nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒10‒21
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Global Shocks Alert and Monetary Policy Responses By Olatunji A. Shobande; Oladimeji T. Shodipe; Simplice A. Asongu
  2. The Short Rate Disconnect in a Monetary Economy By Lenel, Moritz; Piazzesi, Monika; Schneider, Martin
  3. US Monetary Policy and International Risk Spillovers By Kalemli-Ozcan, Sebnem
  4. On Money As a Latent Medium of Exchange By Lagos, Ricardo; Zhang, Shengxing
  5. Macroprudential Policy with Leakages By Bengui, Julien; Bianchi, Javier
  6. "The Impact of the Bank of Japan's Monetary Policy on Japanese Government Bonds' Low Nominal Yields" By Tanweer Akram; Huiqing Li
  7. Beyond the zero lower bound: negative policy rates and bank lending By Garyn Tan
  8. The Effective Rate of Interest on Target Balances By Hans-Werner Sinn
  9. Forecasting the Albanian short-term inflation through a Bayesian VAR model By Meri Papavangjeli
  10. Estimating the Exchange Rate Pass-Through: A Time-Varying Vector Auto-Regression with Residual Stochastic Volatility Approach By Julio-Román, Juan Manuel
  11. Central Bank credibility and inflation expectations: a microfounded forecasting approach By Issler, João Victor; Soares, Ana Flávia
  12. Beyond the Big Challenges facing Facebook's Libra By Jamal Bouoiyour; Refk Selmi
  13. Exchange Rate Regimes and Foreign Direct Investment Flow in West African Monetary Zone (WAMZ) By Perekunah B. Eregha
  14. Vietnam's Monetary Policy during the AFC By Kirrane, Chris
  15. Networks of monetary flow at native resolution By Carolina Mattsson
  16. The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission By Chen, Zhengyang
  17. The Origination and Distribution of Money Market Instruments: Sterling Bills of Exchange during the First Globalisation By Accominotti, Olivier; Lucena, Delio; Ugolini, Stefano
  18. Export Prices, Markups, and Currency Choice after a Large Appreciation By Daniel Kaufmann; Tobias Renkin
  19. Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms By Altavilla, Carlo; Burlon, Lorenzo; Giannetti, Mariassunta; Holton, Sarah
  20. Exchange rate dynamics and monetary policy -- Evidence from a non-linear DSGE-VAR approach By Florian Huber; Katrin Rabitsch
  21. REER Imbalances and Macroeconomic Adjustments: evidence from the CEMAC zone By Simplice A. Asongu; Joseph Nnanna
  22. Currency Based on Time Standard By Tomas Kala
  23. The Limits of onetary Economics: On Money as a Medium of Exchange in Near-Cashless Credit Economies By Lagos, Ricardo; Zhang, Shengxing
  24. Cryptocurrencies, Currency Competition, and The Impossible Trinity By Benigno, Pierpaolo; Schilling, Linda Marlene; Uhlig, Harald
  25. (Dis)Solving the Zero Lower Bound Equilibrium through Income Policy By Guido Ascari; Jacopo Bonchi
  26. Myopic governments and conservative central banks: are they compatible? By Cornel OROS; Blandine ZIMMER
  27. A Macroprudential Theory of Foreign Reserve Accumulation By Arce, Fernando; Bengui, Julien; Bianchi, Javier
  28. The causal linkages among money growth, inflaion and interest rates in Ghana By Amankwah, Ernest; Atta Sarfo, Prince
  29. Money Runs By Donaldson, Jason Roderick; Piacentino, Giorgia
  30. What Rule for the Federal Reserve? Forecast Targeting By Svensson, Lars E.O.
  31. Macroeconomics Challenges and Resilience of Emerging Market Economies By Joshua Aizenman

  1. By: Olatunji A. Shobande (Business School, University of Aberdeen, UK); Oladimeji T. Shodipe (Eastern Illinois University, USA); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: The study examines the role of global predictors on national monetary policy formation for Kenya and Ghana within the New Keynesian DSGE framework. We developed and automatically calibrated our DSGE model using the Bayesian estimator, which made our model robust to rigorous stochastic number of subjective choices. Our simulation result indicates that global factors account for the inability of national Central Banks to predict the behaviour of macroeconomic and financial variables among these developing nations.
