|
on Monetary Economics |
| By: | Benjamin Beckers (Reserve Bank of Australia) |
| Abstract: | Identifying the causal effect of monetary policy on inflation remains a challenge. Researchers frequently find evidence of a 'price puzzle': increases in the policy rate are followed by higher rather than lower inflation. This can be explained by the forward-looking behaviour of the central bank. Inflation does not rise in response to an increase in the policy rate but, instead, the central bank raises its policy rate when it expects inflation to increase in the future. To identify the true causal effects of monetary policy on inflation, it is hence necessary to control for this systematic policy response to expected inflation. For Australia, however, the price puzzle has been found even when controlling for the cash rate's systematic response to the Reserve Bank's own inflation forecasts. I argue that this is due to an additional but omitted systematic response of the cash rate to credit market shocks. Easier credit market conditions lead to an economic expansion and higher inflation. Therefore, the Bank raises the cash rate – its policy rate – when credit spreads decline. However, the Bank's inflation forecasts do not fully capture the inflationary effect of easier credit conditions. As a result, cash rate changes are positively correlated with future inflation even when purging them of the cash rate's response to the Bank's inflation forecasts. Accordingly, I show that accounting for the cash rate's additional response to credit market conditions resolves the price puzzle. As expected, a higher cash rate reduces inflation and output growth, and raises the unemployment rate. |
| Keywords: | monetary policy; inflation; price puzzle; credit market shocks; credit spreads |
| JEL: | E31 E32 E43 E52 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2020-01&r=all |
| By: | Akvile Bertasiute; Domenico Massaro; Matthias Weber |
| Abstract: | We analyze different behavioral models of expectation formation in a multicountry New Keynesian currency union model. Our analyses yield the following robust results. First, economic integration is of crucial importance for the stability of the economic dynamics in a currency union. Second, when the economic dynamics are unstable, more activist monetary policy does not lead to stable economic dynamics. These findings have natural counterparts in the rational expectations version of the model: there, economic integration is crucial for the determinacy of the equilibrium and when the equilibrium is indeterminate, more activist monetary policy does not lead to a determinate equilibrium. In an application to euro area data, we find that the behavioral macroeconomic model outperforms its rational counterpart in terms of prediction performance. |
| Keywords: | Behavioral Macroeconomics, Monetary Unions, Determinacy of Equilibria, Reinforcement Learning |
| JEL: | F45 E52 D84 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2019:16&r=all |
| By: | Lars E.O. Svensson |
| Abstract: | The general monetary policy strategy of “forecast targeting” allows the Federal Reserve to respond flexibly to all relevant information in achieving its dual mandate of maximum employment and price stability. In contrast, a simple “instrument” rule such as a Taylor-type rule restricts the Federal Reserve to only respond in a rigid way to the partial information of current inflation and output. Forecast targeting can be used for any of the more specific strategies of annual-inflation targeting, price-level targeting, temporary price-level targeting, average-inflation targeting, and nominal-GDP targeting. These specific strategies are examined and evaluated according to how well they may fulfill the dual mandate, considering the possibilities of a binding effective lower bound for the federal funds rate and a flatter Phillips curve. Nominal-GPD targeting means that GDP and the GDP deflator are considered perfect substitutes. It therefore does not treat maximum employment and price stability as separate and independent targets. In addition, data on GDP and the GDP deflator have longer reporting lags and are subject to substantial ex post revisions. The latter will require both retrospective and prospective revisions of the target path, with large communication difficulties. Average-inflation targeting has good prospects of handling the problems of a binding effective lower bound and a flatter Phillips curve. As a permanently applied strategy, it would also have good possibilities of becoming understood by and credible with markets and the general public. |
| JEL: | E52 E58 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26657&r=all |
| By: | Wilbert Van der Klaauw; Giorgio Topa (Forschungsinstitut zur Zukunft der Arbeit; Research and Statistics Group; Federal Reserve Bank; University of Chicago; Federal Reserve Bank of New York); Olivier Armantier (Board of Governors of the Federal Reserve System (U.S.); Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York); Basit Zafar (Bank of Italy; Federal Reserve Bank of New York; Forschungsinstitut zur Zukunft der Arbeit; Arizona State University) |
| Abstract: | The New York Fed started releasing results from its Survey of Consumer Expectations (SCE) three years ago, in June 2013. The SCE is a monthly, nationally representative, internet-based survey of a rotating panel of about 1,300 household heads. Its goal, as described in a series of Liberty Street Economics posts, is to collect timely and high-quality information on consumer expectations about a broad range of topics, covering both macroeconomic variables and the households' own situation. In this post, we look at what drives changes in consumer inflation expectations. Do people respond to changes in recent realized inflation, and to expected and realized changes in prices of salient individual commodities?like gasoline? Understanding what drives inflation expectations is important for the conduct of monetary policy, since it improves a central bank?s ability to assess its own credibility and to evaluate the impact of its policy decisions and communication strategy. |
| Keywords: | expectations |
| JEL: | D1 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87150&r=all |
| By: | Cristina Arellano; Yan Bai; Gabriel P. Mihalache |
