nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒03‒09
fifty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Exchange Rate Misalignment and External Imbalances: What is the Optimal Monetary Policy Response? By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  2. CBDC and Monetary Sovereignty By Antonio Diez de los Rios; Yu Zhu
  3. Monetary Policy Implementation and Pass-Through By Fabio Canetg
  4. Countercyclical liquidity policy and credit cycles: Evidence from macroprudential and monetary policy in Brazil By João Barata R. Blanco Barroso; Rodrigo Barbone Gonzalez; José-Luis Peydró; Bernardus F. Nazar Van Doornik
  5. Monetary Policy Implementation With an Ample Supply of Reserves By Antoine Martin; Simon M. Potter; Kyungmin (Teddy) Kim; Sam Schulhofer-Wohl; Gara Afonso; Ed Nosal
  6. CBDC and Monetary Policy By Mohammad Davoodalhosseini; Francisco Rivadeneyra; Yu Zhu
  7. Monetary Policy in Fossil Fuel Exporters : The Curse of Horizons By Arezki,Rabah
  8. On the external validity of experimental inflation forecasts : a comparison with five categories of field expectations By Camille Cornand; Julien Pillot
  9. Counterparties and Collateral Requirements for Implementing Monetary Policy By Ylva Søvik; Emily Eisner; Antoine Martin
  10. SVARs, the central bank balance sheet and the effects of unconventional monetary policy in the euro area By Adam Elbourne
  11. Robustly Optimal Monetary Policy in a New Keynesian Model with Housing By Klaus Adam; Michael Woodford
  12. Monetary policy asset bubbles By Christophe Blot; Paul Hubert; Fabien Labondance
  13. Do zero and sign restricted SVARs identify unconventional monetary policy shocks in the euro area? By Adam Elbourne; Kan Ji
  14. Trust in the central bank and inflation expectation By Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; van Rooij, Maarten
  15. A Fiscal Theory of Monetary Policy with Partially-Repaid Long-Term Debt By John H. Cochrane
  16. Has the information channel of monetary policy disappeared? Revisiting the empirical evidence By Barbara Rossi
  17. Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions By Jean-Bernard Chatelain; Kirsten Ralf
  18. Risk Premia at the ZLB: A Macroeconomic Interpretation By Phuong Ngo; Francois Gourio
  19. Hopf Bifurcation from new-Keynesian Taylor rule to Ramsey Optimal Policy By Jean-Bernard Chatelain; Kirsten Ralf
  20. Criptocurrencies, Fiat Money, Blockchains and Databases By Jorge Barrera
  21. Since the Financial Crisis, Aggregate Payments Have Co-moved with Aggregate Reserves. Why? By Kyra Frye; Helene Hall; Thomas M. Eisenbach
  22. Dollarization Dilemma : Price Stability at the Cost of External Competitiveness in Cambodia By Samreth,Sovannroeun; Sanchez Martin,Miguel Eduardo; Ly,Sodeth
  23. High Unemployment and Disinflation in the Euro Area Periphery Countries By Richard Peck; Thomas Klitgaard
  24. Why Do Central Banks Have Discount Windows By Stavros Peristiani; Joao A. C. Santos
  25. The reaction function channel of monetary policy and the financial cycle By Andrew Filardo; Paul Hubert; Phurichai Rungcharoenkitkul
  26. The Limits of onetary Economics : On Money as a Latent Medium of Exchange By Ricardo Lagos; Shengxing Zhang
  27. Technology Approach for a CBDC By Dinesh Shah; Rakesh Arora; Han Du; Sriram Darbha; John Miedema; Cyrus Minwalla
  28. The Role of Households' Borrowing Constraints in the Transmission of Monetary Policy By Fergus Cumming; Paul Hubert
  29. Winter is possibly not coming : mitigating financial instability in an agent-based model with interbank market By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  30. Crisis Chronicles: Gold, Deflation, and the Panic of 1893 By Thomas Klitgaard; James Narron
  31. How Have High Reserves and New Policy Tools Reshaped the Fed Funds Market? By Sammuel Stern; Gara M. Afonso
  32. Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity By Gareth Anderson; Ambrogio Cesa-Bianchi
  33. R-star in Transition Economies: Evidence from Slovakia By Patrik Kupkovic
  34. Forward Guidance and Household Expectations By Olivier Coibion; Dimitris Georgarakos; Yuriy Gorodnichenko; Michael Weber
  35. The Elusive Gains from Nationally-Oriented Monetary Policy By Martin Bodenstein; Giancarlo Corsetti; Luca Guerrieri
  36. Who’s Borrowing in the Fed Funds Market? By Eric LeSueur; Alex Entz; Gara M. Afonso
  37. Impulse Response Analysis in Conditional Quantile Models and an Application to Monetary Policy By Tae-Hwan Kim; Dong Jin Lee; Paul Mizen
  38. Drilling Down into Core Inflation: Goods versus Services By Richard Peach; M. Henry Linder; Robert W. Rich
  39. Global Footprints of Monetary Policy By Silvia Miranda-Agrippino; Tsvetelina Nenova; Helene Rey
  40. Liquidating bankers' acceptances: International crisis, doctrinal conflict and American exceptionalism in the Federal Reserve 1913-1932 By Adam, Marc Christopher
  41. Is U.S. Monetary Policy Seasonal? By David O. Lucca; Richard K. Crump
  42. Monetary theory and policy : the debate revisited By Jean Luc Gaffard
  43. How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed Securities By Brett Rose; Deborah Leonard; Simon M. Potter; Antoine Martin
  44. Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks By Kenneth D. Garbade
  45. If Interest Rates Go Negative . . . Or, Be Careful What You Wish For By Kenneth D. Garbade; James J. McAndrews
  46. Shocking aspects of monetary policy on income inequality in the euro area By Jérôme Creet; Mehdi El Herradi
  47. Exchange rates and consumer prices: evidence from Brexit By Sampson, Thomas; Leromain, Elsa; Novy, Dennis; Breinlich, Holger
