nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒12‒02
39 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Average Inflation Targeting and Interest-Rate Smoothing By Eo, Yunjong; Lie, Denny
  2. Monetary policy regimes and inflation persistence in the United Kingdom By Shayan Zakipour-Saber
  3. Quantitative Easing and the Term Premium as a Monetary Policy Instrument By Etienne Vaccaro-Grange
  4. Anchored or de-anchored? That is the question By Francesco Corsello; Stefano Neri; Alex Tagliabracci
  5. Disinflationary shocks and inflation target uncertainty By Stefano Neri; Tiziano Ropele
  6. Is Monetary Policy Always Effective? Incomplete Interest Rate Pass-through in a DSGE Model By Hilde C. Bjørnland; Andrew Binning; Junior Maih
  7. Negative monetary policy rates and systemic banks’ risk-taking: Evidence from the Euro area securities register By Johannes Bubeck; Angela Maddaloni; José-Luis Peydró
  8. Firms' Inflation Expectations under Rational Inattention and Sticky Information: An Analysis with a Small-Scale Macroeconomic Model By Tomiyuki Kitamura; Masaki Tanaka
  9. Monetary Aggregates and Macroeconomic Performance: the Portuguese Escudo, 1911-1999 By João Tovar Jalles
  10. Domestic and global determinants of inflation: evidence from expectile regression By Fabio Busetti; Michele Caivano; Davide Delle Monache
  11. Nonbanks, Banks, and Monetary Policy: U.S. Loan-Level Evidence since the 1990s By David Elliott; Ralf R. Meisenzahl; José-Luis Peydró; Bryce C. Turner
  12. Innovations in emerging markets: the case of mobile money By Pelletier, Adeline; Khavul, Susanna; Estrin, Saul
  13. Negative Monetary Policy Rates and Systemic Banks’ Risk-Taking: Evidence from the Euro Area Securities Register By Johannes Bubeck; Angela Maddaloni; José-Luis Peydró
  14. Informed Corporate Credit Market Before Monetary Policy Surprises: Explaining Pre-FOMC Stock Market Movements By Farshid Abdi; Botao Wu;
  15. Policy Maker's Credibility with Predetermined Instruments for Forward-Looking Targets By Jean-Bernard Chatelain; Kirsten Ralf
  16. Estimates of the Natural Rate of Interest and the Stance of Monetary Policies: A Critical Assessment By Enrico S. Levrero
  17. Central bank tone and the dispersion of views within monetary policy committes By Paul Hubert; Fabien Labondance
  18. Portugal adoption of the gold standard: political reasons for a monetary choice (1846-1854) By Rita Martins de Sousa
  19. Liquidity Risk and Funding Cost By Alexander Bechtel; Angelo Ranaldo; Jan Wrampelmeyer
  20. Optimal monetary and macroprudential policies for financial stability in a commodity-exporting economy By Ivan Khotulev; Konstantin Styrin
  21. Proxy structural vector autoregressions, informational sufficiency and the role of monetary policy By Mirela S. Miescu; Haroon Mumtaz
  22. Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission By Hintermaier, Thomas; Koeniger, Winfried
  23. How do we choose to pay using evolving retail payment technologies? Some additional results from Japan By Hiroshi FUJIKI
  24. Expectations switching in a DSGE model for the UK By Anette Borge; Gunnar Bårdsen; Junior Maih
  25. Why has Deflation Continued under Extraordinary Monetary Expansion? By KOBAYASHI Keiichiro
  26. The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy By Pasten, Ernesto; Schoenle, Raphael
  27. Heterogeneous Beliefs, Monetary Policy, and Stock Price Volatility By Katsuhiro Oshima
  28. The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets By Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
  29. Monetary Policy Transparency in Ghana: Recent Evidence By Akosah, Nana; Alagidede, Paul; Schaling, Eric
  30. Monetary Easing, Leveraged Payouts and Lack of Investment By Viral V. Acharya; Guillaume Plantin
  31. The European Central Bank, Italy and the next Eurozone crisis By Ryan, John
  32. Monetary Policy and Wealth Inequality over the Great Recession in the UK An Empirical Analysis By Haroon Mumtaz; Angeliki Theophilopoulou
  33. The Formation of Firms' Inflation Expectations: A Survey Data Analysis By Haruhiko Inatsugu; Tomiyuki Kitamura; Taichi Matsuda
  34. Greece and the Euro: A Mundellian Tragedy By George Alogoskoufis
  35. Bounded rationality in Keynesian beauty contests: A lesson for central bankers? By Mauersberger, Felix; Nagel, Rosemarie; Bühren, Christoph
  36. 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
  37. Of clerks & cleaners: the heterogeneous impact of monetary policy on the US labor market By Zens, Gregor; Böck, Maximilian; Zörner, Thomas O.