    Keywords: Business Cycle, Macroeconomic policy, Financial crises
    JEL: E32
    Date: 2019–01
  2. By: Lenel, Moritz; Piazzesi, Monika; Schneider, Martin
    Abstract: In modern monetary economies, most payments are made with inside money provided by payment intermediaries. This paper studies interest rate dynamics when payment intermediaries value short bonds as collateral to back inside money. We estimate intermediary Euler equations that relate the short safe rate to other interest rates as well as intermediary leverage and portfolio risk. Towards the end of economic booms, the short rate set by the central bank disconnects from other interest rates: as collateral becomes scarce and spreads widen, payment intermediaries reduce leverage, and increase portfolio risk. We document stable business cycle relationships between spreads, leverage, and the safe portfolio share of payment intermediaries that are consistent with the model. Structural changes, especially in regulation, induce low frequency shifts, such as after the financial crisis.
    Date: 2019–08
  3. By: Kalemli-Ozcan, Sebnem
    Abstract: I show that monetary policy divergence vis-a-vis the U.S. has larger spillover effects in emerging markets than advanced economies. The monetary policy of the U.S. affects domestic credit costs in other countries through its effect on global investors' risk perceptions. Capital flows in and out of emerging market economies are particularly sensitive to fluctuations in such risk perceptions and have a direct effect on local credit spreads. Domestic monetary policy is ineffective in mitigating this effect as the pass-through of policy rate changes into short-term interest rates is imperfect. This disconnect between short rates and monetary policy rates is explained by changes in risk perceptions. A key policy implication of my findings is that emerging markets' monetary policy actions designed to limit exchange rate volatility can be counterproductive.
    Date: 2019–10
  4. By: Lagos, Ricardo; Zhang, Shengxing
    Abstract: We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions directly with money strengthens the stance of sellers of goods and services vis-a-vis intermediaries. We show this mechanism is operative even for sellers who never exercise the option to sell for cash, and that these latent money demand considerations imply monetary policy remains effective through medium-of-exchange channels even if the share of monetary transactions is arbitrarily small.
    Keywords: Cashless; credit; liquidity; monetary policy; money
    JEL: D83 E52 G12
    Date: 2019–10
  5. By: Bengui, Julien; Bianchi, Javier
    Abstract: The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages do undermine the effectiveness of macruprudential taxes, yet they do not necessarily call for weaker interventions. Quantitatively, we find that a well-designed macroprudential policy that accounts for leakages remains successful at mitigating the vulnerability to financial crises.
    Keywords: capital flow management; financial crises; limited regulation enforcement; macroprudential policy; regulatory arbitrage
    JEL: E58 F32 G28
    Date: 2019–08
  6. By: Tanweer Akram; Huiqing Li
    Abstract: Nominal yields for Japanese government bonds (JGBs) have been remarkably low for several decades. Japanese government debt ratios have continued to increase amid a protracted period of stagnant nominal GDP, low inflation, and deflationary pressures. Many analysts are puzzled by the phenomenon of JGBs' low nominal yields because Japanese government debt ratios are elevated. However, this paper shows that the Bank of Japan's (BoJ) highly accommodative monetary policy is primarily responsible for keeping JGB yields low for a protracted period. This is consistent with Keynes's view that the short-term interest rate is the key driver of the long-term interest rate. This paper also relates the BoJ's monetary policy and economic developments in Japan to the evolution of JGBs' long-term interest rates.
    Keywords: Japanese Government Bonds; Long-Term Interest Rates; Nominal Bond Yields; Monetary Policy; Bank of Japan; John Maynard Keynes
    JEL: E43 E50 E58 E60 G10 G12
    Date: 2019–10
  7. By: Garyn Tan
    Abstract: How do banks operate in a negative policy rate environment? Bank profitability is threatened by policy rate cuts in negative territory because the zero lower bound on retail deposit rates prevents banks from benefiting from cheaper deposit funding costs. Contrary to some earlier research, this paper finds that banks most affected by negative rates through this retail deposits channel increase their lending relative to less affected banks. The response is limited to mortgage lending, and is driven by banks with high household deposit ratios and banks with high overnight deposit ratios. Overall, net interest margins are unaffected, which implies that the volume effect is large enough to offset the adverse impact on bank profitability. However, the positive effect on lending dissipates as negative rates persist. This suggests that although the "reversal rate" has not been breached, it may creep up over time as banks become more limited in their options to maintain profit margins. The results also point to an important role for bank capitalisation - net interest margins of relatively highly capitalised banks are squeezed, whereas the net interest margins of less capitalised banks are unaffected. This can be explained by differences in capacity for shock absorbency.
