nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒02‒24
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. What’s on the ECB’s mind? – Monetary policy before and after the global financial crisis By Jonas Gross; Johannes Zahner
  2. Macroeconomic Surprises and the Demand for Information about Monetary Policy By Peter Tillmann
  3. The Power of Helicopter Money Revisited: A New Keynesian Perspective By Thomas J. Carter; Rhys R. Mendes
  4. Intervention Under Inflation Targeting--When Could It Make Sense? By David J Hofman; Marcos d Chamon; Pragyan Deb; Thomas Harjes; Umang Rawat; Itaru Yamamoto
  5. Revisiting the monetary presentation of the euro area balance of payments By Picón Aguilar, Carmen; Soares, Rodrigo Oliveira; Adalid, Ramón
  6. The Transmission of Monetary Policy and the Sophistication of Money Market Fund Investors By Marco Cipriani; Gabriele La Spada; Jeff Gortmaker
  7. One Shock, Many Policy Responses By Rui Mano; Silvia Sgherri
  8. Should central banks communicate uncertainty in their projections? By Ryan Rholes; Luba Petersen
  9. Making a Statement: How Did Professional Forecasters React to the August 2011 FOMC Statement? By Richard K. Crump; Stefano Eusepi; Emanuel Moench
  10. The Role of Imported Inputs in Pass-through Dynamics By Dilara Ertug; Pinar Ozlu; M. Utku Ozmen; Caglar Yunculer
  11. How the High Level of Reserves Benefits the Payment System By Antoine Martin; James J. McAndrews; Morten L. Bech
  12. Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default) By Cristina Arellano; Yan Bai; Gabriel Mihalache
  13. Output Gap, Monetary Policy Trade-offs, and Financial Frictions By Francesco Furlanetto; Paolo Gelain; Marzie Sanjani
  14. Regional Monetary Policies and the Great Depression By Pooyan Amir-Ahmadi; Gustavo S. Cortes; Marc D. Weidenmier
  15. Monetary Policy Surprises and Employment: evidence from matched bank-firm loan data on the bank lending-channel By Rodrigo Barbone Gonzalez
  16. A Closer Look at the Federal Reserve’s Securities Lending Program By Jake Schurmeier; Emma Weiss; Frank M. Keane; Michael J. Fleming
  17. Capital Flight inside the Euro Area: Cooling Off a Fire Sale By Thomas Klitgaard; Matthew Higgins
  18. Stressed Outflows and the Supply of Central Bank Reserves By Ryan Bush; Antoine Martin; Patricia Zobel; Phillip Weed; Adam Kirk
  19. The transmission of bank capital requirements and monetary policy to bank lending By Imbierowicz, Björn; Löffler, Axel; Vogel, Ursula
  20. Optimal monetary policy cooperation with a global shock and dollar standard By Xiaoyong Cui; Liutang Gong; Chan Wang; Heng-fu Zou
  21. "Ages of Financial Instability" By Mario Tonveronachi
  22. Do Treasury Term Premia Rise around Monetary Tightenings? By Tobias Adrian; Richard K. Crump; Emanuel Moench
  23. Shilnikov Chaos, Low Interest Rates, and New Keynesian Macroeconomics By William Barnett; Giovanni Bella; Taniya Ghosh; Paolo Mattana; Beatrice Venturi
  24. Exiting Financial Repression : The Case of Ethiopia By Chauffour,Jean-Pierre Christophe; Gobezie,Muluneh Ayalew
  25. Revisiting the Case for International Policy Coordination By Sushant Acharya; Ozge Akinci; Bianca De Paoli; Julien Bengui
  26. Blockchain structure and cryptocurrency prices By Zimmerman, Peter
  27. The Formation of Inflation Expectations: Micro-data Evidence from Japan By Junichi Kikuchi; Yoshiyuki Nakazono
  28. Estimating the optimal inflation target from trends in relative prices By Adam, Klaus; Weber, Henning
  29. Monetary Policy and Government Debt Dynamics Without Commitment By Dmitry Matveev
  30. Inflation Dynamics and Global Value Chains By De Soyres,Francois Michel Marie Raphael; Franco,Sebastian
  31. The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets By Calvin He; Gianni La Cava
  32. What Makes Money Work? By Sobel, Joel
  33. Preparing for Takeoff? Professional Forecasters and the June 2013 FOMC Meeting By Emanuel Moench; Stefano Eusepi; Richard K. Crump
  34. What If the U.S. Dollar's Global Role Changed? By Linda S. Goldberg; Hunter L. Clark; Mark Choi

  1. By: Jonas Gross (University of Bayreuth); Johannes Zahner (Philipps-University Marburg)
    Abstract: This paper analyzes the interest rate setting of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis. In the current monetary policy literature, researchers typically select one Taylor rule-based model in order to analyze the interest rate setting of central banks, but neglect uncertainty about the choice of this respective model. We apply a Bayesian model averaging (BMA) approach to extend the standard Taylor rule to account for model uncertainty driven by heterogeneity in the ECB decision-making body, the governing council. Our results suggest the following: First, the ECB acts according to its official mandate to maintain price stability and therefore to focus its decisions on the inflation rate. Second, economic activity measures have been in the focus of the ECB before the financial crisis broke out. Third, over the last decade, the role of economic activity for ECB monetary policy has decreased so that inflation seems to be the main driver of monetary policy decisions. Fourth, central bankers appear to consider more than one model when they decide about monetary policy measures.
