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on Monetary Economics |
| By: | Marc Anderes (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Alexander Rathke (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sina Streicher (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Filip Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | Economists and central bankers nowadays believe that forward guidance has become more important in a world in which key interest rates have hit their effective lower bounds (ELB). In case of the European Central Bank (ECB), this should have increased the informational content of the introductory statements at the press conference following ECB policy meetings. We examine whether this form of ECB communication adds information to a shadow interest rate that summarises the overall policy stance as interpreted by financial markets. To measure communication, we use information based on ECB press releases distinguishing between topics like inflation, the real economy and monetary developments. We also look at the effect of communication on consensus expectations about key macroeconomic variables. Especially ECB’s assessment of the economy, i.e. communication related to economic growth, triggers movement in financial markets and thereby the shadow rate. Communication of the ECB through its press releases also causes professional forecasters to change their outlook. Not only their growth forecasts are affected, also their expectations for M3 growth and inflation are. |
| Keywords: | Central bank communication, shadow rates, consensus expectations, ECB, euro area, money growth |
| JEL: | E3 E43 E51 E52 E58 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:19-446&r=all |
| By: | Beniak, Patrycja |
| Abstract: | Rapid digitalisation of payments leads to greater cost and time efficiency, yet could also potentially trigger legal and security challenges as well as lead to weakening of finan- cial stability and less effective monetary policy transmission. In order to ensure greater safety, central banks are contemplating and testing solutions thanks to which public using payment innovations could transact in funds that are ultimately backed by central bank. One of these solutions is central bank digital currency, a digital version of cash. The pro- posed versions of central bank digital currency are very diverse. Depending on the version assumed by a particular central bank, central bank digital currency can have an impact on central bank interest rate setting, monetary policy implementation and transmission mechanism. This relates most notably to effective lower bound which could either rise or fall, conditional on design on central bank digital currently. |
| Keywords: | virtual currencies, central bank digital currency, monetary policy, effective lower bound |
| JEL: | E42 E52 E58 G21 G28 |
| Date: | 2019–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96663&r=all |
| By: | Phurichai Rungcharoenkitkul; Claudio Borio; Piti Disyatat Author-X-Name_First: Piti |
| Abstract: | This paper studies the interaction between monetary policy and macroeconomic stability in a model with two distinguishing features. First, financing - cash flows - underpins all economic activity, with banks generating deposits by granting loans. Money is non-neutral as the policy interest rate anchors the real economy. Second, bank lending is subject to an endogenous boom-bust cycle due to externalities in the loan market. Together, these features imply that monetary policy may have long-lasting impact on the real economy through its in fluence on the financial cycle. In this `finance-based' economy, there is no well-defined natural rate of interest to which the economy gravitates. The possibility of a `low interest rate trap' emerges: monetary policy that leans insufficiently against the build-up of financial imbalances increases the vulnerability to financial busts over successive cycles. As a result, low rates can beget lower rates. |
| Keywords: | monetary policy, financial cycle, money neutrality, hysteresis, natural rate of interest |
| JEL: | E52 E58 E43 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:817&r=all |
| By: | Andrew Filardo; Paul Hubert; Phurichai Rungcharoenkitkul Author-X-Name_First: Phurichai |
| 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 G01 G12 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:816&r=all |
| By: | Carolyn Sissoko (University of the West of England, Bristol) |
| Abstract: | This paper argues that Britain’s monetary system at the start of the Napoleonic Wars was substantially different from its monetary system at their end, and that the Restriction and the Bank of England’s discount policy during the Restriction played a determining role in the transformation of the monetary system. Specifically, I argue that Britain’s monetary system through the second half of the 18th century was built on transaction-based credit, and that by the end of the war this monetary system had been transformed into one based on personal credit. I find that the Bullion Committee deliberately reset the public’s inflation expectations in order to stabilize the monetary system. And that the Bank was acting as a lender of last resort with an explicit duty to support commercial interests in the crisis of 1810-11. |