    Keywords: negative rates; zero lower bound; bank lending channel; monetary policy Transmission
    JEL: E43 E52 E58 G20 G21
    Date: 2019–09
  8. By: Hans-Werner Sinn
    Abstract: While the formal decision of the ECB Council to impose interest on Target claims and liabilities is meaningless, this paper shows that the pooling of primary interest income among national central banks in the Eurozone implies that Target and cash balances do, in fact, bear an effective rate of interest. The magnitude of this effective rate of interest is given by a weighted average of the ECB’s policy interest rates where (i) the relative country sizes and (ii) the uses of alternative sources and sinks of international liquidity flows determine the weights. Without countervailing transactions, which would effectively service the Target claims and liabilities, Target balances grow with compound interest. The payment of interest on Target balances internalizes the competitive externality that otherwise could induce excessive money supply in a decentralized monetary system of the kind characterizing the Eurozone. It also implies that the recording of Target balances in the balance sheets of national central banks is compatible with fair value accounting.
    Keywords: Target2, ECB, interest, competitive seignorage externality
    JEL: E40 F41 H60
    Date: 2019
  9. By: Meri Papavangjeli
    Abstract: In the context of the Bank of Albania’s primary objective of achieving and maintaining price stability, generating accurate and reliable forecasts for the future rate of inflation is a necessity for its successful realization. This paper aims to enrich the Bank’s portfolio of short-term inflation forecasting tools through the construction of a Bayesian vector autoregressive (BVAR) model, which unlike standard autoregressive vector (VAR) models, addresses the overparameterization problem, allowing for the inclusion of more endogenous variables, and in this way enabling a more comprehensive explanation of inflation. Several univariate models are estimated to forecast short-term inflation, such as: unconditional mean, random walk, autoregressive integrated moving average (ARIMA) models, and the best performing among them is used as a benchmark to evaluate the forecast performance of the BVAR model. In addition, an unrestricted VAR - the most commonly used tool to obtain projections of the main economic indicators - is constructed as an additional benchmark, based solely on the information that the data series provides. The results show that the BVAR approach, which incorporates more economic information, outperforms the benchmark univariate and the unrestricted VAR models in the different time horizons of the forecast sample, but the differences between models in terms of their forecast performance are not statistically significant.
    Keywords: Bayesian estimation, vector autoregressive, forecasting performance
    JEL: C30 C52 C53 C80
    Date: 2019–10–09
  10. By: Julio-Román, Juan Manuel
    Abstract: The adoption of a Time-Varying Vector Auto-Regression with residual Stochastic Volatility approach to address the state and time dependency of the exchange rate pass-through, ERPT, is proposed. This procedure is employed to estimate the size, duration and stability of the ERPT to flexible relative price changes in Colombia through a fairly simple Phillips curve. For this, the generalized impulse responses, i.e. pass-throughs, from different periods of time are compared. It was found that the ERPT is bigger and faster than previous estimates for broader price indexes. It was also also found that regardless of the existence of time-varying shock sizes, i.e. time varying standard deviations, the ERPT before full Inflation Targeting, IT, is marked and significantly larger before than during full IT, and also that the ERPT relates to real exchange rate volatility. The second results relates to the benefits derived from the adoption of full IT in this country. It was finally found that the output gap and flexible relative price change residual volatilities drop permanently and importantly at 1998Q3, emphasizing the role of the free float regime adoption in the success of IT in this country.
    Keywords: Pass-Through; Price Stickiness; Phillips Curve
    JEL: C22 F31 F41
    Date: 2019–10
  11. By: Issler, João Victor; Soares, Ana Flávia
    Abstract: Credibility is elusive and no generally agreed upon measure of it exists. Despite that, Blinder (2000) generated a consensus in the literature by arguing that ”A central bank is credible if people believe it will do what it says”. It is very hard to argue against such a definition of credibility, being the reason why it became so popular among central bankers and academics alike.
