nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒11‒11
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Hitting the Elusive Inflation Target By Bianchi, Francesco; Melosi, Leonardo; Rottner, Matthias
  2. Libra - Concept and Policy Implications By Groß, Jonas; Herz, Bernhard; Schiller, Jonathan
  3. The Tyranny of the Tenths. The Rise and Gradual Fall of Forward Guidance in Sweden 2007-2018 By Andersson, Fredrik N. G.; Jonung, Lars
  4. The Dollar and Emerging Market Economies: Financial Vulnerabilities Meet the International Trade System By Samer Shousha
  5. The emerging market reaction to Fed tightening By Beniak, Patrycja
  6. Optimal Monetary Policy in Small Open Economies: Producer Currency Pricing By Mikhail Dmitriev; Jonathan Hoddenbagh
  7. Negative Nominal Interest Rates Can Worsen Liquidity Traps By Glover, Andrew
  8. Forward Guidance: Communication, Commitment, or Both? By Bassetto, Marco
  9. Do Monetary Policy Announcements Shift Household Expectations? By Lewis, Daniel J.; Makridis, Christos; Mertens, Karel
  10. Indeterminacy and Imperfect Information By Lubik, Thomas A.; Matthes, Christian; Mertens, Elmar
  11. Forward Guidance under Imperfect Information: Instrument Based or State Contingent? By Jia, Chengcheng
  12. Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates By Ulate, Mauricio
  13. Precautionary Pricing: The Disinflationary Effects of ELB Risk By Amano, Robert; Carter, Thomas; Leduc, Sylvain
  14. Riders on the Storm By Jorda, Oscar; Taylor, Alan M.
  15. MoNK: Mortgages in a New-Keynesian Model By Carlos Carriga; Finn E. Kydland; Roman Sustek
  16. Forecasting Dollar Real Exchange Rates and the Role of Real Activity Factors By Sarthak Behera; Hyeongwoo Kim
  17. Spillover Effects of Foreign Monetary Policy on the Foreign Indebtedness of Banks and Corporations By Paola Morales-Acevedo
  18. Stock market's assessment of monetary policy transmission: The cash flow effect By Gürkaynak, Refet S.; Karasoy-Can, Hatice Gökçe; Lee, Sang Seok
  19. The Asian Currency Crisis Origins, Lessons, and Future Outlook By Chowdhury, Abdur R.
  20. On the Special Role of Deposits for Long-Term Lending By Perazzi, Elena
  21. The Federal Funds Market over the 2007-09 Crisis By Copeland, Adam
  22. Testing for Multiple Bubbles in Inflation for Pakistan By Butt, Muhammad Danial; Ahmed, Mumtaz
  23. Partisan Bias in Inflation Expectations By Oliver Bachmann; Klaus Gründler; Niklas Potrafke; Ruben Seiberlich
  24. On the Risk of Leaving the Euro By Macera, Manuel; Marcet, Albert; Nicolini, Juan Pablo
  25. Momentum Effects in the Cryptocurrency Market After One-Day Abnormal Returns By Guglielmo Maria Caporale; Alex Plastun
  26. What do almost 20 years of micro data and two crises say about the relationship between central bank and interbank market liquidity? Evidence from Italy By Massimiliano Affinito
  27. Bretton Woods and the Reconstruction of Europe By Ohanian, Lee E.; Restrepo-Echavarria, Paulina; Van Patten, Diana; Wright, Mark L. J.
  28. Dealing with Capital Inflows Are There Any Lessons? By Reinhart, Carmen M.; Dunaway, Steven
  29. The impact of central bank liquidity support on banks’ balance sheets By de Haan, Leo; Holton, Sarah; van den End, Jan Willem
  30. Dominant-Currency Pricing and the Global Output Spillovers from U.S. Dollar Appreciation By Georgiadis, Georgios; Schumann, Ben
  31. Time-varying Price Flexibility and Inflation Dynamics By Petrella, Ivan; Santoro, Emiliano; Simonsen, Lasse P.
  32. Cashless Bank Branches in Canada By Walter Engert; Ben Fung

  1. By: Bianchi, Francesco (Duke University); Melosi, Leonardo (Federal Reserve Bank of Chicago); Rottner, Matthias (European University)
    Abstract: Since the 2001 recession, average core inflation has been below the Federal Reserve’s 2% target. This deflationary bias is a predictable consequence of a low nominal interest rates environment in which the central bank follows a symmetric strategy to stabilize inflation. The deflationary bias increases if macroeconomic uncertainty rises or the natural real interest rate falls. An asymmetric rule according to which the central bank responds less aggressively to above-target inflation corrects the bias and allows inflation to converge to the central bank’s target. We show that adopting this asymmetric rule improves welfare and reduces the risk of self-fulfilling deflationary spirals. This approach does not entail any history dependence in setting the policy rate or any commitment to overshoot inflation after periods in which the lower bound constraint was binding.