    Keywords: European Central Bank, Taylor Rule, Bayesian Model Averaging, Model Uncertainty
    JEL: C11 E43 D81 E52 E58
    Date: 2020
  2. By: Peter Tillmann (University of Giessen)
    Abstract: This paper studies the demand for information about monetary policy, while the literature on central bank transparency and communication typically studies the supply of information by the central bank or the reception of the information provided. We use a new data set on the number of views of the Federal Reserve's website to measure the demand for information. We show that exogenous news about the state of the economy as re flected in U.S. macroeconomic news surprises raise the demand for information about monetary policy. Surprises trigger an increase in the number of views of the policy-relevant sections of the website, but not the other sections. Hence, market participants do not only revise their policy expectations after a surprise, but actively acquire new information. We also show that attention to the Fed matters: a high number of views on the day before the news release weakens the high-frequency response of interest rates to macroeconomic surprises.
    Keywords: macroeconomic announcements, nonfarm payroll, attention, event study, central bank communication
    Date: 2020
  3. By: Thomas J. Carter; Rhys R. Mendes
    Abstract: We analyze money financing of fiscal transfers (helicopter money) in two simple New Keynesian models: a “textbook” model in which all money is non-interest-bearing (e.g., all money is currency), and a more realistic model with interest-bearing reserves. In the textbook model with only non-interest-bearing money, we find the following: * A money-financed fiscal expansion can be more stimulative than a debt-financed fiscal expansion of equal magnitude. However, the extra stimulus requires that the central bank abandon its usual feedback rule for an extended period, allowing interest rates to instead be determined by the rate of money creation. * Moreover, the extra stimulus associated with money financing stems solely from its implications for the path of short-term interest rates and cannot be attributed to an oft-cited Ricardian-equivalence argument that money financing avoids the adverse wealth effects associated with higher taxes under debt financing. * Because the stimulative effects of money financing are driven by its implications for interest rates, a combination of debt financing and sufficiently accommodative forward guidance can replicate all welfare-relevant outcomes while bypassing the potential political-economic complications associated with helicopter money. * Apart from these complications, money financing also has the drawback that it would allow money-demand shocks to generate volatility in output and inflation, much as was the case under the money-targeting regimes of the 1970s and 1980s. In the model with interest-bearing reserves, we find the following: * The rate of money creation determines the interest rate on reserves, but broader interest rates are invariant across debt- and money-financing regimes. * As a result, money financing delivers no extra stimulus relative to debt financing. Overall, results suggest that helicopter money cannot be justified on the grounds that it would allow policy-makers to get more stimulus out of a given fiscal expansion: either money financing has no extra stimulative benefits to offer, or all potential benefits could be pursued more effectively and robustly using alternative policies.
    Keywords: Credibility; Economic models; Fiscal Policy; Inflation targets; Interest rates; Monetary Policy; Monetary policy framework; Transmission of monetary policy; Uncertainty and monetary policy
    JEL: E12 E41 E43 E51 E52 E58 E61 E63
    Date: 2020–02
  4. By: David J Hofman; Marcos d Chamon; Pragyan Deb; Thomas Harjes; Umang Rawat; Itaru Yamamoto
    Abstract: We investigate the motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluate the case for such interventions based on the existing literature. Our findings suggest that the rationale for interventions depends on initial conditions and country-specific circumstances. The case is strongest in the presence of large currency mismatches or underdeveloped markets. While interventions can have benefits in the short-term, sustained over time they could entrench unfavorable initial conditions, though more work is needed to establish this empirically. A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed—at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.
