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on Monetary Economics |
| By: | Andrea De Polis (Warwick Business School, University of Warwick); Mario Pietrunti (Bank of Italy) |
| Abstract: | In this paper we estimate an open economy New-Keynesian model to investigate the impact of unconventional monetary policies on the exchange rate, focusing on those adopted since the Global Financial Crisis in the euro area and in the United States. To this end we replace effective, short-term, interest rates with shadow rates, which provide a measure of the monetary stance when the former reach their effective lower bound. We find that since 2009 unconventional monetary policies significantly affected the dynamics of the euro-dollar exchange rate both in nominal and real terms: while the stimulus provided by the Fed prevailed between 2011 and 2014, contributing to the weakening of the dollar, in most recent years the depreciation of the euro mainly reflected the measures adopted by the ECB. |
| Keywords: | exchange rates, shadow rates, unconventional policies |
| JEL: | C11 E52 F31 F41 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1231_19&r=all |
| By: | Saroj Bhattarai; Arpita Chatterjee; Woong Yong Park |
| Abstract: | Spillover effects of US uncertainty shocks are studied in a panel VAR of ?fteen emerging market economies (EMEs). A US uncertainty shock negatively affects EME stock prices and exchange rates, raises EME country spreads, and decreases capital inflows into them. It decreases EME output and consumer prices while increasing net exports. Negative effects on output and asset prices are weaker, but effects on external balance stronger, for Latin American EMEs. We attribute such heterogeneity to di?erential EME monetary policy response to US uncertainty shocks. Analysis of central bank minutes shows Latin American EMEs pay less attention to smoothing capital ?ows. |
| Keywords: | US Uncertainty; Panel VAR; Emerging Market Economies; Monetary Policy Response; Emerging Market Monetary Policy Minutes |
| JEL: | C11 C33 E44 E52 E58 F32 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:snu:ioerwp:no107&r=all |
| By: | David Reifschneider (former Federal Reserve); David Wilcox (Peterson Institute for International Economics) |
| Abstract: | The Federal Reserve faces two important monetary policy challenges: First, since the Great Recession it has struggled to move inflation convincingly up to the 2 percent target level. Second, during the next recession it will struggle to deliver enough support to the economy unless the recession is unusually mild. As a result, the search is on for alternative policy frameworks that might allow the Fed to achieve its monetary policy objectives more effectively. Among the alternatives is average inflation targeting (AIT). The basic idea is simple: Instead of aiming to return inflation over the medium term to the target rate of 2 percent, the Fed would aim to return the average of inflation over some period to the target rate. The crucial innovation of AIT is that when inflation has been running below the target rate, it would have the Fed aim for above-target inflation in the future, in order to bring average inflation up toward the target. Simulations of the Fed’s workhorse econometric model of the US economy (the FRB/US model) suggest that AIT would be a weak addition to the Fed’s policy toolkit for dealing with recessions and persistently low inflation. In addition, simple versions of AIT would sometimes compel the Fed to run an undesirably restrictive monetary policy. AIT is thus not a very appealing alternative to the current framework. |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb19-16&r=all |
| By: | José De Gregorio (Peterson Institute for International Economics) |
| Abstract: | Many emerging-market economies have adopted inflation targeting regimes since they were introduced by New Zealand in 1990. Latin America has not been the exception. Currently eight Latin American countries conduct monetary policy through inflation targeting regimes: Brazil, Chile, Colombia, Guatemala, Mexico, Paraguay, Peru, and Uruguay. This paper reviews the history of chronic inflation in Latin America and describes these countries’ experience with inflation targets and their performance during the global financial crisis. |
| Keywords: | Inflation, Inflation Targets, Latin America, Monetary Policy |
| JEL: | E52 E58 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp19-19&r=all |
| By: | Luca Fornaro |
| Abstract: | Since the creation of the euro, capital flows among member countries have been large and volatile. Motivated by this fact, I provide a theory connecting the exchange rate regime to financial integration. The key feature of the model is that monetary policy affects the value of collateral that creditors seize in case of default. Under flexible exchange rates, national governments can expropriate foreign investors by depreciating the exchange rate. Anticipating this, investors impose tight limits on international borrowing. In a monetary union this source of exchange rate risk is absent, because national governments do not control monetary policy. Forming a monetary union thus increases financial integration by boosting borrowing capacity toward foreign investors. This process, however, does not necessarily lead to higher welfare. The reason is that a high degree of financial integration can generate multiple equilibria, with bad equilibria characterized by inefficient capital flights. Capital controls or fiscal transfers can eliminate bad equilibria, but their implementation requires international cooperation. |