    Keywords: Deflationary bias; asymmetric rules; opportunistic reflation; welfare; natural rate; zero lower bound; disanchoring of inflation expectations; inflation targeting; liquidity traps; macroeconomic uncertainty
    JEL: D83 E31 E52 E62 E63
    Date: 2019–08–30
  2. By: Groß, Jonas; Herz, Bernhard; Schiller, Jonathan
    Abstract: The announcement of the Libra Association to issue a private global currency has triggered a heated debate about the concomitantadvantages and risks. Proponents expectLibra to unfetter money from its "governmental chains" and liberalize and cheapen monetary transactions around the globe. Opponents argue that a private currency imposes unforeseeable risks forboth individualsand the whole financial system. Furthermore, Libra could hamper monetary policies of national central banks. This paper contributes to the debate in two ways. First, we offer a comprehensive overview of the concept of Libra and its possible benefits and downsides to analyze its market potential. Second, we discuss potential implications that a private currency as Libra poses for monetary policy and financial regulation.
    Keywords: Libra,Cryptocurrency,Monetary Policy,Currency Regime
    JEL: E42 E52 G28
    Date: 2019
  3. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: This paper examines the Swedish experience of forward guidance 2007-2018. We focus on three interrelated issues: first, the effects of forward guidance on the discussion within the Board of Directors of the Riksbank, second, on the communication between the Riksbank and the public, and third, on the interest rate expectations held by various groups in Swedish society. We conclude that forward guidance has had negative effects on the dialogue within the Board as well on the communication between the Riksbank and the public. In addition, forward guidance has failed to affect expectations about interest rates in a systematic and significant way. We trace the roots of these consequences to the inability of the Riksbank to forecast its future policy rate three years ahead with any reasonable accuracy. The Riksbank has learned from this dismal performance and partially abandoned forward guidance, returning to a focus on the rate of inflation – as it did prior to the introduction of forward guidance.
    Keywords: forward guidance; central bank communication; interest rate forecasting; inflation targeting; the Riksbank; monetary policy; Sweden
    JEL: E40 E43 E47 E50 E52 E65
    Date: 2019–10–11
  4. By: Samer Shousha
    Abstract: This paper shows that dollar appreciations lead to declines in GDP, investment, and credit to the private sector in emerging market economies (EMEs). These results imply that the transmission of dollar movements to EMEs occurs mainly through financial conditions rather than net exports, contrary to what would be expected from the conventional Mundell-Fleming model. Moreover, the central role of the U.S. dollar in global trade invoicing and financing - the dominant currency paradigm - and the increased integration of EMEs into international supply chains weaken the traditional trade channel. Finally, as expected if financial vulnerabilities are prominent, EMEs with higher exposure to credit denominated in dollars and lower monetary policy credibility experience greater contractions during dollar appreciations.
    Keywords: Dollar ; Balance sheet mismatch ; Dominant currency paradigm ; Global value chain ; Monetary policy credibility
    JEL: F31 F34 F36 F41 F44
    Date: 2019–10–04
  5. By: Beniak, Patrycja
    Abstract: This paper provides one of the first comprehensive assessments of spillovers from 2015-2018 monetary policy tightening phase in the United States to emerging markets, as well as their determinants. It shows that the spillovers were concentrated in the fixed income markets, with a relatively small impact of Fed policy on foreign exchange and stock market price behaviour. The bulk of the impact on fixed income was channeled through rising interest rate expectations rather than an increase in term premia. The decisions on monetary policy tightening in the United States are found to be of less importance for EM pricing than the preceding speeches. The markets were differentiating across individual countries, yet, with exception of the Central and Eastern European economies, based not on macroeconomic fundamentals but the economic policies shaping them. On the top of that, the paper investigates the importance of economic and political risk perception as well as ECB policy for the magnitude of EM spillovers from the Fed tightening, finding both factors irrelevant.