    Keywords: Central banks;Exchange rate policy;Central bank policy;Exchange markets;Central banking and monetary issues;emerging markets,monetary and exchange rate policies,inflation targeting,foreign exchange intervention,capital flows,WP,EME,inflation target,policy instrument,exchange rate,targeter
    Date: 2020–01–17
  5. By: Picón Aguilar, Carmen; Soares, Rodrigo Oliveira; Adalid, Ramón
    Abstract: We explain how the external counterpart of the euro area M3 can be analysed by using the euro area balance of payments (b.o.p.). This is possible because the net external assets of the monetary financial institutions (MFIs) are present in two statistical frameworks that follow similar conventions: the balance sheet items (BSI) of MFIs and the balance of payments statistics. The first step to including external flows in the monetary analysis is to understand the nature of the flows between resident money holders and the rest of the world. This is possible thanks to the monetary presentation of the b.o.p, which provides information on the nature of external transactions and therefore guidance on the persistence of the monetary signal stemming from external flows.Over the past five years, the increase in the euro area’s external competitiveness has given rise to a sustained current account surplus that has consistently supported monetary inflows into the euro area. At the same time, portfolio transactions, which closely reflect financial and monetary policy conditions, have fluctuated significantly, increasing monetary inflows in the period from mid-2012 to mid-2014 and turning them into net outflows during the asset purchase programme (APP) period. JEL Classification: E51, E52, F45, F41, F43, F32, F34
    Keywords: balance of payments, balance sheet items, cross-border flows, monetary aggregates, monetary financial institutions, net external assets
    Date: 2020–02
  6. By: Marco Cipriani (New York University; Federal Reserve Bank; Federal Reserve Bank of New York; George Washington University; National Bureau of Economic Research); Gabriele La Spada; Jeff Gortmaker (Research and Statistics Group)
    Abstract: In December 2015, the Federal Reserve tightened monetary policy for the first time in almost ten years and, over the following three years, it raised interest rates eight more times, increasing the target range for the federal funds rate from 0-25 basis points (bps) to 225-250 bps. To what extent are changes in the fed funds rate transmitted to cash investors, and are there differences in the pass-through between retail and institutional investors? In this post, we describe the impact of recent rate increases on the yield paid by money market funds (MMFs) to their investors and show that the impact varies depending on investors? sophistication.
    Keywords: money market funds; pass-through; monetary policy; investor sophistication
    JEL: G2
  7. By: Rui Mano; Silvia Sgherri
    Abstract: Policymakers have relied on a wide range of policy tools to cope with capital flow shocks. And yet, the effects and interaction of these policies remain under debate, as does the motivation for using them. In this paper, quantile local projections are used to estimate the entire distribution of future policy responses to portfolio flow shocks for 20 emerging markets and understand the variety of policy choices across the sample. To assuage endogeneity concerns, estimates rely on the fact that global capital flows are exogenous from the viewpoint of any one of these countries. The paper finds that: (i) policy responses to capital flow shocks are heterogeneous across countries, fat-tailed—“extreme” responses tend to be more elastic than “typical” responses—and asymmetric—“extreme” responses tend to be more elastic with respect to outflows than to inflows; (ii) country characteristics are linked to policy choices—with cross-country differences in forex intervention relating to the size of balance sheet vulnerabilities and the depth of the forex market; (iii) the use of targeted macroprudential policy and capital flows management measures can help “free the hands” of monetary policy by allowing it to focus more squarely on domestic cyclical developments.
    Keywords: Exchange rate policy;International investment position;Foreign exchange reserves;Foreign exchange intervention;Central banks;Capital flows,emerging markets,macroprudential policies,capital flows management.,WP,policy response,policy tool,flow pressure,forex,policy action
    Date: 2020–01–17
  8. By: Ryan Rholes (Texas A&M University); Luba Petersen (Simon Fraser University)
    Abstract: This paper provides original empirical evidence on the emerging practice by central banks of communicating uncertainty in their inflation projections. We compare the effects of point and density projections in a learning-to-forecast laboratory experiment where participants' aggregated expectations about one- and two-period-ahead inflation influence macroeconomic dynamics. Precise point projections are more effective at managing inflation expectations. Point projections reduce disagreement and uncertainty while nudging participants to forecast rationally. Supplementing the point projection with a density forecast mutes many of these benefits. Relative to a point projection, density forecasts lead to larger forecast errors, greater uncertainty about own forecasts, and less credibility in the central bank's projections. We also explore expectation formation in individual-choice environments to understand the motives for responding to projections. Credibility in the projections is significantly lower when strategic considerations are absent, suggesting that projections are primarily effective as a coordination device. Overall, our results suggest that communicating uncertainty through density projections reduces the ecacy of inflation point projections.