| Date: | 2019–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:uwe:wpaper:20191906&r=all |
| By: | Juan Carlos Cuestas; Nicolas Reigl; Yannick Lucotte |
| Abstract: | This paper presents empirical estimates of bank credit procyclicality for a sample of 11 Central and Eastern Europe countries (CEECs) for the period 2000Q1–2016Q4. In the first step we estimate a traditional-type panel VAR model and analyse the evolution of credit procyclicality in the CEECs by comparing the impulse response functions for different business cycle periods. The results confirm the existence of credit procyclicality in CEECs and show that procyclicality is higher during boom periods. Furthermore we observe the heterogeneity of credit procyclicality in the different countries in our sample. To explain the cross-country heterogeneity in credit procyclicality we construct an interacted panel VAR model (IPVAR) and analyse whether bank level competition, proxied by the aggregate Lerner index, constitutes a driving force of credit procyclicality. Our findings indicate that bank competition affects credit procyclicality and explains the differences in credit dynamics across CEECs. Specifically we show that the reaction of credit to a GDP shock is on average higher in a less competitive banking market. |
| Keywords: | credit cycle, business cycle, bank competition, interacted panel VAR, CEEC |
| JEL: | E32 E51 G20 D40 C33 |
| Date: | 2019–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2019-03&r=all |
| By: | Hans Degryse; A.O. Karas; Koen Schoors |
| Abstract: | We exploit uncertainty regarding banks' involvement in money laundering activities as a natural experiment to study the functioning of the interbank market in uncertain times. We show that bank couples with a stronger relationship (i.e., more frequent and reciprocal interactions before the event) are more likely to continue lending to one another, and at lower interest rates. This is in line with a “helping hand†or “flight to friends†hypothesis during crisis. |
| Keywords: | banks, interbank market, relationship banking, helping-hand hypothesis |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1904&r=all |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:19/071&r=all |
| By: | Cawley, Cormac; Finnegan, Marie |
| Abstract: | The European Central Bank (ECB) engaged in an expanded asset purchase programme (APP) from 2014 to 2018 to help achieve their primary objective of price stability. Total assets purchased over this period was over €2.5 trillion and new net purchases ended in December 2018. This paper identifies whether the ECB’s APP in Ireland operated through the portfolio rebalancing channel, the signalling channel or the lending channel. It presents a quantitative descriptive analysis of some key Irish data sets in the 2014–2018 period and uses time-series visualisation and trend analysis to identify trends and correlations. There are a number of preliminary findings. First, much downward pressure on sovereign debt yields and spreads had occurred before the APP began due to previous accommodative monetary policy and the signalling channel. Second, the corporate-sector purchase programme (CSPP) did impact on targeted bonds and may have had spill overs to non-targeted bonds. Third, the APP did not lead to much increased lending to the SME sector. Fourth, while households did engage in traditional portfolio rebalancing, Irish banks did not and were perhaps more motivated to meet their capital requirements and manage their level of reserves. This is a first step towards understanding the transmission channels of ECB policy in Ireland and more work needs to be done to detangle the transmission of the most recent APP from other factors and consider these findings in the context of theoretical models. Such work is important to help inform policy makers on enhancing the transmission mechanism to the Irish economy of the recently launched new ECB asset purchase programme from November 2019. |
| Keywords: | Quantitative easing; asset purchase programme; Ireland; transmission channels of QE |
| JEL: | E4 E44 E5 E52 E58 |
| Date: | 2019–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:96547&r=all |
| By: | Christian Pfister |
| Abstract: | This paper investigates the real effects of short-term financial constraints in the light of the working capital channel: cash credit constraints may force SMEs to forgo investment opportunities in order to finance their working capital needs. Building on unique indicators of cash and investment credit constraints derived from survey data, I find that: (1) short-term credit constraints are as important as long-term ones in SMEs' investment decisions; (2) the detrimental effect of cash credit constraints on corporate investment is even stronger for firms with higher working capital needs; (3) the negative relationship between working capital and fixed investment is associated with short-term financial frictions; and (4) only liquid SMEs are able to offset short-term financial frictions by adjusting their accounts receivable and inventories. |