    Keywords: unconventional monetary policy, central bank communication, international capital flows, emerging markets, open source software in support of policy analysis
    JEL: E43 E44 E52 F31 F36 F65
    Date: 2019–09–01
  6. By: Mikhail Dmitriev (Department of Economics, Florida State University); Jonathan Hoddenbagh (Department of Economics, Johns Hopkins University)
    Abstract: We establish the share of exports in production as a sufficient statistic for optimal noncooperative monetary policy. Under financial autarky, markups positively co-move with the export share. For complete markets, markups should be procyclical if the export share is procyclical. When central banks cooperate, markups are constant under complete markets, and countercyclical under financial autarky.
    Keywords: Open economy macroeconomics, Optimal monetary policy. Price stability
    JEL: E50 F41 F42
    Date: 2019–10
  7. By: Glover, Andrew (Federal Reserve Bank of Kansas City)
    Abstract: Can central banks use negative nominal interest rates to overcome the adverse effects of the zero lower bound? I show that negative rates are likely to be counterproductive in an expectations-driven liquidity trap. In a liquidity trap, firms expect low demand and cut prices, which leads the central bank to reduce nominal rates to their lower bound. If the resulting decline in real rates is not enough to stabilize demand, then the pessimism of price setters is fulfilled. Theoretically, the effect of a negative nominal rate is non-monotonic: a marginally negative rate is not enough to escape the liquidity trap, but allows for more pessimistic expectations and deflation, while a sufficiently negative rate eliminates the trap altogether. However, plausible estimates of the cost and benefits of price adjustments in the U.S. suggest that negative rates are contractionary in a liquidity trap, even at −100 percent.
    Keywords: Interest Rates; Nominal Negative Rates; Liquidity Traps
    JEL: E50 E52 E58
    Date: 2019–10–03
  8. By: Bassetto, Marco (Federal Reserve Bank of Chicago)
    Abstract: A policy of forward guidance has been suggested either as a form of commitment ("Odyssean") or as a way of conveying information to the public ("Delphic"). I analyze the strategic interaction between households and the central bank as a game in which the central bank can send messages to the public independently of its actions. In the absence of private information, the set of equilibrium payoffs is independent of the announcements of the central bank: forward guidance as a pure commitment mechanism is a redundant policy instrument. When private information is present, central bank communication can instead have social value. Forward guidance emerges as a natural communication strategy when the private information in the hands of the central bank concerns its own preferences or beliefs: while forward guidance per se is not a substitute for the central bank's commitment or credibility, it is an instrument that allows policymakers to leverage their credibility to convey valuable information about their future policy plans. It is in this context that "Odyssean forward guidance" can be understood.
    Keywords: Forward guidance; monetary policy; interest rates
    JEL: C5 E4 E5
    Date: 2019–07–25
  9. By: Lewis, Daniel J. (Federal Reserve Bank of New York); Makridis, Christos (MIT Sloan School of Management); Mertens, Karel (Federal Reserve Bank of Dallas)
    Abstract: We use daily survey data from Gallup to assess whether households' beliefs about economic conditions are influenced by surprises in monetary policy announcements. We first provide more general evidence that public confidence in the state of the economy reacts to certain types of macroeconomic news very quickly. Next, we show that surprises about the federal funds target rate are among the news that have statistically significant and instantaneous effects on economic confidence. In contrast, surprises about forward guidance and asset purchases do not have similar effects on household beliefs, perhaps because they are less well understood. We document heterogeneity in the responsiveness of sentiment across demographics.
    Keywords: monetary policy shocks; central bank communication; information rigidities; consumer confidence; high-frequency identification
    JEL: E30 E40 E50
    Date: 2019–09–01
  10. By: Lubik, Thomas A. (Federal Reserve Bank of Richmond); Matthes, Christian (Federal Reserve Bank of Richmond); Mertens, Elmar (Deutsche Bundesbank)
    Abstract: We study equilibrium determination in an environment where two kinds of agents have different information sets: The fully informed agents know the structure of the model and observe histories of all exogenous and endogenous variables. The less informed agents observe only a strict subset of the full information set. All types of agents form expectations rationally, but agents with limited information need to solve a dynamic signal extraction problem to gather information about the variables they do not observe. We show that for parameter values that imply a unique equilibrium under full information, the limited information rational expectations equilibrium can be indeterminate. We illustrate our framework with a monetary policy problem where an imperfectly informed central bank follows an interest rate rule.