    Keywords: expectations, monetary policy, inflation communication, credibility, laboratory experiment, experimental macroeconomics, uncertainty, strategic, coordination, group versus individual choice
    Date: 2020–01
  9. By: Richard K. Crump; Stefano Eusepi; Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich)
    Abstract: The Federal Open Market Committee (FOMC) statement released on August 9, 2011, was the first to incorporate language on ?forward guidance? with an explicit date tied to the Committee?s expected path of monetary policy. In this post, we exploit the timing of surveys taken before and after this statement?s release to investigate how professional forecasters changed their expectations of growth, inflation, and monetary policy. We find that the average forecast of the federal funds rate shifts considerably and closely aligns with the new language in the statement, while the average forecasts for growth and inflation change less. While there?s near unanimity among forecasters about the future path of the federal funds rate after the August 2011 FOMC statement, forecasters maintained differing views on the growth and inflation outlooks.
    Keywords: Professional Forecasters; FOMC communication; policy expectations
    JEL: E2 E5
  10. By: Dilara Ertug; Pinar Ozlu; M. Utku Ozmen; Caglar Yunculer
    Abstract: In this paper, we analyze the extent to which the use of imported inputs affects exchange rate and import price pass-through into domestic producer and consumer prices for services in Turkey. We first calculate the use of imported inputs on sectoral level by analyzing the input-output tables. Then, by taking the sectoral heterogeneity regarding the use of imported inputs into account, we estimate import price and exchange rate pass-through by utilizing import prices, producer prices (consumer prices for services) and output gap on sectoral basis. Our results point to a substantial heterogeneity across sectors in terms of exchange rate and import price pass-through. While the import price (in foreign currency) pass-through is in line with the share of imported input to a large extent, the pass-through of exchange rate shocks to domestic prices are generally higher than the share of imported inputs in costs inclusive of labor. Our findings also reveal that this excess exchange rate pass-through has strengthened over the recent period. Additional analyses carried out reveal that the high share of foreign currency debt is associated with higher exchange rate pass-through, suggesting that the management of foreign exchange liability might play a critical role to enhance the effectiveness of monetary policy and to create room for maneuver to fight against inflation by reducing the excess exchange rate pass-through.
    Keywords: Imported inputs, Import price pass-through, Exchange rate pass-through, FX liability
    JEL: D57 E31 E52
    Date: 2020
  11. By: Antoine Martin; James J. McAndrews; Morten L. Bech (Bank für Internationalen Zahlungsausgleich; Federal Reserve Bank; Federal Reserve Bank of New York)
    Abstract: Since October 2008, the Federal Reserve has increased the size of its balance sheet by lending to financial intermediaries and purchasing assets on a large scale. While these actions have increased the amount of reserves in the U.S. banking system and therefore raised concerns about excessive bank lending and inflation, we can document an important and overlooked benefit of the high level of reserves: a significantly earlier settlement of payments on Fedwire, the Federal Reserve?s large-value payment system. Quicker settlement on Fedwire improves liquidity throughout the economy, reducing uncertainty and risk for people and firms that rely on banks. At the same time, the Fed has been extending less intraday credit, which reduces the public?s risk exposure.
    Keywords: Large balance sheet; payment system
    JEL: E4 E5 G2
  12. By: Cristina Arellano; Yan Bai; Gabriel 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.
    Date: 2020
  13. By: Francesco Furlanetto (BI Norwegian Business School; Norges Bank); Paolo Gelain; Marzie Sanjani (International Monetary Fund)
    Abstract: This paper investigates how the presence of pervasive financial frictions and large financial shocks changes the optimal monetary policy prescriptions and the estimated dynamics in a New Keynesian model. We find that financial factors affect the optimal policy only to some extent. A policy of nominal stabilization (with a particular focus on targeting wage inflation) is still the optimal policy, although the central bank is now unable to fully stabilize economic activity around its potential level. In contrast, the presence of financial frictions and financial shocks crucially changes the size and shape of the estimated output gap and the relative importance of different shocks in driving economic fluctuations, with financial shocks absorbing explanatory power from labor supply shocks.
