nep-mon New Economics Papers
on Monetary Economics
Issue of 2019‒12‒16
sixteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Are Central Banks Out of Ammunition to Fight a Recession? Not Quite. By Joseph E. Gagnon; Christopher G. Collins
  2. The international effects of central bank information shocks By Michael Pfarrhofer; Anna Stelzer
  3. Does the Lack of Financial Stability Impair the Transmission of Monetary Policy? By Viral V. Acharya; Björn Imbierowicz; Sascha Steffen; Daniel Teichmann
  4. Interbank network characteristics, monetary policy "News" and sensitivity of bank stock returns By Aref Ardekani; Isabelle Distinguin; Amine Tarazi
  5. In Pursuit of a Stable Stabilization Policy in Sweden. From the Gold Standard to Inflation Targeting and Beyond By Jonung, Lars
  6. Is the unemployment inflation trade-off still alive in the Euro Area and its member countries? It seems so By Antonio Ribba
  7. Inflation trends in Asia: implications for central banks By García, Juan Angel; Poon, Aubrey
  8. Inflation Dynamics: Dead, Dormant, or Determined Abroad? By Kristin Forbes
  9. Effects of State-Dependent Forward Guidance, Large-Scale Asset Purchases and Fiscal Stimulus in a Low-Interest-Rate Environment By Günter Coenen; Carlos Montes-Galdón; Frank Smets
  10. Complexity, Conventions and Instability: the role of monetary policy By Citera, Emanuele; Sau, Lino
  11. Differences in euro-area household finances and their relevance for monetary-policy transmission By Hintermaier, Thomas; Koeniger, Winfried
  12. Rare but Long-lasting Liquidity Traps and Fiscal Stimulus By Kevin XD Huang; Nam T Vu
  13. Financial cycles, credit bubbles and stabilization policies By Schuler, Tobias; Corrado, Luisa
  14. Mortgage lending, monetary policy, and prudential measures in small euro-area economies: Evidence from Ireland and the Netherlands By Mary Everett; Jakob de Haan; David-Jan Jansen; Peter McQuade; Anna Samarina
  15. China's Evolving Monetary Policy Framework in International Context By Bradley Jones; Joel Bowman
  16. Capital Controls: Theory and Evidence By Bilge Erten; Anton Korinek; Jose Antonio Ocampo

  1. By: Joseph E. Gagnon (Peterson Institute for International Economics); Christopher G. Collins (Peterson Institute for International Economics)
    Abstract: Central banks in the three largest advanced economies (the United States, Japan, and the eurozone) have only limited ammunition to fight a recession based on the tools used to date. The Federal Reserve has the most amount of tried and tested ammunition in this group. If a recession were to hit the US economy now, the Fed would be able to deliver monetary stimulus equivalent to a cut in the short-term policy interest rate of about 5 percentage points, which is sufficient to fight a mild but not severe recession. The European Central Bank and the Bank of Japan have little ability to ease policy with tools used to date, about the equivalent of a 1 percentage point cut in the policy rate. But they can engage in more exotic forms of monetary policy, such as large-scale purchases of equity and real estate and direct transfers to households, which the Fed cannot do. These tools, however, are largely untested and face political resistance. An important implication of this analysis is that raising expected inflation before a recession hits has a much larger benefit than has been widely recognized. A higher long-run inflation rate gives central banks more room to not only cut their policy rates but also use forward guidance and quantitative easing to reduce longer-term rates.
    Date: 2019–11
  2. By: Michael Pfarrhofer; Anna Stelzer
    Abstract: We explore the international transmission of monetary policy and central bank information shocks by the Federal Reserve and the European Central Bank. Identification of these shocks is achieved by using a combination of high-frequency market surprises around announcement dates of policy decisions and sign restrictions. We propose a high-dimensional macroeconometric framework for modeling aggregate quantities alongside country-specific variables to study international shock propagation and spillover effects. Our results are in line with the established literature focusing on individual economies, and moreover suggest substantial international spillover effects in both directions for monetary policy and central bank information shocks. In addition, we detect heterogeneities in the transmission of ECB policy actions to individual member states.