| Abstract: | This paper develops a New Keynesian model with sovereign default risk (NK-Default). We focus on the interaction between monetary policy, conducted according to an interest rate rule that targets inflation, and external defaultable debt issued by the government. Monetary policy and default risk interact since both affect domestic consumption, production, and inflation. We find that default risk amplifies monetary frictions and generates a tension for monetary policy, which increases the volatility of inflation and nominal rates. These monetary frictions in turn discipline sovereign borrowing, slowing down debt accumulation and lowering sovereign spreads. Our framework replicates the positive comovements of spreads with nominal domestic rates and inflation, a salient feature of emerging markets data, and can rationalize the experience of Brazil during the 2015 downturn, with high inflation, nominal rates, and spreads. |
| JEL: | E52 F34 F41 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26671&r=all |
| By: | Acharya, Viral V.; Imbierowicz, Björn; Steffen, Sascha; Teichmann, Daniel |
| 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 highrisk 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. |
| Keywords: | Central bank liquidity,Monetary policy transmission,Corporate deposits,Financial crisis,Lender of last resort,Loans,Real effects |
| JEL: | E43 E58 G01 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:482019&r=all |
| By: | Marc Giannoni; Abhi Gupta; Andrea Tambalotti (Federal Reserve Bank of New York; Research and Statistics Group; Princeton University; New York University; National Bureau of Economic Research); Domenico Giannone (Solvay Brussels School of Economics and Management; Federal Reserve Bank of New York; La Trobe University; Université Libre de Bruxelles; Libera Universität Internazionale degli Studi Sociali; European Central Bank; University of Aston in Birmingham; European Centre for Advanced Research in Economics and Statistics; Centre for Economic Policy Research (CEPR)); Marco Del Negro; Pearl Li |
| Abstract: | The preceding two posts in this series documented that interest rates on safe and liquid assets, such as U.S. Treasury securities, have declined significantly in the past twenty years. Of course, short-term interest rates in the United States are under the control of the Federal Reserve, at least in nominal terms. So it is legitimate to ask, To what extent is this decline driven by the Federal Reserve?s interest rate policy? This post addresses this question by coupling the results presented in the previous post with those obtained from an estimated dynamic stochastic general equilibrium (DSGE) model. |
| Keywords: | r star; convenience yield; liquidity; safety |
| JEL: | E2 E5 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87240&r=all |
| By: | Apostolos Serletis (University of Calgary); Nahiyan Azad (University of Calgary) |
| Abstract: | This paper explores for spillovers from monetary policy in the United States to a number of emerging market economies. We estimate the Elder and Serletis (2010) bivariate structural GARCH-in-Mean VAR in the U.S. monetary policy rate and the policy rate of each of six emerging economies that target the inflation rate — Brazil, Chile, Mexico, Romania, Serbia, and South Africa. We also estimate the same model in the U.S. monetary policy rate and the exchange rate (against the U.S. dollar) of each of six emerging economies that target the exchange rate — Bosnia and Herzegovina, Bulgaria, Comoros, Croatia, the Former Yugoslav Republic of Macedonia, and Montenegro. Our evidence suggests that positive (negative) U.S. monetary policy shocks tend to appreciate (depreciate) the currencies of the exchange rate targeting emerging economies, but have an ambiguous effect on the policy rates of the inflation-targeting emerging economies. Moreover, monetary policy uncertainty in the United States leads to an increase in policy rates in those emerging economies that target the inflation rate and to a depreciation of the currencies of those emerging economies that target the exchange rate. |
| Date: | 2019–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:clg:wpaper:2019-14&r=all |
| By: | Rita Soares; Joana Sousa Leite; João Filipe; Nuno Nóbrega |
| Abstract: | Banco de Portugal TARGET balance, an accounting position representing a liability towards the European Central Bank arising from net cross-border payments in central bank money settled via the TARGET2 payment system, was the largest item on Banco de Portugal balance sheet by the end of 2018. In this paper, we depict the evolution and explain the main underlying drivers of Banco de Portugal TARGET liability since the beginning of Stage III of the EMU, following two perspectives, one based on Banco de Portugal balance sheet and other on the Portuguese Balance of Payments. We find that the evolution of Banco de Portugal TARGET liability is highly related with the volume of liquidity-providing monetary policy operations, although the underlying drivers evolved throughout the time: demand driven in 2011/2012 and supply driven from 2015 onwards. We find no time-invariant causal link between Banco de Portugal TARGET liability and neither financial market stress indicators nor the net financing needs of the Portuguese economy. We corroborate our findings empirically using simple OLS regressions. |
| JEL: | E42 E44 E52 E58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:o202001&r=all |
| By: | Basit Zafar (Bank of Italy; Federal Reserve Bank of New York; Forschungsinstitut zur Zukunft der Arbeit; Arizona State University); Giorgio Topa (Forschungsinstitut zur Zukunft der Arbeit; Research and Statistics Group; Federal Reserve Bank; University of Chicago; Federal Reserve Bank of New York); Wilbert Van der Klaauw; Scott Nelson; Olivier Armantier (Board of Governors of the Federal Reserve System (U.S.); Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York) |
| Abstract: | Managing consumers? inflation expectations is of critical importance to central banks in the conduct of monetary policy. But managing inflation expectations requires more than just monitoring expectations; it also requires an understanding of how these expectations are formed. In this post, we present results from a new study that investigates how individual consumers use selected information on food prices in forming their inflation expectations. While the provision of this information leads individuals to meaningfully revise expectations of their own-basket inflation rate, we find there is little impact on expectations of overall inflation. |