    Keywords: Limited information; rational expectations; Kalman filter; belief shocks
    JEL: C11 C32 E52
    Date: 2019–10–08
  11. By: Jia, Chengcheng (Federal Reserve Bank of Cleveland)
    Abstract: I study the optimal type of forward guidance in a flexible-price economy in which both the private sector and the central bank are subject to imperfect information about the aggregate state of the economy. In this case, forward guidance changes the private sector’s expectations about both future monetary policy and the state of the economy. I study two types of forward guidance. The first type is instrument based, in which case the central bank commits to a value of the policy instrument. The second type is state contingent, in which case the central bank reveals its imperfect information and commits to a policy response rule. The key message is that forward guidance allows the central bank to reduce ex-ante price fluctuations by making the optimal trade-off between price deviations after the actual shock and after the noise shock. However, this benefit comes with a cost under the instrument-based forward guidance; that is, since firms perfectly know the change in monetary policy and prices are fully flexible, the real output level becomes independent of monetary policy. Consequently, while state-contingent forward guidance guarantees ex-ante welfare improvement, instrument-based forward guidance improves ex-ante welfare only if the central bank’s information is sufficiently precise.
    JEL: D82 D83 E52 E58
    Date: 2019–11–05
  12. By: Ulate, Mauricio (Federal Reserve Bank of San Francisco)
    Abstract: After the Great Recession several central banks started setting negative nominal interest rates in an expansionary attempt, but the effectiveness of this measure remains unclear. Negative rates can stimulate the economy by lowering the rates that commercial banks charge on loans, but they can also erode bank profitability by squeezing deposit spreads. This paper studies the effects of negative rates in a new DSGE model where banks intermediate the transmission of monetary policy. I use bank-level data to calibrate the model and find that monetary policy in negative territory is between 60% and 90% as effective as in positive territory.
    JEL: E32 E44 E52 E58 G21
    Date: 2019–08–27
  13. By: Amano, Robert (Bank of Canada); Carter, Thomas (Bank of Canada); Leduc, Sylvain (Federal Reserve Bank of San Francisco)
    Abstract: We construct a model to evaluate the role that the risk of future effective lower bound (ELB) episodes plays as a factor behind the persistently weak inflation witnessed in many advanced economies since the Great Recession. In our model, a range of precautionary channels cause ELB risk to affect inflation and other macroeconomic outcomes even during “normal times” when nominal rates are far away from the ELB. This behavior is enhanced through a growth channel that captures possible long-lasting output declines at the ELB. We show that ELB risk substantially weighs on inflation even when the policy rate is above the ELB. Our model also predicts substantially below-target inflation expectations and negative inflation risk premia.
    Date: 2019–10–15
  14. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Taylor, Alan M. (University of California, Davis)
    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.
    JEL: E43 E44 E52 E58 F36 N10
    Date: 2019–09–06
  15. By: Carlos Carriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California – Santa Barbara; NBER); Roman Sustek (Centre for Macroeconomics (CFM))
    Abstract: We propose a tractable framework for monetary policy analysis in which both short - and long-term debt affect equilibrium outcomes. This objective is motivated by observations from two literatures suggesting that monetary policy contains a dimension affecting expected future interest rates and thus the costs of long-term financing. In New-Keynesian models, however, long-term loans are redundant assets. We use the model to address three questions: what are the effects of statement vs. action policy shocks; how important are standard New-Keynesian vs. cash flow effects in their transmission; and what is the interaction between these two effects?
    Keywords: Mortgages, Cash-flow effects, Sticky prices, Monetary policy transmission, Monetary policy communication
    JEL: E52 G21 R21
    Date: 2019–10
  16. By: Sarthak Behera; Hyeongwoo Kim
    Abstract: We propose factor-based out of sample forecasting models for US dollar real exchange rates. We estimate latent common factors employing an array of data dimensionality reduction approaches that include the Principal Component Analysis, Partial Least Squares, and the LASSO for a large panel of 125 monthly frequency US macroeconomic time series data. We augment two benchmark models, a stationary autoregressive model and the random walk model, with estimated common factors to formulate out-of-sample forecasts of the real exchange rate. Empirical findings demonstrate that our factor augmented models outperform the benchmark models at longer horizons when factors are extracted from real activity variables excluding financial sector variables. Factors obtained from financial market variables overall play a limited role in forecasting. Our data-driven models tend to perform better than models with international factors that are motivated by exchange rate determination theories.