    Date: 2019–12
  3. By: Viral V. Acharya; Björn Imbierowicz; Sascha Steffen; Daniel Teichmann
    Abstract: We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the period from January 2006 to June 2010. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks for maturities beyond one year, even as it lowers deposit spreads for both high-risk and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, capital expenditures and employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank-lending channel and the central bank's lender-of-last-resort function.
    JEL: E43 E58 G01 G21
    Date: 2019–11
  4. By: Aref Ardekani (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Isabelle Distinguin (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)
    Abstract: This paper investigates whether interbank network topology influences the impact of monetary policy announcements on bank cumulative abnormal returns (CAR's). Although recent studies have emphasized the channels of non-conventional monetary policy actions and the sensitivity of bank stock prices to "News", how such reaction could be influenced by the shape of bank networks remains an open issue. We look at how banks' interconnectedness within interbank loan and deposit networks affects investors' expectations of future bank performance in response to monetary policy "News". Our sample consists of commercial, investment, real estate and mortgage banks in 10 Euro-zone countries. Our results show that the stock prices of banks with stronger local network positions are less sensitive to monetary policy announcements while those of banks with stronger system-wide positions are more sensitive to them.
    Keywords: Interbank network topology,Monetary policy,bank's stock reaction,event study
    Date: 2019–11–28
  5. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: In a historical perspective, the stabilization policy regime in Sweden is in a state of constant change, affected by economic crises, international impulses, domestic politics, and developments in macroeconomic theory. Economists have been deeply involved in this process. The current framework for monetary and fiscal policy, with an independent central bank focusing on inflation targeting, and a rule-based fiscal policy, is not the final stage of this process. Future crises will once again change the goals, the instruments, and the institutional framework. In a historical perspective, the rapid expansion of the financial system, with the accompanying accumulation of private debt and high rates of asset inflation, stands out as a likely cause behind the next crisis. The next crisis will be followed by yet another step in the perennial pursuit of a better stabilization policy.
    Keywords: Monetary policy; fiscal policy; gold standard; price-level targeting; inflation targeting; financial repression; the Riksbank; Sweden
    JEL: E12 E30 E60 G01 H63 N14
    Date: 2019–12–06
  6. By: Antonio Ribba
    Abstract: The unemployment inflation trade-off can be interpreted as a proposition concerning the response of these two variables to aggregate demand shocks. In this paper we study the possible presence of the trade-off in the Euro Area and in a wide group of Euroarea countries in the last 20 years, i.e. since the start of EMU. We use the structural VAR methodology that allows the separation between supply and demand shocks. Our main finding is that the existence of a trade-off is largely confirmed both at the Euro Area and at the national level. Nevertheless, the size of the trade-off, measured at different horizons,shows some heterogeneity among countries. No less important, when we augment the VAR model by introducing monetary policy in the context of an open economy, we find that monetary policy shocks push inflation and unemployment in opposite directions in the Currency Area. Another interesting result concerns the evidence of a relatively flat relation between unemployment and inflation, conditionally to monetary policy shocks.
    Keywords: Unemployment, Inflation, Structural VARs, Euro Area
    JEL: C32 E24 E31 E32
    Date: 2019–12
  7. By: García, Juan Angel; Poon, Aubrey
    Abstract: Trend inflation estimates for 12 of the largest Asian economies over 1995-2018 offer important insights on inflation dynamics and inflation expectations. The disinflationary shocks that hit the region since 2014 were partly transitory, but their effects have been different depending on the behaviour of trend inflation in each country. Countries with relatively high inflation (India, Philippines, Indonesia) benefited, and some were impacted very mildly (China, Taiwan, Hong Kong SAR, Malaysia). Among countries with inflation below target, in those with trend inflation low but constant (Australia, New Zealand) low inflation maybe lasting, but temporary, while those in which trend inflation has declined (South Korea, Thailand) risk low inflation to become entrenched and a de-anchoring of expectations. This diverse international evidence could offer important lessons for monetary policy worldwide. JEL Classification: C11, C32, E31, F41
    Keywords: Asian economies, state space model, stochastic volatility, survey inflation expectations, trend inflation
    Date: 2019–12
  8. By: Kristin Forbes
    Abstract: Inflation dynamics have been difficult to explain over the last decade. This paper explores if a more comprehensive treatment of globalization can help. CPI inflation has become more synchronized around the world since the 2008 crisis, but core and wage inflation have become less synchronized. Global factors (including commodity prices, world slack, exchange rates, and global value chains) are significant drivers of CPI inflation in a cross-section of countries, and their role has increased over the last decade, particularly the role of non-fuel commodity prices. These global factors, however, do less to improve our understanding of core and wage inflation. Key results are robust to using a less-structured trend-cycle decomposition instead of a Phillips curve framework, with the set of global variables more important for understanding the cyclical component of inflation over the last decade, but not the underlying slow-moving inflation trend. Domestic slack still plays a role for all the inflation measures, although globalization has caused some “flattening” of this relationship, especially for CPI inflation. Although CPI inflation is increasingly “determined abroad”, core and wage inflation is still largely a domestic process.