| JEL: | D1 H00 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86835&r=all |
| By: | Mary Amiti (Board of Governors of the Federal Reserve System (U.S.); Schweizerische Nationalbank; Federal Reserve Bank of New York; Universität St. Gallen; Centre for Economic Policy Research (CEPR); Internationaler Währungsfonds; Research and Statistics Group; Chinese University of Hong Kong; University of Melbourne; Universitätt Bern; National Bureau of Economic Research); Jozef Konings (Federal Reserve Bank of Dallas); Oleg Itskhoki (National Bureau of Economic Research; Princeton University; Woodrow Wilson School of Public and International Affairs; Harvard University) |
| Abstract: | Why do large movements in exchange rates have small effects on international goods prices? This empirical regularity is a central puzzle in international macroeconomics. In a new study, we show that the key to understanding this exchange rate disconnect is to take into account that the largest exporters are also the largest importers. This is important because when exporters import their intermediate inputs, they face offsetting exchange rate effects on their marginal costs. For example, a depreciation of the euro relative to the U.S. dollar makes exports in U.S. dollars cheaper?but it also makes imports in euros more expensive. Using Belgian firm-level data, we show that exporters that import a large share of their inputs pass on a much smaller share of the exchange rate shock to export prices. Interestingly, import-intensive firms typically have high export market shares and hence set high markups and actively move them in response to changes in marginal cost, thus providing a second channel that limits the effect of exchange rate shocks on export prices. Our results show that a small exporter with no imported inputs has a nearly complete pass-through of more than 90 percent, while a firm at the 95th percentile of both import intensity and market share distributions has a pass-through of 56 percent, with the two mechanisms playing roughly equal roles. These findings have important implications for aggregate macroeconomic variables. |
| Keywords: | pass-through; importers; exporters; exchange rates |
| JEL: | F00 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86856&r=all |
| By: | Wilbert Van der Klaauw; Giorgio Topa (Forschungsinstitut zur Zukunft der Arbeit; Research and Statistics Group; Federal Reserve Bank; University of Chicago; Federal Reserve Bank of New York); Basit Zafar (Bank of Italy; Federal Reserve Bank of New York; Forschungsinstitut zur Zukunft der Arbeit; Arizona State University); Olivier Armantier (Board of Governors of the Federal Reserve System (U.S.); Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York) |
| Abstract: | The expectations of U.S. consumers about inflation have declined to record lows over the past several months. That is the finding of two leading surveys, the Federal Reserve Bank of New York?s Survey of Consumer Expectations (SCE) and the University of Michigan?s Survey of Consumers (SoC). In this post, we examine whether this decline is broad-based or whether it is driven by specific demographic groups. |
| Keywords: | Expectations; Inflation; Survey |
| JEL: | E2 D1 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87087&r=all |
| By: | N. Gregory Mankiw |
| Abstract: | This essay discusses a new approach to macroeconomics called modern monetary theory (MMT). It identifies the key differences between MMT and the approach found in mainstream textbooks. It concludes that while MMT contains some kernels of truth, its most novel policy prescriptions do not follow cogently from its premises. |
| JEL: | E0 H6 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26650&r=all |
| By: | Asani Sarkar; Viral V. Acharya (Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); Kennesaw State University; London Business School; European Corporate Governance Institute; National Bureau of Economic Research; Reserve Bank of India; City University London); Warren B. Hrung; Michael J. Fleming |
| Abstract: | During the 2007-08 financial crisis, the Fed established lending facilities designed to improve market functioning by providing liquidity to nondepository financial institutions?the first lending targeted to this group since the 1930s. What was the financial condition of the dealers that borrowed from these facilities? Were they healthy institutions behaving opportunistically or were they genuinely distressed? In published research, we find that dealers in a weaker financial condition were more likely to participate than healthier ones and tended to borrow more. Our findings reinforce the importance of Bagehot?s principle that the lender-of-last resort should lend only against high-quality collateral and at a penalty rate so as to discourage unneeded or opportunistic borrowing. |
| Keywords: | stigma; insolvency; central banking; illiqudity; Lender of last resort; crises |
| JEL: | G1 G2 E5 H1 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87193&r=all |
| By: | Scott Sherman (Markets Group); Timothy Wessel (Markets Group); Marco Cipriani (New York University; Federal Reserve Bank; Federal Reserve Bank of New York; George Washington University; National Bureau of Economic Research); Romen Mookerjee (Markets Group); Alyssa Cambron (Markets Group); Joshua Jones (Markets Group); Brett Solimine (Markets Group) |
| Abstract: | The Federal Reserve Bank of New York recently decided to revise the composition of the Overnight Bank Funding Rate (OBFR), a reference rate measuring the cost banks face to borrow overnight in unsecured U.S. dollar-denominated money markets. Specifically, in addition to the federal funds and Eurodollar transactions currently comprising the OBFR, the OBFR now also includes overnight, interest-bearing demand deposits (at rates negotiated between the counterparties and excluding deposits payable on demand) booked within banks? U.S. offices, known as ?selected deposits.? In this post, we discuss the change in more detail, the reason for including selected deposits, and the likely impact on the OBFR?s published values. |
| Keywords: | OBFR; Selected Deposits |
| JEL: | E5 E5 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87329&r=all |
