nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒10‒14
forty-nine papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Stable Money and Central Bank Independence: Implementing Monetary Institutions in Postwar Germany By Carsten Hefeker
  2. Cash is King - Effects of ECB's Conventional and Unconventional Measures By Martin Baumgaertner; Jens Klose
  3. International Spillovers of U.S. Monetary Policy By Demir, Ishak
  4. Inflation convergence and anchoring of expectations in India By Ashima Goyal; Prashant Parab
  5. Monetary Policy and the Limits to Arbitrage: Insights from a New Keynesian Preferred Habitat Model By Walker Ray
  6. The monetary policy of the South African Reserve Bank: stance, communication and credibility By Alberto Coco; Nicola Viegi
  7. The Dollar During the Great Recession: US Monetary Policy Signaling and The Flight To Safety By Stavrakeva, Vania; Tang, Jenny
  8. Asset Price Beliefs and Optimal Monetary Policy By Colin Caines; Fabian Winkler
  9. Threats to Central Bank Independence: High-Frequency Identification with Twitter By Bianchi, Francesco; Kind, Thilo; Kung, Howard
  10. Inside Money, Investment, and Unconventional Monetary Policy By Lukas Altermatt
  11. Credit mechanics: a precursor to the current money supply debate By Decker, Frank; Goodhart, C. A. E.
  12. Monetary Policy Autonomy and International Monetary Spillovers By Demir, Ishak
  13. What is Libra? Understanding Facebook's currency By Schmeling, Maik
  14. Central Bank Digital Currency: Welfare and Policy Implications By Stephen Williamson
  15. The reaction function channel of monetary policy and the financial cycle By Andrew Filardo; Paul Hubert; Phurichai Rungcharoenkitkul
  16. Order flow and rand/dollar exchange rate dynamics By Aadila Hoosain; Alta Joubert; Alain Kabundi
  17. Riders on the Storm By Jordá, Óscar; Taylor, Alan M.
  18. Global Effective Lower Bound and Unconventional Monetary Policy By Jing Cynthia Wu; Ji Zhang
  19. The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission By Chen, Zhengyang
  20. The Interaction Between ConventionalMonetary Policy and Financial Stability: Chile, Colombia, Japan, Portugal and the UK By Zoe Venter
  21. Policy transmission in Indian money markets: The role of liquidity By Ashima Goyal; Deepak Kumar Agarwal
  22. Negative interest rates in the euro area: does it hurt banks? By Jan Stráský; Hyunjeong Hwang
  23. Pegging or Floating? A Regime-Switching Perspective of Asian Exchange Rate Practices By Benjamin KEDDAD; SATO Kiyotaka
  24. Deposit Spreads and the Welfare Cost of Inflation By Pablo Kurlat
  25. "The Effects of Lender of Last Resort on Financial Intermediation during the Great Depression in Japan" By Masami Imai; Tetsuji Okazaki; Michiru Sawada
  26. Modeling consumers' confidence and inflation expectations By Ashima Goyal; Prashant Parab
  27. Global Dimensions of US Monetary Policy By Maurice Obstfeld
  28. To democratize finance, democratize central banking By Woodruff, David M.
  29. Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect By Gürkaynak, Refet S.; Karasoy Can, Gokce; Lee, Sang Seok
  30. Monetary Policy in Sudden Stop-prone Economies By Louphou Coulibaly
  31. Taylor rule implementation of the Optimal policy at the zero lower bound: Does the cost channel matter? By Siddhartha Chattopadhyay; Taniya Ghosh
  32. Money Mining and Price Dynamics By Michael Choi; Guillaume Rocheteau
  33. Monetary policy in a model with commodity and financial market By Vo Phuong Mai Le; Ruthira Naraidoo
  34. Micro Jumps, Macro Humps: monetary policy and business cycles in an estimated HANK model By Adrien Auclert; Ludwig Straub; Matthew Rognlie
  35. Monetary policy for commodity booms and busts By Drechsel, Thomas; McLeay, Michael; Tenreyro, Silvana
  36. "Inflation Target and Anchor of Inflation Forecasts in Japan" By Shin-ichi Fukuda; Naoto Soma
  37. The role of the rand as a shock absorber By Luchelle Soobyah; Daan Steenkamp
  38. The Economics of Cryptocurrencies -- Bitcoin and Beyond By Jonathan Chiu
  39. The Transformation and Performance of Emerging Market Economies Across the Great Divide of the Global Financial Crisis By Michael D. Bordo; Pierre Siklos
  40. Can more public information raise uncertainty? The international evidence on forward guidance By Ehrmann, Michael; Gaballo, Gaetano; Hoffmann, Peter; Strasser, Georg
  41. The Cost of Holding Foreign Exchange Reserves By Eduardo Levy Yeyati
  42. Monetary Transmission with Segmented Markets By Anmol Bhandari; David Evans; Mikhail Golosov
  43. Aggregate demand management, policy errors and optimal monetary policy in India By Barendra Kumar Bhoi; Abhishek Kumar; Prashant Mehul Parab
  44. The Primary Cause of European Inflation in 1500-1700: Precious Metals or Population? The English Evidence By Edo, Anthony; Melitz, Jacques
  45. The FOMC Risk Shift By Kroencke, Tim; Schmeling, Maik; Schrimpf, Andreas
  46. Homogeneity and heterogeneity of cryptocurrencies By Xiao Fan Liu; Zeng-Xian Lin; Xiao-Pu Han
  47. Means of Payment By Nancy L Stokey
  48. The Political Economy of a Diverse Monetary Union By Perotti, Enrico C; Soons, Oscar
  49. A Monetary-Fiscal Theory of the Price Level By David Miller

  1. By: Carsten Hefeker (University of Siegen)
    Abstract: Germany prides itself in having one of the most successful central banks and currencies with respect to independence and stability. I show that not only were both imposed on the country after 1945 but that there was also initial resistance to both among German experts and officials. This was then a rare case of successful imposition of institutions from abroad. Events are discussed in light of Peter Bernholz’s requirements for stable money and a successful central bank.