    Date: 2019–10–10
  12. By: Jamal Bouoiyour (IRMAPE - Institut de Recherche en Management et Pays Emergents - ESC Pau, CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Refk Selmi (IRMAPE - Institut de Recherche en Management et Pays Emergents - ESC Pau, CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)
    Abstract: The Facebook's announcement that it would create its new currency « Libra » sparked a debate with respect the added value, security and regulatory aspects of virtual currencies. Beyond the challenges facing Libra (i.e., regulatory concerns and the risk of money laundering and fraud, etc.), this study seeks to assess if the announcement of this type of project has an impact on the cryptocurrency market. A dynamic event-study methodology is used to examine the abnormal returns of Bitcoin and other major altcoin markets (in particular, Ethereum, Litecoin and Ripple) as a reaction of Facebook « Libra » announcement. Our results suggest that all the cryptocurrencies respond positively to the official announcement of Facebook's much-anticipated cryptocurrency project, and appear highly reactive during the succeeding days. Despite crucial differences between « Libra » and cryptocurrecies, the entrance of Facebook into the cryptocurrency market can be regarded as a stamp of approval that helps to legitimize the crypto space making it go mainstream.
    Keywords: Facebook's new Libra,Cryptocurrency market,Event study methodology
    Date: 2019–10–09
  13. By: Perekunah B. Eregha (Pan-Atlantic University, Lekki-Lagos, Nigeria)
    Abstract: This study examines the effect of exchange rate regimes on Foreign Direct Investment (FDI) flow for WAMZ. The Arellano Panel Correction for Serial Correlation and Heteroskedaticity option of the Within Estimator for fixed effect panel data model as well as the Dynamic Panel Data Instrumental Variable Approach by Anderson and Hsiao (1981) for the countries selected based on data availability for the period 1980-2016 were used. The fixed exchange rate regime was found to hamper FDI flow in the zone while intermediate policy had a significantly positive effect in facilitating FDI flow during periods of declining foreign reserves and narrowing current account balance in WAMZ. This implies that the transmission of the effect of exchange rate regimes on FDI inflows depends on the positions of the foreign reserves and current account balance in the zone. Consequently, the fixed regime is not a good policy in periods of narrowing current account balance and depleting foreign exchange reserves. The study therefore recommends the need for monetary authorities to be cautious in managing their exchange rates especially in periods of depleting foreign reserves and narrowing current account so as not to deter the much needed FDI inflow.
    Keywords: Exchange Rate Regimes; Inflationary Expectation; Exchange rate uncertainty; Foreign Direct Investment Flow; Panel Data Analysis
    JEL: E31 F21 F31
    Date: 2019–01
  14. By: Kirrane, Chris
    Abstract: This paper examines Vietnam's exchange rate policy during the Asian financial crisis. It concludes that the policy of anchoring the Vietnamese Dong to the US dollar and controlled floating used by the Vietnamese monetary authorities since 1992, led to stabilisation of the exchange rate and controlled inflation during a period of rapid growth. It concludes that the risk of a financial crisis, experienced by other Southeast Asian countries was low, even if the country remained vulnerable to a currency crisis because of its current account deficit.
    Keywords: Asian Financial Crisis
    JEL: F3 F31
    Date: 2018–11–01
  15. By: Carolina Mattsson
    Abstract: People and companies move money with every financial transaction they make. We aim to understand how such activity gives rise to large-scale patterns of monetary flow. In this work, we trace the movement of e-money through the accounts of a mobile money system using the provider's own transaction records. The resulting transaction sequences---balance-respecting trajectories---are data objects that represent observed monetary flows. Common sequential motifs correspond to known use-cases of mobile money: digital payments, digital transfers, and money storage. We find that each activity creates a distinct network structure within the system, and we uncover coordinated gaming of the mobile money provider's commission schedule. Moreover, we find that e-money passes through the system in anywhere from minutes to months. This pronounced heterogeneity, even within the same use-case, can inform the modeling of turnover in money supply. Our methodology relates economic activity at the transaction level to large-scale patterns of monetary flow, broadening the scope of empirical study about the network and temporal structure of the economy.
    Date: 2019–10
  16. 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,Structural VAR,Risk-taking channel,High-frequency identification
    JEL: E3 E4 E5
    Date: 2019
  17. By: Accominotti, Olivier; Lucena, Delio; Ugolini, Stefano
    Abstract: This paper presents a detailed analysis of how liquid money market instruments â?? sterling bills of exchange â?? were produced during the first globalisation. We rely on a unique data set that reports systematic information on all 23,493 bills re-discounted by the Bank of England in the year 1906. Using descriptive statistics and network analysis, we reconstruct the complete network of linkages between agents involved in the origination and distribution of London bills. Our analysis reveals the truly global dimension of the London bill market before the First World War and underscores the crucial role played by London intermediaries (acceptors and discounters) in overcoming information asymmetries between borrowers and lenders on this market. The complex industrial organisation of the London money market ensured that risky private debts could be transformed into extremely liquid and safe monetary instruments traded throughout the global financial system.
