nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒01‒20
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Signalling Channel of Negative Interest Rates By Oliver de Groot; Alexander Haas
  2. Money's Past is Fintech's Future: Wildcat Crypto, the Digital Dollar, and Citizen Central Banking By Hockett, Robert C.; Library, Cornell
  3. Thoughts on a review of the ECB's monetary policy strategy By Christophe Blot; Jérôme Creel; Paul Hubert
  4. Monetary Policy in an Era of Global Supply Chains By Shang-Jin Wei; Yinxi Xie
  5. An alternative framework for a textbook analysis of the money multiplier By Zinn, Jesse Aaron
  6. SFX Interventions, Financial Intermediation, and External Shocks in Emerging Economies. By Carrasco, Alex; Florián, David; Nivín, Rafael
  7. Industry Impacts of Unconventional Monetary Policy By Eiji Goto
  8. Incomplete Price Adjustment and Inflation Persistence By Marcelle, Chauvet; Insu, Kim
  9. A Calibration of the Term Premia to the Euro Area By Eric McCoy
  10. Evolution of monetary policy frameworks in the post-crisis environment By Anna Samarina; Nikos Apokoritis
  11. The Welfare Costs of Inflation By Luca Benati; Juan-Pablo Nicolini
  12. Search-for-Yield under Prolonged Monetary Easing and Aging By Yoshiaki Ogura
  13. Bimetallism and its discontents: cooperation and coordination failure in the empire’s monetary politics, 1549–59 By Volckart, Oliver
  14. Helicopter Money: A Preliminary Appraisal By Agarwal, Samiksha; Chakraborty, Lekha
  15. Challenges ahead for EMU monetary policy By Christophe Blot; Jérôme Creel; Paul Hubert
  16. Understanding SLL / US$ exchange rate dynamics in Sierra Leone using Box-Jenkins ARIMA approach By Jackson, Emerson Abraham
  17. Capital Flows at Risk: Taming the Ebbs and Flows By R. G Gelos; Lucyna Gornicka; Robin Koepke; Ratna Sahay; Silvia Sgherri
  18. An Empirical Evidence of Fisher Effect in Bangladesh: A Time-Series Approach By Uddin, Gazi Salah; Alam, Md. Mahmudul; Alam, Kazi Ashraful
  19. Is the negative interest rate policy effective? By Robert L. Czudaj
  20. Exchange Rate Volatility and Pass-Through to Inflation in South Africa By Ken Miyajima
  21. Central banking in challenging times By Claudio Borio
  22. Adding rooms onto a house we love: Central banking after the Global Financial Crisis By Johnson, Juliet; Arel-Bundock, Vincent; Portniaguine, Vladislav
  23. An Analysis of the 2008 Global Financial Crisis: Was Quantitative Easing Appropriate? By Naape, Baneng
  24. Rationally Inattentive Savers and Monetary Policy Changes: A Laboratory Experiment By Andrea Civelli; Cary Deck; Antonella Tutino
  25. Has the ECB lost its mind ? By Christophe Blot; Paul Hubert
  26. U.S. Monetary Policy Spillovers to GCC Countries: Do Oil Prices Matter? By Olumuyiwa S Adedeji; Erik Roos; Sohaib Shahid; Ling Zhu
  27. Exchange Rate Pass-through after a Large Depreciation By Anatoli Colicev; Joris Hoste; Jozef Konings
  28. Exchange Rates and Consumer Prices: Evidence from Brexit By Breinlich, Holger; Leromain, Elsa; Novy, Dennis; Sampson, Thomas
  29. Exchange Rate Pass-through after a Large Depreciation By Anatoli Colicev; Joris Hoste; Jozef Konings
  30. Household Portfolios and Monetary Policy By Sarah Brown; Alexandros Kontonikas; Alberto Montagnoli
  31. Rousseauvian Money By Hockett, Robert C.; Library, Cornell
  32. Risk Management Maturity Assessment at Central Banks By Elie Chamoun; Nicolas Denewet; Antonio Manzanera; Sanjeev Matai

  1. By: Oliver de Groot; Alexander Haas
    Abstract: Negative interest rates are a new (and controversial) monetary policy tool. This paper studies a novel signalling channel and asks whether negative rates can be 1) an effective and 2) an optimal policy tool. 1) We build a financial-friction newKeynesian model in which monetary policy can set a negative reserve rate, but deposit rates are constrained by zero. All else equal, a negative rate contracts bank net worth and increases credit spreads (the costly “interest margin” channel). However, it also signals lower future deposit rates, even with current deposit rates constrained, boosting aggregate demand and net worth. Quantitatively, we find the signalling channel dominates, but the effectiveness of negative rates depends crucially on three factors: i) degree of policy inertia, ii) level of reserves, iii) zero lower bound duration. 2) In a simplified model we prove two necessary conditions for the optimality of negative rates: i) time-consistent policy setting, ii) preference for policy smoothing.