    Keywords: Financial frictions; output gap; monetary policy
    JEL: E32 C51 C52
    Date: 2020–02–15
  14. By: Pooyan Amir-Ahmadi; Gustavo S. Cortes; Marc D. Weidenmier
    Abstract: The Great Depression provides a unique setting to test the impact of monetary policies on economic activity in a monetary union within the same country during a severe crisis. Until the mid-1930s, the 12 Federal Reserve banks had the ability to set their own discount rates and conduct independent monetary policy. Using a structural VAR with sign restrictions and new monthly data for each Federal Reserve district between 1923-33, we extract a national monetary policy factor from the 12 discount rates of the Federal Reserve banks. We then identify the region-specific component for each Fed district by subtracting the common factor component of monetary policy from the discount rate of each Federal Reserve bank. Our findings suggest that there was significant variation in regional monetary policy and that the district reserve banks played a key role in the economic contraction.
    JEL: E52 E58 N1 N12
    Date: 2020–01
  15. By: Rodrigo Barbone Gonzalez
    Abstract: This paper investigates the effects of the bank lending-channel of monetary policy (MP) surprises on credit supply and employment. To identify the effects of MP surprises, I bring the high-frequency identification strategy of Kuttner (2001) to comprehensive and matched bank-firm data from Brazil. The results are robust and stronger than the ones obtained with Taylor residuals or the reference rate. Consistent with theory, financial intermediaries’ constraints are relevant in the transmission of MP (beyond credit) to the real economy. Firms connected to weaker banks not only observe 0.26 pp higher credit intake, but also employ 0.10 pp more following MP stimulus.
  16. By: Jake Schurmeier (Markets Group); Emma Weiss (Markets Group); Frank M. Keane; Michael J. Fleming
    Abstract: The Federal Reserve lends specific Treasury and agency debt securities held in its System Open Market Account (SOMA)?and accepts general Treasury securities as collateral?through its daily securities lending program. The program supports Treasury and agency debt market function by providing a secondary and temporary source of securities to the broader market through the Fed?s trading counterparties, the primary dealers. Importantly, the size and composition of the SOMA portfolio reflect past monetary policy decisions, limiting the program's ability to help alleviate all collateral shortages. In this post, we provide a brief history of the Fed?s securities lending program and describe recent trends in activity and what is driving them.
    Keywords: Federal Reserve; Securities Lending; Treasury securities
    JEL: G1
  17. By: Thomas Klitgaard; Matthew Higgins (National Bureau of Economic Research; Georgia Institute of Technology; Federal Reserve Bank of New York; College of Management)
    Abstract: Countries in the euro area periphery such as Greece, Italy, Portugal, and Spain saw large-scale capital flight in 2011 and the first half of 2012. While events unfolded much like a balance of payments crisis, the contraction in domestic credit was less severe than would ordinarily be caused by capital flight of this scale. Why was that? An important reason is that much of the capital flight was financed by credits to deficit countries? central banks, with those credits extended collectively by other central banks in the euro area. This balance of payments financing was paired with policies to supply liquidity to periphery commercial banks. Absent these twin lifelines, periphery countries would have had to endure even steeper recessions from the sudden withdrawal of foreign capital.
    Keywords: capital flight euro area crisis target2 credit balance of payments financial account cross-border financial flows refinancing central bank lending official assistance periphery
    JEL: F00
  18. By: Ryan Bush (Markets Group); Antoine Martin; Patricia Zobel; Phillip Weed; Adam Kirk
    Abstract: Since the financial crisis, banking regulators around the world have been intensely aware of liquidity risk and, in part as a response, have introduced the Basel III liquidity regulation. Today, the world?s largest banks hold substantial liquidity buffers comprising both securities and central bank reserves, to satisfy internal liquidity stress tests and minimum quantitative regulatory requirements. The appropriate level of liquidity buffers depends on the likely outflows in a market stress situation. In this post, we use public data to provide a rough estimate of stressed outflows that the largest banks would face and consider how they could meet these outflows.