  38. Wages and prices in the euro area: exploring the nexus By Antonio M. Conti; Andrea Nobili
  39. Forecasting inflation in the euro area: countries matter! By Angela Capolongo; Claudia Pacella

  1. By: Eo, Yunjong; Lie, Denny
    Abstract: We study the welfare implication of average inflation targeting as a simple interest-rate rule, in which the monetary authority adjusts its short-term policy rate in response to the output gap as well as average inflation deviation from its target instead of reacting to the contemporaneous inflation rate as in a Taylor-type rule. We find that the welfare improvement achieved by switching to average inflation targeting from a standard Taylor rule is modest with a high degree of interest-rate smoothing, whereas it is significant without interest-rate smoothing. We show that average inflation targeting is welfare-improving in the same way as interest-rate smoothing by making the conduct of monetary policy history-dependent. Thus, the high degree of monetary policy inertia in the estimated interest-rate rules in many advanced economies implies that the welfare gain from adopting the average inflation targeting rule would be modest.
    Keywords: New Keynesian model; History-dependent policy; Welfare analysis; Ramsey policy; Interest-rate rule; Monetary policy inertia;
    Date: 2019–11
  2. By: Shayan Zakipour-Saber (Central Bank of Ireland)
    Abstract: This paper conducts a structural analysis of inflation persistence in the United Kingdom between 1965-2009. I allow for the possibility of shifts in the UK economy by estimating open-economy dynamic stochastic general equilibrium models in which parameters of a Taylor-type monetary policy rule, New Keynesian Phillips curve, and volatilities of structural economic shocks, follow Markov processes (Markov-switching DSGEs). The best-fitting model allows for changes in monetary policy and stochastic shock volatility. The first policy regime responds passively to movements in inflation, adjusting the nominal interest rate less than one-for-one and is estimated to be in place from the early 1970s until the late 1980s. The other regime responds actively to inflation and places less weight on exchange rate movements. This regime is present for the rest sample and almost coincides with the period after the Bank of England explicitly adopted an inflation target in 1992. I find a small but insignificant decrease in inflation persistence in the policy regime that responds more actively to inflation.
    Keywords: Markov-Switching, DSGE, Inflation persistence, Bayesian estimation
    JEL: C11 E31 E52
    Date: 2019–10–15
  3. By: Etienne Vaccaro-Grange (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The transmission of Quantitative Easing to aggregate macroeconomic variables through the yield curve is disentangled in two yield channels: the term premium channel, captured by a term premium series, and the signaling channel, that corresponds to the interest rate expectations counterpart. Both yield components are extracted from a term structure model and plugged into a Structural VAR with Euro Area macroeconomic variables in which shocks are identified using sign restrictions. With this set-up, I show how the central bank can use the term premium as a single monetary policy instrument to foster output and prices. However, I also show that there has been a cost channel in the transmission of QE to inflation between 2015 and 2017. This cost channel provides a new explanation as to why inflation has been so muted during this period, despite the easing monetary environment. Finally, a policy rule for the term premium is estimated.
    Keywords: quantitative easing,shadow-rate term structure model,BVAR,sign restrictions
    Date: 2019–11
  4. By: Francesco Corsello (Bank of Italy); Stefano Neri (Bank of Italy); Alex Tagliabracci (Bank of Italy)
    Abstract: This paper shows that long-term inflation expectations have de-anchored from the ECB Governing Council’s inflation aim. Long-term expectations from the ECB’s Survey of Professional Forecasters have not returned to the levels that prevailed before the 2013-14 disinflation, and their distribution remains tilted to the downside. Long-term expectations have become sensitive to short-term ones and to negative surprises to inflation. Forecasters who have participated to most of the survey rounds are the most responsive to short-term developments in inflation.
    Keywords: inflation expectations, anchoring, monetary policy
    JEL: E31 E52 E58
    Date: 2019–10
  5. By: Stefano Neri (Bank of Italy); Tiziano Ropele (Bank of Italy)
    Abstract: In New Keynesian models favourable cost-push shocks lower inflation and increase output. Yet, when the central bank�s inflation target is not perfectly observed these shocks turn contractionary as agents erroneously perceive a temporary reduction in the target. This effect is amplified when monetary policy is constrained by the effective lower bound on the policy rate.
    Keywords: inflation target, imperfect information, monetary policy
    JEL: E31 E52 E58
    Date: 2019–07
  6. By: Hilde C. Bjørnland; Andrew Binning; Junior Maih
    Abstract: We estimate a regime-switching DSGE model with a banking sector to explain incomplete and asymmetric interest rate pass-through, especially in the presence of a binding zero lower bound (ZLB) constraint. The model is estimated using Bayesian techniques on US data between 1985 and 2016. The framework allows us to explain the time-varying interest rate spreads and pass-through observed in the data. We ?nd that pass-through tends to be delayed in the short run, and incomplete in the long run. All this impacts the dynamics of the other macroeconomic variables in the model. In particular, we ?nd monetary policy to be less e?ective under incomplete pass-through. Furthermore, the behavior of pass-through in the loan rate is di?erent from that of the deposit rate shocks. This creates asymmetric dynamics at the zero lower bound, and incomplete pass-through exacerbates that asymmetry.