    Keywords: Monetary policy, Taylor rule, Forward guidance, Liquidity trap
    JEL: E44 E52 E61
    Date: 2019–08
  2. By: Hockett, Robert C.; Library, Cornell
    Abstract: I argue that crypto-currencies will soon go the way of the ‘wildcat’ banknotes of the mid-19th century. As central banks worldwide upgrade their payments systems, the Fed will begin issuing a ‘digital dollar’ that leaves no licit function for what I call ‘wildcat crypto.’ But the imminent change heralds far more than a shakeout in ‘fintech.’ It will also make possible a new era of what I call ‘Citizen Central Banking.’ The Fed will administer a national system of what I call ‘Citizen Accounts.’ This will not only end the problem of the ‘unbanked,’ it also will simplify monetary policy. Instead of working through private bank ‘middlemen’ that it hopes will lend QE money to borrowers during a downturn, the Fed will be able to do ‘helicopter drops’ directly into Fed Citizen Accounts. And rather than rely solely on interbank lending rate hikes or countercyclical capital buffering during periods of froth, the Fed will be able to impound money through the more ‘carrot-like’ measure of interest credited to those accounts. We are at last on the verge of establishing a true ‘Fed for the People.’
    Date: 2019–02–08
  3. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Time is ripe for a review of the ECB strategy: the economic context and the audience for communication have changed, and the tools for policy decisions and for analysing the environment have expanded. The definition of the inflation target, the twopillar strategy and the use of “non-standard” policy measures need discussion. A change in the ECB mandate is also worth discussing for it would permit to evaluate the current strategy and mandate against an alternative. This document was provided by Policy Department A at the request of the Committee on Economic and Monetary Affairs.
    Date: 2019–11
  4. By: Shang-Jin Wei; Yinxi Xie
    Abstract: We study the implications of global supply chains for the design of monetary policy, using a small-open economy New Keynesian model with multiple stages of production. Within the family of simple monetary policy rules with commitment, a rule that targets separate producer price inflation at different production stages, in addition to output gap and real exchange rate, is found to deliver a higher welfare level than alternative policy rules. As an economy becomes more open, measured by the export share, the optimal weight on the upstream inflation rises relative to that on the final stage inflation. If we have to choose among aggregate price indicators, targeting PPI inflation yields a smaller welfare loss than targeting CPI inflation alone. As the production chain becomes longer, the optimal weight on PPI inflation in the policy rule that targets both PPI and CPI inflation will also rise. A trade cost shock such as a rise in the import tariff can alter the optimal weights on different inflation variables.
    JEL: E52 F4
    Date: 2020–01
  5. By: Zinn, Jesse Aaron (Clayton State University)
    Abstract: In textbooks on the theory of money it is standard practice to hold both reserves and deposits fixed to study the relationship between the quantity of currency in the economy and the money multiplier. But doing so leads to a result that is contrary to the notion that if the public withdraws from their deposits in order to increase currency holdings then bank lending will decrease, causing a fall in both the money supply and the money multiplier. Specifically, when reserves are greater than deposits and both are fixed the money multiplier has a positive relationship with both currency holdings and the currency-deposit ratio. I show that these results are artifacts of implicitly assuming that the monetary authority behaves so as to keep deposits and reserves constant in response to a change in currency held by the public. Dropping these assumptions and abstracting from any response from the central bank results in an unconditionally non-positive relationship between currency holdings and the money multiplier.