    Keywords: bill of exchange; Industrial Organisation; information asymmetry; money market
    JEL: E42 G23 L14 N20
    Date: 2019–10
  18. By: Daniel Kaufmann; Tobias Renkin
    Abstract: We analyze export price adjustment of Swiss manufacturing firms using a novel data set of matched export, import, and domestic prices. After a large, unexpected, and permanent appreciation of the Swiss franc, export prices set in domestic currency fell less than export prices set in foreign currency. This difference prevails if we control for variation in firms' marginal cost. Through the lens of a structural model, this difference can be traced back to strategic complementarity in price setting for firms pricing in foreign currency. Meanwhile, firms setting prices in domestic currency exhibit no strategic complementarity and follow a constant markup-pricing rule.
    Keywords: Nominal exchange rate, border prices, currency choice, variable markups, pricing-to-market, price rigidity, exchange rate pass through, exchange rate sensitive factor costs.
    JEL: E3 E5 F3 F4
    Date: 2019–10
  19. By: Altavilla, Carlo; Burlon, Lorenzo; Giannetti, Mariassunta; Holton, Sarah
    Abstract: Exploiting confidential data from the euro area, we show that sound banks pass negative rates on to their corporate depositors without experiencing a contraction in funding and that the tendency to charge negative rates becomes stronger as policy rates move deeper into negative territory. The negative interest rate policy (NIRP) provides stimulus to the economy through firms' asset rebalancing. Firms with high current assets linked to banks offering negative rates appear to increase their investment in tangible and intangible assets and to decrease their cash holdings to avoid the costs associated with negative rates. Overall, our results challenge the commonly held view that conventional monetary policy becomes ineffective when policy rates reach the zero lower bound.
    Keywords: corporate channel; Lending Channel; monetary policy; negative rates
    JEL: D2 E43 E52 G21
    Date: 2019–10
  20. By: Florian Huber (Paris Lodron University of Salzburg, Salzburg Centre of European Union Studies); Katrin Rabitsch (Institute for International Economics and Development, Department of Economics, Vienna University of Economics and Business)
    Abstract: In this paper, we reconsider the question how monetary policy influences exchange rate dynamics. To this end, a vector autoregressive (VAR) model is combined with a two-country dynamic stochastic general equilibrium (DSGE) model. Instead of focusing exclusively on how monetary policy shocks affect the level of exchange rates, we also analyze how they impact exchange rate volatility. Since exchange rate volatility is not observed, we estimate it alongside the remaining quantities in the model. Our findings can be summarized as follows. Contractionary monetary policy shocks lead to an appreciation of the home currency, with exchange rate responses in the short-run typically undershooting their long-run level of appreciation. They also lead to an increase in exchange rate volatility. Historical and forecast error variance decompositions indicate that monetary policy shocks explain an appreciable amount of exchange rate movements and the corresponding volatility.
    Keywords: Monetary policy, Exchange rate overshooting, stochastic volatility modeling, DSGE priors
    JEL: E43 E52 F31
    Date: 2019–10
  21. By: Simplice A. Asongu (Yaoundé/Cameroon); Joseph Nnanna (The Development Bank of Nigeria, Abuja, Nigeria)
    Abstract: The EMU crisis holds special lessons for existing monetary unions. We assess the behavior of real effective exchange rates (REERs) of members of the Central African Economic and Monetary Community (CEMAC) zone with respect to their long-term equilibrium paths. A reduced form of the fundamental equilibrium exchange rate (FEER) model is estimated and associated misalignments. Our findings suggest that for majority of countries, macroeconomic fundamentals have the expected associations with the exchange rate fluctuations. The analysis also reveals that only the REER adjustments of Cameroon and Gabon are significant in restoring the long-term equilibrium in event of a shock. The Cameroonian economic fundamentals of terms of trade, government expenditure and openness have different long-term relations with the REER in comparison to those of other member states. There is no need for an adjustment in the level of the peg based on the present quantitative analysis of REER paths.