    Keywords: banking sector, incomplete or symmetric interest rate pass-through, DSGE
    Date: 2019–11
  7. By: Johannes Bubeck; Angela Maddaloni; José-Luis Peydró
    Abstract: We exploit the ECB’s negative interest rate policy (NIRP) and administrative data from Italy, severely hit by the Eurozone crisis, to study the transmission of NIRP to the economy through the banking system. NIRP has expansionary effects on credit supply—and hence the real economy— through a portfolio rebalancing channel. By contrast, there is no evidence of a retail deposits channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downward, NIRP differs from rate cuts just above the ZLB.
    Keywords: Negative rates, non-standard monetary policy, reach-for-yield, securities, banks
    JEL: E43 E52 E58 G01 G21
    Date: 2019–03
  8. By: Tomiyuki Kitamura (Bank of Japan); Masaki Tanaka (Bank of Japan)
    Abstract: In this paper, we construct a small-scale macroeconomic model that incorporates three hypotheses on the formation of inflation expectations: the full-information rational expectations (FIRE), rational inattention, and sticky information hypotheses. Using data for Japan, including survey data on firms' inflation expectations, we estimate the model to examine the empirical validity of each hypothesis, and analyze how rational inattention and sticky information affect the dynamics of firms' inflation expectations. Our main findings are twofold. First, each one of the three hypotheses has a role to play in explaining the mechanism of the formation of firms' inflation expectations in Japan. In this sense, the manner in which firms form their inflation expectations in Japan is complex. Second, although firms' inflation expectations have been pushed up by the Bank of Japan's introduction of its "price stability target" and the expansion in the output gap amid the Bank's Quantitative and Qualitative Monetary Easing (QQE), the presence of rational inattention and information stickiness has slowed the pace of the rise in firms' inflation expectations.
    Keywords: Survey inflation expectations; Rational inattention; Sticky information
    JEL: D84 E31 E52
    Date: 2019–11–22
  9. By: João Tovar Jalles
    Abstract: This paper takes a long time span approach to provide a full characterization of several monetary aggregates over Portuguese’s historical economic business cycles. By focusing on the 1911-1999 period (the life span of the currency Escudo), the paper also revisits the issue of the role of money on real macroeconomic outcomes. We get inspiration from the monetarists versus Keynesians debate about direction of causality in the output-money relation and the quest for validity of money (non-)neutrality. By means of descriptive statistics we first uncover that money changes were associated with changes in real economic activity. Most monetary aggregates are more volatile than GDP, display high serial autocorrelation, are generally countercyclical and lead the economic cycle (except checking accounts). Then, through formal time series techniques, our results show that our monetary series were characterized by unit roots and were cointegrated with real GDP (after accounting for endogenously estimated breaks). Evidence suggested that money supply Granger-caused real GDP supporting the money non-neutrality hypothesis in the case of Portugal.
    Keywords: monetary aggregates, unit roots, structural breaks, cointegration, causality
    JEL: E3 E44 E52
    Date: 2019–11
  10. By: Fabio Busetti (Bank of Italy); Michele Caivano (Bank of Italy); Davide Delle Monache (Bank of Italy)
    Abstract: The paper investigates the role of domestic and global determinants of euro area core inflation. We analyse the entire conditional distribution of inflation by estimating a Phillips curve type relationship using an expectile regression approach, extended to capture time-varying effects. The main findings are as follows. First, both the domestic and foreign output gap are significant drivers of euro area core inflation, once external demand pressures are properly orthogonalized in a modified measure of domestic gap. However, the inflationary impact of the domestic component is relatively stronger. Second, the domestic output gap has a bigger influence in the right tail of the conditional distribution of inflation. Third, adding international price pressures in the regression weakens the link between inflation and the foreign output gap. Fourth, in a time- varying perspective, there is an increase in the response of inflation to the domestic gap in the last decade but only at the lower quantiles. Overall, the evidence on the so-called “globalization hypothesis” is mixed: while the pass-through to inflation of foreign prices and the exchange rate increased over time at all quantiles, the impact of global slack remained broadly stable, particularly in the central part of the distribution.
