in terms of output. I also provide empirical evidence for this model result using state-level panel data: the effects of monetary policy shocks on output are larger for low-inequality states.
    Date: 2019
  22. By: Pablo D'Erasmo (FRB Philadelphia); Guillermo Ordonez (University of Pennsylvania); Selman Erol (CMU)
    Abstract: A recent regulatory change involves the use of clearing in financial transactions. Under the new Dodd-Frank mandatory clearing regime, the ultimate counterparty of several transactions (swaps, futures, derivatives, etc) will no longer be the entity at the other side of the transaction. Instead the transaction will be submitted to a Central Clearinghouse (CCP) for clearing. Once cleared, the Clearinghouse is the counterparty to all trades, and the regulatory bodies (CFTC and SEC) will impose constraints that mitigate risks. Similar steps have been recently followed by the European Union’s new regulations. The rationale of forcing the use of CCPs is to reduce counterparty risk and to mitigate network effects. What is the effect of these impositions on the way banks interact with each other? Why banks were not exploiting clearing in absence of regulations? We construct a model to understand how the network may change with and without clearinghouses and how those changes can translate in a stronger potential for contagion and endogenously higher financial fragility, and also what is its impact on the efficiency of the banking sector.
    Date: 2019
  23. By: Stefan Nagel (University of Chicago); Zhengyang Xu (University of Michigan)
    Abstract: Building on recent evidence that lifetime experiences shape individuals’ macroeconomic expectations, we study asset prices in an economy in which a representative agent learns with fading memory from experienced endowment growth. The agent updates subjective beliefs with constant gain, which in- duces memory loss, but is otherwise Bayesian in evaluating uncertainty. The model produces perpetual learning, substantial priced long-run growth rate uncertainty, and, conveniently, a stationary economy. This approach resolves many asset pricing puzzles and it reconciles model-implied subjective belief dynamics with survey data on individual investor return expectations within a simple setting with IID endowment growth, constant risk aversion, and a gain parameter calibrated to microdata estimates. The objective equity premium is high and strongly counter-cyclical in the sense of being negatively related to experienced stock market payout growth (a long-run weighted average of past growth rates). In contrast, the subjective equity premium is slightly pro-cyclical. As a consequence, subjective expectations errors are predictable and negatively related to past experienced payout growth. Consistent with this theory, we show empirically that experienced payout growth is negatively related to future stock market excess returns. Based on expectations data from individual investor surveys spanning several decades, we show that this measure of experienced growth is also strongly negatively related to subjective expectations errors.
    Date: 2019
  24. By: Salih Fendoglu; Mehmet Selman Colak; Yavuz Selim Hacihasanoglu
    Abstract: We show that higher foreign currency indebtedness raises the degree of exchange rate pass-through to domestic producer prices. For identification, we use micro-level data from Turkey, an emerging market economy that has experienced large exchange rate movements over the last decade. Matching the Credit Register of Turkey with disaggregated manufacturing sector data on domestic prices and foreign currency revenues from international trade, we show that sectors with higher ex-ante net foreign-currency liabilities raise their prices significantly more following domestic currency depreciation. The results are stronger if foreign currency liabilities are short term.
    Keywords: Exchange rate pass-through, Producer prices, Foreign currency indebtedness, Emerging market economies
    JEL: E31 F31
    Date: 2019
  25. By: Sebnem Kalemli-Ozcan (University of Maryland); Liliana Varela (London School of Economics)
    Abstract: Using survey based measures of exchange rate expectations from a large set of advanced countries and emerging markets during 1996–2015, we document new facts on international arbitrage and exchange rate determination. We find that positive interest rate differentials imply expected depreciation as predicted by the no-arbitrage condition, however the expected depreciation is not enough to offset the interest rate differentials, leading to UIP deviations. To understand why there is not a full offset, we evaluate the response of each component of the UIP relation—that is the interest rate differential term and and exchange rate adjustment term—to changes in global risk and country fundamentals. This exercise reveals that, in short horizons (1-3 month), expected depreciation as a response to a given shock is large enough to offset most of the interest rate differentials, narrowing down the UIP deviations in general, and vanishing them in the advanced economies. In long horizons (12 month), this is not the case due to a combination of different factors in different countries. In advance countries, currency risk plays a key role, where in bad times (high global risk), currency depreciates more than the expectations, leading to larger deviations. In emerging markets, there is not enough movement in the exchange rate adjustment term. Capital outflows from emerging markets as a result of both higher global risk and worsening country fundamentals lead to larger interest rate differentials. Although there is an expected and actual depreciation as a result of such outflows, these are not enough to offset the interest rate differentials as the role played by the default risk is more important.