    Date: 2018–11–07
  6. By: Carrasco, Alex (Banco Central de Reserva del Perú); Florián, David (Banco Central de Reserva del Perú); Nivín, Rafael (Banco Central de Reserva del Perú)
    Abstract: In this document, we study the role of sterilized foreign exchange (SFX) interventions as an additional monetary policy instrument for emerging market economies in response to external shocks. We develop a model in order to analyze SFX interventions as a balance sheet policy induced by a financial friction in the form of an agency problem between banks and depositors. The severity of the bank's agency problem depends directly on a measure of currency mismatch at the bank level. Moreover, credit and deposit dollarization co-exists in equilibrium as endogenous variables. In this context, SFX interventions can lean against the response of the bank's lending capacity and ultimately the response of real variables by moderating the response of the exchange rate. Furthermore, we take the model to data by calibrating it to replicate some financial steady-state targets for the Peruvian banking system as well as matching the impulse responses of the macroeconomic model to the impulse responses implied by an SVAR model. Our results indicate that SFX interventions successfully reduce GDP and investment volatility by about 6% and 14%, respectively, when compared to a flexible exchange rate regime. Moreover, SFX interventions reduce the response of GDP to foreign interest rate and commodity price shocks by around 11 and 22 percent, respectively. Hence, this policy produces significant welfare gains when responding to external shocks: if the Central Bank does not intervene in the Forex market in the face of external shocks, there would be a welfare loss of 1.1%.
    Keywords: Sterilized Forex Interventions, External Shocks, Financial Cycle, Dollarization, Monetary Policy.
    Date: 2019–12
  7. By: Eiji Goto
    Abstract: While conventional monetary policy has been shown to create differential impacts on industry output, how unconventional monetary policy affects industries is not yet known. Conducting an industry level analysis provides insights of the relative response of industries, monetary transmission mechanisms, and the role of industry composition on the aggregate impact. This paper studies the effects of unconventional monetary policy on industry output in the United States, the United Kingdom, and Japan, three countries that have recently implemented unconventional monetary policy. I use a structural Bayesian vector autoregressive model with zero and sign restrictions to identify an unconventional monetary policy shock. The effects on output across industries within a country have substantial heterogeneity. For example, industry peak output responses in the United States vary from -0.01% to +0.35% in response to a one standard deviation shock to the central bank total asset. Industries across the three countries have some variation in output response to unconventional monetary policy, however, on average the effects are similar to conventional monetary policy. Furthermore, regression analysis shows that lower working capital is associated with a larger industry output response to unconventional monetary policy. The finding indicates the relevance of the interest rate channel to unconventional monetary policy while the policy rates adhere to the zero lower bound.
    JEL: E32 E52 G32
    Date: 2020–01–12
  8. By: Marcelle, Chauvet; Insu, Kim
    Abstract: This paper proposes a sticky inflation model in which inflation persistence is endogenously generated from the optimizing behavior of forward-looking firms. Although firms change prices periodically, their ability to fully adjust them in response to changes in economic conditions is assumed to be constrained due to the presence of managerial and customer costs of price adjustment. In essence, the model assumes that price stickiness arises from a combination of staggered contracts as in Calvo (1983) as well as quadratic adjustment cost as in Rotemberg (1982). We estimate the model using Bayesian techniques. Our findings strongly support both sources of price stickiness in the U.S. data. The model performs well in matching microeconomic evidence on price setting, particularly regarding the size and frequency of price changes. The paper also shows how incomplete price adjustments in a staggered price contracts model limit the contribution of expectations to inflation dynamics: it generates the delayed response of inflation to demand and monetary shocks, and the observed correlation between inflation and economic activity.