| Keywords: | : Central Bank, Currency, Digitalisation, Financial Stability, Monetary Policy. |
| JEL: | E40 E42 E52 E58 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:732&r=all |
| By: | Abidi, Nordine; Falagiarda, Matteo; Miquel-Flores, Ixart |
| Abstract: | The paper investigates the behaviour of credit rating agencies (CRAs) using a natural experiment in monetary policy. Specifically, it exploits the corporate QE of the Eurosystem and its rating-based specific design which generates exogenous variation in the probability for a bond of becoming eligible for outright purchases. The authors show that after the launch of the policy, rating upgrades were mostly noticeable for bonds initially located below, but close to, the eligibility frontier. In line with the theory, rating activity is concentrated precisely on the territory where the incentives of market participants are expected to be more sensitive to the policy design. Complementing the evidence on the activeness of non-standard measures, the findings contribute to better assessing the consequences of the explicit (but not exclusive) reliance on CRAs ratings by central banks when designing monetary policy. |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:eps:ecmiwp:498&r=all |
| By: | Andrea Landi, Alex Sclip, Valeria Venturelli |
| Abstract: | In this paper we investigate the impact of the Federal Reserve's decision to main- tain the zero-lower bound for at least two years on bank profitability and strategies. Using a difference in difference setting we find that banks with lower reliance on deposit funding are more sensitive to the policy event. Reduced net worth of low deposit banks, relative to high deposit banks, induces those banks to change their strategies toward an increase in fee income related products to maintain the tar- geted level of performance. Such an increase is mainly explained by fiduciary and insurance related revenues that entail a lower risk for financial stability. |
| Keywords: | Profitability, diversification, zero-lower bound, unconventional monetary policy, banking |
| JEL: | E43 E44 E52 G21 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:0079&r=all |
| By: | Roger Farmer; Pawel Zabczyk |
| Abstract: | The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies. |
| Date: | 2019–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/219&r=all |
| By: | Òscar Jordà; Fernanda Nechio |
| Abstract: | The Phillips curve remains central to stabilization policy. Increasing financial linkages, international supply chains, and managed exchange rate policy have given core currencies an outsized influence on the domestic affairs of world economies. We exploit such influence as a source of exogenous variation to examine the effects of the recent financial crisis on the Phillips curve mechanism. Using a difference-in-differences approach, and comparing countries before and after the 2008 financial crisis sorted by whether they endured or escaped the crisis, we are able to assess the evolution of the Phillips curve globally. |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:850&r=all |
| By: | Alberto Fuertes (Banco de España); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid.) |
| Abstract: | This paper investigates the empirical relevance of inflation expectations in forecasting exchange rates. To that end, we use an expectation version of purchasing power parity (EVRPPP) based on the differential of inflation expectations derived from inflation-indexed bonds for Brazil, Colombia, Chile, India, Mexico, Poland, South Africa, South Korea and Turkey. Using monthly data on exchange rates and on the inflation expectations, we find that our predictors are not significantly better than the random walk model, although, with the exception of the South Korean Won, they outperform the random walk when considering the sign of the rate of change. We also find strongly support Granger causality running from exchange rate to the forecasts based on EVRPPP and only partial evidence of Granger causality running the other way around. Finally, our results suggest that 1-year, 5-year and 10-year inflation expectations are mutually consistent. |
| Keywords: | Forecasting, Purchasing power parity, Exchange rates, Inflation expectations. JEL classification: C22, F30. |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201918&r=all |
| By: | Ernst Juerg Weber (Economics Programme, University of Western Australia) |