  48. The magnitude of euro area misalignements in 2017 By Bruno Ducoudré; Xavier Timbeau; Sébastien Villemot
  49. 4GM: A New Model for the Monetary Policy Analysis in Colombia By González-Gómez, Andrés; Guarín-López, Alexander; Rodríguez, Diego; Vargas-Herrera, Hernando
  50. More Than Meets the Eye: Some Fiscal Implications of Monetary Policy By Marco Del Negro; Julie Remache; James J. McAndrews

  1. By: Giancarlo Corsetti (Centre for Economic Policy Research; Centre for Macroeconomics (CFM); University of Cambridge); Luca Dedola (Centre for Economic Policy Research; European Central Bank); Sylvain Leduc (Federal Reserve Bank of San Francisco)
    Abstract: How should monetary policy respond to capital inflows that appreciate the currency, widen the current account deficit and cause domestic overheating? Using the workhorse open-macro monetary model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, solve for the optimal targeting rules under cooperation and characterize the constrained-optimal allocation. The answer is sharp: the optimal monetary stance is contractionary if the exchange rate pass-through (ERPT) on import prices is incomplete, expansionary if ERPT is complete – implying that misalignment and exchange rate volatility are higher in economies where incomplete pass through contains the effects of exchange rates on price competitiveness.
    Keywords: Currency misalignments, Trade imbalances, Asset markets and risk sharing, Optimal targeting rules, International policy cooperation, Exchange rate pass-through
    JEL: E44 E52 E61 F41 F42
    Date: 2020–01
  2. By: Antonio Diez de los Rios; Yu Zhu
    Abstract: In an increasingly digitalized world, issuers of private digital currency can weaken central banks’ ability to stabilize the economy. By continuing to make central bank money attractive as a payment instrument in a digital world, a central bank digital currency (CDBC) could help to maintain a country’s monetary sovereignty.
    Keywords: Digital Currencies and Fintech; Monetary Policy
    JEL: E E5 E52 E58 F F5 F55 G G1 G15
    Date: 2020–02
  3. By: Fabio Canetg
    Abstract: I provide a simple general equilibrium model of monetary policy implementation and pass-through for undergraduate and graduate teaching. Besides a household and a firm, the model features a continuum of commercial banks, a government, and a central bank. The household uses deposits and cash to transfer resources over time. Monetary policy is implemented with open market operations and interest on reserves policies. I show that open market operations affect the money market rate, the government bond yield, and the deposit rate through changes in the insurance yield on reserves. At the interest rate floor, the insurance yield is zero. Therefore, open market operations become ineffective when reserves are ample. By contrast, interest on reserves policies change interest rates even at the interest rate floor. In addition, I find that expansionary monetary policies decrease expected commercial bank profits. Also, they increase household cash holdings in a monotonic, but non-linear fashion.
    Keywords: Monetary policy implementation, monetary policy pass-through, open market operations, interest on reserves, negative interest rate policies
    JEL: E41 E43 E52 E58
    Date: 2020–02
  4. By: João Barata R. Blanco Barroso; Rodrigo Barbone Gonzalez; José-Luis Peydró; Bernardus F. Nazar Van Doornik
    Abstract: We show that countercyclical liquidity policy smooths credit supply cycles, with stronger crisis effects. For identification, we exploit the Brazilian supervisory credit register and liquidity policy changes on reserve requirements, that affected banks differentially and have a monetary and prudential purpose. Liquidity policy strongly attenuates both the credit crunch in bad times and high credit supply in booms. Strong economic effects are twice as large during the crisis easing than during the boom tightening. Finally, in crises, liquidity easing: increase less credit supply by more financially constrained banks; and collateral requirements increase substantially, especially by banks providing higher credit supply.
    Keywords: Liquidity; reserve requirements; credit cycles; macroprudential and monetary policy.
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2020–02
  5. By: Antoine Martin; Simon M. Potter; Kyungmin (Teddy) Kim; Sam Schulhofer-Wohl; Gara Afonso; Ed Nosal
    Abstract: Methods of monetary policy implementation continue to change. The level of reserve supply—scarce, abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007-2009 financial crisis. We find that the optimal level of reserve supply likely lies somewhere between scarce and abundant reserves, thus highlighting the benefits of implementation with what could be called “ample” reserves. The Federal Reserve’s announcement in October 2019 that it would maintain a level of reserve supply greater than the one that prevailed in early September is consistent with the implications of our framework.
    Keywords: Federal funds market; interest rates; ample reserve supply; bank reserves; monetary supply
    JEL: E58 E42
    Date: 2020–01–02
  6. By: Mohammad Davoodalhosseini; Francisco Rivadeneyra; Yu Zhu
    Abstract: Improving the conduct of monetary policy is unlikely to be the main motivation for central banks to issue a central bank digital currency (CBDC). While some argue that a CBDC could allow more complex transfer schemes or the ability to break below the zero lower bound, we find these benefits might be small or difficult to realize in practice.