    Keywords: Currency reform, Bundesbank, central bank independence, institutional reform
    JEL: E42 E58 N14 N24
    Date: 2019
  2. By: Martin Baumgaertner (THM Business School); Jens Klose (THM Business School)
    Abstract: In this paper we distinguish the responses of conventional and unconventional monetary policy measures on macroeconomic variables, using a high frequency data set which measures the impact of the ECB's monetary policy decisions. For the period 2002:01 to 2019:06 we show that unconventional and conventional monetary policy measures dffer considerably with respect to inflation. While conventional measures show the expected response, i.e. an interest rate cut increases inflation and vice versa, unconventional measure appear to have no signicant influence. But this holds not for QE, which is found to have similar influence on inflation as conventional interest rate changes.
    Keywords: Unconventional Monetary Policy, High-Frequency Data, ECB
    JEL: E52 E58 C36
    Date: 2019
  3. By: Demir, Ishak
    Abstract: We estimate a structural dynamic factor model on large panel quarterly data to analyse the spillovers of U.S. monetary policy to the advanced economies and emerging and frontier market economies. The estimated model suggests that monetary contraction in U.S. leads to a significant decrease in real GDP with typical inverted hump-shape almost for all countries. It reduces permanently aggregate price level, increases interest rate and leads appreciation of U.S. dollar. However, contagion of U.S. monetary policy to the individual countries shows heterogeneity. For instance, its impact is larger in developing countries. We also find that global financial crisis has amplified the impact of U.S monetary policy on the rest of world in particular on developing countries. Lastly, the empirical results suggest that the cross-country heterogeneity in responses may be consequence of difference in country-specific characteristics such as exchange rate regimes, currency of price settings of firms, central bank independence and geographical distance from Unites States.
    Keywords: cross-country heterogeneity,country-specific characteristic,international monetary spillovers,structural factor model,monetary policy
    JEL: C38 E43 E52 E58 F42 G12
    Date: 2019
  4. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Prashant Parab (Indira Gandhi Institute of Development Research)
    Abstract: Careful research on the inflation targeting regime's impact on anchoring inflation expectations as well as an empirical examination of convergence is used to assess the direction of convergence between core and headline inflation as well as the efficacy of the expectation channel compared to the aggregate demand channel of monetary transmission. There is evidence of more anchoring, with RBI communications as well as headline inflation affecting short-run inflation expectations and core inflation dominating in the long-run. The Repo rate has hardly any affect. While persistently high headline affects core, normally a volatile headline reverts to a more stable core. Transitory shocks to components of core have kept it sticky, but it is also softening, so that both core and headline can be expected to approach the inflation target. Our evidence supports the expectation channel of monetary transmission to inflation but not the aggregate demand channel. It follows monetary policy should focus on clear communication and accurate forecasts, while avoiding excessively high policy rates.
    Keywords: Inflation expectations, targeting, convergence, anchoring, transmission channel
    JEL: E31 E58 E52
    Date: 2019–07
  5. By: Walker Ray (UC Berkeley)
    Abstract: With conventional monetary policy unable to stabilize the economy in the wake of the global financial crisis, central banks turned to unconventional tools. This paper embeds a model of the term structure of interest rates featuring market segmentation and limits to arbitrage within a New Keynesian model to study these policies. Because the transmission of monetary policy depends on private agents with limited risk-bearing capacity, financial market disruptions reduce the efficacy of both conventional policy as well as forward guidance. Conversely, financial crises are precisely when large scale asset purchases are most effective. Policymakers can take advantage of the inability of financial markets to fully absorb these purchases, which can push down long-term interest rates and help stabilize output and inflation.
    Date: 2019
  6. By: Alberto Coco; Nicola Viegi
    Abstract: This paper analyses the evolution of the monetary policy stance, communication and credibility of the South African Reserve Bank (SARB) since 2000, when it adopted a flexible Inflation Targeting (IT) regime to facilitate the achievement of its price stability mandate. Empirical results indicate that the stance became accommodative after the global financial crisis of 2009, with a tendency of the implicit inflation target to increase, while after 2014 it turned tighter and the implicit target started declining. In addition, after the crisis the monetary policy has become less active, with a lower response of policy rates to output and inflation gaps, partially explained with the extension of the mandate to include financial stability. At the same time, applying Natural Language Processing techniques to the SARB monetary policy statements shows a move towards a more ‘forward-looking’ and balanced communication strategy, complementing to some extent the less frequent changes of monetary policy rates. Finally, the behavior of market interest rates and inflation expectations shows that monetary policy has been gradually better at anchoring expectations, especially in the last few years. The analysis helps to understand the interaction between policy, communication and credibility by showing a consistent picture across all different aspects of monetary policy making.
    Keywords: Inflation targeting, Taylor rule, Natural Language Processing, inflation expectations, South Africa
    JEL: C22 E42 E43 E52 E58
    Date: 2019–07
  7. By: Stavrakeva, Vania; Tang, Jenny
    Abstract: Conventional wisdom holds that lowering a home country's interest rate relative to another's will depreciate the domestic currency. We document that US monetary policy easings actually had the opposite effect during the Great Recession. We attribute this effect to calendar-based forward guidance that signaled economic weakness which resulted in a flight-to-safety effect and lower expected inflation in the United States. Our results imply that accusations that the Federal Reserve engaged in a "competitive devaluation" over the Great Recession were unfounded.
    JEL: E52 F31 G01
    Date: 2019–10
  8. By: Colin Caines (Federal Reserve Board); Fabian Winkler (Federal Reserve Board)
    Abstract: We characterize optimal monetary policy when agents have extrapolative beliefs about asset prices. Such boundedly rational expectations induce inefficient asset price and aggregate demand fluctuations. We find that the optimal monetary policy raises interest rates when expected capital gains or the level of current asset prices is high, but does not eliminate deviations of asset prices from their fundamental value. When the asset is in elastic supply, optimal policy also leans against the wind, tolerating low inflation and output when asset prices are too high. Optimal policy can be reasonably approximated by simple interest rate rules that respond to capital gains. Our results are robust to a wide range of belief specifications.
