nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒02‒17
forty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Central Bank Solvency and Inflation By Christopher A. Sims; Marco Del Negro
  2. Central Bank Communication in Ghana: Insights from a Text Mining Analysis By Omotosho, Babatunde S.
  3. Macro and Micro Implications of the Introduction of Central Bank Digital Currencies: An Overview By Gérard Mondello; Elena Sinelnikova; Pavel Trunin
  4. Is There Stigma to Discount Window Borrowing? By Olivier Armantier; Jeffrey Shrader; Asani Sarkar; Eric Ghysels
  5. Monetary Stimulus Policy in China: the Bank Credit Channel By Min Zhang; Yahong Zhang
  6. Indeterminacy and imperfect information By Lubik, Thomas A.; Matthes, Christian; Mertens, Elmar
  7. Can one hear the size of a target zone? By Jean-Louis Arcand; Max-Olivier Hongler; Shekhar Hari Kumar; Daniele Rinaldo
  8. The New Overnight Bank Funding Rate By Adam Spiegel; Matthew Kessler; Julia Gouny; Marco Cipriani
  9. Central bank policy sets the lower bound on bond yield By Joseph E. Gagnon; Olivier Jeanne
  10. Monetary Policy and Wealth Effects By Nicolas Caramp; Dejanir H. Silva
  11. Monetary Policy Uncertainty Spillovers in Time- and Frequency-Domains By Rangan Gupta; Chi Keung Marco Lau; Jacobus A Nel; Xin Sheng
  12. The Populist Case for the Gold Standard By Kristoffer Mousten Hansen
  13. Policy Maker's Credibility with Predetermined Instruments for Forward-Looking Targets By Jean-Bernard Chatelain; Kirsten Ralf
  14. Shilnikov Chaos, Low Interest Rates, and New Keynesian Macroeconomics By Barnett, William; Bella, Giobanni; Ghosh, Taniya; Mattana, Paolo; Venturi, Beatrice
  15. The Transmission of Monetary Policy under the Microscope By Martin Holm; Pascal Paul; Andreas Tischbirek
  16. The Stability of Demand for Money in the Proposed Southern African Monetary Union By Simplice A. Asongu; Oludele E. Folarin; Nicholas Biekpe
  17. Are free-market fiduciary media possible? On Credit intermediation, banking, and money production in the free market By Kristoffer Mousten Hansen
  18. Crossing the credit channel: credit spreads and firm heterogeneity By Anderson, Gareth; Cesa-Bianchi, Ambrogio
  19. Intraday Liquidity Flows By Michele Braun; Adam Copeland; Alexa Herlach; Radhika Mithal
  20. Financial Market Incompleteness and International Cooperation on Capital Controls By Shigeto Kitano; Kenya Takaku
  21. A Comparison of Fed "Tightening" Episodes since the 1980s By Kevin L. Kliesen
  22. Long-run mild deflation under fiscal unsustainability in Japan By Saito, Makoto
  23. Why Didn’t Inflation Collapse in the Great Recession? By Marco Del Negro; Raiden B. Hasegawa; Frank Schorfheide; Marc Giannoni
  24. Consumer In ation Expectations and Household Weights By Constantin Bürgi
  25. A History of SOMA Income By Marco Del Negro; Julie Remache; Meryam Bukhari; Alyssa Cambron
  26. Central Bank Digital Currency: Central Banking For All? By Jesœs Fern‡ndez-Villaverde; Daniel R. Sanches; Linda Schilling; Harald Uhlig
  27. Inflation and Public Debt Reversals in Advanced Economies By Fukunaga,Ichiro; Komatsuzaki,Takuji; Matsuoka,Hideaki
  28. Capacity Utilization and the NAIRCU By Federico Bassi
  29. Survey Measures of Expectations for the Policy Rate By Emanuel Moench; Carlo Rosa; Jeremiah P. Boyle; Matthew Raskin; Lisa Stowe; Richard K. Crump
  30. A Data-Rich Measure of Underlying Inflation for Brazil By Vicente da Gama Machado; Raquel Nadal; Fernando Ryu Ramos Kawaoka
  31. How Much Is Priced In? Market Expectations for FOMC Rate Hikes from Different Angles By Ryan Bush; Marco Huwiler; Eric LeSueur; Giorgio Topa
  32. Sizing Up the Fed's Maturity Extension Program By Jeff W. Huther; Andrea Tambalotti; Katherine Femia
  33. Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics By Roc Armenter; Benjamin Lester; Gara M. Afonso
  34. Adopting mobile money: Evidence from an experiment in rural Africa By Catia Batista; Pedro C. Vicente
  35. Money Market Funds and Systemic Risk By Marco Cipriani; Michael Holscher; Patrick E. McCabe; Antoine Martin
  36. Reconciling Survey- and Market-Based Expectations for the Policy Rate By Joseph Fiorica; Bonni Brodsky; Anthony P. Rodrigues; Marco Del Negro; Eric LeSueur; Ari Morse
  37. Do Survey Joiners and Leavers Differ from Regular Participants? The US SPF GDP Growth and Inflation Forecasts By Michael P. Clements
  38. Countercyclical Capital Buffers: A Cautionary Tale By Christoffer Koch; Gary Richardson; Patrick Van Horn
  39. The Minimum Balance at Risk: A Proposal to Stabilize Money Market Funds By Marco Cipriani; Antoine Martin; Patrick E. McCabe; Michael Holscher
  40. Forecasting with the FRBNY DSGE Model By Marco Del Negro; Andrea Tambalotti; Stefano Eusepi; Marc Giannoni; Bianca De Paoli; Argia M. Sbordone

  1. By: Christopher A. Sims; Marco Del Negro
    Abstract: The monetary base in the United States, defined as currency plus bank reserves, grew from about $800 billion in 2008 to $2 trillion in 2012, and to roughly $4 trillion at the end of 2014 (see chart below). Some commentators have viewed this increase in the monetary base as a sure harbinger of inflation. For example, one economist wrote that this ?unprecedented expansion of the money supply could make the '70s look benign.? These predictions of inflation rest on the monetarist argument that nominal income is proportional to the money supply. The fact that the money supply has expanded rapidly while real income has grown very modestly means that sooner or later prices will have to catch up. Most academic economists (from Cochrane to Krugman and Mankiw) disagree. The monetarist argument arguably applies only to non-interest-bearing central bank liabilities, but since October 2008 a large fraction of the monetary base has consisted of reserves that pay interest (the so-called IOER, or interest on excess reserves) and one linchpin of the Fed?s ?policy normalization principles? consists precisely in raising the IOER along with the federal funds rate. Since reserves pay close to market interest rates, they are close substitutes for other short-term assets such as Treasury bills from a bank?s perspective. As long as the central bank can affect the return on these short-term assets by adjusting the IOER, controlling inflation with a large balance sheet seems no different than it was before the Great Recession.
