nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒03‒16
thirty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. A Forward Guidance Indicator For The South African Reserve Bank: Implementing A Text Analysis Algorithm By Ruan Erasmus; Hylton Hollander
  2. The Fed's Response to Economic News Explains the “Fed Information Effect” By Michael D. Bauer; Eric T. Swanson
  3. The Collateral Channel of Monetary Policy: Evidence from China By Hanming Fang; Yongqin; Xian Wu
  4. A Text Mining Analysis of Central Bank Monetary Policy Communication in Nigeria By Omotosho, Babatunde S.
  5. Inflation and Exchange Rate Pass-Through By Ha,Jongrim; Stocker,Marc; Yilmazkuday,Hakan
  6. Monetary Policy Spillovers under Intermediate Exchange Rate Regimes By Ahmed, Rashad
  7. Currency compositions of international reserves and the euro crisis By Laser, Falk Hendrik; Weidner, Jan
  8. The Role of Central Bank Lending Facilities in Monetary Policy By Helene Lee; Asani Sarkar
  9. From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market By Fabiola Ravazzolo; Alessandro Zori; Gara M. Afonso
  10. The Market Events of Mid-September 2019 By Adam Copeland; Antoine Martin; Gabriele La Spada; Marco Cipriani; Anna Kovner; Gara Afonso
  11. Monetary Policy Implementation: Operational Issues for Countries with Evolving Monetary Policy Frameworks By Nils Mæhle
  12. What’s Driving Up Money Growth? By James J. McAndrews; Donald P. Morgan; James Vickery
  13. Why Pay Interest on Required Reserve Balances? By Antoine Martin; Heather Wiggins; Laura Lipscomb
  14. What Drives Forecaster Disagreement about Monetary Policy? By Stefano Eusepi; Richard K. Crump
  15. Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions By Jean-Bernard Chatelain; Kirsten Ralf
  16. Has the Information Channel of Monetary Policy Disappeared? Revisiting the Empirical Evidence By Lukas Hoesch; Barbara Rossi; Tatevik Sekhposyan
  17. Turnover in Fedwire Funds Has Dropped Considerably since the Crisis, but It's Okay By James J. McAndrews; Antoine Martin; Rod Garratt
  18. Monetary policy and bank lending in developing countries: loan applications, rates, and real effects By Charles Abuka; Ronnie K. Alinda; Camelia Minoiu; José-Luis Peydró; Andrea F. Presbitero
  19. Estimating the Effect of Central Bank Independence on Inflation Using Longitudinal Targeted Maximum Likelihood Estimation By Philipp Baumann; Michael Schomaker; Enzo Rossi
  20. Global Asset Prices and Taper Tantrum Revisited By Jan J. J. Groen
  21. The Pre-FOMC Announcement Drift: More Recent Evidence By David O. Lucca; Emanuel Moench
  22. Banks, Maturity Transformation, and Monetary Policy By Pascal Paul
  23. Validity Assessments of International Parity in the ‘Ecozone’: Implications for Monetary Models of Exchange Rate Determination By Mogaji, Peter Kehinde
  24. Inflation Expectations : Review and Evidence By Kose,Ayhan; Matsuoka,Hideaki; Panizza,Ugo G.; Vorisek,Dana Lauren
  25. How different are Monetary Unions to national economies according to prices? By Marina Glushenkova; Marios Zachariadis
  26. What Is the Composition of Central Bank Balance Sheets in Normal Times? By Ylva Søvik; Antoine Martin; Emily Eisner
  27. Market Intelligence Gathering and Money Demand By Seon Tae Kim; Alessandro Marchesiani
  28. Monetary policy and the top one percent: Evidence from a century of modern economic history By Mehdi El Herradi; Aurelien Leroy
  29. How Much Do Inflation Expectations Matter for Inflation Dynamics? By Sara Shahanaghi; Argia M. Sbordone
  30. Bank Lending and Maturity: the Anatomy of the Transmission of Monetary Policy By Selva Bahar Baziki; Tanju Capacioglu
  31. Why Did U.S. Branches of Foreign Banks Borrow at the Discount Window during the Crisis? By Linda S. Goldberg; David R. Skeie
  32. Forward Guidance and Household Expectations By Olivier Coibion; Dimitris Georgarakos; Yuriy Gorodnichenko; Michael Weber
