nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒01‒13
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Macroeconomic Effects of the ECB's Forward Guidance By Andrejs Zlobins
  2. A tale of two decades: the ECB’s monetary policy at 20 By Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Guilhem, Arthur Saint; Yiangou, Jonathan; Rostagno, Massimo
  3. Furor over the Fed : Presidential Tweets and Central Bank Independence By Antoine Camous; Dmitry Matveev
  4. A two-tier system for remunerating banks’ excess liquidity in the euro area: aims and possible side effects By Alessandro Secchi
  5. The role of households’ borrowing constraints in the transmission of monetary policy By Cumming, Fergus; Hubert, Paul
  6. How Do Changing U.S. Interest Rates Affect Banks in the Gulf Cooperation Council (GCC) Countries? By Olumuyiwa S Adedeji; Yacoub Alatrash; Divya Kirti
  7. Disentanglement of natural interest rate shocks and monetary policy shocks nexus By Kurovskiy, Gleb
  8. Monetary Union and Financial Integration By Luca Fornaro
  9. Optimalmonetary policy in a model of vertical productionand tradewith reference currency By Liutang Gong; Chan Wang; Heng-fu Zou
  10. The currency composition of foreign exchange reserves By Hiro Ito; Robert N McCauley
  11. Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers By Carlo Altavilla; Miguel Boucinha; José-Luis Peydró; Frank Smets
  12. Country-Level Effects of the ECB's Expanded Asset Purchase Programme By Andrejs Zlobins
  13. The effectiveness of the ECB’s asset purchases at the lower bound By Giuseppe Grande; Adriana Grasso; Gabriele Zinna
  14. Monetary policy and birth rates: the effect of mortgage rate pass-through on fertility By Cumming, Fergus; Dettling, Lisa
  15. A reconsideration of the doctrinal foundations of monetary-policy rules: Fisher versus Chicago By George S. Tavlas
  16. Monetary Policy Independence in a Managed Floating Regime: An ARDL Approach By Aiswarya Thomas
  17. Disaggregated Short-Term Inflation Forecast (STIF) for Monetary Policy Decision in Sierra Leone By Jackson, Emerson Abraham; Tamuke, Edmund; Jabbie, Mohamed
  18. Monetary Policy, Price Setting, and Credit Constraints By Almut Balleer; Peter Zorn
  19. Optimal Fiscal and Monetary Policy with Distorting Taxes By Christopher A. Sims
  20. Monetary policy transmission in Morocco: Evidence from borrowers-level data By Bennouna, Hicham; Chmielewski, Tomasz; Doukali, Mohamed
  21. Renewing our Monetary Vows: Open Letters to the Governor of the Bank of England By Jagjit S Chadha; Richard Barwell
  22. Corporate Leverage and Monetary Policy Effectiveness in the Euro Area By Simone Auer; Marco Bernardini; Martina Cecioni
  23. Why do banks close? The geography of branch pruning By Paolo Emilio Mistrulli; Luca Antelmo; Maddalena Galardo; Iconio Garrì; Dario Pellegrino; Davide Revelli; Vito Savino
  24. Economic Stabilisation and Performance in West Africa: The Role of Fiscal and Monetary Policy By Ekundayo P. Mesagan; Ismaila A. Yusuf
  25. Firm turnover in the export market and the case for fixed exchange rate regime By Hamano, Masashige; Pappadà, Francesco
  26. Is Digitalization Driving Domestic Inflation? By Balazs Csonto; Yuxuan Huang; Camilo E Tovar Mora
  27. Interest Rate Trends in a Global Context By Dmitriy Stolyarov; Linda L. Tesar
  28. Has the credit supply shock asymmetric effects on macroeconomic variables? By V. Colombo; A. Paccagnini
  29. Capital and liquidity interaction in banking By Acosta-Smith, Jonathan; Arnould, Guillaume; Milonas, Kristoffer; Vo, Quynh-Anh

  1. By: Andrejs Zlobins (Bank of Latvia)
    Abstract: This paper empirically evaluates the macroeconomic effects of the European Central Bank's (ECB) forward guidance (FG) on the euro area economy and analyses its interaction with asset purchases. To that end, we employ a battery of structural vector autoregressions (SVARs) with both constant and time-varying parameters and/or the error covariance matrix to explore the propagation of the FG shock over time and account for the changing nature of the ECB's FG (Odyssean since July 2013, Delphic prior to that). The FG shock is identified via both traditional sign and zero restrictions of Arias et al. (2014) and narrative sign restrictions of Antolin-Diaz and Rubio-Ram?rez (2018) which allow us to incorporate additional information about the timing of the shock to sharpen the inference. We find that the ECB's FG on interest rates has been an effective policy tool as its announcement causing a 5 bps drop in interest rate expectations increases output by 0.09%–0.12% and the price level by 0.035%. In addition, multiple evidence suggests that the introduction of the expanded asset purchase programme (APP) in 2015 considerably enhanced the FG credibility. Regarding the transmission mechanism, we find that FG significantly lowered uncertainty in the euro area as well as borrowing costs for both households and firms.