    Keywords: solvency; central bank’s balance sheet; monetary policy
    JEL: E2 E5 H00
  2. By: Omotosho, Babatunde S.
    Abstract: Effective central bank communication is useful for anchoring market expectations and enhancing macroeconomic stability. In this paper, the communication strategy of the Bank of Ghana (BOG) is analysed using BOG’s monetary policy committee press releases for the period 2018-2019. Specifically, we apply text mining techniques to investigate the readability, sentiments and hidden topics of the policy documents. Our results provide evidence of increased central bank communication during the sample period, implying improved monetary policy transparency. Also, the computed Coleman and Liau (1975) readability index shows that the word and sentence structures of the press releases have become less complex, indicating increased readability. Furthermore, we find an average monetary policy net sentiment score of 3.9 per cent. This means that the monetary policy committee expressed positive sentiments regarding policy and macroeconomic outlooks during the period. Finally, the estimated topic model reveals that the topic proportion for “monetary policy and inflation” was prominent in the year 2018 while concerns regarding exchange rate were strong in 2019. The paper recommends that in order to enhance monetary policy communication, the Bank of Ghana should continue to improve on the readability of the monetary policy press releases.
    Keywords: Central bank communication, text mining, monetary policy
    JEL: E52 E58 E65
    Date: 2019–11–15
  3. By: Gérard Mondello (Université Côte d'Azur, France; GREDEG CNRS); Elena Sinelnikova (Center for the Study of Central Banks, Institute for Applied Economic Studies, RANEPA); Pavel Trunin (Macroeconomics and Finance Division, Division Head Gaidar Institute for Economic Policy, Moscow)
    Abstract: After the emergence and widespread of cryptocurrencies central banks are studying how their own digital currencies may help and favor the monetary policy implementation. There are many challenges to this process both in legal and economic (financial, monetary) areas. The paper studies the potential movement from a two-tier banking system (central bank and banks) to a one-tier banking system in case of CBDCs emission, including the issues of competition and commercial banking profitability. More specific question is the change of the transmission of monetary policy with CBDC emission.
    Keywords: CBDC, digital currency, cryptocurrency, monetary policy
    JEL: B53 E42
    Date: 2020–02
  4. By: Olivier Armantier (Board of Governors of the Federal Reserve System (U.S.); Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York); Jeffrey Shrader; Asani Sarkar; Eric Ghysels (Centre for Economic Policy Research (CEPR); Centre interuniversitaire de recherche en analyse des organisations; University of North Carolina at Chapel Hill)
    Abstract: The Federal Reserve employs the discount window (DW) to provide funding to fundamentally solvent but illiquid banks (see the March 30 post ?Why Do Central Banks Have Discount Windows??). Historically, however, there has been a low level of DW use by banks, even when they are faced with severe liquidity shortages, raising the possibility of a stigma attached to DW borrowing. If DW stigma exists, it is likely to inhibit the Fed?s ability to act as lender of last resort and prod banks to turn to more expensive sources of financing when they can least afford it. In this post, we provide evidence that during the recent financial crisis banks were willing to pay higher interest rates in order to avoid going to the DW, a pattern of behavior consistent with stigma.
    Keywords: Fed; transparency.; bank borrowing; stigma; financial crisis; TAF; Discount window
    JEL: G2 G1
  5. By: Min Zhang (East China Normal University, Faculty of Economics and Management, School of Economics); Yahong Zhang (Department of Economics, University of Windsor)
    Abstract: This paper develops a novel while plausible way to model the Chinese monetary transmission via open market operations (OMOs). In the model, monetary injections through OMOs, together with differentiated collateral regulation in the banking sector, directly affect banks' loan capacities, which then influences sectoral investments and aggregate GDP. The quantitative analysis shows that the 2009--2010 monetary expansion explains nearly 90 percent of the rise in GDP growth. Moreover, balancing credit allocation across sectors and applying unified banking regulations jointly enhance the GDP growth rate by 2.15 percentage points, with the contribution of the unified banking regulations proving more important.