    Date: 2019
  9. By: Bianchi, Francesco; Kind, Thilo; Kung, Howard
    Abstract: This paper presents market-based evidence that President Trump influences expectations about monetary policy. The main estimates use tick-by-tick fed funds futures data and a large collection of Trump tweets criticizing the conduct of monetary policy. These collected tweets consistently advocate that the Fed lowers interest rates. Identification in our high-frequency event study exploits a small time window around the precise time stamp for each tweet. The average effect of these tweets on the expected fed funds rate is strongly statistically significant and negative, with a cumulative effect of around negative 10 bps. Therefore, we provide evidence that market participants believe that the Fed will succumb to the political pressure, which poses a significant threat to central bank independence.
    Keywords: central bank independence; fed funds target; High-Frequency Identification; monetary policy; Twitter
    JEL: E52 E58 G1
    Date: 2019–09
  10. By: Lukas Altermatt (University of Wisconsin-Madison)
    Abstract: I develop a new monetarist model to analyze why an economy can fall into a liquidity trap, and what the effects of unconventional monetary policy measures such as helicopter money and negative interest rates are under these circumstances. I find that liquidity traps can be caused by a decrease in the bonds-to-money ratio, by a decrease in productivity of capital, or by an increase in demand for consumption. The model shows that, while conventional monetary policy cannot control inflation in a liquidity trap, unconventional monetary policies allow the monetary authority to regain control over the inflation rate, and that an increase in the bonds-to-money ratio is the only welfare-improving policy.
    Date: 2019
  11. By: Decker, Frank; Goodhart, C. A. E.
    Abstract: This paper assesses the theory of credit mechanics within the context of the current money supply debate. Credit mechanics and related approaches were developed by a group of German monetary economists during the 1920s-1960s. Credit mechanics overcomes a one-sided, bank-centric view of money creation, which is often encountered in monetary theory. We show that the money supply is influenced by the interplay of loan creation and repayment rates; the relative share of credit volume neutral debtor-to-debtor and creditor-to-creditor payments; the availability of loan security; and the behavior of non-banks and non-borrowing bank creditors . With the standard textbook models of money creation now discredited, we argue that a more general approach to money supply theory involving credit mechanics needs to be established.
    Keywords: balances mechanics; bank credit; money creation; credit creation; credit mechanics; money supply theory
    JEL: E40 E41 E50 E51
    Date: 2018–10
  12. By: Demir, Ishak
    Abstract: While Federal Reserve continues to normalize its monetary policy on the back of a strengthening U.S. economy, the possibility of mimicking U.S. policy actions and so the debate of monetary autonomy has been particularly heated in the most of developing countries, even in advanced economies. We analyse the role played by country-specific characteristics in domestic monetary policy autonomy to set short-term interest rates in the face of spillovers from of U.S. monetary policy as global external shocks. First, we extricate the non-systematic (non-autonomous) component of domestic interest rates which is related to business cycle synchronisation across countries. Then we employ an interacted panel VAR model, which allows impulse response functions to vary by country characteristics for a broad sample of countries. We find strong empirical evidence for the role of exchange rate flexibility, capital account openness in line with trilemma, but also a significant role for other country characteristics, such as dollarisation in the financial system, the presence of a global bank, use of macroprudential policies, and the credibility of fiscal and monetary policy.
    Keywords: monetary policy autonomy,global financial cycle,international spillovers,trilemma,country-specific characteristics,cross-country difference,dilemma
    JEL: C38 E43 E52 E58 F42 G12
    Date: 2019
  13. By: Schmeling, Maik
    Abstract: Facebook's proposal to create a global digital currency, Libra, has generated a wide discussion about its potential benefits and drawbacks. This note contributes to this discussion and, first, characterizes similarities and dissimilarities of Libra's building blocks with existing institutions. Second, the note discusses open questions about Libra which arise from this characterization and, third, potential future developments and their policy implications. A central issue is that Libra raises considerable questions about its role in and impact on the international monetary and financial system that should be addressed before policymakers and regulators give Libra the green light.
    Date: 2019
  14. By: Stephen Williamson (University of Western Ontario)
    Abstract: A model of multiple means of payment is constructed to analyze the effects of the introduction of central bank digital currency (CBDC). The introduction of CBDC has three beneficial effects. It mitigates crime associated with physical currency, permits the payment of interest on a key central bank liability, and economizes on scarce safe collateral. CBDC admits another instrument of monetary policy, but may require that the central bank take on private assets in its portfolio if CBDC significantly displaces privately supplied means of payment.
    Date: 2019
  15. By: Andrew Filardo (Bank for International Settlements (BIS)); Paul Hubert (Observatoire français des conjonctures économiques); Phurichai Rungcharoenkitkul (Bank for International Settlements (BIS))
    Abstract: This paper examines whether monetary policy reaction function matters for financial stability. We measure how responsive the Federal Reserve’s policy appears to be to imbalances in the equity, housing and credit markets. We find that changes in these policy sensitivities predict the later development of financial imbalances. When monetary policy appears to respond more countercyclically to market overheating, imbalances tend to decline over time. This effect is distinct from that of current and anticipated interest rate levels – the risk-taking channel. The evidence highlights the importance of a “policy reaction function” channel of monetary policy in shaping the financial cycle.