    Keywords: Digital Currencies and Fintech; Monetary Policy; Payment clearing and settlement systems
    JEL: E E4 E41 E5 E51 E52
    Date: 2020–02
  7. By: Arezki,Rabah
    Abstract: This paper examines the role of monetary policy in fossil fuel exporters at different horizons. The main argument is that central banks in these economies need to look beyond the horizon of the business cycle. In the short run, (independent) monetary policy should flexibly target inflation. In the medium run, central banks need to coordinate with fiscal authorities to ensure that monetary policy operates around a credible and sustainable fiscal anchor. In the long run, central banks should beware of the existential threats posed by new risks related to stranded assets.
    Keywords: Macroeconomic Management,Inflation,Banks&Banking Reform,Energy Demand,Energy and Mining,Energy and Environment,Financial Structures
    Date: 2019–06–11
  8. By: Camille Cornand (Université de Lyon, CNRS, Gate OFCE, Sciences Po, Paris, France); Julien Pillot (Université Paris Saclay)
    Abstract: Establishing the external validity of laboratory experiments in terms of inflation forecasts is crucial for policy initiatives to be valid outside the laboratory. Our contribution is to document whether different measures of inflation expectations based on various categories of agents (participants to experiments, households, industry forecasters, professional forecasters, financial market participants and central bankers) share common patterns by analyzing: the forecasting performances of these different categories of data; the information rigidities to which they are subject; the determination of expectations. Overall, the different categories of forecasts exhibit common features: forecast errors are comparably large and autocorrelated, forecast errors and forecast revisions are predictable from past information, which suggests the presence of information frictions. Finally, the standard lagged inflation determinant of inflation expectations is robust to the data sets. There is nevertheless some heterogeneity among the six different sets. If experimental forecasts are relatively comparable to survey and financial market data, central bank forecasts seem to be superior.
    Keywords: Inflation expectations, experimental forecasts, survey forecasts, market based forecasts, central bank forecasts
    JEL: E3 E5
    Date: 2019–02
  9. By: Ylva Søvik; Emily Eisner (Research and Statistics Group); Antoine Martin
    Abstract: What types of counterparties can borrow from or lend to a central bank, and what kind of collateral must they possess in order to receive a loan? These are two key aspects of a central bank?s monetary policy implementation framework. Since at least the nineteenth century, it has been understood that an important role of central banks is to lend to solvent but illiquid institutions, particularly during a crisis, as this provides liquidity insurance to the financial system. They also provide liquidity to markets during normal times as a means to implement monetary policy. Central banks that rely on scarcity of reserves need to adjust the supply of liquidity in the market, as described in our previous post. In this post, we focus on liquidity provision related to the conduct of monetary policy.
    Keywords: central bank collateral and counterparties
    JEL: E5
  10. By: Adam Elbourne (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This discussion paper presents further evidence that the most important published estimates of the effects of unconventional monetary policy are not reliable. It is a further elaboration of the ideas in the CPB discussion paper "Do zero and sign restricted SVARs identify unconventional monetary policy shocks in the euro area?". Previous empirical studies seem to show that the unconventional monetary policy of the ECB, also known as balance sheet policy, has a positive effect on growth and inflation. However, this conclusion is unfounded, because institutional features of monetary policy in the euro area make it impossible to identify unexpectedly exogenous variation in monetary policy. Read CPB Discussion Paper 391 "Do zero and sign restricted SVARs identify unconventional monetary policy shocks in the euro area?". VAR modeling shows the effects of unexpected exogenous variation in monetary policy, also known as policy shocks. This discussion paper presents a number of reasons why the existing literature is unable to isolate unexpected variation in monetary policy.
    JEL: C32 E52
    Date: 2019–12
  11. By: Klaus Adam; Michael Woodford
    Abstract: We analytically characterize optimal monetary policy for an augmented New Keyne- sian model with a housing sector. With rational private sector expectations about housing prices and inflation, optimal monetary policy can be characterized by a standard 'target criterion' that refers to inflation and the output gap, without making reference to housing prices. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. For empirically realistic cases, the central bank should then 'lean against' housing prices, i.e., following unexpected housing price increases (decreases), policy should adopt a stance that is projected to undershoot (overshoot) its normal targets for inflation and the output gap. Robustly optimal policy does not require that the central bank distinguishes between 'fundamental' and 'non-fundamental' movements in housing prices.
    JEL: D81 D84 E52
    Date: 2020–02
  12. By: Christophe Blot (Sciences Po, OFCE ; Université de Paris Nanterre - EconomiX); Paul Hubert (Sciences Po, OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté - CRESE; Sciences Po, OFCE)
    Abstract: This paper assesses the linear and non-linear dynamic effects of monetary policy on asset price bubbles. We use a Principal Component Analysis to estimate new bubble indicators for the stock and housing markets in the United States based on structural, econometric and statistical approaches. We find that the effects of monetary policy are asymmetric so the responses to restrictive and expansionary shocks must be differentiated. Restrictive monetary policy is not able to deflate asset price bubbles contrary to the “leaning against the wind” policy recommendations. Expansionary interest rate policies would inflate stock price bubbles whereas expansionary balance-sheet measures would not.
    Keywords: Booms and busts, Mispricing, Price deviations, Interest rate policy, Unconventional monetary policy,Quantitative Easing, Federal Reserve.