    Keywords: Exchange rate; Macroeconomic impact; CEMAC zone
    JEL: F31 F33 F42 F61 O55
    Date: 2019–01
  22. By: Tomas Kala
    Abstract: The Total Economic Time Capacity of a Year 525600 minutes is postulated as a time standard for a new Monetary Minute currency in this evaluation study. Consequently, the Monetary Minute MonMin is defined as a 1/525600 part of the Total Economic Time Capacity of a Year. The Value CMonMin of the Monetary Minute MonMin is equal to a 1/525600 part of the GDP, p.c., expressed in a specific state currency C. There is described how the Monetary Minutes MonMin are determined, and how their values CMonMin are calculated based on the GDP and all the population in specific economies. The Monetary Minutes trace different aggregate productivity, i.e. exploitation of the total time capacity of a year for generating of the GDP in economies of different states.
    Date: 2019–10
  23. By: Lagos, Ricardo; Zhang, Shengxing
    Abstract: We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that-in contrast to current conventional wisdom in policy-oriented research in monetary economics-the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable-even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations- even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances.
    Keywords: asset prices; Cashless; credit; leverage; liquidity; margin; monetary policy
    JEL: D83 E52 G12
    Date: 2019–10
  24. By: Benigno, Pierpaolo; Schilling, Linda Marlene; Uhlig, Harald
    Abstract: We analyze a two-country economy with complete markets, featuring two national currencies as well as a global (crypto)currency. If the global currency is used in both countries, the national nominal interest rates must be equal and the exchange rate between the national currencies is a risk- adjusted martingale. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). Deviating from interest equality risks approaching the zero lower bound or the abandonment of the national currency. If the global currency is backed by interest-bearing assets, additional and tight restrictions on monetary policy arise. Thus, the classic Impossible Trinity becomes even less reconcilable.
    Keywords: cryptocurrency; currency competition; Exchange Rates; impossible trinity; independent monetary policy; uncovered interest parity
    JEL: D53 E4 F31 G12
    Date: 2019–08
  25. By: Guido Ascari (Department of Economics, University of Oxford (UK).); Jacopo Bonchi (Department of Social Sciences and Economics, Sapienza University of Rome (IT).)
    Abstract: We investigate the possibility to reflate an economy experiencing a long-lasting zero lower bound episode with subdued or negative inflation, by imposing a minimum level of wage inflation. Our proposed income policy relies on the same mechanism behind past disinflationary policies, but it works in the opposite direction. It is formalized as a downward nominal wage rigidity (DNWR) such that wage inflation cannot be lower than a fraction of the inflation target. This policy allows to dissolve the zero lower bound steady state equilibrium in an OLG model featuring “secular stagnation” and in a infinite-life model, where this equilibrium emerges due to deflationary expectations.
    Keywords: zero lower bound, wage indexation, income policy, inflation expectations.
    JEL: E31 E52 E64
    Date: 2019–10
  26. By: Cornel OROS (CRIEF, Université de Poitiers et LEO, Université d'Orléans); Blandine ZIMMER (LaRGE Research Center, Université de Strasbourg)
    Abstract: Governments fear spending disturbances. To derive their optimal scal decisions, they use the robust control approach developed by Hansen and Sargent (2005, 2008). Results show that myopic governments, being more concerned by short-term spending imperatives than by the economy's output level, react to central bank conservatism by setting high taxes, detrimental to macroeconomic performances. Consequently, delegating monetary policy to not too a conservative central bank seems appropriate.
    Keywords: budget uncertainty, robust control, monetary delegation.
    JEL: E58 E60 E62
    Date: 2019
  27. By: Arce, Fernando; Bengui, Julien; Bianchi, Javier
    Abstract: This paper proposes a theory of foreign reserves as macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and can quantitatively account for the recent upward trend in international reserves.
    Keywords: financial crises; International Reserves; macroprudential policy
    JEL: D52 D62 F24
    Date: 2019–08
  28. By: Amankwah, Ernest; Atta Sarfo, Prince
    Abstract: This study instigates the causal linkages among money growth, inflation and interest rate in Ghana. The essence of ensuring price stability, a considerable increase in money growth that enhances economic growth and development and favorable rate of interest that encourage domestic business and foreign direct investment cannot be over emphasized. The data was extracted from two main sources. The main variable under study were money supply, interest rate and inflation rate. Other variables that affect inflation rate such as exchange rate, real gross domestic product were controlled for. Data on money supply, interest rate and exchange rate Twere extracted from world development indicator (WDI) whereas data on inflation and the GDP growth were extracted from annual report of the Central Bank. The data comprises of of missed order of cointegration. That is I (0) and I(1). So bounds test of cointegration proposed by Pesaran, Shin and Smith (2001) was used. It was found out that money growth has both short run and long run relationship with inflation and all the other variables are insignificant in influencing inflation. The Granger causality test was conducted to help find the causality among the variables of interest. The null hypothesis that inflation rate does not does not Granger cause money growth was rejected at 5% which implies that there is a uni-directional causality between inflation and money growth. It was recommended that, in an attempt of reducing inflation both in the long run and short run, increase in money supply should be reasonable.