    Keywords: Policy reaction function channel; Asset price booms; Credit booms; Monetary policy; Financial cycles; Time varying models
    JEL: E50 E52 G00 G12
    Date: 2019–10
  16. By: Aadila Hoosain; Alta Joubert; Alain Kabundi
    Abstract: This paper uses the microstructure approach for the South African foreign exchange market to determine the impact of order flow on the rand/US dollar exchange rate over the short and long term. A hybrid model which combines microeconomic and macroeconomic fundamental determinants of the exchangerate has been adopted. The analysis uses monthly series from January 2004 to December 2016. We find that order flow explains movements in the exchange rate, both in the short and in the long term. The speed of adjustment from short-term deviations is relatively slow. The results based on the rolling-window estimation of the long-run model provide evidence of a changing relationship between order flow and the exchange rate. Consistent with the literature, the results show that the rand/dollar exchange rate reacts to fundamental variables only in the long term. Unlike Meese and Rogoff (1983), who postulate that the best way to estimate the exchange rate over the short term is with a random walk model, the current study shows that the microstructure approach can be exploited to explain short-term dynamics in the exchange rate. The results suggest that transaction flows at the micro level contain important information in explaining rand/dollar exchange rate movements.
    Keywords: Order flow, Exchange rate, Microstructure Approach, Error Correction Model
    JEL: F31 F33 G14 G21
    Date: 2018–12
  17. By: Jordá, Óscar; Taylor, Alan M.
    Abstract: Interest rates in major advanced economies have drifted down and in greater unison over the past few decades. A country's rate of interest can be thought of as reflecting movements in the global neutral rate of interest, the domestic neutral rate, and the stance of monetary policy. Only the latter is controlled by the central bank. Estimates from a state space New Keynesian model show that central bank policy explains less than half of the variation in interest rates. The rest of the time, the central bank is catching up to trends dictated by productivity growth, demography, and other factors outside of its control.
    Keywords: Kalman filter; monetary policy stance; neutral rate of interest; state-space model
    JEL: E43 E44 E52 E58 F36 N10
    Date: 2019–09
  18. By: Jing Cynthia Wu (University of Notre Dame); Ji Zhang (PBC School of Finance, Tsinghua University)
    Abstract: In a standard open-economy New Keynesian model, the effective lower bound causes anomalies: output and terms of trade respond to a supply shock in the opposite direction compared to normal times. We introduce a tractable framework to accommodate for unconventional monetary policy. In our model, these anomalies disappear. We allow unconventional policy to be partially active and asymmetric between countries. Empirically, we nd the US, Euro area, and UK have implemented a considerable amount of unconventional monetary policy: the US follows the historical Taylor rule, whereas the others have done less compared to normal times.
    Date: 2019
  19. By: Chen, Zhengyang
    Abstract: The federal funds rate became uninformative about the stance of monetary policy from December 2008 to November 2015. During the same period, unconventional monetary policy actions, like large-scale asset purchases, show the Federal Reserve’s intention to depress longer-term interest rates. This paper considers a long-term real interest rate as an alternative monetary policy indicator in a structural VAR framework. Based on an event study of FOMC announcements, I advance a novel measure of long-term interest rate volatility with important implication for monetary policy identification. I find that monetary policy shocks identified with this volatility measure drive significant swings in credit market sentiments and real output. In contrast, monetary policy shocks identified by otherwise standard unexpected policy rate changes lead to muted responses of financial frictions and production. Our results support the validity of the risk-taking channel and suggest an indispensable role of financial markets in monetary policy transmission.
    Keywords: Monetary policy transmission; Risk-taking channel; Structural vector autoregression; High-frequency identification
    JEL: E3 E4 E5 G0
    Date: 2019–09–30
  20. By: Zoe Venter
    Abstract: The relationship between monetary policy and financial stability has gained importance in recent years as Central Bank policy rates neared the zero-lower bound. The need to coordinate policy choices, to expand the scope of monetary policy measures and lastly, the need to target financial stability objectives while maintaining a primary objective of financial stability, has become essential. We use an SVAR model and impulse response functions to study the impact of monetary policy shocks on three proxiesforfinancial stabilityas well as a proxy for economic growth. Our main results show that the Central Bank policy rate may be used to correct asset mispricing due to the inverse relationship between the policy rate and the stock market index. The results also show that, in line with theory,the exchange rate appreciates following a positive interest rate shock. Although the impact is only statistically significant for industrial production for the case of the UK, conventional monetary policy may indeed be able to contribute to financial stability when used in conjunction with alternative policy choices.
    Keywords: Monetary Policy, Financial Stability, Structural Vector Autoregressive Model
    JEL: E52 F42 F34 F55
    Date: 2019–09
  21. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Deepak Kumar Agarwal
    Abstract: We derive testable implications for transmission from Indian policy rate and liquidity provision to market rates as well as the interaction between rate and liquidity channels, from an analysis of operating procedures and estimate using event window regressions. The interest rate transmission channel is dominant, but the quantity channel has an indirect impact on the size of interest rate pass through. Short run government securities (G-Secs) yields are most responsive to changes in policy rates. Asymmetry or faster and more adjustment during tightening is found only for G-Secs rates. Liquidity changes matter for short term rates and durable liquidity for longer term government securities. Collateralized short-term market rates respond to the direction of change in Repo when liquidity changes are aligned. These or short-run G-Secs should form the operating target. Liquidity variables increase the size of the G-Secs Repo coefficients, suggesting aligned liquidity increases the impact of a change in the Repo Rate. The results highlight an important asymmetry in monetary transmission for emerging markets in the special role of liquidity in comparison to rates. Implications follow for policy.