  33. Adopting Mobile Money: Evidence from an Experiment in Rural Africa By Batista, Catia; Vicente, Pedro C.
  34. How Do the Fed's MBS Purchases Affect Credit Allocation? By Antoine Martin; Sam Schulhofer-Wohl
  35. The Macro Effects of the Recent Swing in Financial Conditions By Marc Giannoni; Micah Smith; Marco Del Negro
  36. An Examination of U.S. Dollar Declines By Roosevelt D. Bowman; Jan J. J. Groen

  1. By: Ruan Erasmus (Department of Economics, Stellenbosch University); Hylton Hollander (Department of Economics, Stellenbosch University)
    Abstract: The expansion of central bank communications and the increased use thereof as a policy tool to manage expectations have led to an area of research, semantic modelling, that analyses the words and phrases used by central banks. We use text-mining and text-analysis techniques on South African Reserve Bank monetary policy committee statements to construct an index measuring the stance of monetary policy: a forward guidance indicator (FGI). We show that, after controlling for market expectations, FGIs provide significant predictive power for future changes in the repurchase interest rate (the primary monetary policy instrument). Furthermore, we show that FGIs are primarily driven by inflation expectations, which highlights the strong link between the SARB's communication strategy and its inflation targeting mandate. In fact, we observe a systematic anti-inflation bias in the communicated stance of monetary policy---both absolutely and asymmetrically. The results are, however, sensitive to the selection of the dictionary used to analyse the text.
    Keywords: Monetary policy, Text analysis, Forward guidance, Inflation targeting
    JEL: C43 C53 E42 E47 E52 E58
    Date: 2020
  2. By: Michael D. Bauer; Eric T. Swanson (Federal Reserve Bank of San Francisco; University of California Irvine; Federal Reserve Bank; Board of Governors of the Federal Reserve System (U.S.))
    Abstract: High-frequency changes in interest rates around FOMC announcements are a standard method of measuring monetary policy shocks. However, some recent studies have documented puzzling effects of these shocks on private-sector forecasts of GDP, unemployment, or inflation that are opposite in sign to what standard macroeconomic models would predict. This evidence has been viewed as supportive of a “Fed information effect” channel of monetary policy, whereby an FOMC tightening (easing) communicates that the economy is stronger (weaker) than the public had expected. We show that these empirical results are also consistent with a “Fed response to news” channel, in which incoming, publicly available economic news causes both the Fed to change monetary policy and the private sector to revise its forecasts. We provide substantial new evidence that distinguishes between these two channels and strongly favors the latter; for example, (i) high-frequency stock market responses to Fed announcements, (ii) a new survey that we conduct of individual Blue Chip forecasters, and (iii) regressions that include the previously omitted public macroeconomic data releases all indicate that the Fed and Blue Chip forecasters are simply responding to the same public news, and that there is little if any role for a “Fed information effect”.
    Keywords: Federal Reserve; Delphic forward guidance; Blue Chip; forecasts; survey
    JEL: E43 E52 E58
    Date: 2020–02–27
  3. By: Hanming Fang (University of Pennsylvania); Yongqin (Fudan University); Xian Wu (University of Wisconsin)
    Abstract: Collateral-based monetary policy tools have been used extensively by major central banks. Lack of proper policy counterfactuals, however, makes it di?cult to empirically identify their causal e?ects on the ?nancial market and the real economy. We exploit a quasi-natural ex-periment in China, where dual-listed bonds are traded in two mostly segmented markets: the interbank market regulated by the Central Bank, and the exchange market regulated by the securities regulator. During a policy shift in our study period, China’s Central Bank included a class of previously ineligible bonds in the interbank market to become eligible collateral for ?nancial institutions to borrow money from its Medium-Term Lending Facility (MLF). This policy shift allows us to implement a triple-di?erence strategy to estimate the causal impact of the collateral-based unconventional monetary policy. We ?nd that in the secondary market the policy reduced the spreads of the newly collateralizable bonds in the treatment market (the interbank market) by 42-62 basis points. We also ?nd that there is a pass-through e?ect from the secondary market to the primary market: the spreads of the treated bonds newly issued in the interbank market were reduced by 54 basis points.