    Keywords: Money growth, Inflation and Interest rate in Ghana
    JEL: E42
    Date: 2019–10–13
  29. By: Donaldson, Jason Roderick; Piacentino, Giorgia
    Abstract: We develop a model in which, as in practice, bank debt is both a financial security used to raise funds and a kind of money used to facilitate trade. This dual role of bank debt provides a new rationale for why banks do what they do. In the model, banks endogenously perform the essential functions of real-world banks: they transform liquidity, transform maturity, pool assets, and have dispersed depositors. Moreover, they make their debt redeemable on demand. Thus, they are endogenously fragile. We show novel effects of narrow banking, suspension of convertibility, and some other policies.
    Keywords: Banking; demandable debt; financial fragility; Private money
    JEL: E40 G21 G32
    Date: 2019–08
  30. By: Svensson, Lars E.O.
    Abstract: How would the policy rule of forecast targeting work for the Federal Reserve? To what extent is the Federal Reserve already practicing forecast targeting? Forecast targeting means selecting a policy rate and policy-rate path so that the forecasts of inflation and employment "look good," in the sense of best fulfilling the dual mandate of price stability and maximum employment, that is, best stabilize inflation around the inflation target and employment around its maximum level. It also means publishing the policy-rate path and the forecasts of inflation and employment forecasts and, importantly, explaining and justifying them. This justification may involve demonstrations that other policy-rate paths would lead to worse mandate fulfillment. Publication and justification will contribute to making the policy-rate path and the forecasts credible with the financial market and other economic agents and thereby more effectively implement the Federal Reserve's policy. With such information made public, external observers can review Federal Reserve policy, both in real time and after the outcomes for inflation and employment have been observed, and the Federal Reserve can be held accountable for fulfilling its mandate. In contrast to simple policy rules that rely on very partial information in a rigid way, such as Taylor-type rules, forecast targeting allows all relevant information to be taken into account and has the flexibility and robustness to adapt to new circumstances. Forecast targeting can also handle issues of time consistency and determinacy. The Federal Reserve is arguably to a considerable extent already practicing forecast targeting.
    Keywords: Discretion and commitment; Flexible inflation targeting; monetary policy rules
    JEL: E52 E58
    Date: 2019–08
  31. By: Joshua Aizenman
    Abstract: A Growing share of Emerging Markets (EMs) use hybrid versions of inflation targeting (IT) that differ from the IT regimes of OECD countries. Policy interest rates among commodity countries are impacted by real exchange rate and international reserves (IR) changes, aiming at stabilizing their real exchange rate in the presence of volatile terms of trade and heightened exposure to capital inflow/outflow shocks. IT works well with independent central banks; yet, fiscal dominance concerns may hinder the efficacy and independency of central banks. This suggests experimenting with the integration of monetary rules with fiscal rules, possibly linking these rules with the operations of buffers like IR and Sovereign Wealth Funds (SWFs). The Global Financial Crisis validated the benefits of counter-cyclical management of international reserves and SWFs in reducing the volatility of real exchange rates. Macro-prudential policies may complement or even substitute buffer policies by reducing a country’s balance sheet exposure to foreign currency debt, mitigating the risk of costly sudden-stops and capital flight. A growing share of EMs is exposed to new financial technologies (fintech), providing cheaper and faster financial services, deepening financial coverage to previously under-served populations. Deeper fintech diffusion may redirect financial intermediation from regulated banks to emerging fintech shadow banks, some of which may have global reach. These developments, and the diffusion of cryptocurrencies promising anonymized payment systems may hinder the effectiveness of monetary policy, and eventually induce greater financial instability. States may encourage the diffusion of efficient financial intermediation in ways that benefit users, while restricting the use of anonymized exchange and global monies to reduce the threat of a shrinking tax base, and to maintain financial stability.
    JEL: F02 F31 F33 F36 F4 F42
    Date: 2019–10

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