    Keywords: Money markets, transmission, Repo Rate, liquidity
    JEL: E51 E58 E42
    Date: 2019–08
  22. By: Jan Stráský; Hyunjeong Hwang
    Abstract: The negative interest rate policy (NIRP) has been in place in the euro area since June 2014. While the NIRP can provide additional monetary accommodation in the situation where the neutral rate of interest is most likely negative, there are also unintended consequences for banks’ profitability and potential financial stability risks associated with this policy. The paper assesses the effect of the NIRP on the net interest rate margins of the euro area banks using quarterly consolidated bank level data for some 50 banking groups directly supervised by the Single Supervisory Mechanism. Since our data set extends to 2018, it allows us to examine the period of negative short-term interest rates separately from the period of low, but positive policy rates. The econometric results confirm the effect of the interest rate level on bank profitability and, in some specifications, also suggest an additional negative effect on bank profitability in the period of negative euro area short-term interest rates. This additional effect of the NIRP is the strongest when looking at the disaggregated components of net interest income, i.e. interest income and interest expense. However, the effects are not particularly robust across various profitability measures and tend to disappear when conditioning on macroeconomic variables, such as expected real GDP growth and inflation expectations. Therefore, in line with other existing studies, we find weak evidence of possible negative effects on bank profitability from keeping rates low for an extended period of time. Statistical analysis of the bank-level data also points to an ongoing compression of non-interest income, in particular for the best performing banks, and a slow recovery in return on total assets among all banks over the analysed period.This Working Paper relates to the 2018 OECD Economic Survey of Euro Area( rea-and-european-union-economic-snapshot /)
    Keywords: bank profitability, lower bound, monetary policy, negative rates
    JEL: E43 E52 E58 G21 G28
    Date: 2019–10–14
  23. By: Benjamin KEDDAD; SATO Kiyotaka
    Abstract: We propose a two-state Markov-switching version of the Frankel and Wei (MS-FW) model to assess Asian exchange rate policies during the period from August 2005 to August 2016. We impose coefficient constraints on FW coefficients to detect floating and pegging episodes against the main anchor currencies, such as the U.S. Dollar (USD), Renminbi (RMB), Euro, Japanese Yen and Asian Currency Unit. After estimating episodes where Asian currencies co-move with international currencies, we link the estimated regime probabilities to a set of economic fundamentals of Asian countries to identify the determinants of exchange rate regimes in Asia. We reveal that most Asian countries tend to constantly adjust the weight of their currency basket. When Asian countries loosen their peg against the USD, these currencies tend to increase their correlation with the RMB. However, the soft USD peg regime has a longer duration in most Asian countries, while the regime with a large RMB weight tends to be of shorter duration. Finally, we show that China's trade dependence is a key factor in pegging Asian currencies to RMB, though export similarity with China does not necessarily facilitate the RMB regime.
    Date: 2019–09
  24. By: Pablo Kurlat (Stanford)
    Abstract: Since bank deposits and currency are substitutes and banks have monopoly power, higher nominal interest rates lead to higher deposit spreads. This raises the cost of transaction services, increases bank profits and attracts entry into the banking sector. Taking these effects into account, a one percentage point increase in inflation has a welfare cost of 0.086% of GDP, 6.9 times higher than traditional estimates.
    Date: 2019
  25. By: Masami Imai (Department of Economics, Wesleyan University); Tetsuji Okazaki (Faculty of Economics, The University of Tokyo); Michiru Sawada (College of Economics, Nihon University)
    Abstract: The interwar Japanese economy was unsettled by chronic banking instability, and yet the Bank of Japan (BOJ) restricted access to its liquidity provision to a select group of banks, i.e. BOJ correspondent banks, rather than making its loans widely available "to merchants, to minor bankers, to this man and to that man" as prescribed by Bagehot (1873). This historical episode provides us with a quasi-experimental setting to study the impact of Lender of Last Resort (LOLR) policies on financial intermediation. We find that the growth rate of deposits and loans was notably faster for BOJ correspondent banks than the other banks during the bank panic phase of the Great Depression from 1931-1932, whereas it was not faster before the bank panic phase. Furthermore, BOJ correspondent banks were less likely to be closed during the bank panics. To address possible selection bias, we also instrument a bank' s corresponding relationship with the BOJ with its geographical proximity to the nearest branch or the headquarters of the BOJ, which was a major determinant of a bank's transaction relationship with the BOJ at the time. This instrumental variable specification yields qualitatively same results. Taken together, Japan's historical experience suggests that central banks' liquidity provisions play an important backstop role in supporting the essential financial intermediation services in time of financial stringency.
    Date: 2019–01
  26. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Prashant Parab (Indira Gandhi Institute of Development Research)
    Abstract: Using Consumer Confidence Survey data we analyze socio-economic as well as macroeconomic factors that influence inflation expectations of Indian households. We discover that inflation expectations of households depend largely on inflation perceptions, income and education of the respondents, as well as their outlook on the economy, employment and spending. Women, lower income individuals and less educated persons tend to have higher inflation expectations. Macroeconomic variables like inflation, repo rate and GDP growth rate influence inflation expectations positively. Along with these variables, Reserve Bank of India inflation projections influence inflation expectations. Therefore, the Reserve Bank has a significant role in anchoring inflation expectations via communications. Since a rise in Repo, as well as lower growth, raise inflation expectations, it must also give weight to growth under inflation targeting.
    Keywords: Consumer confidence survey, Inflation expectations, Socio-economic variables, Ordered logit, Central Bank communications
    JEL: C30 D83 D84 E52 E58
    Date: 2019–07
  27. By: Maurice Obstfeld (Peterson Institute for International Economics)
    Abstract: This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that US monetary policy faces. It considers three main channels. The first is the determination of domestic inflation in a context where international prices and global competition play a role, alongside domestic slack and inflation expectations. The second channel is the determination of asset returns (including the natural real safe rate of interest, r*) and financial conditions, given integration with global financial markets. The third channel, which is particular to the United States, is the potential spillback onto the US economy from the disproportionate impact of US monetary policy on the outside world. In themselves, global factors need not undermine a central bank's ability to control the price level over the long term--after all, it is the monopoly issuer of the numeraire in which domestic prices are measured. Over shorter horizons, however, global factors do change the tradeoff between price-level control and other goals such as low unemployment and financial stability, thereby affecting the policy cost of attaining a given price path.