    JEL: E44 G12 E52
    Date: 2018–11
  13. By: Adam Elbourne (CPB Netherlands Bureau for Economic Policy Analysis); Kan Ji (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This research re-examines the findings of the existing literature on the effects of unconventional monetary policy. It concludes that the existing estimates based on vector autoregressions in combination with zero and sign restrictions do not successfully isolate unconventional monetary policy shocks from other shocks impacting the euro area economy. In our research, we show that altering existing published studies by making the incorrect assumption that expansionary monetary shocks shrink the ECB’s balance sheet or even ignoring all information about the stance of monetary policy results in the same shocks and, therefore, the same estimated responses of output and prices. As a consequence, it is implausible that the shocks previously identified in the literature are true unconventional monetary policy shocks. Since correctly isolating unconventional monetary policy shocks is a prerequisite for subsequently estimating the effects of unconventional monetary policy shocks, the conclusions from previous vector autoregression models are unwarranted. We show this lack of identification for different specifications of the vector autoregression models and different sample periods.
    JEL: C32 E52
    Date: 2019–02
  14. By: Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; van Rooij, Maarten
    Abstract: Using micro data from the 2015 Dutch CentERpanel, we examine whether trust in the European Central Bank (ECB) influences individuals’ expectations and uncertainty about future inflation, and whether it anchors inflation expectations. We find that higher trust in the ECB lowers inflation expectations on average, and significantly reduces uncertainty about future inflation. Moreover, results from quantile regressions suggest that trusting the ECB increases (lowers) inflation expectations when the latter are below (above) the ECB’s inflation target. These findings hold after controlling for people’s knowledge about the objectives of the ECB. JEL Classification: D12, D81, E03, E40, E58
    Keywords: anchoring, consumer expectations, inflation uncertainty, trust in the ECB
    Date: 2020–02
  15. By: John H. Cochrane
    Abstract: I construct a simple model with sticky prices and interest rate targets, closed by fiscal theory of the price level with long-term debt and fiscal and monetary policy rules. Fiscal surpluses rise following periods of deficit, to repay accumulated debt, but surpluses do not respond to arbitrary unexpected inflation and deflation, so fiscal policy remains active. This specification avoids many puzzles and counterfactual predictions of standard active-fiscal specifications. The model produces reasonable responses to fiscal and monetary policy shocks, including smooth and protracted disinflation following monetary or fiscal tightening.
    JEL: E3 E31 E32 E4 E5 E6 E62 E63
    Date: 2020–02
  16. By: Barbara Rossi
    Abstract: Does the Federal Reserve have an “information advantage†in forecasting macroeconomic variables beyond what is known to private sector forecasters? And are market participants reacting only to monetary policy shocks or also to future information on the state of the economy that the Federal Reserve communicates in its announcements via an “information channel†? This paper investigates the evolution of the information channel over time. Although the information channel appears to be important historically, we find no empirical evidence of its presence in the recent years once instabilities are accounted for.
    Keywords: Forecasting, monetary policy, instabilities, time variation, survey forecasts, information channel of monetary policy.
    JEL: C11 C14 C22 C52 C53
    Date: 2020–02
  17. By: Jean-Bernard Chatelain (PJSE); Kirsten Ralf
    Abstract: We consider a frictionless constant endowment economy based on Leeper (1991). In this economy, it is shown that, under an ad-hoc monetary rule and an ad-hoc fiscal rule, there are two equilibria. One has active monetary policy and passive fiscal policy, while the other has passive monetary policy and active fiscal policy. We consider an extended setup in which the policy maker minimizes a loss function under quasi-commitment, as in Schaumburg and Tambalotti (2007). Under this formulation there exists a unique Ramsey equilibrium, with an interest rate peg and a passive fiscal policy. We thank John P. Conley, Luis de Araujo and one referree for their very helpful comments.
    Date: 2020–02
  18. By: Phuong Ngo (Cleveland State University); Francois Gourio
    Abstract: Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing correlation in turn reduces the term premium, and hence contributes to explaining the decline in long-term interest rates. We use the model to evaluate this mechanism quantitatively. Our results shed light on the validity of the New Keynesian ZLB model, a cornerstone of modern macroeconomic theory.
    Keywords: Liquidity trap; inflation premia; risk premia; term premia; stock market
    JEL: E31 E62 E52 C61
    Date: 2020–01–02
  19. By: Jean-Bernard Chatelain (PSE); Kirsten Ralf
    Abstract: This paper compares different implementations of monetary policy in a new-Keynesian setting. We can show that a shift from Ramsey optimal policy under short-term commitment (based on a negative feedback mechanism) to a Taylor rule (based on a positive feedback mechanism) corresponds to a Hopf bifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (inflation and output gap) are forward-looking variables in the new-Keynesian theory.
    Date: 2020–02
  20. By: Jorge Barrera
    Abstract: Two taxonomies of money that include cryptocurrencies are analyzed. A definition of the term cryptocurrency is given and a taxonomy of them is presented, based on how its price is fixed. The characteristics of the use of current fiat money and the operation of two-level banking systems are discussed. Cryptocurrencies are compared with fiat money and the aspects in which the latter cannot be overcome are indicated. The characteristics of blockchains and databases are described. The possible cases of use of both technologies are compared, and it is noted that blockchains, in addition to cryptocurrencies and certain records, have not yet shown their usefulness, while databases constitute the foundation of most of the automated systems in operation.