| Abstract: | The quantity theory of money remains a cornerstone of modern macroeconomics that provides a benchmark for the long-run behaviour of macroeconomic models. The direct empirical evidence for it is, however, less conclusive than suggested by scatterplots and the exaggerated correlations between money growth and inflation that can be found in the macroeconomic literature. Copulas with upper tail dependence show a considerably weaker relationship between money growth and inflation than Pearson’s r. Even so, the quantity theory will continue to be part of macroeconomics because economics as a science is driven both by observation and by the inherent structure of the accumulated body of economic theory. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:uwa:wpaper:19-12&r=all |
| By: | Danilo Leiva-Leon (Banco de España); Eva Ortega (Banco de España); Jaime Martínez-Martín (European Central Bank) |
| Abstract: | This paper decomposes the time-varying effect of exogenous exchange rate shocks on euro area countries inflation into country-specific (idiosyncratic) and region-wide (common) components. To do so, we propose a flexible empirical framework that is based on dynamic factor models subject to drifting parameters and exogenous information. We show that exogenous shocks to the euro/USD account for over 50% of the nominal euro/USD exchange rate fluctuations in more than 1/3 of the quarters over the past six years – especially in turning points periods. Our main results indicate that headline inflation in euro area countries, and in particular its energy-related component, has significantly become more affected by these exogenous exchange rate shocks since the early 2010s, in particular, for the largest economies of the region. While such increasing sensitivity relies solely on a sustained surge in the degree of comovement for headline inflation, it is also based on a higher region-wide effect of the shocks for the case of energy inflation. Instead, purely exogenous exchange rate shocks do not seem to have a significant effect on the core component of headline inflation, which also displays a lower degree of comovement across euro area countries. |
| Keywords: | exchange rate, inflation, factor model, structural VAR model |
| JEL: | E31 F3 F41 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1934&r=all |
| By: | Anne-Laure Delatte; Pranav Garg; Jean Imbs |
| Abstract: | Using a bank-firm level credit registry combined with firm-level balance sheet data we establish the presence of heterogeneity in the effects of unconventional monetary policy transmission. We examine the consequences of a loosening in the collateral eligibility requirement for credit refinancing in France. The policy was designed to affect bank lending positively. We expect a linear increase in lending and an additional increase in loans to firms with newly acceptable rating. We find a large heterogeneity of the monetary policy transmission including the unexpected reduction of lending by the banks benefiting the most from the policy. These are small, risk-averse banks whose foremost concern after the recession was to strengthen their balance sheets. Banks least affected by the policy respond with a reduction in credit to low risk borrowers in reaction to the change in the market structure. Last we document heterogenous effects of the policy on firms depending on their size. |
| Keywords: | Unconventional Monetary Policy;Transmission Channels;Corporate Finance;Real Effects of Monetary Policy;Individual Data |
| JEL: | C55 C58 E44 G21 G32 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2019-07&r=all |
| By: | Anil Savio Kavuri; Alistair Milne; Justine Wood |
| Abstract: | In the context of recent developments with cryptocurrencies, as well as the potential rise of central bank digital currencies, we present a new visualisation of money. Using three novel figures, we distinguish between the relevant mechanisms, technologies, recordkeeping, and transactions of various forms of money, as well as the classifications of different types of money; this enables the resolution of omissions and ambiguities in other recent such visualisations (CPMI 2018; Bech and Garratt 2017; Bech and Garratt 2017; CPMI 2015; Wadsworth 2018a; Wadsworth 2018b). This reveals the novelty of cryptocurrencies, which use the software-based cryptographically secured recordkeeping, that support the issue of money with a credible commitment to a limited quantity of issue. We conclude with a discussion of policy implications stemming from our analysis. |
| Keywords: | Money, Cryptocurrencies, Central bank digital currencies, Bitcoin |
| JEL: | B22 E40 E41 E42 E50 E51 E52 E58 E59 E61 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-79&r=all |
| By: | Elena Bobeica; Matteo Ciccarelli; Isabel Vansteenkiste |