    Keywords: Monetary policy, natural rate of interest, Phillips curve, current account, capital flows, policy spillbacks
    JEL: E52 F32 F41
    Date: 2019–10
  28. By: Woodruff, David M.
    Abstract: Hockett’s “franchise view” argues, convincingly, that the capacity of banks or quasi-bank financial entities to create money rests on the regulations and guarantees of the state maintaining the legal and regulatory system under which they operate. Block suggests that this insight could be used as a beachhead from which to establish the legitimacy of locally embedded, non-profit lenders whose investments would be dedicated to public purposes. However, given the contemporary ideological, political, and economic context, this proposal on its own could prove counterproductive. To maximize the positive impact of the insight into the public character of money creation, the proposal for public-purpose banking should be fused to democratization of central banking. This could plausibly have ideological effects that would make the public character of private economic power easier to perceive, and to reshape. Subordination of central banks to elected officials would also bring an end to the dynamic whereby monetary easing provides political cover for damaging fiscal austerity, leading to more democratic decision-making about the appropriate combination of fiscal and monetary policy.
    Keywords: Central bank independence; everyday libertarianism; coordination of fiscal and monetary policy
    JEL: F3 G3
    Date: 2019–06–19
  29. By: Gürkaynak, Refet S.; Karasoy Can, Gokce; Lee, Sang Seok
    Abstract: We show that firm liability structure and associated cash flow matter for firm behavior, and that financial market participants price stocks accordingly. Looking at firm level stock price changes around monetary policy announcements, we find that firms that have more cash flow exposure see their stock prices affected more. The stock price reaction depends on the maturity and type of debt issued by the firm, and the forward guidance provided by the Fed. This effect has remained intact during the ZLB period. Importantly, we show that the effect is not a rule of thumb behavior outcome and that the marginal stock market participant actually studies and reacts to the liability structure of firm balance sheets. The cash flow exposure at the time of monetary policy actions predicts future net worth, investment, and assets, verifying the stock pricing decision and also providing evidence of cash flow effects on firms' real behavior. The results hold for S&P500 firms that are usually thought of not being subject to tight financial constraints.
    Keywords: Cash flow effect of monetary policy; Financial Frictions; Investor sophistication; stock pricing
    JEL: E43 E44 E52 E58 G14
    Date: 2019–09
  30. By: Louphou Coulibaly (University of Montreal)
    Abstract: Monetary policy procyclicality is a pervasive feature of emerging market economies. In this paper, I propose a parsimonious theory explaining this fact in a model where access to foreign financing depends on the real exchange rate and the government lacks commitment. The discretionary monetary policy is procyclical to mitigate balance sheet effects originating from exchange rate depreciations during sudden stops. Committing to an inflation targeting regime is found to increase social welfare and reduce the frequency of financial crises, despite increasing their severity. Finally, the ability to use capital controls induces a less procyclical discretionary monetary policy and delivers higher welfare gains than an inflation targeting regime by reducing both the frequency and the severity of crises.
    Date: 2019
  31. By: Siddhartha Chattopadhyay (Department of Humanities and Social Sciences, IIT Kharagpur); Taniya Ghosh (Indira Gandhi Institute of Development Research)
    Abstract: This paper analyzes the implementation of the optimal policies at the Zero Lower Bound (ZLB) by the Taylor rule in the presence of cost channel. We find that, the presence of cost channel significantly impairs the ability of the Taylor rule to implement optimal policies when economy is subject to the ZLB. The main findings of the paper are, (i) the Taylor rule with optimally chosen inflation target partially implements the optimal discretionary policy but cannot implement the optimal policy under commitment, and (ii) the T-only policy, which follows discretion after an optimally chosen exit date from the ZLB, is the best that can be implemented by the Taylor rule in the presence of cost channel.
    Keywords: New-Keynesian Model, Cost Channel, ZLB
    JEL: E63 E52 E58
    Date: 2019–06
  32. By: Michael Choi (University of California, Irvine); Guillaume Rocheteau (University of California, Irvine)
    Abstract: We develop a random-matching model where the private production of money results from an occupation choice. While there exists a unique perfect-foresight equilibrium where the value of money reaches a steady state, there is a continuum of equilibria where the value of money inflates and bursts. In the early stage of the transition, money is not used as means of payment and its value grow at a rate equal or larger than the rate of time preference. We study divisible, indivisible, interest-bearing, and competing monies, the role of mining to con firm trades, and the implementation of the constrained-efficient allocation.
    Date: 2019
  33. By: Vo Phuong Mai Le; Ruthira Naraidoo
    Abstract: This paper builds a small open economy model for a net commodity exporter to consider financial frictions and monetary policies in order to investigate the main determinants of business cycles. Since we make a distinction to the access of financial markets between the commodity and non-commodity sectors, we notice that as usual, a commodity price shock benefits the competitiveness of the economy and its borrowing terms. We outline a novel effect in this paper which we dub the financial market effect following a positive commodity price shock that decreases the credit premium and hence exacerbate the commodity price boom. However the negative sectoral downturn affects entrepreneur credit together with disinflationary pressures of a real exchange rate appreciation. This opens the role for stabilization policies which we analyze comparing three types of monetary regimes. Estimating the model on South Africa, a major commodity exporting economy with inflation targeting regime, we .find as conventional wisdom suggests that a hypothetical Taylor rule targeting the price-level allows for adjustment in inflation expectations that can dampen disinflationary pressures. Furthermore, due to smoother change in nominal rate of interest, there is lesser variability in financial markets.
    Keywords: Business cycles, Small open economy, Commodity prices, financial frictions, Monetary policy, Price-level targeting, South Africa economy
    JEL: E32 E44 E58 F41 F44 O16
    Date: 2019–05
  34. By: Adrien Auclert (Stanford); Ludwig Straub (Harvard); Matthew Rognlie (Northwestern University)
    Abstract: We estimate a Heterogeneous-Agent New Keynesian model that matches existing microeconomic evidence on marginal propensities to consume and macroeconomic ev- idence on the impulse response to a monetary policy shock. We rule out habit forma- tion as an explanation for the hump shape of output, but show that sticky information in the sense of Mankiw and Reis (2002) can rationalize both the micro and the macro data. Our estimated model implies a central role for investment in the monetary transmission mechanism.