    Keywords: asymmetric least squares, globalization, inflation quantiles, Phillips curve, time varying parameters
    JEL: C53 E17
    Date: 2019–06
  11. By: David Elliott; Ralf R. Meisenzahl; José-Luis Peydró; Bryce C. Turner
    Abstract: We show that credit supply effects and associated real effects of monetary policy depend on the size of nonbank presence in the respective lending market. Nonbank presence also alters how monetary policy affects the distribution of risk. For identification, we use exhaustive loan-level data since the 1990s and Gertler-Karadi (2015) monetary policy shocks. First, different from the literature showing that low monetary policy rates increase credit supply and risk-taking by banks, we find that higher monetary policy rates shifts credit supply for corporates, mortgages, and consumers shifts from regulated banks to less regulated, more fragile nonbanks. Moreover, this shift is more pronounced for ex-ante riskier borrowers. Second, nonbanks reduce the effectiveness of the bank lending channel of monetary policy at the loan-level. However, this reduction varies substantially across lending markets. Total credit and real effects are largely neutralized in consumer loans and the associated consumption, but not in corporate loans and investment.
    Keywords: negative rates, non-standard monetary policy, reach-for-yield, securities, banks
    JEL: E51 E52 G21 G23 G28
    Date: 2019–11
  12. By: Pelletier, Adeline; Khavul, Susanna; Estrin, Saul
    Abstract: Mobile money is a financial innovation that provides transfers, payments, and other financial services at a low or zero cost to individuals in developing countries where banking and capital markets are deficient and financial inclusion is low. We use transaction costs and institutional theories to explain the growth and impact of mobile money. Having developed a new archival dataset that tracks mobile money deployment across 90 emerging economies during 16 years between 2000 and 2015, we address the question of relative economic impact of the banking and telecoms sectors in the provision of mobile money. We show that telecom groups and not banks are more likely to launch mobile money in countries where legal rights are weaker and credit information less prevalent. However, it is when mobile money is offered via a banking channel that the spillover effects on the economy are greater. Findings have significant implications for policy and strategy.
    JEL: G21 M13 O33
    Date: 2019–09–09
  13. By: Johannes Bubeck; Angela Maddaloni; José-Luis Peydró
    Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans.
    Keywords: negative rates, non-standard monetary policy, reach-for-yield, securities, banks
    JEL: E43 E52 E58 G01 G21
    Date: 2019–11
  14. By: Farshid Abdi; Botao Wu;
    Abstract: We show that U.S. corporate bond market movements during the days preceding FOMC announcements can predict monetary policy surprises, as well as the pre-FOMC stock market movements. Starting several days before an expansionary (contractionary) surprise in FOMC decisions, corporate bond prices surge (decline) and yield spreads decline (surge). The pattern is statistically and economically significant. Moreover, corporate bond customers buy (sell) more often from dealers before expansionary (contractionary) surprises, suggesting that in aggregate they have more accurate information about the outcome of FOMC announcements. A portfolio that mimics customer trades is profitable with a Sharpe ratio of 0.64 and is profitable before both contractionary and expansionary surprises. Furthermore, consistent with the informativeness of corporate bond transactions, we show that lagged corporate bond customer-dealer trade imbalances can predict pre-FOMC stock market movements and explain pre-FOMC drift. Corporate bond yield changes "Granger-cause" stock pre-FOMC movements, and a 1% surge in the constructed TRACE bond yield during a 2 p.m.-to-2 p.m. period ending one day before an FOMC announcement, predicts a 5.8% decline in the S&P 500 index for the 2 p.m.-to-2 p.m. period ending on the FOMC meeting day. This bond-to-stock granger causality does not exist for non-pre-FOMC periods and is stronger for the companies with higher probability of default.
    Keywords: Pre-FOMC Announcement Drift, Corporate Bond, Credit Risk, Enhanced TRACE, TAQ
    JEL: G10 G12 E44 E52
    Date: 2018–08
  15. 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, INSEEC - INSEEC Business School - Institut des hautes études économiques et commerciales Business School (INSEEC))
    Abstract: The aim of the present paper is to provide criteria for a central bank of how to choose among di¤erent monetary-policy rules when caring about a number of policy targets such as the output gap and expected in ‡ation. Special attention is given to the question if policy instruments are predetermined or only forward looking. Using the new-Keynesian Phillips curve with a cost-push-shock policy-transmission mechanism, the forward-looking case implies an extreme lack of robustness and of credibility of stabilization policy. The backward-looking case is such that the simple-rule parameters can be the solution of Ramsey optimal policy under limited commitment. As a consequence, we suggest to model explicitly the rational behavior of the policy maker with Ramsey optimal policy, rather than to use simple rules with an ambiguous assumption leading to policy advice that is neither robust nor credible.