    Keywords: Monetary stimulus, Bank credit channel, Open market operation rule, Chinese economy
    JEL: E32 E44 E52
    Date: 2020–02
  6. By: Lubik, Thomas A.; Matthes, Christian; Mertens, Elmar
    Abstract: We study equilibrium determination in an environment where two kinds of agents have different information sets: The fully informed agents know the structure of the model and observe histories of all exogenous and endogenous variables. The less informed agents observe only a strict subset of the full information set. All types of agents form expectations rationally, but agents with limited information need to solve a dynamic signal extraction problem to gather information about the variables they do not observe. In this environment, we identify a new channel that leads to equilibrium indeterminacy: Optimal information processing of the less informed agent introduces stable dynamics into the equation system that lead to self-fulling expectations. For parameter values that imply a unique equilibrium under full information, the limited information rational expectations equilibrium is indeterminate. We illustrate our framework with a monetary policy problem where an imperfectly informed central bank follows an interest rate rule.
    Keywords: limited information,rational expectations,signal extraction,belief shocks
    JEL: C11 C32 E52
    Date: 2020
  7. By: Jean-Louis Arcand; Max-Olivier Hongler; Shekhar Hari Kumar; Daniele Rinaldo
    Abstract: We develop a target zone model with realistic features such as finite exit time, non-stationary dynamics and heavy tails. Our rigorous characterization of risk corresponds to the dynamic counterpart of a mean-preserving spread. We explicitly solve for both stationary and transient exchange rate paths, and show how they are influenced by the distance to both the time horizon and the target zone bands. This enables us to show how central bank intervention is endogenous to both the distance of the fundamental to the band and the underlying risk. We discuss how the credibility of the target zone is shaped by the set horizon and the degree of underlying risk, and we determine a minimum time at which the required parity can be reached. We prove that the interplay of the diffusive component and the destabilizing risk component can yield an endogenous regime shift characterized by a threshold level of risk above which the target zone ceases to exist. All the previous results cannot obtain by means of the standard Gaussian and affine models. We recover by numerical simulations the different exchange rate densities established by the target zone literature.
    Date: 2020–02
  8. By: Adam Spiegel; Matthew Kessler (Markets Group); Julia Gouny (Markets Group); Marco Cipriani (New York University; Federal Reserve Bank; Federal Reserve Bank of New York; George Washington University; National Bureau of Economic Research)
    Abstract: The Federal Reserve Bank of New York will begin publishing the overnight bank funding rate (OBFR) sometime in the first few months of 2016. The OBFR will be a broad measure of U.S. dollar funding costs for U.S.-based banks as it will be calculated using both fed funds and Eurodollar transactions, as reported in a new data collection?the FR 2420 Report of Selected Money Market Rates. In a recent post, ?The Eurodollar Market in the United States,? we described the Eurodollar activity of U.S.-based banks and compared recent fed funds and Eurodollar rates. Here, we look at the historical relationship between overnight fed funds and Eurodollars and compare the new OBFR rate to the fed funds rate.
    Keywords: Eurodollars; OBFR; Fed funds
    JEL: G1 E5 D1
  9. By: Joseph E. Gagnon (Peterson Institute for International Economics); Olivier Jeanne (Peterson Institute for International Economics)
    Abstract: This paper shows that the scope for bond yields to fall below zero is strictly limited by market expectations about how far below zero central banks are willing to set their short-term policy rates. If a central bank communicates a credible commitment to keeping its policy rate above a given level under all circumstances, then bond yields must be higher than that level. This result holds true even in a model in which central banks are able to depress the term premium in bond yields below zero via large-scale purchases of long-term bonds, also known as quantitative easing (QE). QE becomes less effective as bond yields approach their lower bound.
    Keywords: Negative interest rate, quantitative easing
    JEL: E43 E58 G12
    Date: 2020–01
  10. By: Nicolas Caramp; Dejanir H. Silva (Department of Economics, University of California Davis)
    Abstract: This paper studies the role of wealth effects in the monetary transmission mechanism in New Keynesian models. We propose a decomposition of consumption that extends the Slutsky equation to a general equilibrium setting. Wealth effects, and their amplification in general equilibrium, explain a large fraction of the consumption and inflation response to changes in nominal interest rates in the standard equilibrium. In RANK, wealth effects are determined, generically, by the revaluation of public debt and the fiscal response to monetary policy. In a medium-scale DSGE model, we find a fiscal response that is several times larger than the response we estimate in the data. Therefore, the model is unable to generate sufficiently strong effects. In an analytical HANK model with positive private debt, private wealth effects amplify the response to monetary policy and improve the quantitative performance of the DSGE model.
    Keywords: New Keynesian, Monetary Policy, Fiscal Policy, Wealth Effects
    JEL: E21 E52 E63
    Date: 2020–01–31
  11. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Chi Keung Marco Lau (Huddersfield Business School, University of Huddersfield, Huddersfield, HD1 3DH, United Kingdom); Jacobus A Nel (University of Pretoria, 0002, South Africa); Xin Sheng (Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, CM1 1SQ, United Kingdom)
    Abstract: We use the recently created monthly Interest Rate Uncertainty measure, to investigate monetary policy uncertainty across the US, Germany, France, Italy, Spain, UK, Japan, Canada, and Sweden in both the time and frequency domains. We find that the largest spillover indices are from innovations in the country itself, however, there are some instances where spillover indices between countries are large. These relationships change over time and we observe large variances in pairwise spillovers during the global financial crisis. We find that most of the volatility is confined to the crisis period.