| By: | Basit Zafar (Bank of Italy; Federal Reserve Bank of New York; Forschungsinstitut zur Zukunft der Arbeit; Arizona State University); Olivier Armantier (Board of Governors of the Federal Reserve System (U.S.); Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York); Giorgio Topa (Forschungsinstitut zur Zukunft der Arbeit; Research and Statistics Group; Federal Reserve Bank; University of Chicago; Federal Reserve Bank of New York); Wilbert Van der Klaauw |
| Abstract: | Surveys of consumers? inflation expectations are now a key component of monetary policy. To date, however, little work has been done on 1) whether individual consumers act on their beliefs about future inflation, and 2) whether the inflation expectations elicited by these surveys are actually informative about the respondents? beliefs. In this post, we report on a new study by Armantier, Bruine de Bruin, Topa, van der Klaauw, and Zafar (2010) that investigates these two issues by comparing consumers? survey-based inflation expectations with their behavior in a financially incentivized experiment. We find that the decisions of survey respondents are generally consistent with their stated inflation beliefs. |
| Keywords: | Experimental Economics; Survey Design; Inflation Expectations |
| JEL: | D1 E5 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86759&r=all |
| By: | Muhammad Nadim Hanif (State Bank of Pakistan); Javed Iqbal (State Bank of Pakistan); Syed Hamza Ali (State Bank of Pakistan); Muhammad Abdus Salam (State Bank of Pakistan) |
| Abstract: | Existing measures of core inflation ignore a part of ‘should be’ the core inflation. Exclusion based measures ‘exclude’ a part of persistent inflation inherently existing in the excluded part whereas filter based measures ‘filter-out’ the cyclical part also rather than the irregular component only. This study proposes a new idea to define and measure core inflation – noise free inflation or denoised inflation. As against considering only trend to define core inflation, this study proposes using cyclical component also to be part of core inflation. If core inflation is to be useful, for monetary policy making, as an indicator of underlying inflation, it has to include demand related component of inflation associated with current economic cycle. By using wavelet analysis approach to decompose seasonally adjusted price index into noise, cyclical component and trend, we estimate a denoised inflation series for Pakistan for the period July 1992 to June 2017. Since denoised inflation passes ‘statistical’ as well as ‘theoretical’ tests necessary for a series to be core inflation, we think it can be used as a new core inflation measure for Pakistan. This can also be estimated and tested for any country. |
| Keywords: | Estimation of Cyclical Component, Inflation, Monetary Policy |
| JEL: | C19 E31 E52 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:sbp:wpaper:102&r=all |
| By: | Apostolos Serletis (University of Calgary); Cosmas Dery (University of Calgary) |
| Abstract: | In this paper, we are motivated by the fact that little is known about the relative performance of broad and narrow Divisia monetary aggregates, and by recent work that tests and rejects the appropriateness of the aggregation assumptions that underlie the various monetary aggregates published by the Federal Reserve as well as a large number of monetary asset groupings suggested by earlier studies. We present a comprehensive comparison of narrow versus broad Divisia monetary aggregates within three classes of empirical models. We compute correlations between the cyclical components of Divisia monetary aggregates at different levels of aggregation and the cyclical component of industrial production. We test for Granger causality running from the Divisia aggregates to industrial production and various other measures of real economic activity. We also reestimate a structural VAR based on earlier work by Leeper and Roush (2003) and Belongia and Ireland (2015, 2016), modifying that earlier work by using monthly rather than quarterly data and extending it, both by using broad as well as narrower Divisia monetary aggregates and by allowing for GARCH behavior in the structural shocks. |
| Date: | 2019–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:clg:wpaper:2019-16&r=all |
| By: | Oguzhan Cepni (Central Bank of the Republic of Turkey, Anafartalar Mah. Istiklal Cad. No:10 06050 Ankara, Turkey); Wiehan Dul (Department of Economics, University of Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA and School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, UK) |
| Abstract: | This paper investigates the impact of uncertainty shocks on REITs returns over a monthly period from 1972:01 to 2015:12, and sub-samples from 1972:01 to 2009:06, and 2009:07 to 2015:12, to accommodate for the possible effects of the Global Financial Crisis (GFC) and unconventional monetary policy decisions. We use the recently-proposed variations in the price of gold, around events associated with unexpected changes in uncertainty as an instrument to identify uncertainty shocks in a proxy Structural Vector Autoregressive (SVAR) model. Moreover, to control for news-related effects associated with these events, uncertainty and news shocks are jointly identified based on a set-identified proxy SVAR, as recently suggested in the VAR literature. Our results show that the uncertainty shock generates a larger negative impact on REITs returns over the post-GFC period to the extent that it also outweighs the impact of the otherwise dominant news (productivity) shocks. In addition, the impulse response dynamics related to the recursively identified uncertainty shock, as is standard in the literature, resembles the effects of a news shock, and somewhat contrary to intuition suggests that the impact of the uncertainty shock on REITs returns were higher during the pre-GFC era. |
| Keywords: | Connectedness, U.S. REITs, Proxy SVAR Model, Uncertainty, Monetary Policy Regimes |
| JEL: | C32 E52 R33 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202001&r=all |
| By: | David Finck (University of Giesssen) |
| Abstract: | A common finding in the literature is that forward guidance cannot be credible under discretionary policy as long as the zero lower bound is an one-off event. However, this is not the case when recurring episodes of zero interest rates are possible. In this paper, we contribute to this new result and assess the sustainability of forward guidance under the cost channel. We find that forward guidance can be sustainable under the cost channel. However, we show that it is less credible compared to a standard New Keynesian model. Our results show that this finding also depends on the strength of the cost channel. Furthermore, provide evidence that ignoring the presence of a cost channel can be costly in terms of steady-state consumption. |