    JEL: E30 E52 E58 F62
    Date: 2019–11
  9. By: Günter Coenen; Carlos Montes-Galdón; Frank Smets (-)
    Abstract: We study the incidence and severity of lower-bound episodes and the efficacy of three types of state-dependent policies—forward guidance about the future path of interest rates, large-scale asset purchases and spending-based fiscal stimulus—in ameliorating the adverse consequences stemming from the effective lower bond on nominal interest rates. In particular, we focus on the euro area economy and examine, using the ECB’s New Area- Wide Model, the consequences of the lower bound both for the near-term economic outlook, characterised by persistently low nominal interest rates and inflation, and in a lasting low-real-interest-rate world. Our findings suggest that, if unaddressed, the lower bound can have very substantial costs in terms of worsened macroeconomic performance. Forward guidance, if fully credible, is most powerful and can largely undo the distortionary effects due to the lower bound. A combination of imperfectly credible forward guidance, asset purchases and fiscal stimulus is almost equally effective, in particular when asset purchases enhance the credibility of the forward guidance policy via a signalling effect.
    Keywords: Effective lower bound, monetary policy, forward guidance, asset purchases, fiscal policy, euro area
    JEL: E31 E32 E37 E52 E62
    Date: 2019–11
  10. By: Citera, Emanuele; Sau, Lino (University of Turin)
    Abstract: Ever since the 2008 financial crisis, there has been both a widespread recognition that the mainstream approach on financial markets has failed to anticipate and to justify the crisis and on the need of ex ante and ex post adequate economic policies to cope with such phenomena. The aim of our paper is to provide a theoretical and methodological analysis of the role of conventions as emergent phenomena in financial markets, the latter being thought of as dynamically complex systems. Drawing upon the notion of ‘dynamic complexity’ and Keynes’ view of financial markets, we claim that social conventions can only provisionally stabilize the system, but they will eventually lead to financial instability and crisis. Then, we adopt this framework to investigate the implications for monetary policy to stabilize the system by virtue of the role of central bank to intervene, and thus shape, a convention. In this respect, we consider the credibility of the monetary authority and how it can be exerted through ‘moral suasion’ to control the financial fragility of investors’ balance-sheet positions as well as to affect the convention around the longterm interest rate.
    Date: 2019–11
  11. By: Hintermaier, Thomas; Koeniger, Winfried
    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
  12. By: Kevin XD Huang (Vanderbilt University); Nam T Vu (Miami University of Ohio)
    Abstract: A DSGE model with (i) state-dependent pricing and (ii) history-dependent monetary policy that compensates for lost opportunities of cutting the nominal interest rate due to a binding effective zero lower bound (ZLB) generates rare but long-lasting liquidity traps with endogenous transitions between the traps and normal times. Dynamic government spending multipliers (GSMs) are typically above unity in the liquidity traps but are uniformly below unity in normal times. Without (i) or (ii), the model generates only short-lived ZLB events while producing below-unity GSMs irrespective of the state of the economy.