    Keywords: US Dollar Real Exchange Rate; Principal Component Analysis; Partial Least Squares; LASSO; Out-of-Sample Forecast
    JEL: C38 C53 C55 F31 G17
    Date: 2019–10
  17. By: Paola Morales-Acevedo (Monetary and International Investment Office of the Central Bank of Colombia)
    Abstract: This paper analyses the impact of foreign monetary policy — from a broad range of countries — on the foreign indebtedness of Colombian banks and corporations, and evaluates if capital controls can help to mitigate these spillover effects. The paper uses two unique loan-level datasets on cross-border lending that cover all the foreign loans granted by foreign-located financial institutions to domestically located financial and non-financial companies, respectively. The results support the existence of spillover effects of foreign monetary policy over the characteristics of cross-border loans. In particular, periods of foreign monetary policy easing (tightening) are associated with: i) increases (decreases) on the cross-border lending to banks, and decreases (increases) on the cross-border lending to corporations; and ii) decreases (increases) on the loan interest rates to banks and corporations. The paper also finds that capital controls play an important role in mitigating these spillover effects, however, their effectiveness depends on the stance of both foreign and domestic monetary policy.
    Keywords: cross-border lending, monetary policy, capital control
    JEL: E44 F34 G01
    Date: 2019–11–05
  18. By: Gürkaynak, Refet S.; Karasoy-Can, Hatice Gökçe; 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,investor sophistication,financial frictions,stock pricing
    JEL: E43 E44 E52 E58 G14
    Date: 2019
  19. By: Chowdhury, Abdur R.
    Abstract: What started in the summer of 1997 as a regional economic and financial crisis in East and Southeast Asia had developed into a global financial crisis within the span of a year. This crisis followed the crisis in the European Monetary System in 1992-3 and the Mexican peso crisis in 1994-5. However, unlike the previous two crises, the scale and depth of the Asian crisis surprised everyone. One obvious reason for this is East and Southeast Asia's track record of economic success. Since the 1960s, no other group of countries in the world has produced more rapid economic growth or such a dramatic reduction in poverty. Given so many years of sustained economic performance the obvious question is: how could events in Asia unfold as they did? This paper has three objectives. First, to explain what led to this crisis and how did it spread throughout the region; second, to analyze the lessons that can be learned from this crisis to prevent it from reoccurring in the future and; third, to evaluate the future outlook of the countries in this region. The paper shows that what led to the crisis was a fatal combination of several self­ reinforcing factors including external sector weaknesses, fragility in domestic financial markets due to inadequately administered financial liberalization, loss of confidence, and short-term capital flows, maturing within less than a year and denominated in unhedged dollars. Some of these factors were country-specific while others were common to the entire region. Asia's financial crisis will almost certainly lead to important changes in the international financial system, as countries try to find an appropriate balance between the benefits from gaining access to international capital flows and the potential for instability and other risks that also seem to be much greater in a world of large and highly mobile capital movement. The paper discusses important lessons from the crisis. Some are preventive, designed to reduce the probability of financial crisis in the future, while others are more fundamental in nature. After the analysis of what went wrong and what we can learn from the crisis, comes the analysis of what happens next as Asian countries try to find their way back to economic stability and growth. The recovery process for these countries can be broadly divided into three phases. In the first phase, policies designed to address the causes of the crisis need to be formulated. In the second phase, a recovery of private capital inflow can be expected. The third and final phase of the process will be reached when the recapitalization of the financial system has been largely accomplished and when the level of private consumption and private investment have reached the pre-crisis level.
    Keywords: International Development
  20. By: Perazzi, Elena
    Abstract: I build a general equilibrium model to show that deposits are a special form of financing, that makes banks more suitable to extend long-term loans when confronted with the risks of monetary policy. In the model, banks borrow short-term and lend long-term, are subject to a minimum equity requirement consistent with Basel III, and face a financial friction: they cannot raise equity on the market. Consistent with the "bank-capital channel" of monetary policy, when the risk-free rate increases, the value of the banks' assets and equity are eroded, and banks deleverage by cutting their lending. I show that, thanks to a combination of banks' market power in the deposit market and of the money-like properties of deposits, the profits on deposits are strongly countercyclical, and reduce the contraction of lending at high interest rates due to the bank capital channel. Amid current proposals for narrow banking, this effect provides a rationale for the coexistence of lending and deposit-taking activities in current commercial banks.
    Keywords: Deposits, Banks, Long-Term Lending, Narrow Banking
    JEL: E5 G21
    Date: 2019–10–25
  21. By: Copeland, Adam (Federal Reserve Bank of New York)
    Abstract: This paper measures how the 2007-09 financial crisis affected the U.S. federal funds market. I accomplish this by developing and estimating a structural model of this market, in which intermediation plays a crucial role and borrowing banks differ in their unobserved probability of default. The estimates imply that the expected probability of default increases 0.29 percentage point at the start of the crisis in mid-2007 and then gains a further 1.91 percentage points after the bankruptcy of Lehman Brothers. These increases do not cause a market freeze, however, because simultaneously there is a shift outward in the supply of funds. The model indicates that amid the turmoil of the crisis, lenders viewed the fed funds market as a relatively attractive place to invest cash overnight.