| Keywords: | Monetary union, international financial integration, exchange rates, optimal currency area, capital flights, euro area. |
| JEL: | E44 E52 F33 F34 F36 F41 F45 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1677&r=all |
| By: | Jeonghun Choi |
| Abstract: | This study estimates a simple small open dynamic stochastic general equilibrium model through the Bayesian approach using Korean data. It mainly analyzes the monetary policy conducted by the central bank of Korea in relation to the 2008{2009 global nancial crisis. Speci cally, it aims to answer three questions. (1) Is there any change in the Korean monetary policy before and after the global nancial crisis? (2) If so, what is the di erence between them? (3) What are the subsequent change in the role and e ect of the monetary policy alteration? To answer these questions, we rst implement a rolling estimation, which enables us to control the influence of the crisis and to find the time-varying characteristics of the Korean economy. Based on the results from the rst stage, we re-estimate the model by dividing the whole sample period into two sub-periods, namely, pre-crisis and post-crisis. According to our estimation results, exchange rate movements become an additional interest in deciding the policy rate of Korea after the peak of the crisis. In addition, the behavior of the Korean monetary authority becomes relatively more aggressive. When models including the data of the peak of the crisis are estimated, model ts become worse and the posterior estimates are distorted. Finally, we conduct simulations to gauge the altered role and e ect of the change. As measures of performance, volatilities of inflation, output, and exchange rate of the simulated series obtained by stochastic simulation show that the central bank of Korea can achieve more stabilized inflation and exchange rates under the post-crisis policy rule. Our results are robust for various speci cations of the monetary policy rule, alternative prior distribution, and data that can be used as proxies for the exchange rate and inflation of Korea. |
| URL: | http://d.repec.org/n?u=RePEc:snu:ioerwp:no94&r=all |
| By: | Cassola, Nuno; Kok, Christoffer; Mongelli, Francesco Paolo |
| Abstract: | The prolonged crisis exposed the vulnerability of a monetary union without a banking union. The Single Supervisory Mechanism (SSM), which started operating in November 2014, is an essential step towards restoring banks to health and rebuilding trust in the banking system. The ECB is today responsible for setting a single monetary policy applicable throughout the euro area and for supervising all euro area banks in order to ensure their safety and soundness, some directly and some indirectly. Its role in the area of financial stability has also expanded through the conferral of macroprudential tasks and tools that include tightening national measures when necessary. It thus carries out these complementary functions, while its primary objective of pursuing price stability remains unchanged. What are the working arrangements of this enlarged ECB, and what are the similarities and existing synergies among these functions? In the following pages, focusing on the organisational implications of the “new” ECB, we show the relative degrees of centralisation and decentralisation that exist in discharging these functions, the cycles of policy preparation and the rules governing interaction between them. JEL Classification: E42, E58, F36, G21 |
| Keywords: | banking supervision, banking union, decision-making process, European Central Bank, financial stability, macroprudential policies, monetary policy, systemic risks |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2019237&r=all |
| By: | Gee Hee Hong; Rahul Anand; Yaroslav Hul |
| Abstract: | The Bank of Japan has introduced various unconventional monetary policy tools since the launch of Abenomics in 2013, to achieve the price stability target of 2 percent inflation. In this paper, a forward-looking open-economy general equilibrium model with endogenously determined policy credibility and an effective lower bound is developed for forecasting and policy analysis (FPAS) for Japan. In the model’s baseline scenario, the likelihood of the Bank of Japan reaching its 2 percent inflation target over the medium term is below 40 percent, assuming the absence of other policy reactions aside from monetary policy. The likelihood of achieving the inflation target is even lower under alternative risk scenarios. A positive shock to central bank credibility increases this likelihood, and would require less accommodative macroeconomic policies. |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/229&r=all |