    Date: 2020–02
  21. By: Kyra Frye; Helene Hall; Thomas M. Eisenbach (Leonard N. Stern School of Business; Federal Reserve Bank of New York)
    Abstract: Fedwire Funds, a key payment system in the United States, is used by banks to wire money to one another throughout the day. Historically, the total value of payments sent over Fedwire has been roughly proportional to economic activity. Since the financial crisis, however, we have instead observed a strong co-movement between total payments and the level of aggregate reserves. This co-movement suggests that a fraction of every dollar of reserves created recirculates on a daily basis. In this post, we investigate why total payments, a flow variable driven by real and financial activity, would co-move with total reserves, a stock variable controlled by the Federal Reserve.
    Keywords: payments; reserves
    JEL: G1 G2
  22. By: Samreth,Sovannroeun; Sanchez Martin,Miguel Eduardo; Ly,Sodeth
    Abstract: Cambodia has recorded both rapid economic growth and macroeconomic stability in recent decades despite (orthanks to) high levels of dollarization. Previous studies on dollarization in Cambodia have largely focused on examining its causes and estimating seigniorage losses. As an attempt to further explore the effects of dollarization in Cambodia, this paper examines its impact on the competitiveness of the export sector. The main results, based on a vector autoregression estimation of quarterly data over 1994Q4-2016Q4, indicate that a positive US interest rate shock has a negative impact on Cambodia's trade balance with the European Union, its main trading partner, as it leads to appreciation of the US dollar. Furthermore, this shock also leads to a significant decrease in Cambodia's international reserve levels during the first two quarters following the shock. The surrendering of monetary and exchange rate independence seems to affect the competitiveness of the tradable sector negatively as well as exacerbate financial sector vulnerability to solvency and liquidity risks.
    Keywords: International Trade and Trade Rules,Inflation,Macroeconomic Management,Economic Growth,Industrial Economics,Economic Theory&Research
    Date: 2019–06–17
  23. By: Richard Peck (Research and Statistics Group); Thomas Klitgaard
    Abstract: Economists often model inflation as dependent on inflation expectations and the level of economic slack, with changes in expectations or slack leading to changes in the inflation rate. The global slowdown and the subsequent sovereign debt crisis caused the greatest divergence in unemployment rates among euro area member countries since the monetary union was founded in 1999. The pronounced differences in economic performances of euro area countries since 2008 should have led to significant differences in price behavior. That turned out to be the case, with a strong correlation evident between disinflation and labor market deterioration in euro area countries.
    Keywords: inflation unemployment euro area periphery disinflation phillips curve
    JEL: F00 E2
  24. By: Stavros Peristiani (Board of Governors of the Federal Reserve System (U.S.)); Joao A. C. Santos
    Abstract: Though not literally a window any longer, the ?discount window? refers to the facilities that central banks, acting as lender of last resort, use to provide liquidity to commercial banks. While the need for a discount window and lender of last resort has been debated, the basic rationale for their existence is that circumstances can arise, such as bank runs and panics, when even fundamentally sound banks cannot raise liquidity on short notice. Massive discount window borrowing in the immediate aftermath of the September 11 terrorist attack on the United States clearly illustrates the importance of a discount window even in a modern economy. In this post, we discuss the classical rationale for the discount window, some debate surrounding it, and the challenges that the ?stigma? associated with borrowing at the discount window poses for the effectiveness of the discount window.
    Keywords: Discount window; stigma; financial stability; lender of last resort
    JEL: G2
  25. By: Andrew Filardo (Bank for International Settlements & IMF); Paul Hubert (Sciences PO, OFCE); Phurichai Rungcharoenkitkul (Bank for International Settlements)
    Keywords: Policy reaction function channel, asset price booms, credit booms, monetary policy, financial cycles, time-varying model
    JEL: E50 E52 G00 G01 G12
    Date: 2019–10
  26. By: Ricardo Lagos; Shengxing Zhang
    Abstract: We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions directly with money strengthens the stance of sellers of goods and services vis-á-vis intermediaries. We show this mechanism is operative even for sellers who never exercise the option to sell for cash, and that these "latent money demand" considerations imply monetary policy remains effective through medium-of-exchange channels even if the share of monetary transactions is arbitrarily small.
    JEL: D83 E5 G12
    Date: 2020–02
  27. By: Dinesh Shah; Rakesh Arora; Han Du; Sriram Darbha; John Miedema; Cyrus Minwalla
    Abstract: In this note, we highlight a range of technical options and considerations in designing a contingent system for a central bank digital currency (CBDC) in Canada and explore how these options achieve stated public policy goals.
    Keywords: Central bank research; Digital Currencies and Fintech
    JEL: E E4 E42 E5 E51 O O3 O31
    Date: 2020–02
  28. By: Fergus Cumming; Paul Hubert
    Date: 2019–12
  29. By: Lilit Popoyan (Institute of Economics (LEM), Scula superiore Sant'Anna, Pisa, Italia); Mauro Napoletano (Sciences Po OFCE, Skema Business School); Andrea Roventini (EMbe DS and Institute of Economics (LEM))
    Keywords: Financial instability, interbank market freezes, monetary policy, macro- prudential policy, Basel III regulation, Tinbergen principle, agent-based model.