    Keywords: Inflation Persistence, Phillips Curve, Sticky Prices, Convex Costs, Incomplete Price Adjustment, Infrequent Price Adjustment
    JEL: C68 E31 E52
    Date: 2019–12–04
  9. By: Eric McCoy
    Abstract: Credit risk-free long-term interest rates can typically be decomposed into two components: expectations of the future path of the short-term policy rate and the term premium. Changes in term premium are considered to have been an important driver behind developments in long-term bond yields in recent years. As policy rates of major central banks approached their effective lower bound in the aftermath of the global financial crisis, their ability to provide the necessary degree of monetary stimulus using conventional policy measures became very limited. In this particular context, central banks had to move beyond conventional policy instruments and instead deploy a set of unconventional tools (such as large-scale asset purchase programs and forward guidance) that were tailored to target the longer-end of the yield curve. There is a growing body of empirical evidence suggesting that these unconventional measures turned out to be effective in compressing the term premium component of interest rates. This paper, after providing a definition of the term premium and a succinct overview of different ways to measure it, presents the empirical results obtained from calibrating a Gaussian affine term structure (GATSM) based term premia model to the euro area. In addition to discussing the GATSM model’s assumptions and specifications, it also describes the calibration algorithm employed, which is based on genetic algorithms. Thereafter, it provides some insight into the time profile of the euro area term premium in the post global financial crisis (GFC) era and in particular how it has evolved after key ECB policy decisions since 2008.
    JEL: E43 E44 E52 E58
    Date: 2019–09
  10. By: Anna Samarina; Nikos Apokoritis
    Abstract: This paper evaluates the changes in monetary policy frameworks made by 14 central banks in advanced economies over the period 2007-2018. We draw several conclusions about the evolution of their monetary policy strategies. There has been a tendency among central banks to move towards more narrowly defined inflation targets and to lower the (mid)point of the target. Additionally, transparency and commitment of central banks have been enhanced, and monetary policy toolkit has been expanded.
    Keywords: advanced economies; monetary policy framework
    JEL: E52 E58
    Date: 2020–01
  11. By: Luca Benati; Juan-Pablo Nicolini
    Abstract: We estimate the welfare costs of inflation originating from lack of liquidity satiation–as in Bailey (1956), Friedman (1969), Lucas (2000), and Ireland (2009)–for the U.S., U.K., Canada, and three countries/economic areas (Switzerland, Sweden, and the Euro area) in which interest rates have recently plunged below zero. We pay special attention to (i) the fact that, as shown by recent experience, zero cannot be taken as the effective lower bound (ELB); (ii) the possibility that, as discussed by Mulligan and Sala-i-Martin (2000), the money demand curve may become flatter at low interest rates; (iii) the functional form for money demand.; and (iv) what the most relevant proxy for the opportunity cost is. We report three main findings: (1) allowing for an empirically plausible ELB (e.g., -1%) materially increases the welfare costs compared to the standard benchmark of zero; (2) there is nearly no evidence that at low interest rates money demand curves may become flatter: rather, evidence for the U.S. (the country studied by Mulligan and Sala-i-Martin (2000)) clearly points towards a steeper curve at low rates; and (3) welfare costs are, in general, non-negligible: this is especially the case for the Euro area, Switzerland, and Sweden, which, for any level of interest rates, demand larger amounts of M1 as a fraction of GDP. For policy purposes the implication is that, ceteris paribus, inflation targets for these countries should be set at a comparatively lower level.
    Date: 2019–12
  12. By: Yoshiaki Ogura
    Abstract: We find several facts that suggest the Japanese regional loan market conforms to the "search-for-yield" phenomenon, in which banks are driven to provide more risky loans by diminished loan spreads. We use a structural model to estimate demand elasticity and the degree of competition in local loan markets simultaneously. Our estimates show that competition intensifies in markets where banks hold more slack liquidity caused by monetary easing, and where loan demand is less elastic against lowering interest rates due to a rapidly aging population. We find reasonably robust evidence that banks in such competitive markets are driven to extend riskier loans.