| By: | Honohan, Patrick; Lane, Philip R. |
| Abstract: | We analyse the prospects for greater monetary integration in Africa, in the wake of EMU. We argue that the structural characteristics of African economies are quite different to the EMU members but that much can be gained from monetary cooperation, as an external agency of restraint and in promoting stability in the financial sector. EMU has only a marginal impact on the net benefits of monetary cooperation but the euro would be a natural anchor for any African monetary unions. Indeed, the most likely route to new monetary cooperation in Africa is via a common peg to the euro. |
| Keywords: | International Development |
| URL: | http://d.repec.org/n?u=RePEc:ags:widerw:295503&r=all |
| By: | Laurence M. Ball; Sandeep Mazumder |
| Abstract: | This paper asks whether a textbook Phillips curve can explain the behavior of core inflation in the euro area. A critical feature of the analysis is that we measure core inflation with the weighted median of industry inflation rates, which is less volatile than the common measure of inflation excluding food and energy prices. We find that fluctuations in core inflation since the creation of the euro are well explained by three factors: expected inflation (as measured by surveys of forecasters); the output gap (as measured by the OECD); and the pass-through of movements in headline inflation. Our specification resolves the puzzle of a “missing disinflation” after the Great Recession, and it diminishes the puzzle of a “missing inflation” during the recent economic recovery. |
| JEL: | E31 E32 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26450&r=all |
| By: | Antonio David; Carlos Eduardo Gonçalves |
| Abstract: | This paper investigates what factors affect the duration of sudden stops in capital flows using quarterly data for a large panel of countries. We find that countries with floating exchange rate regimes tend to experience shorter sudden stop episodes and that fixed exchange rate regimes are associated with longer periods of low output growth following sudden stops. These effects are quantitatively large: having a flexible exchange rate regime increases the probability of exiting the sudden stop state by between 50 to 80 percent. Flexible exchange rate regimes significantly shorten the duration of output decelerations following sudden stops by over 30 percent. Positive variations in terms of trade also abbreviate the duration of sudden stops. In terms of policies, identification is trickier, but the evidence suggests that monetary policy tightening shortens the duration of sudden stops. Changes in capital account restrictions do not seem to matter. |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/230&r=all |
| By: | Zhengyang Chen |
| 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 Reserveâs 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. |
| JEL: | E3 E4 E5 |
| Date: | 2019–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2019:pch1858&r=all |
| By: | Silvia Albrizio (Banco de España); Sangyup Choi (Yonsei University); Davide Furceri (IMF); Chansik Yoon (Princeton University) |
| Abstract: | How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel. |
| Keywords: | monetary policy spillovers, international bank lending channel, cross-border banking flows, global financial cycles, local projections |
| JEL: | E52 F21 F32 F42 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1938&r=all |
| By: | Israel, Karl-Friedrich; Latsos, Sophia |
| Abstract: | This paper analyzes the impact of conventional and unconventional monetary policy on income inequality in Japan, using hitherto unexplored data from the Japan Household Panel Survey. Empirical evidence shows that expansionary monetary policy in Japan has contributed to diminishing the gender pay gap, but also to increasing the education pay gap. These effects may have materialized via the aggregate demand channel and the labor productivity channel. In contrast, expansionary monetary policy has had no significant impact on the development of the age pay gap. |
| Keywords: | income inequality,Japan,monetary policy,low interest rate policy,unconventional monetary policy,monetary easing |
| JEL: | D31 D63 E52 E58 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:leiwps:163&r=all |
| By: | Andrew Phiri (Department of Economics, Nelson Mandela University) |
| Abstract: | There is a new wave of monetary thought popularized in industrialized economies going under the banner of Neo-Fisherism. Proponents of this school of thought assume that there exists reverse causality in the conventional Fisher effect in which interest rates cause movements in expected inflation instead of interest rates being driven by inflation expectations. We examine whether the Neo-Fisherian hypothesis holds for the South African economy as an inflation-targeting emerging economy characterized by moderate inflation and policy rates. Using frequency domain causality tests on quarterly repo rate and inflation expectations data collected between 2002:q3 and 2019:q2, we find evidence of uni-directional causality from repo rates to inflation expectations over the short- and long-run. Policy implications of these findings are discussed. |