    Keywords: Unconventional Monetary Policy, Collateral, Bond Spread, Medium-Term Lend-ing Facility
    JEL: E52 E58 G12
    Date: 2020–02–18
  4. By: Omotosho, Babatunde S.
    Abstract: This paper employs text-mining techniques to analyse the communication strategy of the Central Bank of Nigeria (CBN) during the period 2004-2019. Since the policy communique released after each meeting of the CBN’s monetary policy committee (MPC) represents an important tool of central bank communication, we construct a corpus based on 87 policy communiques with a total of 123, 353 words. Having processed the textual data into a form suitable for analysis, we examined the readability, sentiments, and topics of the policy documents. While the CBN’s communication has increased substantially over the years, implying increased monetary policy transparency; the computed Coleman and Liau readability index shows that the word and sentence structures of the policy communiques have become more complex, thus reducing its readability. In terms of monetary policy sentiments, we find an average net score of -10.5 per cent, reflecting the level of policy uncertainties faced by the MPC over the sample period. In addition, our results indicate that the topics driving the linguistic contents of the communiques were influenced by the Bank’s policy objectives as well as the nature of shocks hitting the economy per period.
    Keywords: Central bank communication, Text mining, Monetary policy
    JEL: E02 E32 E52 E58 E61
    Date: 2019
  5. By: Ha,Jongrim; Stocker,Marc; Yilmazkuday,Hakan
    Abstract: The degree to which domestic prices adjust to exchange rate movements is key to understanding inflation dynamics, and hence to guiding monetary policy. However, the exchange rate pass-through to inflation varies considerably across countries and over time. By estimating structural factor-augmented vector-autoregressive models for 47 countries, this paper brings to light two fundamental factors accounting for these variations: the nature of the shock triggering currency movements and country-specific characteristics. The empirical results in this paper are three-fold. First, an empirical investigation demonstrates that different domestic and global shocks can be associated with widely different pass-through ratios. Second, country characteristics matter, including policy frameworks that govern monetary policy responses, as well as other structural features that affect an economy's sensitivity to currency fluctuations. Pass-through ratios tend to be lower in countries that combine flexible exchange rate regimes and credible inflation targets. Finally, the empirical results suggest that central bank independence can greatly facilitate the task of stabilizing inflation following large currency movements and allows fuller use of the exchange rate as a buffer against external shocks.
    Keywords: Inflation,Macroeconomic Management,Financial Structures,International Trade and Trade Rules,Trade and Services
    Date: 2019–03–13
  6. By: Ahmed, Rashad
    Abstract: I investigate monetary policy transmission under the Trilemma across Advanced and Emerging Market Economies, paying particular attention on the extent of spillovers under intermediate exchange rate regimes (i.e. managed floats). The extent of monetary pass-through: 1) is broadly significant, but more incomplete in Emerging Markets than Advanced Economies, 2) occurs over both the short-run and longer-run, 3) varies within intermediate exchange rate regimes, 4) appears to be diversifiable under a basket peg, and 5) is non-linear in exchange rate flexibility. The latter three points suggest that near-corner exchange rate policies can carry starkly different implications from corner policies themselves: Countries can face almost the same monetary autonomy as under a float without resorting to a pure float. Countries under a fixed regime appear to gain disproportionate monetary independence by giving up relatively little exchange rate stability. The use of international reserves as an additional policy instrument appears to play a role in explaining these non-linearities, particularly in Emerging Markets. Such gains in monetary autonomy are allocated towards domestic objectives differently across Advanced Economies and Emerging Markets. Advanced Economies tend to put greater emphasis on output stabilization while Emerging Markets focus on inflation. Non-linear policy trade-offs under intermediate exchange rate regimes may help explain the continuous rejection of the Two Corners hypothesis, the scarcity of true pure floats, and the persistent dominance of middle-ground exchange rate policy.