    Keywords: forward guidance, central bank communication, unconventional monetary policy, euro area, structural VAR
    JEL: C54 E32 E52 E58
    Date: 2019–11–25
  2. By: Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Guilhem, Arthur Saint; Yiangou, Jonathan; Rostagno, Massimo
    Abstract: The 20th anniversary of Economic and Monetary Union (EMU) offers an opportunity to look back on the ECB’s record and learn lessons that can improve the conduct of policy in the future. This paper charts the way the ECB has defined, interpreted and applied its monetary policy framework – its strategy – over the years from its inception, in search of evidence and lessons that can inform those reflections. Our “Tale of Two Decades” is largely a tale of “two regimes”: one – stretching slightly beyond the ECB’s mid-point – marked by decent growth in real incomes and a distribution of shocks to inflation almost universally to the upside; and the second – starting well into the post-Lehman period – characterised by endemic instability and crisis, with the distribution of shocks eventually switching from inflationary to continuously disinflationary. We show how the most defining element of the ECB’s monetary policy framework, its characteristic definition of price stability with a hard 2% ceiling, functioned as a key shock-absorber in the relatively high-inflation years prior to the crisis, but offered a softer defence in the face of the disinflationary forces that hit the euro area in its aftermath. The imperative to halt persistent disinflation in the post-crisis era therefore called for a radical, unprecedented policy response, comprising negative policy rates, enhanced forms of forward guidance, a large asset purchase programme and targeted long-term loans to banks. We study the multidimensional interactions among these four instruments and quantify their impact on inflation and economic activity. JEL Classification: E50, E51, E52
    Keywords: financial crises, monetary policy, non-standard measures ECB, policy strategy
    Date: 2019–12
  3. By: Antoine Camous; Dmitry Matveev
    Abstract: We illustrate how market data can be informative about the interactions between monetary and fiscal policy. Federal funds futures are private contracts that reflect investor’s expectations about monetary policy decisions. By relating price movements of these contracts with President Trump’s tweets on monetary policy, we explore how markets have perceived presidential attempts to influence monetary policy decisions. Overall, our results indicate markets expected the Federal Reserve to adjust monetary policy in the direction suggested by President Trump.
    Keywords: Central bank research; Credibility; Financial markets; Monetary Policy
    JEL: E44 E52 E58
    Date: 2019–12
  4. By: Alessandro Secchi (Bank of Italy)
    Abstract: This note focuses on a two-tier excess reserve remuneration system, a measure recently introduced by the ECB Governing Council that aims at supporting the bank-based transmission of monetary policy by exempting part of banks’ excess reserves from the negative remuneration resulting from the current application of the deposit facility rate. The analysis shows how this tool helps to preserve the positive contribution of negative rates to the accommodative stance of monetary policy, although a careful calibration is necessary to avoid unwarranted effects on euro short-term rates. The initial experience with the two-tier excess reserve remuneration system has been positive so far: its introduction has taken place without any major tensions in money market rates.
    Keywords: interest rates, monetary policy implementation, unconventional monetary measures, liquidity management
    JEL: E42 E43 E52 E58
    Date: 2019–12
  5. By: Cumming, Fergus (Bank of England); Hubert, Paul (Sciences Po)
    Abstract: This paper investigates how the transmission of monetary policy to the real economy depends on the distribution of household debt. Using an original loan‑level dataset covering the universe of UK mortgages, we assess the effect of monetary shocks on aggregate consumption by exploiting time variation in a measure of the proportion of households close to their borrowing constraint. We find that monetary policy is most potent when there is a large share of constrained households. In contrast, we find no evidence that the average level of borrowing relative‑to‑income of the household sector affects the transmission of monetary policy.