| Keywords: | Neo-fisher effect; interest rates; inflation expectations; South Africa; emerging economies; spectral causality tests. |
| JEL: | C32 C52 E31 E42 E58 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:mnd:wpaper:1911&r=all |
| By: | Claire Giordano (Banca d’Italia) |
| Abstract: | This paper explores the robustness of Behavioural Equilibrium Exchange Rate (BEER) models – employed to estimate real effective exchange rate (REER) deviations from “equilibrium” values consistent with macroeconomic fundamentals – to the frequency (annual vs. quarterly) of the underlying data. Indeed, data frequency influences both the length of the sample period (which is typically shorter in a quarterly model) and the set of relevant fundamentals to be included in the specification, and can affect the plausibility of some of the BEER modelling assumptions, which are especially restrictive at the quarterly frequency. The paper compares REER misalignment estimates stemming from a carefully specified annual model, estimated since 1980 for 55 countries, and a comparable quarterly model, estimated since 1999, which is a variant of that currently in use at the Bank of Italy (Giordano, 2018). In the overlapping period the annualised quarterly-model misalignments are quite similar to those based on the annual model. Moreover, the in-sample power of quarterly REER misalignments in explaining subsequent, actual REER developments is found to be higher than that of the annual estimates, signalling their greater usefulness in assessing a country’s external economic outlook. This paper therefore confirms the robustness of the quarterly BEER model currently employed at the Bank of Italy; moreover, it suggests that the “optimal” frequency of a BEER model depends on the use (research vs. monitoring and policy-making) one makes of the resulting measures. |
| Keywords: | real effective exchange rate, equilibrium exchange rate, BEER model, data frequency |
| JEL: | C54 F00 F31 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_522_19&r=all |
| By: | Mirela Miescu; Haroon Mumtaz |
| Abstract: | We show that the contemporaneous and longer horizon impulse responses estimated using small-scale Proxy structural vector autoregressions (SVARs) can be severely biased in the presence of information insufficiency. Instead, we recommend the use of a Proxy Factor Augmented VAR (FAVAR) model that remains robust in the presence of this problem. In an empirical exercise, we demonstrate that this issue has important consequences for the estimated impact of monetary policy shocks in the US. We find that the impulse responses of real activity and prices estimated using a Proxy FAVAR are substantially larger and more persistent than those suggested by a small-scale Proxy SVAR. |
| Keywords: | information sufficiency, dynamic factor models, instrumental variables, monetary policy, structural VAR |
| JEL: | C36 C38 E52 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:280730188&r=all |
| By: | Stephen S. Poloz |
| Abstract: | This paper looks at the implications for monetary policy of the widespread adoption of artificial intelligence and machine learning, which is sometimes called the “fourth industrial revolution.” The paper reviews experiences from the previous three industrial revolutions, developing a template of shared characteristics: * new technology displaces workers; * investor hype linked to the new technology leads to financial excesses; * new types of jobs are created; * productivity and potential output rise; * prices and inflation fall; and * real debt burdens increase, which can provoke crises when asset prices crash. The experience of the Federal Reserve during 1995–2006 is particularly instructive. The paper uses the Bank of Canada’s main structural model, ToTEM (Terms-of-Trade Economic Model), to replicate that experience and consider options for monetary policy. Under a Taylor rule, monetary policy may allow growth to run as long as inflation remains subdued, easing the burden of adjustment on those workers directly affected by the new technology, while macroprudential policies help check financial excesses. This argues for a family of Taylor rules enhanced by the addition of financial stability considerations. |
| Keywords: | Economic models; Financial stability; Monetary policy framework; Uncertainty and monetary policy |
| JEL: | C5 E3 O11 O33 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:19-11&r=all |
| By: | Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school) |
| Abstract: | The reference model of frictionless endowment economies includes a Fisher relation for the real interest rate and government intertemporal budget constraint. For this model, Ramsey optimal policy mix is a unique equilibrium with an interest rate peg and a "passive" fiscal rule with a negative-feedback value of its parameter stabilizing public debt. This is a third equilibrium with respect to the two usual equilibria with ad hoc policy rules. The first one has passive fiscal policy and an active monetary policy rule parameter destabilizing in.ation. The second one has an active fiscal policy rule parameter destabilizing public debt and a passive monetary policy which includes the case of an interest rate peg. : |