    Keywords: Connectedness, Frequency domain spillover, Monetary policy uncertainty, Pairwise spillovers, Uncertainty spillover
    JEL: C32 D80 E52 F42
    Date: 2020–01
  12. By: Kristoffer Mousten Hansen (GRANEM - Groupe de Recherche Angevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut National de l'Horticulture et du Paysage)
    Abstract: There have been many calls for reforming the gold standard since the end of the classical gold standard and especially since the end of Bretton Woods. While these calls have somewhat abated in recent years, in this article we will attempt to show that the gold standard is still a superior monetary system, and that the reform of the monetary system is still a desirable policy. We will proceed by first analyzing the shortcomings of the present fiat-money order, indicating how it distorts the market and society through inflation, redistribution, by artificially increasing the importance of financial markets and by hampering U. S. industrial production in international trade. Then we will show these problems would cease to exist under the gold standard, and we will indicate a possible reform for returning to gold in the U. S. Finally, we will argue that such a reform in order to be successful must become a popular crusade-i.e., it must become a populist issue. We do not pretend to any great originality with this proposal, rather it should be seen as an updated and slightly modified version of Mises's proposed reform from the 1950's.
    Date: 2020–01–28
  13. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school, INSEEC - INSEEC Business School - Institut des hautes études économiques et commerciales Business School (INSEEC))
    Abstract: The aim of the present paper is to provide criteria for a central bank of how to choose among di¤erent monetary-policy rules when caring about a number of policy targets such as the output gap and expected in ‡ation. Special attention is given to the question if policy instruments are predetermined or only forward looking. Using the new-Keynesian Phillips curve with a cost-push-shock policy-transmission mechanism, the forward-looking case implies an extreme lack of robustness and of credibility of stabilization policy. The backward-looking case is such that the simple-rule parameters can be the solution of Ramsey optimal policy under limited commitment. As a consequence, we suggest to model explicitly the rational behavior of the policy maker with Ramsey optimal policy, rather than to use simple rules with an ambiguous assumption leading to policy advice that is neither robust nor credible.
    Keywords: Determinacy,Proportional Feedback Rules,Dynamic Stochastic General Equilibrium,Ramsey Optimal Policy under Quasi-Commitment Keywords: Determinacy,Ramsey Optimal Policy under Quasi-Commitment
    Date: 2019–11
  14. By: Barnett, William; Bella, Giobanni; Ghosh, Taniya; Mattana, Paolo; Venturi, Beatrice
    Abstract: The paper shows that in a New Keynesian (NK) model, an active interest rate feedback monetary policy, when combined with a Ricardian passive fiscal policy, à la Leeper-Woodford, may induce the onset of a Shilnikov chaotic attractor in the region of the parameter space where uniqueness of the equilibrium prevails locally. Implications, ranging from long-term unpredictability to global indeterminacy, are discussed in the paper. We find that throughout the attractor, the economy lingers in particular regions, within which the emerging aperiodic dynamics tend to evolve for a long time around lower-than-targeted inflation and nominal interest rates. This can be interpreted as a liquidity trap phenomenon, produced by the existence of a chaotic attractor, and not by the influence of an unintended steady state or the Central Bank's intentional choice of a steady state nominal interest rate at its lower bound. In addition, our finding of Shilnikov chaos can provide an alternative explanation for the controversial “loanable funds” over-saving theory, which seeks to explain why interest rates and, to a lesser extent inflation rates, have declined to current low levels, such that the real rate of interest is below the marginal product of capital. Paradoxically, an active interest rate feedback policy can cause nominal interest rates, inflation rates, and real interest rates unintentionally to drift downwards within a Shilnikov attractor set. Policy options to eliminate or control the chaotic dynamics are developed.
    Keywords: Shilnikov chaos criterion, global indeterminacy, long-term un-predictability, liquidity trap
    JEL: C6 C61 C62 E12 E5 E52 E6 E63
    Date: 2020–01–30
  15. By: Martin Holm (University of Oslo); Pascal Paul; Andreas Tischbirek (HEC Lausanne, University of Lausanne)
    Abstract: We investigate the transmission of monetary policy to household consumption using detailed administrative data on the universe of households in Norway. Based on a novel series of identified monetary policy shocks, we estimate the dynamic responses of consumption, income, and saving along the liquid asset distribution of households. We find that low-liquidity but also high-liquidity households show strong responses, interest rate changes faced by borrowers and savers feed into consumption, and indirect effects of monetary policy outweigh direct effects, albeit with a delay. Overall, the results support the importance of financial frictions, cash-flow channels, and heterogeneous effects of monetary policy.
    Keywords: Monetary policy; Household balance sheets; Liquidity constraints; Heterogeneous agent New Keynesian models
    JEL: D31 E12 E21 E24 E32 E43 E52
    Date: 2020–01–31
  16. By: Simplice A. Asongu (Yaoundé/Cameroon); Oludele E. Folarin (University of Ibadan, Ibadan, Nigeria); Nicholas Biekpe (Cape Town, South Africa)
    Abstract: This study investigates the stability of demand for money in the proposed Southern African Monetary Union (SAMU). The study uses annual data for the period 1981 to 2015 from ten countries making-up the Southern African Development Community (SADC). A standard function of demand for money is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across countries in the stability of money. This divergence is articulated in terms of differences in cointegration, CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long-term determinants and error correction in event of a shock. Policy implications are discussed in the light of the convergence needed for the feasibility of the proposed SAMU. This study extends the debate in scholarly and policy circles on the feasibility of proposed African monetary unions.
    Keywords: Stable; demand for money; bounds test
    JEL: E41 C22
    Date: 2019–01
  17. By: Kristoffer Mousten Hansen (GRANEM - Groupe de Recherche Angevin en Economie et Management - UA - Université d'Angers - AGROCAMPUS OUEST - Institut National de l'Horticulture et du Paysage)
    Abstract: Recent debates in monetary theory has centered on so-called free banking and its role in a pure market economy. In this paper we intend to tackle this question from a different angle, as we examine how and to what extend fiduciary media can emerge in a pure market economy.