    Date: 2019–10
  13. By: Volckart, Oliver
    Abstract: The article uses new sources to review the hypotheses that Charles V's currency bill of 1551 failed because of the electoral-Saxon resistance against the undervaluation of the taler that it stipulated, or because the emperor was too weak to overcome the estates' resistance to collective action in monetary policies. The study shows that these issues were overshadowed by the dispute about whether a bimetallic currency should be established. Charles V's currency bill failed because the Diet of Augsburg (1550–51) asked the emperor to publish it before all open issues had been resolved. This request placed the emperor in a dilemma where he had to make a decision but could not do so without antagonising important parties. It was the result of a coordination failure at the level of the Empire, which in turn was a consequence of a lack of continuity among those personnel involved in shaping monetary policies.
    Keywords: monetary politics; currency unions; coinage; bimetallism; early modern history
    JEL: E50 H10 H60 N10 N40
    Date: 2018–07–31
  14. By: Agarwal, Samiksha; Chakraborty, Lekha
    Abstract: Helicopter money is a monetary policy tool to boost spending levels in an economy experiencing low nominal demand, deflation and high debt to GDP ratio. It is the monetary financing of fiscal deficits, in a strict sense of “seigniorage”, in order to reach the inflation and the growth targets in the economy. We critically review in this paper how helicopter money is carried out through direct transfers to the public, or through a “fiscal stimulus” (tax cut or public expenditure boost). Helicopter drops are gaining relevance today in context of the non-efficaciousness of orthodox monetary policy tools like Quantitative Easing (QE) and the persistently low demand levels in the economies. However, the political economy determinants, the macroeconomic policy context and the fiscal-monetary policy linkages are crucial in the effective implementation of helicopter money and it is indeed challenging. When fiscal consolidation strategies adopt public expenditure compression rather than tax buoyancy to reach the rule-based fiscal policies and in turn its adverse consequences on economic growth - which has started showing up in growth downturn - a re-look into the plausible financing patterns of deficit and new monetary policy tools is refreshing.
    Keywords: Helicopter money, Quantitative easing, Demand, Fiscal stimulus
    JEL: C61 E2 E21 E52 E62
    Date: 2019
  15. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: With the economic slowdown in the euro area, questions arise as to whether the ECB retains some economic and political margins for manoeuvre after a decade of active policies. In this note, we highlight three possible monetary policy developments. We discuss their pros and cons according to four dimensions: political constraints, technical constraints, independence and interactions with fiscal policy.
    Date: 2019–09
  16. By: Jackson, Emerson Abraham
    Abstract: This study was carried out with the purpose of producing twelve out-of-sample forecast for a univariate exchange rate variable as a way of addressing challenges faced around dollarization issues in the domestic economy. In pursuit of this, the ARIMA model was utilised, with the best model [1,4,7] indicating that the Sierra Leone - Leone [SLL] currency will continue to depreciate against the United States Dollar [US$] throughout most part of the year 2020. This was done on the assumption of Ceteris Paribus condition, and most importantly on the view that past events of the univariate exchange rate variable is a determinant of future outcomes or performances. In a bid to moving forward, policy recommendations have suggested high level collaboration between relevant policy institutions like the Bank of Sierra Leone and the Ministry of Finance to address issues of concern, for example, a boost to the real sector and many more.
    Keywords: Box-Jenkins ARIMA, Exchange Rate, Forecast, Sierra Leone
    JEL: C52 C53 E47 F31 F47
    Date: 2020–01–01
  17. By: R. G Gelos; Lucyna Gornicka; Robin Koepke; Ratna Sahay; Silvia Sgherri
    Abstract: The volatility of capital flows to emerging markets continues to pose challenges to policymakers. In this paper, we propose a new framework to answer critical policy questions: What policies and policy frameworks are most effective in dampening sharp capital flow movements in response to global shocks? What are the near- versus medium-term trade-offs of different policies? We tackle these questions using a quantile regression framework to predict the entire future probability distribution of capital flows to emerging markets, based on current domestic structural characteristics, policies, and global financial conditions. This new approach allows policymakers to quantify capital flows risks and evaluate policy tools to mitigate them, thus building the foundation of a risk management framework for capital flows.