| Keywords: | Forward Guidance, Sustainability, Cost Channel, Discretion |
| JEL: | E12 E43 E52 E58 E61 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202004&r=all |
| By: | Samba Diop (Alioune Diop University, Bambey, Senegal); Simplice A. Asongu (Yaoundé, Cameroon) |
| Abstract: | This study improves the African Regional Integration Index (ARII) proposed by the African Union, the African Development Bank and the United Nations Economic Commission for Africa by providing a theoretical framework and addressing shortcomings related to weighting and aggregation of the indicator. This paper measures monetary integration in the eight African Regional Economic Communities (RECs) by constructing an Index of African Monetary Integration (IAMI). It proposes an Optimal Currency Area as theoretical framework and uses a panel approach to appreciate the dynamics of the index over different periods of time. The findings show that: (i) inflation and finance (trade and mobility) present the highest (lowest) score while ECOWAS is (EAC and IGAD are) the highest (least) performing. (ii) Surprisingly, in most RECs, the highest contributors to wealth creation are not the top performers in regional monetary integration. (iii) The RECs in Africa are characterized by a stable monetary integration which is different from the gradual process usually observed in monetary integration because with the exception of the EAC and UMA, the dynamics of IAMI show a steady trend in the overall index across time. Policy implications are discussed. |
| Keywords: | Monetary Integration; Currency Unions; Economic Communities; Africa |
| JEL: | E10 E50 O10 O55 P50 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:20/003&r=all |
| By: | Òscar Jordà; Sanjay R. Singh; Alan M. Taylor |
| Abstract: | Is the effect of monetary policy on the productive capacity of the economy long lived? Yes, in fact we find such impacts are significant and last for over a decade based on: (1) merged data from two new international historical databases; (2) identification of exogenous monetary policy using the macroeconomic trilemma; and (3) improved econometric methods. Notably, the capital stock and total factor productivity (TFP) exhibit hysteresis, but labor does not. Money is non-neutral for a much longer period of time than is customarily assumed. A New Keynesian model with endogenous TFP growth can reconcile all these empirical observations. |
| JEL: | E01 E30 E32 E44 E47 E51 F33 F42 F44 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26666&r=all |
| By: | Gibbs, Christopher G.; McClung, Nigel |
| Abstract: | We provide suffcient conditions for when a rational expectations structural model predicts bounded responses of endogenous variables to forward guidance announcements. The conditions coincide with a special case of the well-known (E)xpectation-stability conditions that govern when agents can learn a Rational Expectations Equilibrium. Importantly, we show that the conditions are distinct from the determinacy conditions. We show how the conditions are useful for diagnosing the features of a model that contribute to the Forward Guidance Puzzle and reveal how to construct well-behaved forward guidance predictions in standard medium-scale DSGE models. |
| JEL: | E31 E32 E52 D84 D83 |
| Date: | 2019–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2019_019&r=all |
| By: | Roberta Colavecchio; Ieva Rubene |
| Abstract: | How long does it take for exchange rate changes to pass through into inflation? Does it make a difference whether the exchange rate depreciates or appreciates? Do relatively large exchange rate changes entail more exchange rate pass-through? In this paper, we examine possible non-linearities in the transmission of exchange rate movements to import and consumer prices in all 19 euro area countries as well as the euro area as a whole from 1997 to 2019Q1. We extend a standard single-equation linear framework with additional interaction terms to account for possible non-linearities and apply local projections to obtain state-dependent impulse response functions. We find that (i) euro area consumer and import prices respond significantly to exchange rate movements after one year, responding more when the exchange rate change is relatively large; and (ii) euro appreciations and depreciations affect the level of euro area exchange rate pass-through in a symmetric fashion; (iii) for euro area countries results differ for import and consumer prices and across countries. |
| Keywords: | Exchange Rate Pass-Through; Inflation; Local Projections; Non-Linearities |
| JEL: | E31 F41 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcl:bclwop:bclwp138&r=all |
| By: | Giorgio Topa (Forschungsinstitut zur Zukunft der Arbeit; Research and Statistics Group; Federal Reserve Bank; University of Chicago; Federal Reserve Bank of New York); Wilbert Van der Klaauw; Basit Zafar (Bank of Italy; Federal Reserve Bank of New York; Forschungsinstitut zur Zukunft der Arbeit; Arizona State University); Olivier Armantier (Board of Governors of the Federal Reserve System (U.S.); Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York) |
| Abstract: | In this second of a series of four blog postings, we discuss the data on inflationexpectationscollected in our new FRBNY Survey of Consumer Expectations (SCE). Inflation expectations are a key consideration for monetary policy as they are believed to influence consumer behavior, thereby affecting economic activity and actual inflation. The SCE data on inflation expectations represent a major innovation as they contain information not previously collected from consumers on a regular basis. In this post, we provide some background on the survey and presentsome initial findings. |
| Keywords: | household finance; inflation; surveys |
| JEL: | D1 E5 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86909&r=all |
| By: | Martin Hellwig (Max Planck Institute for Research on Collective Goods) |