| Keywords: | Frictionless endowment economy,Fiscal theory of the Price Level,Ramsey optimal policy,Interest Rate Rule,Fiscal Rule Keywords: Frictionless endowment economy,Fiscal Rule |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-02278791&r=all |
| By: | Silvia Albrizio; Sangyup Choi; Davide Furceri; Chansik Yoon |
| Abstract: | How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel. |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/234&r=all |
| By: | Montes, Manuel F. |
| Abstract: | The emergence of a select group of developing countries as destinations for private portfolio investment in the 1990s (and the subsequent peso crisis in Mexico in 1994) has rekindled the old issues about the responsibilities and capacities public authorities have with regard to managing the absorption of these resources. This paper discusses the purposes public authorities might have in resisting these flows and presents a model of how authorities might intervene through their domestic financial system. It reviews the experiences of Chile, Malaysia, and Korea as countries whose policy responses have straddled the range of options. It suggests three key issues in the attempts of authorities to intervene in these private decisions. First, it is important for authorities to have clear objectives if they are going to attempt to resist market signals, such as exchange appreciation. Second, authorities should have a constant stance with regard to desirable flows and use flexible instruments. Third, authorities should exert efforts to improve their capacity to intervene through efforts such as building up reserves and creating domestic markets for sterilization instruments. |
| Keywords: | International Development |
| URL: | http://d.repec.org/n?u=RePEc:ags:widerw:295445&r=all |
| By: | Dilts Stedman, Karlye (Federal Reserve Bank of Kansas City) |
| Abstract: | This paper examines international spillovers from unconventional monetary policy between the United States, the euro area, the United Kingdom and Japan, and assesses the influence of asynchronous policy normalization on the slope of the yield curve. Using high frequency futures data to identify monetary policy surprises and controlling for contemporaneous news, I find that spillovers increase during periods of unconventional monetary policy and strengthen during asynchronous policy normalization. Local projections suggest persistent spillovers from the Federal Reserve, whereas other spillovers fade quickly. Through the lens of a shadow rate term structure model, I find that such spillovers elicit revisions, domestically and internationally, to both the expected path of short-term interest rates and required risk compensation, with the latter gaining importance at the effective lower bound of interest rates. |
| Keywords: | Monetary Policy; Spillovers |
| JEL: | E5 F42 G15 |
| Date: | 2019–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp19-09&r=all |
| By: | Pfarrhofer, Michael (University of Salzburg); Niko , Hauzenberger (University of Salzburg) |
| Abstract: | Understanding disaggregate channels in the transmission of monetary policy to the real and nancial sectors is of crucial importance for effectively implementing policy measures. We extend the empirical econometric literature on the role of production networks in the propagation of shocks along two dimensions. First, we set forth a Bayesian spatial panel state-space model that assumes time variation in the spatial dependence parameter, and apply the framework to a study of measuring network effects of US monetary policy on the industry level. Second, we account for cross-sectional heterogeneity and cluster impacts of monetary policy shocks to production industries via a sparse nite Gaussian mixture model. The results suggest substantial heterogeneities in the responses of industries to surprise monetary policy shocks. Moreover, we nd that the role of network effects varies strongly over time. In particular, US recessions tend to coincide with periods where between 40 to 60 percent of the overall e ects can be attributed to network e ects; expansionary economic episodes show muted network e ects with magnitudes of roughly 20 to 30 percent. |
| Keywords: | production networks; monetary policy shocks; high-frequency identi cation; spatio-temporal modeling |
| JEL: | C23 C32 O47 R11 |
| Date: | 2019–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:sbgwpe:2019_006&r=all |
| By: | Szilard Benk; Max Gillman |
| Abstract: | Real oil prices surged from 2009 through 2014, comparable to the 1970’s oil shock period. Standard explanations based on monopoly markup fall short since inflation remained low after 2009. This paper contributes strong evidence of Granger (1969) predictability of nominal factors to oil prices, using one adjustment to monetary aggregates. This adjustment is the subtraction from the monetary aggregates of the 2008-2009 Federal Reserve borrowing of reserves from other Central Banks (Swaps), made after US reserves turned negative. This adjustment is key in that Granger predictability from standard monetary aggregates is found only with the Swaps subtracted. |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/237&r=all |