    Date: 2019–12–20
  18. By: Uddin, Gazi Salah; Alam, Md. Mahmudul (Universiti Utara Malaysia); Alam, Kazi Ashraful
    Abstract: This paper is an attempt to trace the relationship between interest rates and rates of inflation in the economy of Bangladesh. In view of this, a time series approach is considered to examine the empirical evidence of Fisher’s effect in the country. By applying OLS and Unit Root test, the estimated value is used to determine the casual relationship between interest rates and inflation for the monthly sample period of August 1996 to December 2003. The empirical results suggest that there does not exist any co-movement of inflation with interest rates and the relationship between the variables is also not significant for Bangladesh. Further, the trends advocate that the inflation premium, equal to expected inflation that investors add to real-risk free rate of return, is ineffective in the country.
    Date: 2019–02–20
  19. By: Robert L. Czudaj
    Abstract: This paper examines the effectiveness of the negative interest rate policy conducted by several central banks to stabilize economic growth and inflation exectations through the signaling channel. In doing so, we assess survey-based expectations data for up to 44 economies from 2002 to 2017 and analyze the impact of the adoption of a negative interest rate policy on expectations made by professionals based on a difference-in-differences approach. Our main ï¬ ndings are as follows: First, we show that the introduction of negative policy rates signiï¬ cantly reduces expectations regarding 3-month money market interest rates and also 10-year government bond yields. Second, we also provide evidence for a signiï¬ cantly positive effect of this unconventional monetary policy tool on GDP growth and inflation expectations. This implies that the negative interest rate policy appears to be effective in boosting economic growth and overcoming a deflationary spiral. Consequently, the effect of negative nominal interest rates on real interest rate expectations is also negative.
    Keywords: Expectations, Inflation, Monetary policy, Negative interest rates, Survey data
    JEL: E31 E43 E52
    Date: 2019–12
  20. By: Ken Miyajima
    Abstract: Does the South African rand’s relatively large volatility affect inflation? To shed some light on this question, a standard estimation technique of exchange rate pass-through to inflation is extended to incorporate exchange rate volatility. Estimated results suggest that higher exchange rate volatility tends to increase core inflation but to a relatively limited extent in South Africa. The finding lends support to the policy of allowing the rand to float freely and work as a shock absorber, consistent with the nation’s successful inflation targeting regime.
    Date: 2019–12–13
  21. By: Claudio Borio
    Abstract: Since the Great Financial Crisis, central banks have been facing a triple challenge: economic, intellectual and institutional. The institutional challenge is that central bank independence - a valuable institution - has come in for greater criticism. This essay takes a historical perspective and draws parallels with the previous waxing and waning of central bank independence. It suggests that this institution is closely tied to globalisation, as both spring from the same fountainhead: an intellectual and political environment that supports an open system in which countries adhere to the same principles and governments remain at arm′s length from the functioning of a market economy. This suggests that the fortunes of independence are also tied to those of globalisation. The essay then proceeds to explore ways that can help safeguard independence. A key one is to narrow the growing expectations gap between what central banks are expected to deliver and what they can actually deliver. In that context, it also considers and dismisses the usefulness of recently proposed schemes that involve controlled deficit monetisation.
    Keywords: central bank independence, globalisation, business cycles, fiscal dominance
    JEL: E5
    Date: 2019–12
  22. By: Johnson, Juliet; Arel-Bundock, Vincent (Université de Montréal); Portniaguine, Vladislav
    Abstract: This article examines the extent to which central bankers have been willing and able to rethink their beliefs about monetary policy in the wake of the Global Financial Crisis. We show that despite the upheaval, the core pre-crisis monetary policy paradigm remains relatively intact: central bankers believe that they should primarily pursue price stability through targeting low inflation in a transparent manner, and that they need operational independence to achieve this goal. In a bid to address post-crisis conditions and maintain their credibility, however, central bankers have also layered new elements onto the old core. We document both the resilience of pre-crisis beliefs and the process of layering using computer-assisted text analysis and qualitative analysis of 13,586 speeches given between 1997 and 2017 by central bankers from around the world.