| Abstract: | This contribution to the panel on the future to EMU discusses the tensions that arise from the fact that banks are, on the one hand, an essential element of the monetary transmission mechanism and, on the other hand, an integral part of local, regional or national polities. Banking union can eliminate or at least reduce some of the procrastination that has allowed maintained bank weaknesses to persist and harmed the transmission of monetary policy but, whereas the SSM has been fairly successful, resolution is still not working properly and needs further reforms. At the same time, banking union suffers from the problem that interventions from Brussels or Frankfurt are seen as infringements of national sovereignty that lack political legitimacy. The conflict between supranational and national interests is ultimately irresolvable but, if EMU is to survive, measures must be taken to limit its impact. |
| Keywords: | Monetary union, central banking, politics of banks, banking union, bank resolution, bail-in. |
| JEL: | E42 E44 E51 G18 G28 G33 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2019_13&r=all |
| By: | Gauti Eggertsson; Sergey K. Egiev; Alessandro Lin; Josef Platzer; Luca Riva |
| Abstract: | This paper presents a toolkit to solve for equilibrium in economies with the effective lower bound (ELB) on the nominal interest rate in a computationally efficient way under a special assumption about the underlying shock process, a two-state Markov process with an absorbing state. We illustrate the algorithm in the canonical New Keynesian model, replicating the optimal monetary policy in Eggertsson and Woodford (2003), as well as showing how the toolkit can be used to analyze the medium scale DSGE model developed by the Federal Reserve Bank of New York. As an application, we show how well various policy rules perform relative to the optimal commitment equilibrium. A key conclusion is that previously suggested policy rules – such as price level targeting and nominal GDP targeting – do not perform well when there is a small drop in the price level, as observed during the Great Recession, because they do not imply sufficiently strong commitment to low future interest rates (”make-up strategy”). We propose two new policy rules, Cumulative Nominal GDP Targeting Rule and Symmetric Dual-Objective Targeting Rule that are more robust. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2020-14&r=all |
| By: | Marc Giannoni; Marco Del Negro; Andrea Tambalotti (Federal Reserve Bank of New York; Research and Statistics Group; Princeton University; New York University; National Bureau of Economic Research); Domenico Giannone (Solvay Brussels School of Economics and Management; Federal Reserve Bank of New York; La Trobe University; Université Libre de Bruxelles; Libera Universität Internazionale degli Studi Sociali; European Central Bank; University of Aston in Birmingham; European Centre for Advanced Research in Economics and Statistics; Centre for Economic Policy Research (CEPR)) |
| Abstract: | Interest rates in the United States have remained at historically low levels for many years. This series of posts explores the forces behind the persistence of low rates. We briefly discuss some of the explanations advanced in the academic literature, and propose an alternative hypothesis that centers on the premium associated with safe and liquid assets. Our argument, outlined in a paper we presented at the Brookings Conference on Economic Activity last March, suggests that the increase in this premium since the late 1990s has been a key driver of the decline in the real return on U.S. Treasury securities. |
| Keywords: | liquidity; convenience yield; safety; r star |
| JEL: | E2 E5 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87238&r=all |
| By: | Alyssa Cambron (Markets Group); Marco Cipriani (New York University; Federal Reserve Bank; Federal Reserve Bank of New York; George Washington University; National Bureau of Economic Research); Scott Sherman (Markets Group); Adam Copeland (Research and Statistics Group; National Bureau of Economic Research; Federal Reserve Bank of New York; Federal Reserve Bank; University of Minnesota); Kathryn Bayeux (Markets Group); Brett Solimine (Markets Group) |
| Abstract: | The Federal Reserve Bank of New York, in cooperation with the Office of Financial Research, is proposing to publish three new overnight Treasury repurchase (repo) benchmark rates. Recently, the Federal Reserve decided to modify the construction of the broadest proposed benchmark rate (the other two proposed rates are expected to remain unchanged; see the Bank?s announcement on May 24). In this post, we describe the changes to this rate in further detail. We compare this revised rate to the originally proposed benchmark rate and show that, in the post-liftoff period, it trades higher, on average. |
| Keywords: | GC; Reference Rate; Repo; Specials |
| JEL: | G1 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87197&r=all |
| By: | Zhang, Hanzhe (Michigan State University, Department of Economics); Hu, Yunzhi (Kenan-Flagler Business School, University of North Carolina, Chapel Hill, NC) |
| Abstract: | How should the government effectively provide liquidity to banks during periods of financial distress? During the 2008-2010 crisis, banks avoided borrowing from the Fed's long-standing discount window (DW), but actively borrowed and sometimes paid a higher interest in its special monetary program, the Term Auction Facility (TAF), although both programs had the same borrowing requirements. We use a dynamic adverse selection model with endogenous borrowing stigma costs to explain how the combination of the DW and TAF increased banks' borrowing and willingness to pay for loans from the Fed. Using micro-level data on DW borrowing and TAF bidding from 2007 to 2010, we confirm our theoretical predictions about the financial condition of banks in different facilities. |
| Keywords: | lending of last resort; discount window stigma; Term Auction Facility; adverse selection |
| JEL: | D44 E52 E58 G01 |
| Date: | 2020–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:ris:msuecw:2020_005&r=all |
| By: | Zigraiova, Diana; Havranek, Tomas; Novak, Jiri |