    Date: 2019
  26. By: Christopher Clayton (Harvard University); Andreas Schaab (Harvard University); Xavier Jaravel (London School of Economics)
    Abstract: This paper investigates the implications of heterogeneous price rigidities across sectors for the distributional and aggregate effects of monetary policy. First, we identify and characterize analytically a new set of earnings and expenditure channels of monetary policy that emerge in the presence of sectoral heterogeneity. Second, we establish empirically that (i) prices are more rigid in sectors selling to college-educated households, (ii) prices are more rigid in sectors employing college-educated households, and (iii) sectors that employ college-educated households also sell more to these households. These new facts suggest that monetary policy stabilizes sectors that matter relatively more for college-educated households, due to an expenditure channel (from (i)), an earnings channel (from (ii)), and their amplification by feedback loops (from (iii)). Finally, we develop a multi-sector incomplete-markets Heterogeneous Agent New Keynesian model, in which households of different education levels work and consume in different sectors. We quantify the aggregate and distributional effects from heterogeneous price rigidities using this model. In the baseline calibration, we find that the consumption of college-educated households is 22% more sensitive to monetary policy shocks as that of non-college households, while the aggregate real effect of monetary policy is 5% stronger than with homogeneous price rigidities.
    Date: 2019
  27. By: Max Raskin; Fahad Saleh; David Yermack
    Abstract: This paper provides a systematic evaluation of the different types of digital currencies. We express skepticism regarding centralized digital currencies and therefore focus our economic analysis on private digital currencies. Specifically, we highlight the potential for private digital currencies to improve welfare within an emerging market with a selfish government. In that setting, we demonstrate that a private digital currency not only improves citizen welfare but also encourages local investment and enhances government welfare.
    JEL: E42 E5 E58
    Date: 2019–09
  28. By: Angelini, Elena; Bokan, Nikola; Christoffel, Kai; Ciccarelli, Matteo; Zimic, Srečko
    Abstract: This paper presents the blueprint of a new ECB multi-country model. The version documented in the following pages is estimated on euro area data. As a prelude to the country models, this version is meant to enhance the understanding of the main model mechanisms, enlarge the suite of area wide tools, and provide a tool for a top down approach between euro area and country modelling. The model converges to a well-defined steady state and its properties are in line with macroeconomic theory and standard empirical benchmarks. The design is aligned to its role as workhorse model in the context of the forecasting and policy simulation exercises at the ECB. JEL Classification: C3, C5, E1, E2, E5
    Keywords: euro area, forecasting, monetary policy, Semi-structural model, simulations
    Date: 2019–09
  29. By: Elena Deryugina (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation)
    Abstract: We estimated a Non-Stationary Dynamic Factor model and used it to generate artificial episodes of disinflation (permanent change in the mean inflation rate). These datasets were used to test the forecasting abilities of alternative underlying inflation indicators (i.e. the measures that capture sustained movements in inflation extracted from information in a disaggregated set of price data). We found that the out of sample forecast errors of the benchmark underlying inflation measures (based on unobserved trend extraction) are more severely affected by disinflation than the alternative simpler methods (based on exclusion or reweighting approaches). We also show that a Non-Stationary Dynamic Factor model may be employed for extraction of the unobserved trend to be used as an underlying inflation measure.
    Keywords: Underlying inflation, Non-Stationary Dynamic Factor model, Russia.
    JEL: E31 E32 E52 C32
    Date: 2019–09
  30. By: Ewa Stanisławska (Narodowy Bank Polski); Maritta Paloviita (Bank of Finland); Tomasz Łyziak (Narodowy Bank Polski)
    Abstract: Using a novel approach based on micro-level survey responses, we assess the reliability of aggregated inflation expectations estimates in the European Commission Consumer Survey. We identify the share of consumers, whose qualitative and quantitative views on expected increase of prices do not match each other. Then we consider the impact of inconsistent survey responses on balance statistics and mean values of quantitative inflation expectations. We also analyze expectations’ formation estimating the sticky-information models. The results, based on Finnish and Polish data, suggest that even if the fraction of inconsistent survey responses is non-negligible, it matters neither for the aggregated figures of inflation views, nor for understanding of the formation of inflation expectations by consumers. We conclude that micro-level inconsistencies do not reduce the reliability of the current EC Consumer Survey dataset. Our results also indicate that inconsistent responses are not important drivers of the inflation overestimation bias displayed in the data.
    Keywords: inflation expectations, European Union, consumer survey.
    JEL: D12 D84
    Date: 2019
  31. By: Donato Masciandaro
    Abstract: This article discusses the relationships between populism, economic policy design and central bank independence (CBI). Assuming that 1) a macro (banking) shock can occur, 2) the incumbent government can face a trade - off between bail-out and bail-in and can finance its public spending choosing between taxes and debt; 3) an independent central bank design the monetary policy strategy assuming a long run perspective – i.e. welfare function maximization; 3) labour and financial assets represent the citizens endowment, with the possibility of monetary and banking externalities, it is possible that the majority of citizens prefer an overall policy design – including monetary policy - that are different from the social optimal ones. Then if the incumbent government wishes to please the voters, the political pressure measures the difference between the government goals and the central bank choices. The political pressure can be considered a proxy for a contingent demand of CBI reform – a metrics for de facto CBI. If we define as populist any policy that guarantees anti- elites redistribution without regard for longer term distortions, a populist pressure that promote a more politically dependent central bank can arise when the elites are sophisticated investors, while the majority of citizens are unsophisticated investors.