    Date: 2018–10–26
  23. By: Naape, Baneng
    Abstract: This essay aimed to investigate the effects of Quantitative Easing (QE) on selected macroeconomic and financial variables. By means of a desktop approach, we find that QE1 had a strong, beneficial impact on the real economy through the banking sector whereas QE2 and QE3 had small positive or neutral effects on banks and life Insurers. Although QE did not close the gap left by the 2008 global financial crisis, it helped reduce the rate at which the crisis was rising and proved to be an effective crisis management tool. QE helps in the short run but weakens the economy in the long run. Hence, this calls for a complete clean-up of the financial sector and a new approach to monetary policy.
    Keywords: Quantitative Easing, Global Financial Crisis, economic downturn, Advanced Economies
    JEL: E5 G1 G14
    Date: 2019–12–15
  24. By: Andrea Civelli; Cary Deck; Antonella Tutino
    Abstract: We present a model where rationally inattentive agents decide how much to save while imperfectly tracking interest rate changes. Suitable assumptions on agents’ preferences and interest rate distribution allow us to derive testable theoretical predictions and their implications for monetary policy. We probe these predictions using a laboratory experiment with induced inattention that closely reflects the theoretical assumptions. We find that, empirically, the laboratory data corroborates the results of the theoretical model. In particular, we show that experimental subjects respond to changes in the interest rate policy environment with: (1) a decrease in savings when the utility gain from savings does not compensate for the cognitive cost of tracking the interest rate; (2) more informed and deliberate consumption/investment choices when the monetary authority stabilizes the economy by lowering the volatility of the policy rate, implementing a version of Delphic forward guidance; (3) a slight decrease in information processing but no behavioral changes in consumption when the monetary authority signals current monetary policy stance, implementing a version of Odyssean forward guidance; (4) a sizable decrease in investment when their perception of the outlook deteriorates. These experimental and theoretical findings agree with the empirical literature on the effect of monetary policy on households’ consumption behavior in U.S. data and abroad.
    Keywords: Rational Inattention; Experimental Evidence; Informational Processing Capacity; Consumption
    JEL: C91 D11 D8 E20
    Date: 2019–12–19
  25. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: This Policy brief analyses the recent expansionary decisions of the ECB in September 2019, which are now under scrutiny and have even been criticized. ■ Recent facts confirm the need of an expansionary monetary policy, as inflation expectations are still decreasing and credit remains weak. ■ We pay a special attention to the three types of risk evoked in the public debate. ■ First, it has been argued that low interest rates could increase the households saving rate due to an income effect. We show that this does not materialize on recent data. We observe such a correlation only for Germany, and this already before 2008, casting some doubt on the direction of the causality. ■ Second, it is argued that the banks' profits are at risk because of low interest rates. We show that banks' profits are steady and are recovering since 2012, and that the new measures are not expected to have a negative effect on bank's profits. ■ Third, using a macro-finance assessment of financial imbalances, we do not observe the emerging of bubbles on housing and stock market. ■ Although the downside should be carefully analysed, we conclude that the critics of the recent expansionary monetary policy does not rely on sound evidence. ■ Finally, and in any case, a fiscal expansion would reduce the need for expansionary policies. A discussion of the euro area fiscal stance is needed.
    Date: 2019–12
  26. By: Olumuyiwa S Adedeji; Erik Roos; Sohaib Shahid; Ling Zhu
    Abstract: This paper provides empirical evidence that the size of the spillovers from U.S. monetary policy to non-oil GDP growth in the GCC countries depends on the level of oil prices. The potential channels through which oil prices could affect the effectiveness of monetary policy are discussed. We find that the level of oil prices tends to dampen or amplify the growth impact of changes in U.S. monetary policy on the non-oil economies in the GCC.