    Keywords: Determinacy,Proportional Feedback Rules,Dynamic Stochastic General Equilibrium,Ramsey Optimal Policy under Quasi-Commitment Keywords: Determinacy,Ramsey Optimal Policy under Quasi-Commitment
    Date: 2019–11
  16. By: Enrico S. Levrero (Roma Tre University)
    Abstract: Starting with the literature on the estimates of the natural rate of interest, this paper critically analyzes the modern practice of identifying the benchmark rate of monetary policy with an equilibrium or neutral interest rate reflecting `fundamental forces` unaffected by monetary factors. After briefly mentioning the determinants of the natural rate of interest in the New- Keynesian models, the paper discusses the different notions of it that we find in these models and the problems encountered when the natural rate is estimated. It states that these problems are not only related to the difficulties in distinguishing the kind and persistency of economic shocks, but pertain to theory, namely to model specification and the alleged independence of the average or normal interest rate from monetary policy. Following Keynes`s suggestion regarding the monetary nature of interest rates, some final remarks will thus be advanced on their effects on prices and income distribution as well as on the objectives and stance of monetary policies.
    Keywords: Natural rates of interest, Structural and semi-structural models, Monetary policies,Taylor-rule, Interest rates and income distribution
    JEL: E43 E52 E58 E13 E12 E11
    Date: 2019–01
  17. By: Paul Hubert (Sciences Po - OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: Does policymakers’ choice of words matter? We explore empirically whether central bank tone conveyed in FOMC statements contains useful information for financial market participants. We quantify central bank tone using computational linguistics and identify exogenous shocks to central bank tone orthogonal to the state of the economy. Using an ARCH model and a high-frequency approach, we find that positive central bank tone increases interest rates at the 1-year maturity. We therefore investigate which potential pieces of information could be revealed by central bank tone. Our tests suggest that it relates to the dispersion of views among FOMC members. This information may be useful to financial markets to understand current and future policy decisions. Finally, we show that central bank tone helps predicting future policy decisions.
    Date: 2019–11
  18. By: Rita Martins de Sousa
    Abstract: This article analyses the transition from bimetallism to the gold standard in Portugal. The research has emphasised that the high percentage of gold coins in circulation and the network externalities were the main reasons for the de jure adoption of the gold standard in 1854. However, it has not provided a justification for either the appreciation of gold in the Portuguese market in 1847 which was contrary to the international trend or the reasons behind the decision to continue to circulate British gold sovereigns in 1851 when all other foreign coins were withdrawn. We argue that the political pressure applied by groups with ownership of British gold coins explains the transition from bimetallism to the gold standard.
    Keywords: PMonetary history, Gold standard, Portugal, nineteenth century JEL classification: N13; N20; E42
    Date: 2019
  19. By: Alexander Bechtel; Angelo Ranaldo; Jan Wrampelmeyer
    Abstract: We propose and test a new channel that links funding liquidity risk and interest rates in short-term funding markets. Borrowers with high liquidity risk are willing to pay a markup to lock in their funding, independent of risk premiums demanded by lenders. We test the channel using unique trade-by-trade data and reveal systematic an persistent differences in borrowers' funding liquidity risk that lead to systematic and persistent heterogeneity in funding costs. Our results have important implications for financial stability, the transmission of monetary policy, and banks' asset and liability management
    Keywords: Funding liquidity risk, short-term interest rates, risk premiums, funding costs, interbank market
    JEL: G12 G18 G21 E43 E52 D40
    Date: 2019–05
  20. By: Ivan Khotulev (Bank of Russia, Russian Federation); Konstantin Styrin (Bank of Russia, Russian Federation)
    Abstract: We develop a model to analyze the optimal combination of macroprudential and monetary policies in a small open commodity-exporting economy. Unlike a closed economy, where monetary and macroprudential policies tend to be substitutes, in a small open economy the optimal policy mix depends on the specifics of shocks and economic structure. Monetary and macroprudential policies tend to be complements when the degree of pass-through of credit spreads into marginal costs and prices is sufficiently high, or when a credit boom is caused by a commodity boom, a fraction of consumers lacks access to financial markets, and the government follows a fiscal policy rule. The two policies are substitutes when the complementarity between domestic and imported production inputs is sufficiently high.
    Keywords: Monetary policy, macroprudential policy, financial stability, commodity exporter, small open economy.
    JEL: E52 E58 G01 G28
    Date: 2019–11
  21. By: Mirela S. Miescu (Lancaster University); Haroon Mumtaz (Queen Mary University of London)
    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: 2019–09–16
  22. By: Hintermaier, Thomas (University of Bonn); Koeniger, Winfried (University of St. Gallen)
    Abstract: This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a financial asset and housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across countries, and within countries by household characteristics such as age, housing tenure, and asset positions. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission in the euro area.