    Keywords: reserve; stressed outflows; Fed balance sheet
    JEL: G2 G2
  19. By: Imbierowicz, Björn; Löffler, Axel; Vogel, Ursula
    Abstract: We investigate the transmission of changes in bank capital requirements and supranational monetary policy, and their interaction effect, on euro area bank lending and lending rates. Our results show that - for weakly capitalized banks - increases in capital requirements are in the short-run associated with a decrease in the total of domestic and cross-border bank lending. In addition, we find that there is no similar effect of capital requirements for strongly capitalized banks. Furthermore, changes in the monetary policy stance are positively related to lending rates. Regarding the interacting effect of national capital requirements and supranational monetary policy, we observe that increases in capital requirements attenuate the general effects of monetary policy on interest rates. Overall, the transmission of an accommodating monetary policy to lending rates is attenuated by contemporaneous increases in bank capital requirements which additionally imply a transitory decrease of the loan growth of weakly capitalized banks.
    Keywords: Bank Lending,Lending Rates,Capital Requirements,Monetary Policy,International Policy Interaction
    JEL: E52 F30 G28
    Date: 2019
  20. By: Xiaoyong Cui (School of Economics, Peking University); Liutang Gong (Guanghua School of Management, Peking University); Chan Wang (School of Finance, Central University of Finance and Economics); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: Contrary to the consensus in the literature, we demonstrate that there exist the welfare gains from monetary policy cooperation when the world is hit by a global shock. We reach our conclusion in a two-country New Keynesian model with a global oil price shock and dollar standard. When exporters in both countries and oil producer which is modeled as a third party such as OPEC price goods in the home currency, the U.S. dollar, the status of home and foreign monetary policy is asymmetric. Speciffically, home monetary policy can influence the welfare levels of the households in the world while foreign monetary policy can only affect the welfare level of the domestic household. By internalizing the negative externality of home monetary policy to foreign country, world planner can achieve the welfare gains from monetary policy cooperation. In addition, unlike what is found in the literature, we show that not all countries are willing to take part in monetary policy cooperation, unless the world planner transfers part of the welfare gains from the country which benefits from the monetary policy cooperation to the one which loses.
    Keywords: A global shock, Dollar standard, Monetary policy cooperation, Welfare gains
    JEL: E5 F3 F4
    Date: 2020
  21. By: Mario Tonveronachi
    Abstract: Starting from the mid-nineteenth century, this paper analyzes two periods of financial instability connected with financial globalization. The first culminates with the 1929 crisis, while the second characterizes the more recent experience starting from the 1970s. The period in between is divided into two subperiods. The first goes up to World War II and sees a retrenchment from globalization and the affirmation of a statist approach to national policy autonomy in pursuing domestic goals, for which we take as examples the New Deal, financial regulation, and the new international cooperative approach finally leading to Bretton Woods. The second subperiod, marked by the new international monetary order and limited globalization, although appearing as a relatively calm interlude, conceals the seeds of a renewed push toward financial fragility. The above periods are synthetically analyzed in terms of the development and mutual fertilization of theories, institutions, and vested public and private interests. The narrative is based on two interpretative keys: the Minskyan theory of financial fragility and changes in the public-private partnership, mainly with reference to the financial sector for which the role of the State as guarantor of last resort necessarily ensues. The lesson that can be derived is that a laissez-faire approach to globalization strengthens asymmetric powers and necessarily leads to overglobalization, as well as to financial and economic instability, rendering it extremely difficult and socially costly for the State to comply with its role of financial guarantor.
    Keywords: Financial Instability; Financial Fragility Theory; Globalization; International Cooperation; Financial Regulation; Public-Private Partnership
    JEL: B00 E1 E31 E32 E4 F33 G18
  22. By: Tobias Adrian; Richard K. Crump; Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich)
    Abstract: Some commentators have expressed concern that Treasury yields might rise sharply once the Federal Open Market Committee (FOMC) begins to raise the federal funds rate (FFR), worrying, in particular, about a sudden increase in Treasury term premia. In this post, we analyze the dynamics of Treasury term premia over the last fifty years and discuss their evolution around recent tightening cycles, paying special attention to the 1994 episode when bond prices dropped sharply around the world. We find that term premia don?t typically rise when monetary policy tightens. We also conclude, based on the behavior of term premia and survey evidence, that the sharp rise in Treasury yields in 1994 was in large part due to an upward shift in the expected path of future short-term interest rates.