    JEL: C63 E52 E6 G01 G21 G28
    Date: 2019–07
  30. By: Thomas Klitgaard; James Narron (Executive Office)
    Abstract: In the late 1800s, a surge in silver production made a shift toward a monetary standard based on gold and silver rather than gold alone increasingly attractive to debtors seeking relief through higher prices. The U.S. government made a tentative step in this direction with the Sherman Silver Purchase Act, an 1890 law requiring the Treasury to significantly increase its purchases of silver. Concern about the United States abandoning the gold standard, however, drove up the demand for gold, which drained the Treasury?s holdings and created strains on the financial system?s liquidity. News in April 1893 that the government was running low on gold was followed by the Panic in May and a severe depression involving widespread commercial and bank failures.
    Keywords: panic 1893 gold silver bimetallism Bryan Friedman monetary policy standard
    JEL: E5 N2
  31. By: Sammuel Stern; Gara M. Afonso
    Abstract: Over the last decade, the federal funds market has evolved to accommodate new policy tools such as interest on reserves and the overnight reverse repo facility. Trading motives have also responded to the expansion in aggregate reserves as the result of large-scale asset purchases. These changes have affected market participants differently since, for instance, not all institutions are required to keep reserves at the Fed and some are not eligible to earn interest on reserves. Differential effects have changed the profile of participants willing to borrow and lend in this market, and this shift provides an opportunity to study how unconventional policy actions shape participant incentives. In today?s post, we take a detailed look at regulatory filings to identify the main players in today?s fed funds market and understand how their roles have evolved.
    Keywords: monetary policy; Fed funds market
    JEL: G1 G2 E5
  32. By: Gareth Anderson (International Monetary Fund (IMF); University of Oxford); Ambrogio Cesa-Bianchi (Bank of England; Centre for Economic Policy Research (CEPR); Centre for Macroeconomics (CFM))
    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: 2020–01
  33. By: Patrik Kupkovic (Narodna banka Slovenska, Bratislava, Slovakia)
    Abstract: The aim of this paper is to estimate the equilibrium real interest rate in Slovakia by means of a semi-structural unobserved components model. The equilibrium real interest rate is understood here as a short-term, risk-free real interest rate consistent with output at its potential level, and inflation at its target level after the effect of all cyclical shocks have disappeared. Contribution to the literature is in two ways: i) development of a modelling framework for small, open, and converging economies which can be used for other transition economies, and (ii) assessment of the adoption of the euro and its effect on the equilibrium real interest rate. Based on the estimates, the equilibrium real interest rate fell from the positive pre-euro (also pre-crisis) level into to the negative territory.
    Keywords: equilibrium real interest rate, unobserved components model, open economy, monetary policy
    JEL: E43 E52 E58
    Date: 2020–02
  34. By: Olivier Coibion; Dimitris Georgarakos; Yuriy Gorodnichenko; Michael Weber
    Abstract: We compare the causal effects of forward guidance communication about future interest rates on households’ expectations of inflation, mortgage rates, and unemployment to the effects of communication about future inflation in a randomized controlled trial using more than 25,000 U.S. individuals in the Nielsen Homescan panel. We elicit individuals’ expectations and then provide 22 different forms of information regarding past, current and/or future inflation and interest rates. Information treatments about current and next year’s interest rates have a strong effect on household expectations but treatments beyond one year do not have any additional impact on forecasts. Exogenous variation in inflation expectations transmits into other expectations. The richness of our survey allows us to better understand how individuals form expectations about macroeconomic variables jointly and the non-response to long-run forward guidance is consistent with models in which agents have constrained capacity to collect and process information.
    Keywords: expectations management, inflation expectations, surveys, communication, randomized controlled trial
    JEL: E31 C83 D84
    Date: 2020
  35. By: Martin Bodenstein (Federal Reserve Board); Giancarlo Corsetti (Centre for Economic Policy Research; Centre for Macroeconomics (CFM); University of Cambridge); Luca Guerrieri (Federal Reserve Board)
    Abstract: The consensus in the recent literature is that the gains from international monetary cooperation are negligible, and so are the costs of a breakdown in cooperation. However, when assessed conditionally on empirically-relevant dynamic developments of the economy, the welfare cost of moving away from regimes of explicit or implicit cooperation may rise to multiple times the cost of economic fluctuations. In economies with incomplete markets, the incentives to act non-cooperatively are driven by the emergence of global imbalances, i.e., large net-foreign-asset positions; and, in economies with complete markets, by divergent real wages.
    Keywords: Monetary ppolicy cooperation, Global imbalances, Open-loop Nash games
    JEL: E44 E61 F42
    Date: 2020–01
  36. By: Eric LeSueur (Markets Group); Alex Entz (Research and Statistics Group); Gara M. Afonso
    Abstract: The federal funds market plays an important role in the implementation of monetary policy. In our previous post, we examine the lending side of the fed funds market and the decline in total fed funds volume since the onset of the financial crisis. In today?s post, we discuss the borrowing side of this market and the interesting role played by foreign banks.