| By: | Federico Bassi (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Most empirical studies provide evidence that the rate of capacity utilization is stable around a constant Non-accelerating inflation rate of capacity utilization (NAIRCU). Nevertheless , available statistical series of the rate of capacity utilization, which is unobservable, are constructed by assuming that it is stable over time. Hence, the stability of the NAIRCU is an artificial artefact. In this paper, we develop a method to estimate the rate of capacity utilization without imposing stability constraints. Partially inspired to the Production function methodology (PFM), we estimate the parameters of a production function by imposing aggregate correlations between the rate of capacity utilization and a set of macroeconomic variables, namely investment , labor productivity and unemployment. Our results show that the NAIRCU is not a constant rate but a non-stationary time-varying trend, and that chronicle under-utilization of capacity with stable inflation is a plausible equilibrium. Hence, persistent deviations of GDP might reflect persistent shocks to capacity utilization rather than exogenous shocks to total factor productivity. As a corollary, expansionary demand policies do not necessarily create permanent inflationary pressures if the NAIRCU is below full-capacity output, namely in post-crisis periods. Abstract Most empirical studies provide evidence that the rate of capacity utilization is stable around a constant Non-accelerating inflation rate of capacity utilization (NAIRCU). Nevertheless, available statistical series of the rate of capacity utilization, which is unobservable, are constructed by assuming that it is stable over time. Hence, the stability of the NAIRCU is an artificial artefact. In this paper, we develop a method to estimate the rate of capacity utilization without imposing stability constraints. Partially inspired to the Production function methodology (PFM), we estimate the parameters of a production function by imposing aggregate correlations between the rate of capacity utilization and a set of macroeconomic variables, namely investment, labor productivity and unemployment. Our results show that the NAIRCU is not a constant rate but a non-stationary time-varying trend, and that chronicle under-utilization of capacity with stable inflation is a plausible equilibrium. Hence, persistent deviations of GDP might reflect persistent shocks to capacity utilization rather than exogenous shocks to total factor productivity. As a corollary, expansionary demand policies do not necessarily create permanent inflationary pressures if the NAIRCU is below full-capacity output, namely in post-crisis periods. |
| Keywords: | Capacity utilization,NAIRCU,Potential GDP,Hysteresis,Secular stagnation |
| Date: | 2019–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cepnwp:hal-02360456&r=all |
| By: | Garth Baughman; Francesca Carapella |
| Abstract: | This note presents a simplifed version of the model of voluntary reserve targets (VRT) developed in Baughman and Carapella (forthcoming), with a Walrasian interbank market. First, the model makes transparent the role of target setting in controlling the market rate. Second, the simplicity of the model allows for an analysis of the interaction between VRT and tolerance bands, which are a common tool for controlling rate variability. We find that the persistent overshooting of interbank rates observed during the Bank of England's experiment with VRT may derive from the interaction between target setting and tolerance bands, a new explanation relative to the literature. We also suggest a simple remedy. |
| Keywords: | Monetary policy implementation ; Tolerance bands ; Voluntary reserve targets |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-60&r=all |
| By: | Miguel Ampudia; Skander J. Van den Heuvel |
| Abstract: | Does banks' exposure to interest rate risk change when interest rates are very low or even negative? Using a high-frequency event study methodology and intraday data, we find that the effect of surprise interest rate cuts announced by the ECB on European bank equity values – an effect that is normally positive – has become negative since interest rates in the euro area reached zero and below. Since then, a further unexpected cut of 25 basis points in the short-term policy rate lowered banks' stock prices by about 2% on average, compared to a 1% increase in normal times. In the cross section, this 'reversal' was far more pronounced for banks with a more traditional, deposit-intensive funding mix. We argue that the reversal as well as its cross-sectional pattern can be explained by the zero lower bound on interest rates on retail deposits. |
| Keywords: | Bank profitability ; Interest rate risk ; Monetary policy ; Negative interest rates ; ECB |