    Date: 2020–01–28
  18. By: Anderson, Gareth (Bank of England); Cesa-Bianchi, Ambrogio (Bank of England, CFM and CEPR)
    Abstract: We show that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a unique panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms’ expected default — the excess bond premium. Consistent with the spreads response, we also document that high-leverage firms experience a sharper contraction in debt and investment than low-leverage firms. Our results provide evidence that balance sheet effects are crucial for understanding the transmission mechanism of monetary policy.
    Keywords: Monetary policy; heterogeneity; credit spreads; excess bond premium; credit channel; financial accelerator; event-study; identification
    JEL: E44 F44 G15
    Date: 2020–02–07
  19. By: Michele Braun; Adam Copeland (Research and Statistics Group; National Bureau of Economic Research; Federal Reserve Bank of New York; Federal Reserve Bank; University of Minnesota); Alexa Herlach (Payments Policy Function of the New York Fed's Credit and Payments Risk Group.); Radhika Mithal (Markets Group)
    Abstract: Transactions denominated in U.S. dollars flow around the clock and around the globe, filling the pipelines that support commerce. On a typical day, more than $14 trillion of dollar-denominated payments is routed through the banking system. Critical to a well-functioning economy are the timing and smooth flow of dollars for large-value transactions and the infrastructure that enables that dollar flow. This financial market infrastructure provides essential economic services??plumbing? for the economy?and is made up of a variety of entities. In this post, we describe this financial market infrastructure, providing a simple map of its main entities and describing the flow of U.S. dollar payments among these entities. A more detailed study of intraday liquidity flows has been released by the Payments Risk Committee.
    Keywords: Payments; Liquidty; Financial Market Infrastructure
    JEL: G1
  20. By: Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We examine how the degree of financial market incompleteness affects welfare gains from international cooperation on capital controls. When financial markets are incomplete, international risk sharing is disturbed. However, the optimal global policy significantly reverses the welfare deterioration due to inefficient risk-sharing. We show that when financial markets are more incomplete, the welfare gap between the optimal global policy and the Nash equilibrium increases, and the welfare gains from international cooperation on capital controls then become larger.
    Keywords: Financial markets; Incomplete markets; Policy cooperation; Capital controls; Optimal policy; Welfare; Ramsey policy; Open-loop Nash game
    JEL: D52 E61 F32 F38 F42 G15
    Date: 2020–01
  21. By: Kevin L. Kliesen
    Abstract: Deciding to undertake a series of tightening actions present unique challenges for Federal Reserve policymakers. These challenges are both political and economic. Using a variety of economic and financial market metrics, this article examines how the economy and financial markets evolved in response to the five tightening episodes enacted by the FOMC since 1983. The primary aim is to compare the most-recent episode, from December 2015 to December 2018, with the previous four episodes. The findings in this article indicate that the current episode bears some resemblance to previous Fed tightening episodes, but also differs in several key dimensions. For example, in the first four episodes, the data show the FOMC was generally tightening into a strengthening economy with building price pressures. In contrast, in the fifth episode the FOMC began its tightening regime during a deceleration in economic activity and with headline and core inflation remaining well below the FOMC’s 2 percent inflation target. Moreover, both short- and long-term inflation expectations were drifting lower. These developments helped explain why there was a one-year gap between the first and second increases in the federal funds target rate in the most-recent episode. Another key difference is that in three of the first four episodes, the FOMC continued to tighten after the yield curve inverted; a recession then followed shortly thereafter. However, in the final episode, the FOMC ended its tightening policy about eight months before the yield curve inverted. It remains to be seen if a recession follows this inversion.
    Keywords: Federal Open Market Committee; monetary policy; macroeconomy; inflation; yield curve; recession
    JEL: E3 E4 E5 N1
    Date: 2020–01–30
  22. By: Saito, Makoto
    Abstract: A macroeconomic policy debate has been ongoing in Japan for over the past two decades, with one side proposing drastic fiscal reforms to avoid hyperinflation and the other recommending expansionary policies to escape from a liquidity trap. However, neither side has been able to explain why mild deflation has continued for such a long time, despite primary budget deficits and unprecedented monetary expansion. This paper presents an alternative theory, arguing that fiscal sustainability will be restored in the future not as a result of drastic fiscal reforms, hyperinflation, or continuous mild inflation, but largely through a one-off surge in the price level, such that the price level becomes several times higher than before. Such a price surge is considered a rare event accompanied by catastrophic endowment shocks in the following years. Within this framework, mild deflation coexists with fiscal unsustainability until this sharp surge in the price level occurs.
    Keywords: the fiscal theory of the price level, fiscal sustainability, mild deflation, price surges, yield curves
    JEL: E31 E41 E58 E63
    Date: 2020–01
  23. By: Marco Del Negro; Raiden B. Hasegawa; Frank Schorfheide; Marc Giannoni
    Abstract: GDP contracted 4 percent from 2008:Q2 to 2009:Q2, and the unemployment rate peaked at 10 percent in October 2010. Traditional backward-looking Phillips curve models of inflation, which relate inflation to measures of ?slack? in activity and past measures of inflation, would have predicted a substantial drop in inflation. However, core inflation declined by only one percentage point, from 2.2 percent in 2007 to 1.2 percent in 2009, giving rise to the ?missing deflation? puzzle. Based on this evidence, some authors have argued that slack must have been smaller than suggested by indicators such as the unemployment rate or deviations of GDP from its long-run trend. On the contrary, in Monday?s post, we showed that a New Keynesian DSGE model can explain the behavior of inflation in the aftermath of the Great Recession, despite large and persistent output gaps. An implication of this model is that information about the future stance of monetary policy is very important in determining current inflation, in contrast to backward-looking Phillips curve models where all that matters is the current and past stance of policy.