    Keywords: asymmetric information; fed funds; intermediation; financial crisis
    JEL: D82 G01 G14
    Date: 2019–11–01
  22. By: Butt, Muhammad Danial; Ahmed, Mumtaz
    Abstract: Detection of bubbles in financial markets is an issue of great importance as these split an enduring impact to every sector of the economy leading to substantial losses. In Pakistan, price level has seen abrupt changes which hurts the economic efficiency whereas inflation rates are usually high. So, it is important to detect bubbles present in inflation to have a check whether the hike in inflation is demand driven or there is a prevailing price exuberant behavior that results in sudden boom in inflation. There are very limited studies on detecting bubbles in inflation series for Pakistan. So, the present study takes a lead and address this very important issue by making use of recently developed state of art GSADF approach proposed by Phillips et al. (2015). The empirical analysis is based on five different series which cover inflation rates such as consumer price index (CPI) for the general, the food and the non-food items, the sensitive price index (SPI) and the wholesale price index (WPI). This approach is best suited for testing multiple bubbles as opposed to earlier methods that are designed to test for the presence of only a single bubble in any time series. The empirical findings based on monthly time series data from Jan 2006 to Jan 2019 confirm the existence of multiple bubbles in WPI and CPI non-food. However, for rest of three series, only single bubble has been witnessed. The analysis from the date stamping of bubbles reveal that all bubbles arise during the global financial crisis of 2008 which triggered oil prices resulting in domestic currency depreciation. Some important policy implications are discussed as well.
    Keywords: Explosivity; Consumer price index; Wholesale price index, Sensitive price index; GSADF; Simulation
    JEL: E31 G00 P24 P44
    Date: 2019–10–26
  23. By: Oliver Bachmann; Klaus Gründler; Niklas Potrafke; Ruben Seiberlich
    Abstract: We examine partisan bias in inflation expectations. Our dataset includes inflation expectations of the New York Fed’s Survey of Consumer Expectations over the period June 2013 to June 2018. The results show that inflation expectations were 0.46 percentage points higher in Republican-dominated than in Democratic-dominated US states when Barack Obama was US president. Compared to inflation expectations in Democratic-dominated states, inflation expectations in Republican-dominated states declined by 0.73 percentage points when Donald Trump became president. We employ the Blinder-Oaxaca decomposition method to disentangle the extent to which political ideology and other individual characteristics predict inflation expectations: around 25% of the total difference between inflation expectations in Democratic-dominated versus Republican-dominated states is based on how partisans respond to changes in the White House’s occupant (partisan bias). The results also corroborate the belief that voters’ misperceptions of economic conditions decline when the president belongs to the party that voters support.
    Keywords: inflation expectation, partisan bias, political ideology, voters’ perceptions, Blinder-Oaxaca, US president
    JEL: C13 D72 E31 P44
    Date: 2019
  24. By: Macera, Manuel (Universidad Torcuato Di Tella); Marcet, Albert (Univeritat Autonoma de Barcelona); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: Following the sovereign debt crisis of 2012, some southern European countries have debated proposals to leave the Euro. We evaluate this policy change in a standard monetary model with seigniorage financing of the deficit. The main novel feature is that we depart from rational expectations while maintaining full rationality of agents in a sense made very precise. Our first contribution is to show that small departures from rational expectations imply that inflation upon exit can be orders of magnitude higher than under rational expectations. Our second contribution is to provide a framework for policy analysis in models without rational expectations.
    Keywords: Internal rationality; Inflation; Seigniorage
    JEL: E41 E52 E63
    Date: 2019–08–08
  25. By: Guglielmo Maria Caporale; Alex Plastun
    Abstract: This paper examines whether there exists a momentum effect after one-day abnormal returns in the cryptocurrency market. For this purpose a number of hypotheses of interest are tested for the BitCoin, Ethereum and LiteCoin exchange rates vis-à-vis the US dollar over the period 01.01.2017-01.09.2019, specifically whether or not: H1) the intraday behaviour of hourly returns is different on overreaction days compared to normal days; H2) there is a momentum effect on overreaction days, and H3) after one-day abnormal returns. The methods used for the analysis include a number of statistical methods as well as a trading simulation approach. The results suggest that hourly returns during the day of positive/negative overreactions are significantly higher/lower than those during the average positive/negative day. Overreactions can usually be detected before the day ends by estimating specific timing parameters. Prices tend to move in the direction of the overreaction till the end of the day when it occurs, which implies the existence of a momentum effect on that day giving rise to exploitable profit opportunities. This effect (together with profit opportunities) is also observed on the following day. In two cases (BTCUSD positive overreactions and ETHUSD negative overreactions) a contrarian effect is detected instead.