| JEL: | G21 E52 E58 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-64&r=all |
| By: | Haaparanta, Pertti |
| Abstract: | It is argued that the theoretical literature on dual exchange markets has completely neglected the form of central bank intervention emphasized by the "classics". They advocated neutral intervention where the central bank sells in the capital market all foreign exchange it acquires from the current transactions. Current literature concentrates on the non-sterilized intervention. In a choice-theoretic framework it is shown that the form of intervention matters very much for the transmission of changes in foreign rate of interest and in terms of trade. On normative side it is shown that one can always design the dual exchange system in such a way that it is superior to the uniform fixed rate system. |
| Keywords: | International Development |
| URL: | http://d.repec.org/n?u=RePEc:ags:widerw:295591&r=all |
| By: | Yossi Yakhin (Bank of Israel) |
| Abstract: | Breaking the uncovered interest rate parity (UIP) condition is essential to accounting for the empirical behavior of exchange rates and is a prerequisite for theoretical analysis of sterilized foreign exchange interventions. Gabaix and Maggiori (2015) account for some of the long-standing empirical exchange rate puzzles by introducing financial intermediaries that are willing to absorb international saving imbalances for a premium, thereby deviating from the UIP. In another important contribution, Fanelli and Straub (2019) lay down the principles for foreign exchange interventions. In their model, regulatory exposure limits and participation cost in the international financial markets drive a wedge in the UIP. This paper demonstrates that, to a first-order approximation, a simple reduced-form portfolio adjustment cost friction, as in Schmitt-Grohé and Uribe (2003), generates identical deviations from the UIP as the micro-founded models mentioned above. Therefore, to the extent that one is only concerned with first-order dynamics and second moments, there is no gain from adopting the rich microstructure of either models - the simple ad-hoc adjustment cost is just as good. |
| Keywords: | UIP, Financial Frictions, Open Economy Macroeconomics |
| JEL: | E58 F31 F41 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2019.15&r=all |
| By: | Lahcen Bounader; Mohamed Doukali |
| Abstract: | We test the existence of the balance sheet channel of monetary policy in a middle-income country. Firm-level data scarcity and quality, in such a context, make the identification of this channel a steep challenge. To circumvent this challenge, we use panel instrumental variables estimation with measurement error to analyze the financial statements of 58 500 Moroccan firms over the period 2010-2016. Our analysis confirms the existence of this channel. It shows that monetary policy has a significant impact on small and medium enterprises’ access to banks’ financing, and that firm-specific variables are key determinants of firms’ financing decisions. |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/239&r=all |
| By: | Antoine Mandel (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, UP1 - Université Panthéon-Sorbonne, PSE - Paris School of Economics); Vipin Veetil (IIT Madras - Indian Institute of Technology Madras) |
| Abstract: | We develop a tractable model of out-of-equilibrium dynamics in a general equilibrium economy with cash-in-advance constraints. The dynamics emerge from local interactions between firms governed by the production network underlying the economy. We analytically characterise the influence of network structure on the propagation of monetary shocks. In the long run, the model converges to general equilibrium and the quantity theory of money holds. In the short run, monetary shocks propagate upstream via nominal demand changes and downstream via real supply changes. Lags in the evolution of supply and demand at the micro level can give rise to arbitrary dynamics of the distribution of prices. Our model explains the long standing Price Puzzle: a temporary rise in the price level in response to monetary contractions. The Price Puzzle emerges under two assumptions about downstream firms: they are disproportionally affected by monetary contractions and they account for a sufficiently small share of the wage bill. Empirical evidence supports the two assumptions for the US economy. Our model calibrated to the US economy using a data set of more than fifty thousand firms generates the empirically observed magnitude of the price level rise after monetary contractions. |
| Abstract: | Nous proposons un modèle de la dynamique hors-équilibre dans une économie en réseau où les agents sont soumis à des contraintes financières. Nous étudions la propagation des chocs de politique monétaire dans ce cadre. Nous démontrons notamment que le "price puzzle" émerge dans ce cadre du fait des délais dans la propagation des chocs. |
| Keywords: | Price Puzzle,Production Network,Money,Monetary Non-Neutrality,Out-Of-Equilibrium dynamics,Réseaux de production,dynamique hors-équilibre |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-02354576&r=all |