    Keywords: Great Recession; DSGE Models; Missing Disinflation
    JEL: E2 E5 G1
  24. By: Constantin Bürgi (St. Mary’s College of Maryland)
    Abstract: There are substantial di erences between general in ation expec- tations as reported in consumer surveys and CPI in ation. This paper proposes that some of this di erence can be explained by the fact that households are not weighted the same in the two measures. In the CPI, households are weighted according to their expenditure, while they have equal weights in the consumer survey. To estimate the im- pact of the weighting di erence, it is assumed that households predict the in ation of their own consumption basket. New empirical evidence is provided that supports this assumption as consumers do not predict CPI in ation and they predict a basket of goods. The estimated dif- ference in mean expectations explained by the di erence in weights is 0.7 percentage points or 20-25% of the di erence for the US.
    Keywords: CPI; CPI Expectations; Consumer In ation Expectations; Democratic CPI; Plutocratic CPI
    JEL: E31
    Date: 2020–02
  25. By: Marco Del Negro; Julie Remache; Meryam Bukhari (Markets Group); Alyssa Cambron (Markets Group)
    Abstract: Historically, the Federal Reserve has held mostly interest-bearing securities on the asset side of its balance sheet and, up until 2008, mostly currency on its liability side, on which it pays no interest. Such a balance sheet naturally generates income, which is almost entirely remitted to the U.S. Treasury once operating expenses and statutory dividends on capital are paid and sufficient earnings are retained to equate surplus capital to capital paid in. The financial crisis that began in late 2007 prompted a number of changes to the balance sheet. First, the asset side of the balance sheet increased dramatically, a result of both the various liquidity facilities and the Large-Scale Asset Purchase programs (LSAPs) (see yesterday's post on the history of the Fed?s balance sheet). Second, this expansion of the balance sheet was financed in large part by issuing interest-bearing reserves instead of additional noninterest-bearing currency. As a consequence of these changes, future net income from the Fed?s portfolio will depend on a wider range of factors and may be more variable for a period of time?a topic that has generated increased discussion (see papers by Carpenter et al., Hall and Reis, and Greenlaw, Hamilton, Hooper, and Mishkin).
    JEL: H00
  26. By: Jesœs Fern‡ndez-Villaverde (University of Pennsylvania - Department of Economics); Daniel R. Sanches (Federal Reserve Banks - Federal Reserve Bank of Philadelphia); Linda Schilling (Ecole Polytechnique- CREST); Harald Uhlig (University of Chicago - Department of Economics)
    Abstract: The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bankÕs contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endangered maturity transformation.
    Keywords: central bank digital currency, central banking, intermediation, maturity transformation, bank runs, lender of last resort
    JEL: E58 G21
    Date: 2020
  27. By: Fukunaga,Ichiro; Komatsuzaki,Takuji; Matsuoka,Hideaki
    Abstract: This paper quantitatively assesses the effects of inflation shocks on the public debt-to-GDP ratio in 19 advanced economies using simulation and estimation approaches. The simulations based on the debt dynamics equation and estimations of impulse responses by local projections both suggest that a 1 percentage point shock to the inflation rate reduces the debt-to-GDP ratio by about 0.5 to 1 percentage points. The results also suggest that the impact is larger and more persistent when the debt maturity is longer, but the difference from the benchmark case is not significant. These results imply that modestly higher inflation, even if accompanied by some financial repression, could reduce the public debt burden only marginally in many advanced economies.
    Date: 2020–01–29
  28. By: Federico Bassi (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Most empirical studies provide evidence that the rate of capacity utilization is stable around a constant Non-accelerating inflation rate of capacity utilization (NAIRCU). Nevertheless , available statistical series of the rate of capacity utilization, which is unobservable, are constructed by assuming that it is stable over time. Hence, the stability of the NAIRCU is an artificial artefact. In this paper, we develop a method to estimate the rate of capacity utilization without imposing stability constraints. Partially inspired to the Production function methodology (PFM), we estimate the parameters of a production function by imposing aggregate correlations between the rate of capacity utilization and a set of macroeconomic variables, namely investment , labor productivity and unemployment. Our results show that the NAIRCU is not a constant rate but a non-stationary time-varying trend, and that chronicle under-utilization of capacity with stable inflation is a plausible equilibrium. Hence, persistent deviations of GDP might reflect persistent shocks to capacity utilization rather than exogenous shocks to total factor productivity. As a corollary, expansionary demand policies do not necessarily create permanent inflationary pressures if the NAIRCU is below full-capacity output, namely in post-crisis periods. Abstract Most empirical studies provide evidence that the rate of capacity utilization is stable around a constant Non-accelerating inflation rate of capacity utilization (NAIRCU). Nevertheless, available statistical series of the rate of capacity utilization, which is unobservable, are constructed by assuming that it is stable over time. Hence, the stability of the NAIRCU is an artificial artefact. In this paper, we develop a method to estimate the rate of capacity utilization without imposing stability constraints. Partially inspired to the Production function methodology (PFM), we estimate the parameters of a production function by imposing aggregate correlations between the rate of capacity utilization and a set of macroeconomic variables, namely investment, labor productivity and unemployment. Our results show that the NAIRCU is not a constant rate but a non-stationary time-varying trend, and that chronicle under-utilization of capacity with stable inflation is a plausible equilibrium. Hence, persistent deviations of GDP might reflect persistent shocks to capacity utilization rather than exogenous shocks to total factor productivity. As a corollary, expansionary demand policies do not necessarily create permanent inflationary pressures if the NAIRCU is below full-capacity output, namely in post-crisis periods.