    Keywords: european household portfolios, consumption, monetary policy transmission, international comparative finance, housing
    JEL: D14 D31 E21 E43 G11
    Date: 2019–11
  23. By: Hiroshi FUJIKI
    Abstract: Using Japanese individual household datasets, we obtain the following results that are consistent with findings in most advanced economies. For our first set of findings, persons using electronic money (contactless prepaid cards available in Japan after 2001) for day-to-day transaction values of less than 5,000 yen have lower cash holdings than cash users. Second, the average cash holdings of credit card users for both day-to-day and regular payments are less than that of cash users for day-to-day payments not using credit cards for regular payments. Our second set of findings contributes to the related literature in at least two respects. First, we combine the choice of payment methods for both day-to-day and regular payments. Second, we pay due attention to institutional details about the use of credit cards in Japan and propose unique identifying assumptions excluding those persons using credit cards for day-to-day transactions but not regular payments, and those using cash for day-to-day transactions but credit cards for regular payments.
    Date: 2019–05
  24. By: Anette Borge (Department of Economics, Norwegian University of Science and Technology); Gunnar Bårdsen (Department of Economics, Norwegian University of Science and Technology); Junior Maih (Norges Bank and Norwegian Business School BI)
    Abstract: Rational expectations (RE) has been dominant both in the economic literature and in the macromodels routinely used in Central banks. The RE assumption has recently come under attack as one of the drawbacks of the Dynamic Stochastic General Equilibrium (DSGE modeling) paradigm. This study attempts to investigate whether other ways of modeling expectations would necessarily find a better support in the data. We investigate the relevance of the RE assumption by introducing regime switching into the expectations formation of an otherwise standard DSGE model by Justiniano and Preston (2010). In our model, expectations switch between RE and Adaptive expectations (AE). The model is estimated on UK data using Bayesian techniques. By introducing a switching mechanism, the model explains the data better than both the pure RE and the pure AE models. Expectation formation switches to AE during changes in monetary policy and the financial crisis. The dynamics of the economic system is different under the two expectation regimes. Hence, should the UK economy switch to an AE regime after Brexit, the dynamics of the economic system could be substantially more uncertain than under RE, given the model.
    Date: 2019–10–15
  25. By: KOBAYASHI Keiichiro
    Abstract: We propose a theoretical argument for a new rational expectations equilibrium hypothesis in the intergenerational economy, where each generation is intergenerationally altruistic and rational. The intergenerationally-rational expectations equilibrium implies that deflation can continue under an extreme increase in money supply.
    Date: 2019–10
  26. By: Pasten, Ernesto (Central Bank of Chile); Schoenle, Raphael (Federal Reserve Bank of Cleveland)
    Abstract: Realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages in the transmission of monetary policy shocks. Quantitatively, heterogeneity in price stickiness is the central driver for real effects. Input-output linkages and consumption shares alter the identity of the most important sectors to the transmission. Reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.
    Keywords: input-output linkages; multi-sector Calvo model; monetary policy;
    JEL: E31 E32 O40
    Date: 2019–11–15
  27. By: Katsuhiro Oshima (Graduate School of Economics, Kyoto University)
    Abstract: This paper investigates how the stance of monetary policy affects stock price volatilities in an economy where two types of households with subjective and objective beliefs about expected capital gains from stock prices exist. I assume that investors construct subjective beliefs about expected capital gains by Bayesian learning from observed growth rates of stock prices. In a model with only homogenous subjective beliefs, the effect of the interest rate on stock prices tends to be unrealistically strong. In contrast, assuming heterogeneity by including investors with both subjective and objective beliefs improves the fit of theoretical moments to the data and especially helps to explain stock price volatility under interest rate shocks with conventional sizes. This quantitative improvement in stock price reactions to interest rate shocks allows me to conduct realistic analysis about how the stance of monetary policy affects stock price volatilities. Strong inertia of monetary policy rule does not necessarily reduce asset price volatilities. This depends on what kind of shock the economy is experiencing. When the monetary policy is persistent, stock price volatilities magnify under an unexpected monetary policy shock
    Keywords: stock price, asset pricing, heterogeneity, subjective belief, monetary policy, sticky prices, New Keynesian
    JEL: D83 D84 E44 E52 G12 G14
    Date: 2019–11
  28. By: Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks’ capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
    Keywords: U.S. bank lending ; Stress tests ; Emerging markets ; Monetary policy spillovers
    JEL: E44 F31 G15 G21 G23
    Date: 2019–11–22
  29. By: Akosah, Nana; Alagidede, Paul; Schaling, Eric
    Abstract: Monetary policy involves a dual role as central banks must not only be a heedful observer of outcomes but must also be able to shape the outcomes. In view of this, greater policy transparency has been endorsed to boost credibility, effectiveness and flexibility of monetary policy. With more than a decade of practicing of fully-fledged IT regime, it is of paramount interest to ascertain the pace of policy transparency in Ghana. Consequently, this paper determines the extent of policy transparency in Bank of Ghana, utilizing both methodologies of Dincer and Eichengreen (2008) and Al-Mashat and others (2018). The application of the two transparency measures reveals that policy transparency environment of Bank of Ghana (BOG) has indeed improved since 2009. Our score suggests that monetary policy in Ghana is 41% -57% transparent as at end 2018. The relatively moderate score for BOG emanated largely from low level of transparency about its policy framework (FPAS model) and the procedural policy processes. To further boost transparency, BOG is required to increase transparency in the documentation and publication of the Bank’s core quarterly projection model, as well as evaluating and publishing how each decision on policy instrument or target are attained. Publication of other core variables (aside inflation) in the baseline forecasts and regular external evaluation of the policy framework along with public disclosure of the findings are necessary to boost policy transparency.