    Date: 2019
  35. By: Drechsel, Thomas; McLeay, Michael; Tenreyro, Silvana
    Abstract: Macroeconomic volatility in commodity-exporting economies is closely tied to fluctuations in international commodity prices. Commodity booms improve exporters' terms of trade and loosen their borrowing conditions, while busts lead to the reverse. This paper studies optimal monetary policy for commodity exporters in a small open economy framework that includes a key role for financial conditions. We incorporate the interaction between the commodity and financial cycles via a working capital constraint for commodity producers, which loosens as commodity prices increase. A rise in global commodity prices causes an inefficient reallocation towards the commodity sector, which expands and increases its demand for inputs. The real exchange-rate appreciates, but because domestic fims do not internalize that the appreciation reduces the scale of the reallocation, they do not raise prices enough. An inefficient boom takes place, with inflation rising and output increasing relative to its welfare-maximizing level. Returning inflation to target is not sufficient to close the output gap, leaving the policymaker facing a stabilization tradeoff. The optimal policy lets the exchange rate appreciate and raises interest rates, with a larger rate rise required the greater the loosening in borrowing conditions. The paper compares alternative policy rules and discusses a key practical challenge for emerging and developing economies: how to transition to a stable path from initial conditions of high and persistent inflation.
    Keywords: Commodity financialization; commodity prices; Exchange Rates; monetary policy; small open economy
    JEL: E31 E52 E58 F41 Q02 Q30
    Date: 2019–09
  36. By: Shin-ichi Fukuda (Faculty of Economics, The University of Tokyo); Naoto Soma (Faculty of Economics, The University of Tokyo)
    Abstract: In literature, a number of studies argued that an explicit inflation targeting regime provides less uncertainty about future inflation rates through anchoring expectations. However, it is far from clear whether the argument still holds true when the central bank faces a serious difficulty in achieving the target. The Bank of Japan (BOJ) is a central bank that has adopted an explicit inflation target but faced a serious difficulty in achieving it. The purpose of this paper is to explore whether the explicit inflation targeting regime could anchor inflation expectations in Japan. In the analysis, we estimate panel Phillips curves by using Japanese forecaster-level data of “ESP Forecast†. We find significant structural changes in how to form inflation expectations. Before the BOJ announced the 2% inflation target, the estimated anchor of inflation expectations was negative. The new target increased the estimated anchor to significant positive values. This suggests that the BOJ’s explicit inflation target could partly anchor inflation expectations. However, the estimated anchor has never reached the target. More importantly it started to decline when it turned out that the 2% target would not be feasible in the short-run. This implies that an explicit inflation targeting needs to be a feasible one to anchor inflation expectations persistently.
    Date: 2019–01
  37. By: Luchelle Soobyah; Daan Steenkamp
    Abstract: This paper investigates the impact of rand shocks on industry output and various other South African macroeconomic variables. We use a factor augmented model, which has the key advantage of providing a rich narrative about the disaggregated impacts of exchange rate shocks. We show that the currency tends to react to changes in the relative fundamentals of the economy, such as those captured by commodity export prices, and that the independent impact on the economy of exchange rate changes that are unrelated to fundamentals is estimated to be small. The results suggest that the exchange rate tends to act as a shock absorber to the shocks that hit the economy: a large proportion of the variation in the rand can be explained by other shocks, while rand shocks themselves explain a relatively small proportion of South Africa’s macroeconomic volatility. That said, the role that the exchange rate plays as a shock absorber appears to be weaker in South Africa than for other commodity exporters like Australia and New Zealand.
    Keywords: FAVAR, exchange rate shocks
    JEL: C38 F31 F41
    Date: 2019–07
  38. By: Jonathan Chiu (Bank of Canada)
    Abstract: How well can a cryptocurrency serve as a means of payment? We study the optimal design of cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade. The challenge for cryptocurrencies is to overcome double-spending by relying on competition to update the blockchain (costly mining) and by delaying settlement. We estimate that the current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and relies exclusively on money growth rather than transaction fees to finance mining rewards. We also point out that cryptocurrencies can potentially challenge retail payment systems provided scaling limitations can be addressed.
    Date: 2019
  39. By: Michael D. Bordo; Pierre Siklos
    Abstract: The process of central bank (CB) evolution by emerging market economies (EMEs), including central bank independence (CBI) and transparency (CBT), converged towards that of the advanced economies (AEs) before the Global Financial Crisis (GFC) of 2007-2008. It was greatly aided by the adoption of inflation targeting. In this paper we evaluate this convergence process for a representative set of EMEs and AEs since the disruption of the GFC. We use several measures of institutional development (changes in CBI, changes in CBT, changes in a new index of institutional resilience and changes in a new measure of CB credibility). We then use panel VARs based on both factor models and observed data to ascertain the impact of global shocks, financial shocks, trade shocks and credibility shocks on the EMEs versus the AEs. We find that although some EMEs did maintain the levels of CBI and CBT that they had before the crisis, on average they experienced a decline in institutional resilience to shocks and in the quality of their governance. Moreover it appears that CB credibility in EMEs was more fragile than was the case for the AEs in the face of the global shocks (from the US) than was the case for the AEs.
    JEL: E52 E58 F0
    Date: 2019–10
  40. By: Ehrmann, Michael; Gaballo, Gaetano; Hoffmann, Peter; Strasser, Georg
    Abstract: Central banks have used different types of forward guidance. This paper reports cross-country evidence showing that, in general, forward guidance mutes the response of government bond yields to macroeconomic news. However, calendar-based guidance with a short horizon counter-intuitively raises it. Using a stylized model where agents learn from market signals, it shows that the public release of more precise information about future rates lowers the informativeness of market signals and, as a consequence, may increase uncertainty and amplify the reaction of expectations to macroeconomic news.
    Keywords: central bank communication; disagreement; forward guidance; heterogeneous beliefs; Macroeconomic news
    JEL: D83 E43 E52 E58
    Date: 2019–09
  41. By: Eduardo Levy Yeyati
    Abstract: Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effects empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate.