    Keywords: Capacity utilization,NAIRCU,Potential GDP,Hysteresis,Secular stagnation
    Date: 2019–11–12
  29. By: Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich); Carlo Rosa; Jeremiah P. Boyle; Matthew Raskin; Lisa Stowe (Markets Group); Richard K. Crump
    Abstract: Market prices provide timely information on policy expectations. But as we emphasized in our previous post, they can deviate from investors? expectations of the most likely path because they embed risk premiums and represent probability-weighted averages over different possible paths. In contrast, surveys explicitly ask respondents for their views on the likely path of economic variables. In this post, we highlight two surveys conducted by the Federal Reserve Bank of New York that provide information about expectations that can complement market-based measures.
    Keywords: Federal funds rate; Survey of Market Participants; Policy expectations; Survey of Primary Dealers
    JEL: E5 G1
  30. By: Vicente da Gama Machado; Raquel Nadal; Fernando Ryu Ramos Kawaoka
    Abstract: This paper proposes a new measure of underlying inflation for Brazil based on a generalized dynamic factor model (GDFM). The approach summarizes a wide set of indicators, which the Banco Central do Brasil (BCB) regularly monitors in its assessment of the inflation scenario, such as data on prices, activity, financial and monetary variables. Differently from most core inflation approaches, the model takes account of the time series dimension – by extracting the lower frequency component – as well as the cross-section dimension and is able to handle end-of-sample unbalances. To our knowledge, it is the first application of this procedure for Brazil. The resulting series exhibits lower variability, unbiasedness and a relatively good forecasting performance compared to various other measures of trend inflation. Overall, the findings suggest the novel underlying inflation measure may be an important complement to the information set used by the BCB.
  31. By: Ryan Bush (Markets Group); Marco Huwiler; Eric LeSueur (Markets Group); Giorgio Topa (Forschungsinstitut zur Zukunft der Arbeit; Research and Statistics Group; Federal Reserve Bank; University of Chicago; Federal Reserve Bank of New York)
    Abstract: It is essential for policymakers and financial market participants to understand market expectations for the path of future policy rates because these expectations can have important implications for financial markets and the broader economy. In this post?which is meant to complement prior Liberty Street Economics posts, including Crump et al. (2014a, 2014b ) and Brodsky et al. (2016a, 2016b)?we offer some insights into estimating and interpreting market expectations for increases in the federal funds target range at upcoming meetings of the Federal Open Market Committee (FOMC).
    Keywords: market expectations; Policy rate; Desk surveys
    JEL: D8 E5 G1
  32. By: Jeff W. Huther; Andrea Tambalotti (Federal Reserve Bank of New York; Research and Statistics Group; Princeton University; New York University; National Bureau of Economic Research); Katherine Femia
    Abstract: The Federal Open Market Committee (FOMC) recently announced its intention to extend the average maturity of its holdings of securities by purchasing $400 billion of Treasury securities with remaining maturities of six years to thirty years and selling an equal amount of Treasury securities with remaining maturities of three years or less. The nominal size of this maturity extension program, at $400 billion, is smaller than the $600 billion of purchases during the second round of large-scale asset purchases (LSAP 2) completed in June 2011. The two programs are more comparable in size, however, once we consider the characteristics of the securities expected to be purchased and sold under the maturity extension program. In this post, we explain what this means and why it matters.
    Keywords: Large Scale Asset Purchases; Duration; 10-year equivalents; Maturity Extension Program; portfolio balance channel
    JEL: G1
  33. By: Roc Armenter (Federal Reserve Bank of Philadelphia; Board of Governors of the Federal Reserve System (U.S.); Northwestern University; United States); Benjamin Lester; Gara M. Afonso
    Abstract: As a consequence of the Federal Reserve?s large-scale asset purchases from 2008-14, banks? reserve balances at the Fed have increased dramatically, rising from $10 billion in March 2008 to more than $2 trillion currently. In that new environment of abundant reserves, the FOMC put in place a framework for controlling the fed funds rate, using the interest rate that it offered to banks and a different, lower interest rate that it offered to non-banks (and banks). Now that the Fed has begun to gradually reduce its asset holdings, aggregate reserves are shrinking as well, and an important question becomes: How does a change in the level of aggregate reserves affect trading in the fed funds market? In our recent paper, we show that the answer depends not just on the aggregate size of reserve balances, as is sometimes assumed, but also on how reserves are distributed among banks. In particular, we show that a measure of the typical trade in the market known as the effective fed funds rate (EFFR) could rise above the rate paid on banks? reserve balances if reserves remain heavily concentrated at just a few banks.
    Keywords: Monetary policy implementation; federal funds market; over-the-counter markets
    JEL: E5
  34. By: Catia Batista; Pedro C. Vicente
    Abstract: Who uses mobile money? And what is mobile money used for? This paper describes the mobile money adoption patterns following the experimental introduction of mobile money services for the first time in rural areas of Southern Mozambique. In particular, we examine the individual characteristics of early and late adopters, as well as their mobile money usage patterns. For this purpose, we use a combination of administrative and household survey data to characterize the adoption of mobile money services in the three years following their initial introduction. We find that a large proportion of the individuals who were offered mobile money services adopted this technology. These users of mobile money (and early adopters in particular) are more educated than non-users, and they also are more likely to already hold a bank account. Positive-self-selection into mobile money usage raises the question of whether mobile money is an effective tool for financial inclusion.