    Keywords: Transparency Inflation targeting Accountability Monetary Policy Ghana
    JEL: E0 E3 E31 E52 E58
    Date: 2019–09
  30. By: Viral V. Acharya; Guillaume Plantin
    Abstract: This paper studies a model in which a low monetary policy rate lowers the cost of capital for entrepreneurs, potentially spurring productive investment. Low interest rates, however, also induce entrepreneurs to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit entrepreneurs, they come at the social cost of reducing their incentives thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, due to the presence of a shadow-banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first-best. The optimal monetary policy may even consist of “leaning against the wind,” i.e., not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency.
    JEL: E52 E58 G01 G21 G23 G28
    Date: 2019–11
  31. By: Ryan, John
    Abstract: The European Central Bank (ECB) is the least accountable central bank among advanced nations. Its degree of independence has only one precedence: the German Reichsbank, a central bank with one of history’s most disastrous records. The lessons of German history do not seem to be interpreted correctly by the ECB.
    Keywords: Bundesbank; European Central Bank; Eurozone
    JEL: J1 L81 E6
    Date: 2018–11–17
  32. By: Haroon Mumtaz (Queen Mary, University of London); Angeliki Theophilopoulou (Brunel University London)
    Abstract: We use detailed micro information at household level from the Wealth and Assets Survey to construct measures of wealth inequality from 2005 to 2016 at the monthly frequency. We investigate the dynamic relationship between monetary policy and the evolution of wealth inequality measures. Our findings suggest that expansionary monetary policy shocks lead to an increase in wealth inequality and contributed significantly to its fluctuations. This effect is heterogeneous across the wealth distribution with the monetary shock affecting the median household relative to the 20th percentile by a larger amount than the right tail. Our results suggest that the shock is transmitted through changes in net property and financial wealth that constitute the bulk of total wealth of households near the median of the wealth distribution.
    Keywords: Inequality, Wealth, FAVAR, Monetary Policy Shocks
    JEL: D31 E21 E44 E52
    Date: 2019–10–31
  33. By: Haruhiko Inatsugu (Bank of Japan); Tomiyuki Kitamura (Bank of Japan); Taichi Matsuda (Bank of Japan)
    Abstract: In this paper, using both semi-aggregate and firm-level survey data of the inflation expectations of Japanese firms, we examine the empirical validity of three hypotheses on the formation of inflation expectations: the full-information rational expectations (FIRE), noisy information, and sticky information hypotheses. Our main findings are as follows. First, the results of our panel VAR analysis using semi-aggregate data show that, while firms' inflation expectations have a forward-looking aspect consistent with FIRE, they are not fully consistent with FIRE in that they tend to incorporate the changes in the actual inflation rate only gradually. Second, the forecast errors of semi-aggregate inflation expectations correlate with the past revisions of expectations, implying that FIRE does not hold for all firms. Third, the results of firm-level dynamic panel regressions show that firms' inflation expectations depend to a great extent on their past expectations, which is consistent with both the noisy information and sticky information hypotheses. The regression results also show that the short-term expectations of small firms are influenced by their perception of their own business conditions, which is consistent with the noisy information hypothesis, especially the rational inattention variant. These findings suggest that firms in Japan form their inflation expectations in a complex manner that cannot be described by a single theory.
    Keywords: Firms' inflation expectations; Survey data; FIRE; Noisy information; Sticky information
    JEL: D84 E31 E52
    Date: 2019–11–22
  34. By: George Alogoskoufis
    Abstract: This paper analyzes the process of destabilization, crisis and adjustment in the Greekeconomy since the accession of the country to the European Union and, subsequently, the euro area. It reviews four policy cycles of the past 40 years, the four acts of the Greektragedy, and discusses alternative ways forward, following the sudden stop and the great depression of the 2010s. It concludes that despite the significant constraints implied by continued participation in the euro area, namely a stark Mundellian conflict between internal and external balance, exiting the euro area risks further destabilizingthe economy and bringing about a return of the problems of the 1980s. The currentchallenge for Greece is to seek to remain and prosper in the euro area. This would require a policy mix based on supply side reforms which would allow for a sustained recovery without the reemergence of external imbalances.