    Keywords: Populism, Financial Inequality, Monetary Policy, Central bank Independence, Political Economics
    JEL: D72 D78 E31 E52 E58 E62
    Date: 2019
  32. By: Haelim Anderson (Federal Deposit Insurance Corporation); Kinda Hachem (UVA Darden); Simpson Zhang (Office of the Comptroller of the Currency)
    Abstract: In environments where aggregate liquidity is insufficient, the prevention of bank failures requires either a liquidity injection by the central bank or a suspension of convertibility. Suspensions lock savers out of their funds, undermining the liquidity service that banks exist to provide. At the same time, post-crisis reforms are deliberately curtailing the ability of central banks to create new, stigma-free lending facilities that inject emergency liquidity, especially for shadow banks. This raises a critical question: Can anything be done to mitigate bank failures when neither a suspension of convertibility nor a liquidity injection by the central bank is viable? In this paper, we show that there is a forced reallocation of existing liquidity that achieves fewer bank failures than a decentralized interbank market. We also show that this reallocation can be implemented through the issuance of centralized loan certificates, which were a policy instrument utilized by the New York Clearinghouse (NYCH) during the Panic of 1873. Using a novel, hand-collected data set, we find that the NYCH issued loan certificates to banks in the way our model suggests they should have, helping to resolve the panic. We also consider alternative policies in a quantitative extension and find that none do uniformly better than loan certificates.
    Date: 2019
  33. By: Gerald Carlino (Federal Reseve Bank of Philadelphia); Nicholas Zarra (New York University); Robert Inman (Wharton School, University of Pennsylvania); Thorsten Drautzburg (Federal Reserve Bank of Philadelphia)
    Abstract: States have become an increasingly important agent of fiscal policy in the U.S. Motivated by the large literature that finds increases in partisanship among policymakers, we analyze whether partisanship affects state fiscal policy and what its macroeconomic effects are. Using data from close elections, we find strong partisanship effects in the passthrough of federal transfers to state: Republican governors spend less of federal funds and, instead, cut distortionary taxes. Transfers are an important vehicle of federal policies, with a share of 40% in the 2009 stimulus bill and funding the 2014 Medicaid expansion. We provide causal evidence that the passthrough of federal transfers by state governments varies between Republican and Democratic governors, using a regression-discontinuity design. To analyze the macroeconomic effects of this partisan behavior, we use a structural model of Republican and Democratic regions in a monetary union. The model delivers an aggregate transfer multiplier that is significantly lower with partisan differences. This is due to distortionary tax cuts that lower the initial aggregate demand effects, but make Republican states more competitive with a delay. Our model implies that the transfer multiplier varies over time with the partisan affiliation of governors and we find empirical support for this prediction using local-projection methods.
    Date: 2019
  34. By: Lutz Kilian (University of Michigan); Xiaoqing Zhou (Bank of Canada)
    Abstract: There has been much interest in the relationship between the price of crude oil, the value of the U.S. dollar, and the U.S. interest rate since the 1980s. For example, the sustained surge in the real price of oil in the 2000s is often attributed to the declining real value of the U.S. dollar as well as low U.S. real interest rates, along with a surge in global real economic activity. Quantifying these effects one at a time is difficult not only because of the close relationship between the interest rate and the exchange rate, but also because demand and supply shocks in the oil market in turn may affect the real value of the dollar and real interest rates. We propose a novel identification strategy for disentangling the causal effects of oil demand and oil supply shocks from the effects of exogenous shocks to the U.S. real interest rate and exogenous shocks to the real value of the U.S. dollar. We empirically evaluate popular views about the role of exogenous real exchange rate shocks in driving the real price of oil, and we examine the extent to which shocks in the global oil market drive the U.S. real exchange rate and U.S. real interest rates. Our evidence for the first time provides direct empirical support for theoretical models of the link between oil prices, exchange rates, and interest rates.
    Date: 2019
  35. By: Emanuele Borgonovo; Stefano Caselli; Alessandra Cillo; Donato Masciandaro; Giovanni Rabitti
    Abstract: In the economic literature, a medium of payment has two properties: liquidity and store of value. The fast and increasing development of digital currencies raises the question: is privacy a third attribute? We test these assertions through a laboratory experiment. From the theoretical viewpoint, the experiment relies on the simultaneous combination of Keynes’s traditional demand for money and Friedman’s forward looking intuition on the role of privacy. Results show that privacy positively matters and increases the overall appeal of a medium of payment, even more for risk prone individuals. Given privacy, the sacrifice ratio between liquidity risk and opportunity cost is relatively high. Within the current debate, the experiment suggests that the future competition between alternative currencies will depend on how the three properties will be mixed in a way consistent with the individual’s preferences.
    Keywords: Money Demand, Cryptocurrencies, Central Bank Digital Currencies, Behavioural Economics
    Date: 2019

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