    Keywords: Fintech, Mobile money, Technology adoption, Self-selection, Financial inclusion, Financial deepening, Mozambique, Africa.
    Date: 2020
  35. By: Marco Cipriani (New York University; Federal Reserve Bank; Federal Reserve Bank of New York; George Washington University; National Bureau of Economic Research); Michael Holscher; Patrick E. McCabe; Antoine Martin
    Abstract: On September 16, 2008, Reserve Primary Fund, a money market fund (MMF) with $65 billion in assets under management, announced that losses in its portfolio had caused the value of shares in the fund to drop from $1.00 to $0.97. The news that an MMF had ?broken the buck? spread panic quickly to other MMFs. In the two days following Reserve?s announcement, investors withdrew approximately $200 billion (10 percent of assets) from so-called ?prime? MMFs, which, like Reserve, mainly invest in privately issued short-term securities. The massive redemptions and resulting strains on MMFs contributed to a freezing of the markets that provide short-term credit to businesses and financial institutions and a sudden spike in short-term interest rates. Responding to these severe disruptions, the Treasury Department intervened on September 19 with a government guarantee of the value of MMF shares, and the Federal Reserve announced on the same day a facility designed to provide liquidity to MMFs. These unprecedented actions stopped the run on MMFs (for more analysis of the run in 2008, see McCabe, 2010). In this post, we discuss why MMFs are a source of financial fragility and the need for reforms to mitigate the risks they pose to the financial system and the economy.
    JEL: G2
  36. By: Joseph Fiorica (Markets Group); Bonni Brodsky (Markets Group); Anthony P. Rodrigues; Marco Del Negro; Eric LeSueur (Markets Group); Ari Morse
    Abstract: In our previous post, we showed that the gap between the market-implied path for the federal funds rate and the survey-implied mean expectations for the federal funds rate from the Survey of Primary Dealers (SPD) and the Survey of Market Participants (SMP) narrowed from the December survey to the January survey. In particular, we provided explanations for this narrowing as well as for the subsequent widening from January to March. This post continues the discussion by presenting a novel approach called ?tilting? that yields insights by measuring how much the survey probability distributions have to be altered to match the market-implied path of the federal funds rate. We interpret any discrepancy between the original and tilted distributions as arising from either risk premia or dispersion in beliefs.
    Keywords: policy rate; survey expectations; KLIC
    JEL: E5 G1
  37. By: Michael P. Clements (ICMA Centre, Henley Business School, University of Reading)
    Abstract: If learning-by-doing is important for macro-forecasting, newcomers might be different to regular, established particants. Stayers may also differ from the soon-to-leave. We test these conjectures for macro-forecasters point predictions of output growth and inflation, and for their histogram forecasts. A bootstrap approach is used to overcome the problems associated with the relatively small numbers of joiners and leavers. Controlling for the numbers of forecasters with the bootstrap approach is required to correctly determine whether there are systematic differences between experienced forecasters and newcomers, and between stayers and leavers.
    Keywords: forecast accuracy, experience, learning-by-doing, probability forecasts
    JEL: C53
    Date: 2020–01
  38. By: Christoffer Koch; Gary Richardson; Patrick Van Horn
    Abstract: Countercyclical capital buffers (CCyBs) are an old idea recently resurrected. CCyBs compel banks at the core of financial systems to accumulate capital during expansions so that they are better able to sustain operations during downturns. To gauge the potential impact of modern CCyBs, we compare the behavior of large and highly-connected commercial banks during booms before the Great Depression and Great Recession. Before the former, core banks did not expect bailouts and were subject to regulations that incentivized capital accumulation during booms. Before the later, core banks expected bailouts and kept capital levels close to regulatory minima. Our analysis indicates that the pre-Depression regulatory regime induced money-center banks to build capital buffers between 3% and 5% of total assets during economic expansions, which is up to double the maximum modern CCyB. These buffers enabled those banks to continue operations without government assistance during severe crises. This historical analogy indicates that modern countercyclical buffers may achieve their immediate goals of protecting core banks during crises but raises questions about whether they will contribute to overall financial stability.
    JEL: E02 E42 G01 G2 G21 G3 N1
    Date: 2020–01
  39. By: Marco Cipriani (New York University; Federal Reserve Bank; Federal Reserve Bank of New York; George Washington University; National Bureau of Economic Research); Antoine Martin; Patrick E. McCabe; Michael Holscher
    Abstract: In a June post, we explained why the design of money market funds (MMFs) makes them prone to runs and thereby contributes to financial instability. Today, we outline a proposal for strengthening MMFs that we?ve put forward in a recent New York Fed staff report. The proposal aims to reduce, and possibly eliminate, the incentive for investors to run from a troubled fund, while retaining the defining features of money market funds that make them popular financial products. U.S. Treasury Secretary Timothy Geithner, in a recent letter to the Financial Stability Oversight Council, requested that it consider an idea similar to what we described in our staff report as one of several potential options for reforming MMFs to address their structural vulnerabilities.
    Keywords: Runs; Money Market Funds; Minimum Balance at Risk
    JEL: G2
  40. By: 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); Stefano Eusepi; Marc Giannoni; Bianca De Paoli; Argia M. Sbordone
    Abstract: The Federal Reserve Bank of New York (FRBNY) has built a DSGE model as part of its efforts to forecast the U.S. economy. On Liberty Street Economics, we are publishing a weeklong series to provide some background on the model and its use for policy analysis and forecasting, as well as its forecasting performance. In this post, we briefly discuss what DSGE models are, explain their usefulness as a forecasting tool, and preview the forthcoming pieces in this series.
    Keywords: DSGE Models; Forecasting
    JEL: E2 E5

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