    Keywords: Heterogeneity; distributions; mortgage debt; state-dependence
    JEL: E21 E52 E58
    Date: 2019–12–20
  6. By: Olumuyiwa S Adedeji; Yacoub Alatrash; Divya Kirti
    Abstract: Given their pegged exchange rate regimes, Gulf Cooperation Council (GCC) countries usually adjust their policy rates to match shifting U.S. monetary policy. This raises the important question of how changes in U.S. monetary policy affect banks in the GCC. We use bank-level panel data, exploiting variation across banks within countries, to isolate the impact of changing U.S. interest rates on GCC banks funding costs, asset rates, and profitability. We find stronger pass-through from U.S. monetary policy to liability rates than to asset rates and bank profitability, largely reflecting funding structures. In addition, we explore the role of shifts in the quantity of bank liabilities as policy rates change and the role of large banks with relatively stable funding costs to explain these findings.
    Date: 2019–12–06
  7. By: Kurovskiy, Gleb
    Abstract: This paper proposes a novel two-step identification procedure of natural interest rate shocks. Altogether, monetary policy and natural interest shocks explain about 90% of total inflation dynamics. The paper exploits (J.E. Arias et al., 2019) procedure, which allows getting canonical impulse response functions to monetary policy shocks. I find no evidence of price and output puzzles. The estimated natural interest rate declines from 2015 to 2019 years. Furthermore, Bank of Russia follows the mandate and reacts to inflation in monetary policy feedback rule, while does not respond to output fluctuations.
    Keywords: SVAR, monetary policy, natural interest rate, Russia
    JEL: C32 E52 E58
    Date: 2019–12–12
  8. 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: 2019–12
  9. By: Liutang Gong (Peking University, Guanghua School of Management and LMEQF); Chan Wang (Central University of Finance and Economics, School of Finance); Heng-fu Zou (Central University of Finance and Economics, China Economics and Management Academy)
    Abstract: This paper examines optimal monetary policy rules in a model of vertical production and trade with reference currency. As evidenced by empirical findings, we assume that final-goods prices are sticky, but intermediategoods prices are flexible. We find that even if intermediate-goods prices are flexible, monetary authorities need to respond to the shocks at the stage of intermediate-goods production. We also find that, when a shock occurs at the stage of final-goods production, monetary responses are independent of the expenditure share of finalgoods producers on intermediate goods. For the first time in the literature, our model gives a condition under which both countries are willing to participate in monetary cooperation. Thus the gains from cooperation are real. In addition, we compare the volatility of the nominal exchange rate in Nash case with that in cooperative case, and compare the volatility of the nominal exchange rate in our model with that in a model without vertical production and trade as well. We also extend the model to consider a case of dual price stickiness. We find that the change in solution methods completely alters the conclusions of the model.
    Keywords: exchange rates, monetary cooperation, optimal monetary policy, reference-currency pricing, vertical production and trade
    JEL: E5 F3 F4
    Date: 2020
  10. By: Hiro Ito; Robert N McCauley
    Abstract: This paper analyses the factors that govern the choice of the currency composition of official foreign exchange reserves. First, we introduce a new panel dataset on the key currencies in foreign exchange reserves of about 60 economies in the 1999-2017 period. Second, we show that the currency composition of reserves relates strongly to the co-movement of the domestic currency with key currencies and the currency invoicing of trade. These factors represent attributes of the dollar or the euro rather than of the United States or the euro area. They exert about equal effects on the currency composition of foreign exchange reserves. We demonstrate that these findings are robust to a host of other possible factors.
    Keywords: foreign exchange reserves, international currency, key currency, currency zones, invoicing of trade, currency of international debt, foreign exchange reserve management
    JEL: E44 E58 F14 F31
    Date: 2019–12
  11. By: Carlo Altavilla; Miguel Boucinha; José-Luis Peydró; Frank Smets
    Abstract: We analyse the effects of supranational versus national banking supervision on credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralisation of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à-vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism driving the results is higher quantity and quality of human resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers – first time in the literature – is crucial for external validity.