    Keywords: Federal funds; borrowing; foreign institutions
    JEL: E5 G1 G2
  37. By: Tae-Hwan Kim (Yonsei Univ); Dong Jin Lee (Sangmyung Univ); Paul Mizen (Univ of Nottingham)
    Abstract: This paper presents a new method to analyze the e¤ect of shocks on time series using quantile impulse response function (QIRF). While conventional impulse response analysis is re- stricted to evaluation using the conditional mean function, here, we propose an alternative impulse response analysis that traces the e¤ect of economic shocks on the conditional quantile function. By changing the quantile index over the unit interval, it is possible to measure the e¤ect of shocks on the entire conditional distribution of a given variable in our framework. Therefore we can observe the complete distributional consequences of policy interventions, especially at the upper and lower tails of the distribution as well as at the mean. Using the new approach, it becomes possible to evaluate two distinct features, namely, (i) the degree of uncertainty of a shock by measuring how the dispersion of the conditional distribution is changed after a shock, and (ii) the asymmetric e¤ect of a shock by comparing the responses to an impulse at the lower tails with those at the upper tails of the conditional distribution. None of these features can be observed in the conventional impulse response analysis exclusively based on the conditional mean function. In addition to proposing the QIRF, our second contribution is to present a new way to jointly estimate a system of multiple quantile functions. Our proposed system quantile estimator is obtained by extending the result of Jun and Pinkse (2009) to the time series context. We illustrate the QIRF on a VAR model in a manner similar to Romer and Romer (2004) in order to assess the impact of a monetary policy shock on the US economy.
    Keywords: Quantile vector autoregression; monetary policy shock; quantile impulse response function; structural vector autoregression
    JEL: C32 C51
  38. By: Richard Peach; M. Henry Linder; Robert W. Rich
    Abstract: Among the measures of core inflation used to monitor the inflation outlook, the series excluding food and energy prices is probably the best known and most closely followed by policymakers and the public. While the conventional ?ex food and energy? measure is a composite of the price changes of a large number of different products and services, almost all models developed to explain and forecast its behavior do not distinguish between the goods and services categories. Is the distinction important? Here, we highlight the different behavior and determinants of goods inflation and services inflation and suggest, based on preliminary analysis, that we can improve the forecast accuracy of this conventional core inflation measure by combining separate inflation forecasts of the two categories.
    Keywords: Services Inflation; Goods Inflation; Core Inflation; Phillips curve
    JEL: E2 E5
  39. By: Silvia Miranda-Agrippino (Bank of England; CEPR; Centre for Macroeconomics (CFM)); Tsvetelina Nenova (London Business School); Helene Rey (London Business School; CEPR; NBER)
    Abstract: We study the international transmission of the monetary policy of the two world's giants: China and the US. From East to West, the channels of global transmission differ markedly. US monetary policy shocks affect the global economy primarily through their effects on integrated financial markets, global asset prices, and capital ows. EMEs in particular see both a reduction in in ows and a surge in out ows when the market tide turns as a result of a US monetary contraction. Conversely, international trade, commodity prices and global value chains are the main channels through which Chinese monetary policy transmits worldwide. AEs with a strong manufacturing sector are particularly sensitive to these disturbances.
    Keywords: Monetary policy, Global financial cycle, International pillovers, US, China
    JEL: E44 E52 F33 F42
    Date: 2020–01
  40. By: Adam, Marc Christopher
    Abstract: This paper seeks to explain the collapse of the market for bankers' acceptances between 1931 and 1932 by tracing the doctrinal foundations of Federal Reserve policy and regulations back to the Federal Reserve Act of 1913. I argue that a determinant of the collapse of the market was Carter Glass' and Henry P. Willis' insistence on one specific interpretation of the "real bills doctrine", the idea that the financial system should be organized around commercial bills. The Glass-Willis doctrine, which stressed non-intervention and the self-liquidating nature of real bills, created doubts about the eligibility of frozen acceptances for purchase and rediscount at the Reserve Banks and caused accepting banks to curtail their supply to the market. The Glass-Willis doctrine is embedded in a broader historical narrative that links Woodrow Wilson's approach to foreign policy with the collapse of the international order in 1931.
    Keywords: Federal Reserve System,Acceptances,Great Depression
    JEL: B30 E58 F34 N12 N22
    Date: 2020
  41. By: David O. Lucca (Federal Reserve Bank); Richard K. Crump
    Abstract: Many economic time series display periodic and predictable patterns within each calendar year, generally referred to as seasonal effects. For example, retail sales tend to be higher in December than in other months. These patterns are well-known to economists, who apply statistical filters to remove seasonal effects so that the resulting series are more easily comparable across months. Because policy decisions are based on seasonally adjusted series, we wouldn?t expect the decisions to exhibit any seasonal behavior. Yet, in this post we find that the Federal Reserve has been much more likely to lower interest rates in the first month of each quarter over the past twenty-five years. While some of this seasonality is a result of meeting scheduling, a large seasonal component remains unexplained.
    Keywords: Federal funds rate; FOMC; seasonality
    JEL: E2 E5
  42. By: Jean Luc Gaffard (OFCE, Sciences Po, Paris, France Université Côte d'Azur)
    Abstract: This paper is aimed at revisiting monetary analysis in order to better understand erroneous choices in the conduct of monetary policy. According to the prevailing consensus, the market economy is intrinsically stable and is upset only by poor behaviour by government or the banking system. We maintain on the contrary that the economy is unstable and that achieving stability requires a discretionary economic policy. This position relies upon an analytical approach in which monetary and financial organisations are devices that help markets to function. In this perspective, which focuses on the heterogeneity of markets and agents, and, consequently, on the role of institutions in determining overall performance, it turns out that nominal rigidities and financial commitment offer the means to achieve economic stability. This is because they preventsuccessive, unavoidable disequilibria from becoming explosive.