    Keywords: cryptocurrencies, anomalies, momentum effect, overreactions, abnormal returns, patterns
    JEL: G12 G17 C63
    Date: 2019
  26. By: Massimiliano Affinito
    Abstract: This paper studies the mutual interplay between central bank (CB) liquidity provisions and interbank market (IM) liquidity exchanges, exploring whether the relationship changes in the event of IM impairments and massive CB liquidity injections during global and sovereign crises. The analysis uses a data set containing 17 years of monthly bank-by-bank and counterparty-by-counterparty data collated from 1998 to 2015 in Italy. The results show the existence of complementarity. Banks receiving CB liquidity redistribute more to other banks. When CB liquidity increases exponentially during crises, some healthy banks specialise in interbank lending. The complementarity helps to offset euro area fragmentation via domestic interbank relationships and to adjust the collateral and maturity profiles of banks' liquidity.
    Keywords: liquidity, financial and sovereign crises, central bank intervention, interbank
    JEL: G21 E52 C30
    Date: 2019–11
  27. By: Ohanian, Lee E. (University of California Los Angeles); Restrepo-Echavarria, Paulina (Federal Reserve Bank of St. Louis); Van Patten, Diana (University of California Los Angeles); Wright, Mark L. J. (Federal Reserve Bank of Minneapolis)
    Abstract: The Bretton Woods international financial system, which was in place from roughly 1949 to 1973, is the most significant modern policy experiment to attempt to simultaneously manage international payments, international capital flows, and international currency values. This paper uses an international macroeconomic accounting methodology to study the Bretton Woods system and finds that it: (1) significantly distorted both international and domestic capital markets and hence the accumulation and allocation of capital; (2) significantly slowed the reconstruction of Europe, albeit while limiting the indebtedness of European countries. Our results also provide support for the utility of the accounting methodology in that it finds a sharp change in the behavior of domestic and international capital market wedges that coincides with the breakdown of the system.
    Keywords: Bretton Woods; International Payments; Capital Flows
    JEL: E21 F21 F41 J20
    Date: 2019–10–13
  28. By: Reinhart, Carmen M.; Dunaway, Steven
    Abstract: We have now witnessed more than half a decade of relatively heavy capital inflows to a large group of highly heterogeneous developing countries and economies in transition in Asia, Eastern Europe, the Former Soviet Union, Latin America, and parts of Africa and the Middle East—in effect, we have already seen the reversal of these flows in a number of cases. In light of the richness of the country experiences and the continued relevance of the topic in a world of increasingly integrated capital markets, our aim in this paper is threefold: first, to chronicle the policies adopted in a broad range of countries, so as to document who did what and when; second, to try to assess to what extent such policies achieved their intended objectives and; lastly following from the previous two points, to draw lessons about which policies appeared to have been the most successful tools in coping with surging capital inflows, with emphasis on the 'policy mix' and how individual measures interact. In this retrospective review of the policy response to the surge in capital inflows we find crucial importance of the interaction of policies to either magnify or reduce the volume of inflows, affect their composition, and/or alter their macroeconomic consequences. For example, a combination of little or no short-term exchange rate uncertainty (as is the case when there is an implicit or explicit peg), sterilized intervention, which tends to prevent domestic short-term interest rates from converging toward international levels, and no binding impediments to capital inflows (through either taxation or quantitative constraints) is likely to maximize the volume of short-term capital inflows a country receives (this policy mix characterizes the Mexican experience during 1990-93 reasonably well). The pairing of little or no short-term exchange rate risk and relatively high domestic interest rates favors the short-term investor; for the long-term investor, there is always exchange rate risk since over longer horizons the probability of a realignment of the peg or a change in the exchange rate regime increases. Further, longer-term investments (such as foreign direct investment) tend to be less interest sensitive. Hence, it would not be surprising to see that if such a policy mix remains in place for any extended period of time it may end up skewing the composition of inflows toward the short end of the maturity spectrum. Similarly, it could be argued that the mix of sterilized intervention and controls on inflows may undermine the 'individual effectiveness' of these policies. The comparatively high interest rate differentials that usually accompany sterilization may act as an inducement to circumvent the capital controls (i.e. firms and banks may find ways of borrowing offshore). To the extent that they are successful in dodging the controls, this tends to offset some of the contractionary effects of the sterilization efforts (this is case of Brazil in 1994-95). Along the same lines, liberalizing controls on outflows as a policy aimed at reducing net capital inflows may backfire if domestic interest rates are high relative to international levels and/or if it is interpreted a positive signal of the future economic/policy environment. Indeed, several countries (Chile, Malaysia, and Thailand) liberalized outflows while at the same time engaging in substantive sterilization efforts.