| Abstract: | A key theoretical prediction in financial economics is that under risk neutrality and rational expectations a currency's forward rates should form unbiased predictors of future spot rates. Yet scores of empirical studies report negative slope coefficients from regressions of spot rates on forward rates, which is inconsistent with the forward rate unbiasedness hypothesis. We collect 3,643 estimates from 91 research articles and using recently developed techniques investigate the effect of publication and misspecification biases on the reported results. Correcting for these biases we estimate the slope coefficients of 0.31 and 0.98 for developed and emerging currencies respectively, which implies that empirical evidence is in line with the theoretical prediction for emerging economies and less puzzling than commonly thought for developed economies. Our results also suggest that the coefficients are systematically influenced by the choice of data, numeraire currencies, and estimation methods. |
| Keywords: | Forward rate bias,uncovered interest parity,meta-analysis,publication bias |
| JEL: | C83 F31 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:213578&r=all |
| By: | Andrea Berardi (Ca Foscari University of Venice - Dipartimento di Economia); Alberto Plazzi (Swiss Finance Institute; Universita' della Svizzera italiana) |
| Abstract: | Using a stochastic volatility affine term structure model, we explicitly consider the interrelation between yield curves and macro and volatility factors. We provide estimates of short rate expectations, term premium and convexity of nominal yields and for their real and inflation components for four different currency areas: US, Euro Area, UK, and Japan. We find that in all areas there are non-negligible convexity effects in correspondence with high volatility periods, and that term premium and convexity explain a significant proportion of the dynamics at the long end of the yield curve. Using panel regressions, we show that, overall, short rate expectations are procyclical while term premia exhibit a countercyclical behaviour and tend to increase with yield volatility. We also detect strong cross-country co-movements both in short rate expectations and term premia, with the degree of connectedness exhibiting significant time variation.. |
| Keywords: | Term structure, Term premia, Yield volatility, Macro factors |
| JEL: | G12 E43 E44 C58 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1973&r=all |
| By: | Simone Giansante (University of Bath - School of Management); Mahmoud Fatouh (University of Essex; Bank of England); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We investigate the impact of the Bank of England’s asset purchase program (APP) on the composition of assets of UK banks, and to the implications for the real economy, using a unique database on the program. The identification of banks that receives deposits (QE banks) injections by the program as well as the magnitude of these injections provides the ideal empirical design for a difference-in-difference matching exercise. We find no evidence that suggests QE boosted bank lending to the real economy. The overall reduction of retail lending was more pronounce for treated (QE) banks than for the control group. QE banks reallocated their assets towards lower risk weighted investments, such as government securities and reserves, as confirmed by the increased sensitivity of their equity returns on peripheral EU bond returns. Our findings suggest that risk weighted based capital constraints can limit the effectiveness of expansionary unconventional monetary policies and provide incentives on carry trade activities. |
| Keywords: | monetary policy, quantitative easing, bank lending |
| JEL: | E51 G21 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1972&r=all |
| By: | Neha Shah (Markets Group); Marco Cipriani (New York University; Federal Reserve Bank; Federal Reserve Bank of New York; George Washington University; National Bureau of Economic Research); Philip Mulder; Catherine Chen (Markets Group); Gabriele La Spada |
| Abstract: | On October 14, 2016, amendments to Securities and Exchange Commission (SEC) rule 2a-7, which governs money market mutual funds (MMFs), went into effect. The changes are designed to reduce MMFs? susceptibility to destabilizing runs and contain two principal requirements. First, institutional prime and muni funds?but not retail or government funds?must now compute their net asset values (NAVs) using market-based factors, thereby abandoning the fixed NAV that had been a hallmark of the MMF industry. Second, all prime and muni funds must adopt a system of gates and fees on redemptions, which can be imposed under certain stress scenarios. This post studies the effect of the amendments on the size and composition of the MMF industry and, in particular, whether MMF investors shifted their assets from prime and muni funds toward government funds in anticipation of the tighter regulatory regime. |
| Keywords: | Regulation; SEC; Money Market Funds; MMF |
| JEL: | G2 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87183&r=all |
| By: | Marc Giannoni; Andrea Tambalotti (Federal Reserve Bank of New York; Research and Statistics Group; Princeton University; New York University; National Bureau of Economic Research); Domenico Giannone (Solvay Brussels School of Economics and Management; Federal Reserve Bank of New York; La Trobe University; Université Libre de Bruxelles; Libera Universität Internazionale degli Studi Sociali; European Central Bank; University of Aston in Birmingham; European Centre for Advanced Research in Economics and Statistics; Centre for Economic Policy Research (CEPR)); Brandyn Bok; Marco Del Negro |
| Abstract: | The previous post in this series discussed several possible explanations for the trend decline in U.S. real interest rates since the late 1990s. We noted that while interest rates have generally come down over the past two decades, this decline has been more pronounced for Treasury securities. The conclusion that we draw from this evidence is that the convenience associated with the safety and liquidity embedded in Treasuries is an important driver of the secular (long-term) decline in Treasury yields. In this post and the next, we provide an overview of the two complementary empirical strategies we adopt to extract the trends in real interest rates and quantify their driving factors. Much more detail on all of this can be found in our recently published Brookings paper. |
| Keywords: | r star; convenience yield; safety; liquidity |
| JEL: | E2 E5 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87239&r=all |