    Keywords: Series: Document de travail
    JEL: E31 E32 E5 E61 E62
    Date: 2018–11
  43. By: Brett Rose; Deborah Leonard; Simon M. Potter; Antoine Martin
    Abstract: In our previous post, we considered balance sheet mechanics related to the Federal Reserve?s purchase and redemption of Treasury securities. These mechanics are fairly straightforward and help to illustrate the basic relationships among actors in the financial system. Here, we turn to transactions involving agency mortgage-backed securities (MBS), which are somewhat more complicated. We focus particularly on what happens when households pay down their mortgages, either through regular monthly amortizations or a large payment covering some or all of the outstanding balance, as might occur with a refinancing.
    Keywords: MBS; Balance sheet; mortgage-backed securities; reinvestment
    JEL: E5
  44. By: Kenneth D. Garbade (Federal Reserve Bank; Bankers Trust Company)
    Abstract: From time to time, and most recently in the April 2014 meeting of the Treasury Borrowing Advisory Committee, U.S. Treasury officials have questioned whether the Treasury should have a safety net that would allow it to continue to meet its obligations even in the event of an unforeseen depletion of its cash balances. (Cash balances can be depleted by an unanticipated shortfall in revenues or a spike in disbursements, an inability to access credit markets on a timely basis, or an auction failure.) The original version of the Federal Reserve Act provided a robust safety net because the act implicitly allowed Reserve Banks to buy securities directly from the Treasury. This post reviews the history of the Fed?s direct purchase authority. (A more extensive version of the post appears in this New York Fed staff report.)
    Keywords: liquidity buffer; safety net; direct purchases
    JEL: E5 G2
  45. By: Kenneth D. Garbade (Federal Reserve Bank; Bankers Trust Company); James J. McAndrews
    Abstract: The United States has slid into eight recessions in the last fifty years. Each time, the Federal Reserve sought to revive economic activity by reducing interest rates (see chart below). However, since the end of the last recession in June 2009, the economy has continued to sputter even though short-term rates have remained near zero. The weak recovery has led some commentators to suggest that the Fed should push short-term rates even lower?below zero?so that borrowers receive, and creditors pay, interest.
    Keywords: Negative interest rates
    JEL: E5 G2 G1
  46. By: Jérôme Creet (Sciences Po, OFCE); Mehdi El Herradi (LAREFI, Université de Bordeaux)
    Keywords: Euro area, monetary policy, income distribution, Panel VAR
    JEL: E62 E64 D63
    Date: 2019–09
  47. By: Sampson, Thomas; Leromain, Elsa; Novy, Dennis; Breinlich, Holger
    Abstract: This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0:29. We estimate the Brexit vote increased consumer prices by 2:9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.
    Keywords: Brexit; exchange rate pass-through; import costs; inflation
    JEL: E31 F15 F31
    Date: 2019–12
  48. By: Bruno Ducoudré (OFCE, Sciences Po, Paris, France); Xavier Timbeau (OFCE, Sciences Po, Paris, France); Sébastien Villemot (OFCE, Sciences Po, Paris, France)
    Abstract: This paper is aimed at revisiting monetary analysis in order to better understand erroneous choices in the conduct of monetary policy. According to the prevailing consensus, the market economy is intrinsically stable and is upset only by poor behaviour by government or the banking system. We maintain on the contrary that the economy is unstable and that achieving stability requires a discretionary economic policy. This position relies upon an analytical approach in which monetary and financial organisations are devices that help markets to function. In this perspective, which focuses on the heterogeneity of markets and agents, and, consequently, on the role of institutions in determining overall performance, it turns out that nominal rigidities and financial commitment offer the means to achieve economic stability. This is because they prevent successive, unavoidable disequilibria from becoming explosive. Classification-JEL: Equilibrium exchange rate, trade balance, price-competitiveness
    Keywords: E31, F41
    Date: 2018–12
  49. By: González-Gómez, Andrés; Guarín-López, Alexander; Rodríguez, Diego; Vargas-Herrera, Hernando
    Abstract: This paper introduces 4GM, a semi-structural model for monetary policy analysis and macroeconomic forecasting in Colombia. This model is based on a New-Keynesian rational expectation framework for an oil-exporting small open economy. In this paper, we present the model structure and examine the response of its variables to domestic, foreign and oil-price shocks. Further, we assess 4GM in terms of its historical shock decomposition and its out-of-sample forecasting.
    Keywords: Semi-structural model; Monetary policy; Macroeconomic forecasting
    JEL: E17 E37 E47 E52 E58
    Date: 2020–02
  50. By: Marco Del Negro; Julie Remache; James J. McAndrews
    Abstract: In 2012, the Fed?s remittances to the U.S. Treasury amounted to $88.4 billion. The vast majority of these remittances originated as income from the SOMA portfolio (see the second post in this series for an account of the history of SOMA income). While net income has been high in recent years because of the Fed?s large balance sheet, it is likely to drop in the future as the Fed normalizes interest rates. This is because the Fed will likely face increased interest expense on its reserve balances and possibly realize losses in the case of asset sales. A recent paper by economists at the Board of Governors of the Federal Reserve System (Carpenter et al.) shows that under some scenarios the Fed may be forced to decrease its remittances to zero for a few years (see also the related work by Hall and Reis and by Greenlaw, Hamilton, Hooper, and Mishkin). The fact that remittances may vary more over the next few years than they have in the past has highlighted the fact that monetary policy has fiscal implications.
    JEL: H00

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