    Keywords: international reserves, exchange rate policy, capital flows, financial crisis
    JEL: E42 E52 F33 F41
    Date: 2019–05
  42. By: Anmol Bhandari (University of Minnesota); David Evans (University of Oregon); Mikhail Golosov (University of Chicago)
    Abstract: n this paper we build a monetary model with segmented markets in which the trans- mission of monetary shocks to the real economy is consistent with the empirical behavior of profits shares, interest rates, and risk premium.
    Date: 2019
  43. By: Barendra Kumar Bhoi (Indira Gandhi Institute of Development Research); Abhishek Kumar (Indira Gandhi Institute of Development Research); Prashant Mehul Parab (Indira Gandhi Institute of Development Research)
    Abstract: This paper evaluates the rule-based interest rate policy for India since 2000 Q1, which has become more relevant in the flexible inflation targeting (FIT) regime. Based on results of the reduced form Taylor-rule, we observed two episodes of possible policy errors since 2001. First, in the aftermath of the global financial crisis, RBI brought down repo rate much below the level warranted by the Taylor rule that fueled inflation. Moreover, monetary policy tightening, followed thereafter, during March 2009 to June 2011 was insufficient in controlling prices. Second, despite favorable supply shocks, repo rate was above the rule-based policy rate during June 2013 to March 2016, leading to very high real interest rate. In the post-crisis period, we observed significant increase in the interest rate persistence, which could be attributed to RBI's reluctance to cut policy rate despite softening of inflation, leading to growth slowdown. Our results suggest that the optimal policy rate ranges from 4 to 5 for the last quarter of 2018. Actual repo rate at 6.5 in December 2018 was 150 to 250 basis points above the optimal rate. RBI has reduced repo rate by a cumulative 110 basis points since December 2018. As the negative output gap has widened and inflation remains subdued, there is scope to cut the repo rate further.
    Keywords: Optimal Monetary Policy, Flexible Inflation Targeting, Taylor Rule, Growth Slowdown
    JEL: E47 E52 E58
  44. By: Edo, Anthony; Melitz, Jacques
    Abstract: We perform the first econometric test to date of the influences of inflows of precious metals and population growth on the "Great Inflation" in Europe following the discov-ery of the New World. The English evidence strongly supports the near-equivalent im-portance of both influences. For 1500-1700, silver is the only relevant precious metal in the estimates. The study controls for urbanization, government spending, mortality crises and climatic changes. The series for inflows of the precious metals into Europe from America and European mining are newly constructed based on the secondary sources.
    Keywords: " Demography; European economic history 1500-1700; Precious metals; The "Great Inflation
    JEL: E31 F00 J10 N13 N33
    Date: 2019–09
  45. By: Kroencke, Tim; Schmeling, Maik; Schrimpf, Andreas
    Abstract: A large share of stock returns around FOMC meetings is driven by shocks that are uncorrelated with news about risk-free rates but seem closely related to changes in investors' perception of risk. These "FOMC risk shifts" can only partly be traced to fundamental news. However, FOMC risk shifts are accompanied by sizeable shifts in fund flows reminiscent of "risk on/off" modes and strong price pressure, which accounts for up to half of returns. Our results highlight the role of investor heterogeneity as an important factor to understanding the short-term dynamics of stock returns in response to monetary policy news.
    Keywords: Equity premium; Fund flows; Monetary Policy Surprises; Portfolio rebalancing; Price pressure
    JEL: E44 G10 G12
    Date: 2019–10
  46. By: Xiao Fan Liu; Zeng-Xian Lin; Xiao-Pu Han
    Abstract: Thousands of cryptocurrencies have been issued and publicly exchanged since Bitcoin was invented in 2008. The total cryptocurrency market value exceeds 300 billion US dollars as of 2019. This paper analyzes the prices, volumes, blockchain transactions, coin difficulties and public opinion popularities of 3607 actively exchanged cryptocurrencies. We aim to reveal and explain the homogeneity, i.e., the strong correlation of market performance, and the heterogeneity, i.e., the imbalance of popularities and sophistications, of the cryptocurrencies.
    Date: 2019–10
  47. By: Nancy L Stokey (Department of Economics)
    Abstract: When consumers or firms purchase goods or pay bills, they must choose a means of payment: cash, credit card, check, electronic transfer, etc. What governs those choices? In particular, how do their choices vary with the inflation rate, and how do total transaction costs change?
    Date: 2019
  48. By: Perotti, Enrico C; Soons, Oscar
    Abstract: We analyze the political economy of monetary unification among countries with different quality of institutions. Countries with stronger institutions have lower public spending and better investment incentives, even under a stronger currency. Governments under weaker institutions spend more so must occasionally devalue. In a MU market prices and flows adjust quickly but institutional differences persist, so a diverse monetary union (DMU) has many redistributive effects. The government in the weaker country expand spending and investment may be reduced by the fiscal and common exchange rate effect. Strong country production benefits from the weaker currency but needs to offer fiscal support in a fiscal crisis, a transfer legitimized by its ex ante devaluation gain. Some governments may join a DMU even if it depresses productive capacity to expand public spending. Even in a DMU beneficial for all countries, workers and firms in weaker countries and savers in stronger countries may lose.
    Keywords: institutional quality; institutions; Monetary Unions; political economy
    Date: 2019–09
  49. By: David Miller (Federal Reserve Board)
    Abstract: Treating nominal government bonds as safe assets leads to a new theory of the price level. Holmstrom (2015) and Gorton (2017) define safe assets as having opaque backing with costly-to-forecast returns. I confirm this definition's empirical implications for government bonds, and analyze the theoretical implications. Government bonds' nominal return is their face value, however their real return is determined by the government's surplus. While consumers hold uninformed beliefs about the surplus, the monetary authority exerts control of the price level. In troubled times, the fiscal authority exerts control as consumers worry about default and pay a high cost to accurately forecast the surplus.
    Date: 2019

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