    Keywords: supervision, banking, AnaCredit, monetary policy, euro area crisis
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2019–12
  12. By: Andrejs Zlobins (Bank of Latvia)
    Abstract: This paper evaluates the macroeconomic effects of the European Central Bank's (ECB) expanded asset purchase programme (APP) on Latvia and other euro area countries and investigates the cross-border transmission mechanism. To that end, we employ two different vector autoregressive (VAR) models often used to evaluate the spillovers stemming from the monetary policy actions, namely a bilateral structural VAR with block exogeneity (BSVAR-BE) and a multi-country mixed cross-section global VAR with stochastic volatility (MCS-BGVAR-SV), both estimated using Bayesian techniques. We find that the APP had a limited and weakly significant impact on Latvia's output and that most of the effect was generated by spillovers from other countries. However, we provide evidence that the APP had a robust impact on Latvian inflation due to depreciation of the euro. Regarding other jurisdictions, our results suggest that the ECB's asset purchases had a larger impact on industrial production in the countries where the portfolio rebalancing channel was activated. Despite that, our evidence suggests that the APP was mainly transmitted to inflation via exchange rate depreciation rather than through aggregate demand-driven shifts in the Phillips curve.
    Keywords: expanded asset purchase programme, quantitative easing, euro area, GVAR, SVAR, Bayesian estimation
    JEL: C54 E47 E58 F42
    Date: 2019–09–03
  13. By: Giuseppe Grande (Bank of Italy); Adriana Grasso (Bank of Italy); Gabriele Zinna (Bank of Italy)
    Abstract: In this research note, we assess – both theoretically and empirically – whether net asset purchases by the ECB can further reduce term premiums and bond yields in the euro area. Theory says that, at the effective lower bound, the duration extracted by the central bank is no longer sufficient to assess the price impact of the purchases. In fact, we show empirically that their impact is state-contingent, and is smaller the more the shadow rate is below the short-rate lower bound, and the lower the volatility of bond yields. Nevertheless, central bank asset purchases are still effective in reducing long-term term premiums and bond yields. Moreover, in the euro area, there is room to reduce the duration held by the market. Overall, asset purchases remain a viable tool at the disposal of the ECB for exerting downward pressure on yields.
    Keywords: preferred-habitat theory, term premiums, effective lower bound, quantitative easing, large-scale asset purchases, forward guidance
    JEL: E43 E52 G12
    Date: 2019–12
  14. By: Cumming, Fergus (Bank of England); Dettling, Lisa (Federal Reserve Board of Governors)
    Abstract: This paper examines whether monetary policy pass-through to mortgage rates affects household fertility decisions. Using administrative data on UK mortgages and births, our empirical strategy exploits variation in the timing of when families were eligible for a rate adjustment, coupled with the large reductions in interest rates that occurred during the Great Recession. We estimate that each 1 percentage point drop in the policy rate increased birth rates by 2%. In aggregate, this pass-through of accommodative monetary policy to mortgage rates was sufficiently large to outweigh the headwinds of the Great Recession and prevent a ‘baby bust’ in the UK, in contrast to the US. Our results provide new evidence on the nature of monetary policy transmission and suggest a new mechanism via which mortgage contract structures can affect aggregate demand and supply.
    Keywords: Mortgages; monetary policy; birth rates; fertility; natality; interest rates
    JEL: E43 E52 J13
    Date: 2019–12–20
  15. By: George S. Tavlas (Bank of Greece)
    Abstract: There has long been a presumption that the price-level-stabilization frameworks of Irving Fisher and Chicagoans Henry Simons and Lloyd Mints were essentially equivalent. I show that there were subtle, but important, differences in the rationales underlying the policies of Fisher and the Chicagoans. Fisher’s framework involved substantial discretion in the setting of the policy instruments; for the Chicagoans the objective of a policy rule was to tie the hands of the authorities in order to reduce discretion and, thus, monetary-policy uncertainty. In contrast to Fisher, the Chicagoans provided assessments of the workings of alternative rules, assessed various criteria -- including simplicity and reduction of political pressures -- in the specification of rules, and concluded that rules would provide superior performance compared with discretion. Each of these characteristics provided a direct link to the rules-based framework of Milton Friedman. Like Friedman’s framework, Simons’s preferred rule targeted a policy instrument.