    Keywords: Greece, Euro Area, fiscal policy, monetary policy, competitiveness, current account
    Date: 2019–05
  35. By: Mauersberger, Felix; Nagel, Rosemarie; Bühren, Christoph
    Abstract: The goal of this paper is to show how adding behavioral components to micro-foundated models of macroeconomics may contribute to a better understanding of real world phenomena. The authors introduce the reader to variations of the Keynesian Beauty Contest (Keynes, The General Theory of Employment, Interest, and Money, 1936), theoretically and experimentally with a descriptive model of behavior. They bridge the discrepancies of (benchmark) solution concepts and bounded rationality through step-level reasoning, the so-called level-k or cognitive hierarchy models. These models have been recently used as building blocks for new behavioral macro theories to understand puzzles like the lacking rise of inflation after the financial crisis, the effectiveness of quantitative easing, the forward guidance puzzle and the effectiveness of temporary fiscal expansion.
    Keywords: beauty contest game,expectation formation,equilibration,level-k reasoning,macroeconomics,game theory,experimental economics
    JEL: E12 E13 D80 D9 C91
    Date: 2019
  36. By: Massimiliano Affinito (Bank of Italy)
    Abstract: This paper studies the mutual interplay between central bank (CB) liquidity provisions and interbank markets (IM) liquidity exchanges exploring whether the relationship changes during IM impairments and CB massive liquidity injections in the global and sovereign crises. The analysis leverages on a dataset containing seventeen years of monthly bank-by-bank and counterparty-by-counterparty data from 1998 to 2015 in Italy. The results show the existence of a complementarity relationship. Banks receiving CB liquidity redistribute more to other banks. When CB liquidity increases exponentially in the crises some healthy banks specialize in interbank lending. The complementarity relationship helps to offset the euro-area fragmentation via domestic interbank relationships and to adjust collateral and maturity profiles of banks’ liquidity.
    Keywords: liquidity, financial and sovereign crises, central bank intervention, interbank
    JEL: G21 E52 C30
    Date: 2019–10
  37. By: Zens, Gregor; Böck, Maximilian; Zörner, Thomas O.
    Abstract: In this paper we estimate the effect of monetary policy on the US labor market using disaggregated data based on large scale micro surveys. By employing a Bayesian factor-augmented vector autoregression framework, we investigate the impact of an unanticipated interest rate change on the unemployment rate in 32 occupation groups. Our results on the aggregate level are in line with the literature and point towards a strong influence of monetary policy on economic activity, overall unemployment and investment. A closer look on the disaggregated level reveals heterogeneous impacts across occupation groups. This heterogeneity can partially be explained by the amount of routine tasks and the degree of offshorability of an particular occupation group. These results suggest that workers who are highly vulnerable to medium-term and long-term developments such as automatization and offshoring are also hit disproportionately hard by short-term economic fluctuations.
    Keywords: Monetary Policy, Unemployment, FAVAR, Occupation-level, Bayesian Analysis
    Date: 2019–11
  38. By: Antonio M. Conti (Bank of Italy); Andrea Nobili (Bank of Italy)
    Abstract: We investigate the structural relationship between wages dynamics and core inflation in the euro area using Bayesian VAR models. We find that the pass-through from wages to consumer prices net of food and energy is less than unity and depends on the nature of the shocks hitting the economy. A monetary policy shock implies a positive co-movement between these variables, which is similar in magnitude to that stemming from an aggregate demand shock. Financial shocks, as captured by credit spreads and indicators of systemic stress, are instead associated with a negative co-movement between wages and prices and generate firms’ countercyclical mark-ups, consistently with recent models featuring financial frictions and nominal rigidities. These findings may explain why the recent pick-up in wages is not associated with a sustained path of core inflation in the euro area.
    Keywords: wage-price pass-through, countercyclical mark-ups, financial shocks, Bayesian VAR
    JEL: E30 E32 E51
    Date: 2019–10
  39. By: Angela Capolongo (ECARES, Université Libre de Bruxelles); Claudia Pacella (Bank of Italy)
    Abstract: We construct a Bayesian vector autoregressive model with three layers of information: the key drivers of inflation, cross-country dynamic interactions, and country-specific variables. The model provides good forecasting accuracy with respect to the popular benchmarks used in the literature. We perform a step-by-step analysis to shed light on which layer of information is more crucial for accurately forecasting euro area inflation. Our empirical analysis reveals the importance of including the key drivers of inflation and taking into account the multi-country dimension of the euro area. The results show that the complete model performs better overall in forecasting inflation excluding energy and unprocessed food, while a model based only on aggregate euro area variables works better for headline inflation.
    Keywords: inflation, forecasting, euro area, Bayesian estimation
    JEL: C32 C53 E31 E37
    Date: 2019–06

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