    Date: 2019–12–27
  27. By: Anatoli Colicev; Joris Hoste; Jozef Konings
    Abstract: This paper uses monthly scanner consumer price data to study exchange rate pass-through (ERPT) after the Kazakh Tenge switched from a fixed to a floating exchange rate regime in August 2015. The depreciation of the Tenge was large (50%), triggered overnight and unanticipated. This exchange rate shock allows us to have a clear identification strategy. In particular, we model ERPT to consumer prices using Local Projections estimations, which is especially well-suited to capture price dynamics after large shocks. We find that prices respond fast, yet incomplete. After 12 months the ERPT into consumer prices is between 25% and 34%. We also find that ERPT depends on the type of product, i.e. whether it is foreign sourced and whether the product is part of an international brand.
    Date: 2019–08
  28. By: Breinlich, Holger (University of Surrey); Leromain, Elsa (UC Louvain); Novy, Dennis (University of Warwick); Sampson, Thomas (London School of Economics.)
    Abstract: This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0.29. We estimate the Brexit vote increased consumer prices by 2.9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.
    Date: 2019
  29. By: Anatoli Colicev; Joris Hoste; Jozef Konings
    Abstract: This paper uses monthly scanner consumer price data to study exchange rate pass-through (ERPT) after the Kazakh Tenge switch from a fixed to a floating exchange rate regime in August 2015. The depreciation of the Tenge was large (50%), triggered overnight and unanticipated. This exchange rate shock allows us to have a clear identification strategy. In particular, we model ERPT to consumer prices using Local Projections estimations, which is especially well-suited to capture price dynamics after large shocks. We find that prices respond fast, yet incomplete. After 12 months the ERPT into consumer prices is between 25% and 34%. We also find that ERPT depends on the type of product, i.e. whether it is foreign sourced and whether the product is an international brand.
    Date: 2019–10
  30. By: Sarah Brown (Department of Economics, University of Sheffield, UK); Alexandros Kontonikas (Essex Business School, University of Essex, UK); Alberto Montagnoli (Department of Economics, University of Sheffield)
    Abstract: We show that expansionary monetary policy is associated with higher household portfolio allocation to high risk assets and lower allocation to low risk assets, in line with “reaching for yield” behaviour. Our findings are based on analysis of US household level panel data using two measures of monetary policy shifts over the period 1999-2007. We also show that the impact of monetary policy changes is stronger for active investors. In addition, our hurdle model estimates reveal that monetary shocks strongly affect the decision to hold high risk assets, but not the decision to hold low risk assets. Finally, our results highlight the role of self-reported risk attitudes as well as that of mortgage-holder status in affecting the response of household portfolios to monetary policy changes.
    Keywords: Household Financial Portfolio Allocation; Monetary Policy
    JEL: D14 G11 E52
    Date: 2020–01
  31. By: Hockett, Robert C.; Library, Cornell
    Abstract: I show that the intimate functional links among states, monies, and financial systems, ubiquitous across history and geography as they are, are not accidental. I do so by analytically 'deriving' first the polity, then money and finance, from a temporally extended implicit covenant that is both grounded in and facilitative of ongoing joint agency among persons. This lends to state and money alike their shared normative and, once formally systematized, legal character. I indicate throughout how this shared genesis, function, and normative character keep state, money, and ultimately finance practically ‘joined at the hip,’ and manifest how polity and economy, indeed our political and productive selves, are thus joined as well. To recognize and to ‘own’ this, I conclude, is in a sense finally to own our own selves.
    Date: 2018–11–06
  32. By: Elie Chamoun; Nicolas Denewet; Antonio Manzanera; Sanjeev Matai
    Abstract: Effective risk management at central banks is best enabled by a sound framework embedded throughout the organization that supports the design and execution of risk management activities. To evaluate the risk management practices at a central bank, the Safeguards Assessments Division of the IMF’s Finance Department developed a tool that facilitates stocktaking of elements that are present and categorizes the function based on its maturity. Tailored recommendations are then provided to the central bank which provide a roadmap to advance the risk management function.
    Date: 2019–12–27

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.