    Keywords: monetary policy rules; Chicago monetary tradition; Irving Fisher; Henry Simons;Lloyd Mints; Milton Friedman
    JEL: B22 E52
    Date: 2019–11
    Abstract: Though a highly debated and contested idea, the open economy trilemma started to gain significant attention recently after Rey?s argument that; in an open economy setting there is no trilemma but only a dilemma between two choices: capital mobility and independent monetary policy. In other words, Rey concludes that exchange rate regimes do not play any role in deciding between capital mobility and independent monetary policy. Further, a lot of studies have come up which largely discuss about the monetary policy independence in countries that allow free mobility of capital flows, by making comparisons between countries with fixed exchange rate regime and floating exchange rate regime. However, the studies on monetary policy independence of countries with managed floating exchange rate regimes are very scant. Given this context, it becomes quite imperative to undertake a study on the monetary policy independence in India for the fact that India is a unique case in itself with not complete free mobility of capital and a managed float exchange rate regime. . Therefore, this paper employed the auto regressive distributed lag (ARDL) approach to study the monetary policy independence in India. The results of the study reveal that the Indian monetary policy stance is highly integrated with the US and the European Union monetary policy stance.
    Keywords: Mundell's trilemma, Monetary policy Independence, Financial Integration, Globalization
    JEL: F41 E52 E58
    Date: 2019–10
  17. By: Jackson, Emerson Abraham; Tamuke, Edmund; Jabbie, Mohamed
    Abstract: In this paper, the researchers have developed a short term inflation forecasting (STIF) model using Box-Jenkins time series approach (ARIMA) for analysing inflation and associated risks in Sierra Leone. The model is aided with fan charts for all thirteen components, including the Headline CPI as communication tools to inform the general public about uncertainties that surround price dynamics in Sierra Leone – this then make it possible for policy makers to utilise expert judgments in a bid to stabilize the economy. The uniqueness of this paper is its interpretation of risks to each of the disaggregated components, while also improving credibility of decisions taken by policy makers at the Bank of Sierra Leone [BSL]. Empirically, Food and Non-Alcoholic Beverages, Housing and Health components indicate that shock arising from within or outside of Sierra Leone can significantly impact headline CPI, with immediate pass-through effect of high prices on consumers’ spending, at least in the short-run. The outcome of this empirical research shows uniqueness of the disaggregated model in tailoring policy makers’ attention towards targeting sector-specific policy interventions. Fan Charts produced have also highlighted degree of risks, which is based on confidence bands, which shows deviation from the baseline forecast. The ultimate goal is to improve sectoral productive capacity, while at the same time, monitoring price volatility spill-over through empirical disaggregation of the CPI basket – in association with this, outcome from the study also shows that the use of multivariate models like VAR would be welcome to monitor events on price dynamics in the national economy.
    Keywords: STIF; ARIMA; Disaggregated CPI; Fan Charts; Sierra Leone
    JEL: C13 C52 C53 E37
    Date: 2019–09–07
  18. By: Almut Balleer; Peter Zorn
    Abstract: We estimate the effects of monetary policy on price-setting behavior in administrative micro data underlying the German producer price index. We find a strong degree of monetary non-neutrality. After expansionary monetary policy, the mass of additional price adjustments is economically small and the average absolute size across all price changes falls. The aggregate price level hardly adjusts, and monetary policy has real effects. These estimates rule out quantitative structural models that generate small and transient effects of monetary policy through selection on large price adjustments. We provide evidence that monetary policy propagates primarily through production units with weak financial positions.
    Keywords: price setting, extensive margin, intensive margin, monetary policy, local projections, menu cost, credit constraints
    JEL: E30 E31 E32 E44 E52
    Date: 2019
  19. By: Christopher A. Sims (Princeton University)
    Abstract: When the interest rate on government debt is low enough, it becomes possible to roll it over indefinitely, never taxing to retire it, without producing a growing debt to GDP ratio. This has been called a situation with zero “fiscal cost†to debt.But when low interest on debt arises from its providing liquidity services, zero fiscal cost is equivalent to finance through seigniorage. Some finance through seigniorage is generally optimal, however, despite results in the literature seeming to show that this is not so.
    JEL: E52 E62
    Date: 2019–08
  20. By: Bennouna, Hicham; Chmielewski, Tomasz; Doukali, Mohamed
    Abstract: This paper investigates the impact of monetary policy on firms’ liability structure depending on their specific characteristics (size, age, profit, and collateral) over the period 2010 to 2016 using firm-level data. Our results provide evidence that firms borrowing tend to decrease after a restrictive monetary policy, in line with the traditional interest rate channel. We confirm that small and medium firms are more significantly affected by tight monetary policy conditions than large firms, suggesting the existence of the balance sheet channel in Morocco.