    Keywords: tightening cycles; Term premia; monetary policy
    JEL: E2 G1
  23. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Giovanni Bella (Department of Economics and Business, University of Cagliari, Italy); Taniya Ghosh (Indira Gandhi Institute of Development Research, Mumbai, India); Paolo Mattana (Department of Economics and Business, University of Cagliari, Italy); Beatrice Venturi (Department of Economics and Business, University of Cagliari, Italy)
    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: C61 C62 E12 E52 E63
    Date: 2020–01
  24. By: Chauffour,Jean-Pierre Christophe; Gobezie,Muluneh Ayalew
    Abstract: Ethiopia's framework for managing its monetary and foreign exchange policy has relied on some standard instruments of financial repression. Over time, the framework has led to the buildup of large macro-financial imbalances. Exiting financial repression while maintaining macroeconomic stability would require solid control over the macro-financial flows and good anticipation of the immediate financial effects of the reform. The paper presents and quantifies such a gradual liberalization reform scenario of Ethiopia's monetary and foreign exchange system.
    Keywords: Inflation,International Trade and Trade Rules,Banks&Banking Reform,Macroeconomic Management,Legal Institutions of the Market Economy
    Date: 2019–12–12
  25. By: Sushant Acharya; Ozge Akinci; Bianca De Paoli; Julien Bengui
    Abstract: Prompted by the U.S. financial crisis and subsequent global recession, policymakers in advanced economies slashed interest rates dramatically, hitting the zero lower bound (ZLB), and then implemented unconventional policies such as large-scale asset purchases. In emerging economies, however, the policy response was more subdued since they were less affected by the financial crisis. As a result, capital flows from advanced to emerging economies increased markedly in response to widening interest rate differentials. Some emerging economies reacted by adopting measures to slow down capital inflows, acting under the presumption that these flows were harmful. This type of policy response has reignited the debate over how to moderate international spillovers.
    JEL: F00 E5 G1
  26. By: Zimmerman, Peter (Bank of England)
    Abstract: I present a model of cryptocurrency price formation that endogenizes both the financial market for coins and the fee-based market for blockchain space. A cryptocurrency has two distinctive features: a price determined by the extent of its usage as money, and a blockchain structure that restricts settlement capacity. Limited settlement space creates competition between users of the currency, so speculative activity can crowd out monetary usage. This crowding-out undermines the ability of a cryptocurrency to act as a medium of payment, lowering its value. Higher speculative demand can reduce prices, contrary to standard economic models. Crowding-out also raises the riskiness of investing in cryptocurrency, explaining high observed price volatility.
    Keywords: Blockchain; cryptocurrency; global games; price volatility
    JEL: D04 E42 G13
    Date: 2020–02–14
  27. By: Junichi Kikuchi; Yoshiyuki Nakazono
    Abstract: Using a unique survey of 50,000 households for 4 years, this study examines how households form inflation expectations. There are three findings. First, disagreements on inflation forecasts among households are larger for the shorter-term than those for the longer-term horizon; additionally, disagreements are predicted by how frequently households collect information about overall inflation rates. Inflation forecasts for the 1-year horizon are widely dispersed, while those for the 10-year horizon are anchored below 2%. Second, households heterogeneously update their information sets on prices. 46% of the households collect information about the consumer price index at least once a quarter, while the remaining households less frequently or never obtain this information. Third, forecast revisions are sensitive to a change in food prices. We show that more than half of households are attentive only to a change in food prices and may form their inflation expectations using food price changes as a signal of fluctuations in the overall inflation rates. The existence of numerous households that are inattentive to the nationwide inflation rates casts doubt on the transmission mechanism of the monetary policy through the management of expectations.
    Date: 2020–01
  28. By: Adam, Klaus; Weber, Henning
    Abstract: Using the official micro price data underlying the U.K. consumer price index, we document a new stylized fact for the life-cycle behavior of consumer prices: relative to a narrowly defined set of competing products, the price of individual products tends to fall over the product lifetime. We show that this data feature has important implications for the optimal inflation target. Constructing a sticky-price model featuring a product life cycle and heterogeneous relative-price trends, we derive closed-form expressions for the optimal inflation target under Calvo and menu-cost frictions. We show how the optimal target can be estimated from the observed trends in relative prices. For the U.K. economy, we find the optimal target to be equal to 2.6% in 2016. It has steadily increased over the period 1996 to 2016 due to changes in relative price trends over this period. JEL Classification: E31
    Keywords: micro price data, optimal inflation, U.K. inflation target
    Date: 2020–02
  29. By: Dmitry Matveev
    Abstract: I show that maturity considerations affect the optimal conduct of monetary and fiscal policy during a period of government debt reduction. I consider a New Keynesian model and study a dynamic game of monetary and fiscal policy authorities without commitment, characterizing the incentives that drive the choice of interest rate. The presence of long-term bonds makes government budgets less sensitive to changes in interest rates. As a result, a reduction of government debt induced by a lack of policy commitment is associated with tight monetary policy. Furthermore, the long maturity of bonds slows down the speed of debt reduction up to the rate consistent with existing empirical evidence on the persistence of government debt. Finally, the long maturity of bonds brings down the welfare loss associated with debt reduction.