| Abstract: | This paper documents, for the first time in a systematic manner, the link between labor cost and price inflation in the euro area. Using country and sector quarterly data over the period 1985Q1-2018Q1 we find a strong link between labor cost and price inflation in the four major economies of the euro area and across the three main sectors. The dynamic interaction between prices and wages is timevarying and depends on the state of the economy and on the shocks hitting the economy. Our results show that it is more likely that labor costs are passed on to price inflation with demand shocks than with supply shocks. However, the pass-through is systematically lower in periods of low inflation as compared to periods of high inflation. These results confirm that, under circumstances of predominantly demand shocks, labor cost increases will be passed on to prices. Coming from a period of low inflation, however, this pass-through could be moderate at least until inflation stably reaches a sustained path. |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:848&r=all |
| By: | Anthony Edo; Jacques Melitz |
| 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 discovery of the New World. The English evidence strongly supports the near-equivalent importance 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: | The “Great Inflation”;Demography;Precious Metals;European Economic History 1500-1700 |
| JEL: | E31 F00 J10 N13 N33 |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2019-10&r=all |
| By: | Frédérique Bec; Mélika Ben Salem (Université de Cergy-Pontoise, THEMA) |
| Abstract: | This paper develops an asymmetrical overshooting correction autoregressive model to capture excessive nominal exchange rate variation. It is based on the widely accepted perception that open economies might prefer under-evaluation to over-evaluation of their currency so as to foster their net exports. Our approach departs from existing works by allowing the strength of the overshooting correction mechanism to di er between over-depreciations and over-appreciations. It turns out that most of monthly e ective exchange rates for the G20 countries are in fact well characterized by an overshooting correction after an over-appreciation only. |
| Keywords: | nominal exchange rate, asymmetrical overshooting correction. |
| JEL: | C22 F31 F41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2019-12&r=all |
| By: | Simon Gilchrist; Egon Zakrajsek |
| Abstract: | The diminished sensitivity of inflation to changes in resource utilization that has been observed in many advanced economies over the past several decades is frequently linked to the increase in global economic integration. In this paper, we examine this “globalization” hypothesis using both aggregate U.S. data on measures of inflation and economic slack and a rich panel data set containing producer prices, wages, output, and employment at a narrowly defined industry level. Our results indicate that the rising exposure of the U.S. economy to international trade can indeed help explain a significant fraction of the overall decline in responsiveness of aggregate inflation to fluctuations in economic activity. This flattening of the U.S. Phillips curve is supported strongly by our cross-sectional evidence, which shows that increased trade exposure significantly attenuates the response of inflation to fluctuations in output across industries. Our estimates indicate that the inflation-output tradeoff is about three times larger for low-trade intensity industries compared with their high-trade intensity counterparts. |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:849&r=all |
| By: | Harald Finger; Pablo Lopez Murphy |
| Abstract: | This paper looks empirically at some economic effects of volatile exchange rates and financial conditions and examines policy responses for managing such volatility. It also sheds light on some economic costs that stem from volatile capital flows and exchange rates and analyzes how countries deploy their policy toolkits in response. The data-driven analysis should contribute to ongoing reflections about how to manage volatile capital flows and exchange rates both in Asian EMEs and more broadly. |
| Keywords: | Exchange rate policy;Real effective exchange rates;Balance of payments;Exchange markets;Balance of payments statistics;DPPP,capital flow,capital inflow,output gap,inflow,currency depreciation |
| Date: | 2019–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfdep:19/17&r=all |
| By: | James H. Stock; Mark W. Watson |
| Abstract: | An unobserved components model with stochastic volatility is used to decompose aggregate Euro area HICP inflation into a trend, seasonal and irregular components. Estimates of the components based only on aggregate data are imprecise: the width of 68% error bands for the seasonally adjusted value of aggregate inflation is 1.0 percentage points in the final quarter of the sample. Estimates are more precise using a multivariate model for a 13-sector decomposition of aggregate inflation, which yields a corresponding error band that is roughly 40% narrower. Trend inflation exhibited substantial variability during the 2001-2018 period and this variability closely mirrored variation in real activity. |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:847&r=all |