    Keywords: Corporate balance sheets, monetary policy transmission, panel data.
    JEL: E44 E52 G20
    Date: 2019–11–30
  21. By: Jagjit S Chadha; Richard Barwell
    Abstract: Over the past 20 years, considerable progress has been made in the science of monetary policy. This is under threat from a new era of economic populism. There is a clear danger that in the absence of an open and deep debate about the fundamental objectives of the central bank, the political system will try to offload its obligations onto the central bank balance sheet and seek to unwind genuine progress by arguing that we need a new direction from the problems of the past, or perhaps worse still, that those old objectives were the root cause of the problems we now face. To be clear, they were not. Monetary and financial stability does not cause economic strife, but its absence surely will. The National Institute of Economic and Social Research commissioned a number of expert UK-based economists to survey the monetary landscape. When doing so, we chose to move to the next generation and asked a set of younger monetary economists to outline their views. The views in this book are offered on a personal basis and do not necessarily represent those of any of the institutions for which they work or NIESR. But they are new voices to which we should listen.
    Date: 2019–10
  22. By: Simone Auer (Bank of Italy); Marco Bernardini (Bank of Italy); Martina Cecioni (Bank of Italy)
    Abstract: We study the differences in the response of industrial production to monetary policy shocks within the euro area manufacturing sector conditional on leverage. Using polynomial state-dependent local projections, we document a non-linear relationship between corporate leverage and the effectiveness of monetary policy. When leverage is low, more indebted industries adjust their production more strongly in response to a monetary policy shock, consistently with a financial accelerator framework. At higher leverage ratios, this positive relation weakens until it reaches a point where additional leverage is associated with a decrease in the sensitivity to monetary policy. We show that this weakening effect is particularly intense within the short-term horizon and in recessions. Our results are consistent with recent studies analyzing the role of default risk in dampening the financial accelerator mechanism.
    Keywords: financial heterogeneity, monetary policy, polynomial state-dependent local projections, high-frequency shocks, panel data
    JEL: C23 E32 E52 G32
    Date: 2019–12
  23. By: Paolo Emilio Mistrulli (Bank of Italy); Luca Antelmo (Bank of Italy); Maddalena Galardo (Bank of Italy); Iconio Garrì (Bank of Italy); Dario Pellegrino (Bank of Italy); Davide Revelli (Bank of Italy); Vito Savino (Bank of Italy)
    Abstract: In the aftermath of the Great Recession, the number of bank branches declined in most of developed countries. In this paper, we investigate how banks have downsized their branch networks in Italy, by comparing the pre and post crisis spatial distribution of branches. By using a detailed dataset that includes a wide set of controls for the characteristics of each bank branch, we estimate the probability of a branch being closed as a function of its distance from both proprietary and competitors’ branches. We find that banks are more prone to close branches in those areas where other proprietary branches are closer and also where competitors’ branches are closer. This indicates that, since the start of the crisis, banks have closed branches especially in those areas where their proprietary network was relatively more populated and competition was fiercer.
    Keywords: Bank Branch, Geographical Location, Market Structure
    JEL: G21 L10 R3
    Date: 2019–12
  24. By: Ekundayo P. Mesagan (Pan Atlantic University, Lekki, Lagos, Nigeria); Ismaila A. Yusuf (University of Strathclyde, Glasgow, Scotland.)
    Abstract: The study examines the impact of fiscal and monetary policy on economic performance and stabilisation in Nigeria, Gambia, and Ghana between 1980 and 2017. In the study, the real gross domestic product and the exchange rate are used to proxy economic performance and economic stabilisation respectively while fiscal policy is captured with deficit finance and government expenditure. Also, the broad money supply and monetary policy rate are used as proxies of monetary policy. The study obtains country-specific results using the fully modified ordinary least squares technique and findings show that monetary policy has insignificant effect on economic performance in Nigeria and the Gambia, but has significant impact in Ghana while fiscal policy significantly enhances economic performance in Nigeria and Gambia, but is insignificant in Ghana. Result also confirms that monetary policy significantly drives economic stabilisation in Nigeria and the Gambia, but insignificantly in Ghana while fiscal policy has insignificant impact on economic stabilisation in Ghana and Gambia, but significant in Nigeria. Thus, we conclude that fiscal policy is relatively more important in stimulating economic performance in Nigeria and Gambia while monetary policy is relatively more important in determining economic performance in Ghana. For economic stabilisation, both fiscal and monetary policies are important in Nigeria, both are ineffective in Ghana, while monetary policy is more important in the Gambia. The study recommends further reductions in monetary policy rate to put less pressure on the exchange rate and stabilise the various economies.