    Keywords: Fiscal Policy; Monetary Policy
    JEL: E52 E62 E63
    Date: 2019–12
  30. By: De Soyres,Francois Michel Marie Raphael; Franco,Sebastian
    Abstract: The global economy has witnessed a decline in inflation and an increase in inflation synchronization since the early 1980s. This paper investigates the relationship between inflation synchronization and trade integration, and documents the strong link between inflation co-movement and Global Value Chain (GVC) participation. Using 35 years and both gross and value-added trade flows, evidence shows that an increase in production linkages, as proxied by trade in intermediate inputs, is strongly associated with higher inflation correlation. Moreover, backward GVC participation is associated with an increase in bilateral inflation co-movement while forward participation is linked with a higher correlation between domestic and worldwide inflation. The paper also finds evidence of the effect of trade integration in decreasing inflation levels.
    Date: 2019–12–18
  31. By: Calvin He (Reserve Bank of Australia); Gianni La Cava (Reserve Bank of Australia)
    Abstract: We document that the effect of monetary policy on housing prices varies substantially by local housing market. We show that this heterogeneity across local housing markets can be partly explained by variation in housing supply conditions – housing prices are typically more sensitive to changes in interest rates in areas where land is more expensive. But other factors are important too. Specifically, we find the sensitivity is greater in areas where incomes are relatively high, households are more indebted and there are more investors. Taken together, this suggests that the state of the economy can affect the sensitivity of housing prices to monetary policy. We also directly explore how monetary policy affects housing wealth inequality. We find that housing prices in more expensive areas are more sensitive to changes in interest rates than in cheaper areas. This suggests that lower interest rates increase housing wealth inequality, while higher rates do the opposite. However, these effects appear to be temporary.
    Keywords: housing; monetary policy; mortgage debt; inequality; heterogeneity
    JEL: D31 E21 E52
    Date: 2020–02
  32. By: Sobel, Joel
    Date: 2019–12–18
  33. By: Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich); Stefano Eusepi; Richard K. Crump
    Abstract: Following the June 18-19 Federal Open Market Committee (FOMC) meeting different measures of short-term interest rates increased notably. In the chart below, we plot two such measures: the two-year Treasury yield and the one-year overnight indexed swap (OIS) forward rate, one year in the future. The vertical line indicates the final day of the June FOMC meeting. To what extent did this rise in rates following the June FOMC meeting reflect a shift in the expected future path of the federal funds rate (FFR)? Market participants and policy makers often directly read the expected path from financial market data such as the OIS contracts. In this post, we take an alternative approach by looking at surveys of professional forecasters to assess how expectations changed.
    Keywords: FOMC; Professional Forecasts; Monetary Policy
    JEL: E2 E5
  34. By: Linda S. Goldberg; Hunter L. Clark (Research and Statistics Group); Mark Choi (Emerging Markets and International Affairs Group)
    Abstract: It isn?t surprising that the dollar is always in the news, given the prominence of the United States in the global economy and how often the dollar is used in transactions around the world (as discussed in a 2010 Current Issues article). But the dollar may not retain this dominance forever. In this post, we consider and catalog the implications for the United States of a potential lessening of the dollar?s primacy in international transactions. The circumstances surrounding such a possibility are important for the effects. As long as U.S. fundamentals remain strong, key consequences could be somewhat higher funding costs and somewhat lower seigniorage revenues (the excess returns to the government of creating money), some reduced U.S. spillovers to the rest of the world, and enhanced sensitivity of the domestic economy to foreign economic conditions.
    Keywords: Dollar; reserves; currency; international role; rmb; euro
    JEL: E2 F00

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