| By: | Olivier Armantier (Board of Governors of the Federal Reserve System (U.S.); Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York); Basit Zafar (Bank of Italy; Federal Reserve Bank of New York; Forschungsinstitut zur Zukunft der Arbeit; Arizona State University); Wilbert Van der Klaauw; Giorgio Topa (Forschungsinstitut zur Zukunft der Arbeit; Research and Statistics Group; Federal Reserve Bank; University of Chicago; Federal Reserve Bank of New York) |
| Abstract: | Starting in the first quarter of 2014, the Federal Reserve Bank of New York (FRBNY) will begin reporting findings from a new national survey designed to elicit consumers? expectations for a wide range of household-level and aggregate economic and financial conditions. This week, we provide an introduction to the new survey in a series of four blog posts. In this first post, we discuss the overall objectives of the new survey, its sample design, and content. In the posts that follow, we will provide further details and present preliminary findings from the survey on three broad categories of expectations: those relating to inflation, the labor market, and household finance. |
| Keywords: | inflation; surveys; labor market; Household Finance; expectations |
| JEL: | D1 E5 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86910&r=all |
| By: | Eduardo Levy Yeyati; Juan Francisco Gómez |
| Abstract: | Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effect s empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate. |
| Keywords: | International reserves; exchange rate policy; capital flows; financial crisis |
| JEL: | E42 E52 F33 F41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpgobi:201901&r=all |
| By: | Richard K. Crump; Matthew Raskin; Jeremiah P. Boyle; Carlo Rosa; Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich); Lisa Stowe (Markets Group) |
| Abstract: | Market expectations of the path of future policy rates can have important implications for financial markets and the economy. Because interest rate derivatives enable market participants to hedge against or speculate on potential changes in various short-term U.S.interest rates, they are a rich and timely source of information on market expectations. In this post, we describe how information about market expectations can be derived from interest rate futures and forwards, focusing on three main instruments: federal funds futures, overnight index swaps (OIS), and Eurodollar futures. We also discuss how options on interest rate futures can be used to gain insight into the full distribution of rate expectations?information that cannot be gleaned from futures or forwards alone. In a forthcoming companion post, we explore an alternative source of policy rate expectations based on the two surveys conducted by the Trading Desk at the Federal Reserve Bank of New York. |
| Keywords: | Interest rate derivatives; options; Monetary policy expectations |
| JEL: | E5 G1 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:87000&r=all |
| By: | Antoine Mandel (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 - Université Panthéon-Sorbonne, PSE - Paris School of Economics); Vipin Veetil (IIT Madras - Indian Institute of Technology Madras) |
| Abstract: | We develop a tractable model of out-of-equilibrium dynamics in a general equilibrium economy with cash-in-advance constraints. The dynamics emerge from local interactions between firms governed by the production network underlying the economy. We analytically characterise the influence of network structure on the propagation of monetary shocks. In the long run, the model converges to general equilibrium and the quantity theory of money holds. In the short run, monetary shocks propagate upstream via nominal demand changes and downstream via real supply changes. Lags in the evolution of supply and demand at the micro level can give rise to arbitrary dynamics of the distribution of prices. Our model explains the long standing Price Puzzle: a temporary rise in the price level in response to monetary contractions. The Price Puzzle emerges under two assumptions about downstream firms: they are disproportionally affected by monetary contractions and they account for a sufficiently small share of the wage bill. Empirical evidence supports the two assumptions for the US economy. Our model calibrated to the US economy using a data set of more than fifty thousand firms generates the empirically observed magnitude of the price level rise after monetary contractions. |
| Abstract: | Nous proposons un modèle de la dynamique hors-équilibre dans une économie en réseau où les agents sont soumis à des contraintes financières. Nous étudions la propagation des chocs de politique monétaire dans ce cadre. Nous démontrons notamment que le "price puzzle" émerge dans ce cadre du fait des délais dans la propagation des chocs. |
| Keywords: | Price Puzzle,Production Network,Money,Monetary Non-Neutrality,Out-Of-Equilibrium dynamics,Réseaux de production,dynamique hors-équilibre |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-02354576&r=all |
| By: | Olivier Armantier (Board of Governors of the Federal Reserve System (U.S.); Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York); Wilbert Van der Klaauw; Giorgio Topa (Forschungsinstitut zur Zukunft der Arbeit; Research and Statistics Group; Federal Reserve Bank; University of Chicago; Federal Reserve Bank of New York); Basit Zafar (Bank of Italy; Federal Reserve Bank of New York; Forschungsinstitut zur Zukunft der Arbeit; Arizona State University) |
| Abstract: | The Thomson Reuters/University of Michigan Survey of Consumers (the ?Michigan Survey? hereafter) is the main source of information regarding consumers? expectations of future inflation in the United States. The most recent release of the Michigan Survey on March 25 drew considerable attention because it showed a large spike in year-ahead expectations for inflation: as shown in the chart below, the median rose from 3.4 to 4.6 percent and the other quartiles of responses showed similar increases. What may have caused this rise in inflation expectations and what lessons should be taken from it? In this post, we draw upon the findings of an ongoing New York Fed research project to shed some light on the possible sources of the recent increase and to gauge its significance. While our research spans both short- and medium-term inflation expectations, this blog post discusses movements in short-term measures only and does not discuss medium-term expectations. |
| Keywords: | Inflation expectations; Michigan Survey |
| JEL: | E5 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:86743&r=all |