    Keywords: Fiscal Policy; Monetary Policy; Deficit Finance; Economic Performance
    JEL: E52 E62 E63 H62 F31 F43
    Date: 2019–01
  25. By: Hamano, Masashige; Pappadà, Francesco
    Abstract: This paper revisits the case for exible vs. fixed exchange rate regime in a two-country model with firm heterogeneity and nominal wage rigidity under incomplete financial markets. Dampening nominal exchange rate fluctuations simultaneously stabilizes the firm turnover in the export market. When firms are homogeneous and low productive, the fixed exchange rate regime dominates the flexible one because it reduces the fluctuations in labor demand arising from entry and exit of exporters following a demand shock. We also show that an alternative regulation policy in the export market does not rule out the possible adoption of a managed floating regime.
    JEL: F32 F41 E40
    Date: 2020–01–07
  26. By: Balazs Csonto; Yuxuan Huang; Camilo E Tovar Mora
    Abstract: This paper examines the extent to which digitalization—measured by a new proxy based on IP addresses allocations per country—has influenced inflation dynamics in a sample of 36 advanced and emerging economies over 2000-2017. Phillips curve estimates show that digitalization has a statistically significant negative effect on inflation in the short run. Its economic impact is not large but has increased since 2012 and mainly operates through a cost/competition channel. Principal components and cointegration analysis further suggest digitalization is a key driver of lower trend inflation.
    Date: 2019–12–06
  27. By: Dmitriy Stolyarov (University of Michigan); Linda L. Tesar (University of Michigan)
    Abstract: Long-term interest rates have been falling globally since the early 1980s and have reached historically low levels. Past forecasts largely missed this secular decline. This paper reviews methodologies for making long-term interest rate projections. We synthesize results from studies that use long historical series and cross-country data to estimate the trend and decompose it into components. We then construct a set of economic indicators that are potentially useful in interest rate forecasting. We add international, forward-looking economic indicators as explanatory variables in a standard macrofinance forecasting model. We find that the model with international variables can outperform the other models by better tracking the falling trajectory of United States interest rates in the post-2008 period, a trend missed by domestic variables. Further, we find that global economic indicators, especially the composite leading indicator for the European Union, are capable of accounting for a large portion of yield variance not only in the U.S. but in other advanced economies as well.
    Date: 2019–09
  28. By: V. Colombo; A. Paccagnini
    Abstract: We investigate the role played by the credit supply shock across the business cycle in the U.S. over the period 1973 - 2018. We estimate a nonlinear VAR including nominal, real, monetary, and financial variables. According to our results, a credit supply shock triggers asymmetric and negative effects on macroeconomic variables. We find that the state-dependent forecast error variance decomposition of industrial production, employment, and inflation due to the shock is from six to eight times larger in recessions than in normal times.
    JEL: C32 E32 E52
    Date: 2020–01
  29. By: Acosta-Smith, Jonathan (Bank of England); Arnould, Guillaume (Bank of England); Milonas, Kristoffer (Moodys); Vo, Quynh-Anh (Bank of England)
    Abstract: We study the interaction between banks’ capital and their liquidity transformation in both a theoretical and empirical set-up. We first construct a simple model to develop hypotheses which we test empirically. Using a confidential Bank of England dataset that includes bank-specific capital requirement changes since 1989, we find that banks engage in less liquidity transformation when their capital increases. This finding suggests that capital and liquidity requirements are at least to some extent substitutes. By establishing a robust causal relationship, these results can help guide the optimal joint calibration of capital and liquidity requirements and inform macro-prudential policy decisions.
    Keywords: Banking; liquidity transformation; capital requirements and financial regulation
    JEL: G21 G28 G32
    Date: 2019–12–20

This nep-mon issue is ©2020 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.