    Keywords: International Development
  29. By: de Haan, Leo; Holton, Sarah; van den End, Jan Willem
    Abstract: We empirically analyse the relationship between longer term central bank liquidity support and banks’ balance sheet ratios, using difference-in-differences panel regressions and propensity score matching on a large sample of banks in the euro area. The research question is whether the liquidity operations, which were introduced to prevent disorderly deleveraging, can also be linked to unintended changes in banks’ funding policies and asset allocations. The results show that unconditional and conditional refinancing operations are associated with different developments on banks’ balance sheets. Unconditional longer-term refinancing operations went together with higher maturity transformation by banks in stressed countries, and also more carry trades, i.e. banks borrowing more while increasing their holdings of government bonds. In contrast, refinancing operations that were conditional on banks’ lending were not associated with such carry trades, highlighting the benefits of conditionality attached to long-term refinancing operations. JEL Classification: E51, G21, G32
    Keywords: banking, central bank liquidity, financial intermediation
    Date: 2019–11
  30. By: Georgiadis, Georgios (European Central Bank); Schumann, Ben (European Central Bank)
    Abstract: Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy coordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, producer-currency pricing (PCP) and local-currency pricing (LCP). In the model, under DCP the output spillovers from shocks that appreciate the U.S. dollar multilaterally decline with an economy's export-import U.S. dollar pricing share differential, i.e., the difference between the share of an economy's exports and imports that are priced in the dominant currency. Underlying this prediction is a change in an economy's net exports in response to multilateral changes in the U.S. dollar exchange rate that arises because of differences in the extent to which exports and imports are priced in the dominant currency. We then confront this prediction of DCP with the data in a sample of up to 46 advanced and emerging-market economies for the time period from 1995 to 2018. Specifically, controlling for other cross-border transmission channels, we document that consistent with the prediction from DCP the output spillovers from U.S. dollar appreciation correlate negatively with recipient economies' export-import U.S. dollar invoicing share differentials. We document that these findings are robust to considering U.S. demand, U.S. monetary policy and exogenous exchange rate shocks as a trigger of U.S. dollar appreciation, as well as to accounting for the role of commodity trade in U.S. dollar invoicing.
    Keywords: Dominant-currency pricing; U.S. shocks; spillovers
    JEL: C50 E52 F42
    Date: 2019–09–04
  31. By: Petrella, Ivan (University of Warwick); Santoro, Emiliano (University of Copenhagen); Simonsen, Lasse P. (Birkbeck College)
    Abstract: TWe study how and to what extent inflation dynamics is shaped by time variation in the capacity of nominal demand to stimulate price adjustment. Using microdata underlying the UK consumer price index, we estimate a generalized Ss model of lumpy price adjustment, and condense large cross-sectional information on micro price changes into a measure of price flexibility. The latter displays sizeable time variation, which maps into a marked non-linearity of inflation dynamics: the half-life of the rate of inflation is twice as large in periods of relatively low flexibility, along with appearing remarkably close to the one observed in a linear setting. Changes in firms’ price-adjustment cost structure, as reflected in the adjustment hazard, are key to account for state dependence in price setting. Neglecting these facts may severely bias our understanding of inflation dynamics.
    Keywords: inflation ; price flexibility ; Ss models
    JEL: E30 E31 E37 C22
    Date: 2019
  32. By: Walter Engert; Ben Fung
    Abstract: Cashless or tellerless bank branches have proliferated in several countries in recent years. In a cashless bank branch, teller or counter services such as cash withdrawals, deposits and cheque-cashing are not available. These services are instead provided via automatic teller machines. This note discusses the development of tellerless bank branches in Canada and analyzes the potential implications for cash demand.
    Keywords: Bank notes; Digital Currencies and Fintech; Financial services
    JEL: E41 E42 E51
    Date: 2019–10

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