    Keywords: State-dependent pricing, history-dependent monetary policy, zero lower bound, fiscal stimulus, dynamic government spending multipliers
    JEL: E0 E5
    Date: 2019–12–08
  13. By: Schuler, Tobias; Corrado, Luisa
    Abstract: This paper analyzes the effects of several policy instruments for mitigating financial bubbles generated in the banking sector. We augment a New Keynesian macroeconomic framework by endogenizing boundedly-rational expectations on asset values of loan portfolios, allow for interbank trading and show how a credit bubble can develop from a financial innovation. We then evaluate the efficacy of several policy instruments in counteracting financial bubbles. We find that an endogenous capital requirement reduces the impact of a financial bubble significantly while central bank intervention (“leaning against the wind”) proves to be less effective. A welfare analysis ranks the policy reaction through an endogenous capital requirement highest. We therefore provide a rationale for the use of countercyclical capital buffers. JEL Classification: E44, E52
    Keywords: Basel III, CCyB, credit-to-GDP gap
    Date: 2019–12
  14. By: Mary Everett; Jakob de Haan; David-Jan Jansen; Peter McQuade; Anna Samarina
    Abstract: This paper examines whether the increased use of macroprudential policies since the global financial crisis has affected the impact of (euro area and foreign) monetary policy on mortgage lending in Ireland and the Netherlands, which are both small open economies in the euro area. Using bank-level data on domestic lending in both countries during the period 2003-2018, we find that restrictive euro area monetary policy shocks reduce the growth of mortgage lending. We find evidence that stricter domestic prudential regulation mitigates this effect in Ireland, but not so in the Netherlands. There is weak evidence for an international bank lending channel.
    Keywords: monetary policy; prudential policy; mortgage lending; European monetary union
    JEL: G21 E42 F36
    Date: 2019–11
  15. By: Bradley Jones (Reserve Bank of Australia); Joel Bowman (Reserve Bank of Australia)
    Abstract: China's monetary policy framework has evolved considerably over the years. However, official descriptions provide limited detail and it generally remains less well understood than befits the world's second largest economy. This paper takes stock of the evolution of monetary policy in China and, by placing these developments in international context, also contributes to the emerging discussion about whether aspects of monetary policy in China are beginning to converge on advanced economy norms. Our main takeaways are as follows. First, on the institutional set-up, we note that the absence of instrument independence and the nature of accountability mechanisms remain substantial points of difference, reflecting China's single-party state system in which the levers of macroeconomic management remain highly coordinated under the State Council. Second, the objectives for monetary policy in China and how they find practical expression in the operational framework continue to have few parallels in advanced economies, although some implementation features (such as the corridor for policy rates) are more familiar as China continues to transition from a quantity- to price-based monetary system. Third, elements of The People's Bank of China's communication framework are broadly evolving along the lines observed elsewhere, with remaining exceptions mostly a result of China's unique institutional arrangements. Fourth, our empirical analysis of monetary policy transmission points to both similarities and differences: while policy rates now have a larger effect than monetary aggregates on output and bond yields, reflecting a Chinese financial system that is becoming more developed (as in advanced economies in the 1970s–1980s), the similar average inflation outcomes observed in China and advanced economies have been generated through different means. In sum, our analysis suggests that while some aspects of monetary policy in China are beginning to resemble those observed in advanced economies, convergence is neither likely nor even desired by the authorities given China's institutional configuration and preferred model of economic development.
    Keywords: China; monetary policy; financial markets
    JEL: E02 E42 E52 E58 E63
    Date: 2019–12
  16. By: Bilge Erten; Anton Korinek; Jose Antonio Ocampo
    Abstract: This paper synthesizes recent advances in the theoretical and empirical literature on capital controls. We start by observing that international capital flows have both benefits and costs, but some of these are not internalized by individual actors and thus constitute externalities. The theoretical literature has identified pecuniary externalities and aggregate demand externalities that respectively contribute to financial instability and recessions. These externalities provide a natural rationale for counter-cyclical capital controls that lean against boom and busts cycles in international capital flows. The empirical literature has developed several measures of capital controls to capture different aspects of capital account openness. We evaluate the strengths and weaknesses of different measures and provide an overview of the empirical findings on the effectiveness of capital controls in addressing the externalities identified by the theory literature, i.e. in reducing financial fragility and enhancing macroeconomic stability. We also discuss strategies to deal with the endogeneity of capital controls in such statistical exercises. We conclude by providing an overview of the historical and current debates on the role of capital controls in macroeconomic management and their relationship to the academic literature.
    JEL: D62 E44 F32 F38 F42 H23
    Date: 2019–11

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