    Keywords: Monetary policy, exchange rate regimes, international spillovers, policy trilemma
    JEL: F3 F31
    Date: 2020–02–27
  7. By: Laser, Falk Hendrik; Weidner, Jan
    Abstract: During recent years, central banks have increased the levels of their international reserves at an unprecedented pace. In this paper, we introduce new country-specific reserve data and examine determinants of the composition of international reserves. Using a dataset of 36 countries (and the euro area) for the years from 1996 to 2016, we identify currency pegs and trade patterns as determinants of currency compositions. Our results emphasize the importance of transaction motives for the composition of currency reserves. The euro crisis appears to have been a setback for the euro, which temporarily seemed to challenge the US dollar as the most important international reserve currency and potentially impacted the determination of international reserve compositions.
    Keywords: International reserves,central banks,euro crisis
    JEL: E58 F31 G01
    Date: 2020
  8. By: Helene Lee (Markets Group); Asani Sarkar
    Abstract: Central bank lending facilities were vital during the financial crisis of 2007-08 when many banks and nonbank financial institutions turned to them to meet funding needs as private funding dried up. Since then, there has been renewed interest in the design of central bank lending facilities in the post-crisis period. In this post, we compare the Federal Reserve?s discount window with the lending facilities at three other major central banks: the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We observe that, relative to the other central banks, the Fed?s discount window is less integrated into the monetary policy framework. In a follow-up post, we will discuss differences in the central banks? counterparty and collateral policies.
    Keywords: Monetary Policy; Standing Lending Facility; Central Banks
    JEL: E5
  9. By: Fabiola Ravazzolo (Markets Group); Alessandro Zori (Markets Group); Gara M. Afonso
    Abstract: How do changes in the interest rate that the Federal Reserve pays on reserves affect interest rates in money markets in which the Fed does not participate? And through which channels do changes in the so-called administered rates influence rates in onshore and offshore U.S. dollar money markets? This post offers an interactive map illustrating the web of relationships between the Fed, key market players, and the various instruments in the U.S. dollar funding market.
    Keywords: passthrough; US dollar funding market; monetary policy
    JEL: E5
  10. By: Adam Copeland (Research and Statistics Group; National Bureau of Economic Research; Federal Reserve Bank of New York; Federal Reserve Bank; University of Minnesota); Antoine Martin; Gabriele La Spada; Marco Cipriani (New York University; Federal Reserve Bank; Federal Reserve Bank of New York; George Washington University; National Bureau of Economic Research); Anna Kovner (Harvard University; Federal Reserve Bank); Gara Afonso
    Abstract: This paper studies the mid-September 2019 stress in U.S. money markets: On September 16 and 17, unsecured and secured funding rates spiked up and, on September 17, the effective federal funds rate broke the ceiling of the Federal Open Market Committee (FOMC) target range. We highlight two factors that may have contributed to these events. First, reserves may have become scarce for at least some depository institutions, in the sense that these institutions’ reserve holdings may have been close to, or lower than, their desired level. Moreover, frictions in the interbank market may have prevented the efficient allocation of reserves across institutions, so that although aggregate reserves may have been higher than the sum of reserves demanded by each institution, they were still scarce given the market’s inability to allocate reserves efficiently. Second, we provide evidence that some large domestic dealers likely experienced an increase in intermediation costs, which led them to charge higher spreads to ultimate cash borrowers. This increase was due to a temporary reduction in lending from money market mutual funds, including through the Fixed Income Clearing Corporation’s (FICC’s) sponsored repo program.
    Keywords: central bank reserves; repo market; monetary policy; federal funds market; regulation
    JEL: E42 E58 G14
    Date: 2020–03–01
  11. By: Nils Mæhle
    Abstract: This paper discusses operational issues for countries that want to reform their monetary policy frameworks. It argues that stabilizing short-term interest rates on a day-to-day basis has significant advantages, and thus that short-term interest rates, not reserve money, in most cases should be the daily operating target, including for countries relying on a money targeting policy strategy. The paper discusses how a policy formulation framework based on monetary aggregates can be combined with an operational framework that ensures more stable and predictable short-term rates to enhance policy transmission. It also discusses how to best configure an interest-rate-based operational framework when markets are underdeveloped and liqudity management capacity is weak.
    Date: 2020–02–07
  12. By: James J. McAndrews; Donald P. Morgan; James Vickery
    Abstract: Two key monetary aggregates, M1 and M2, have grown quickly recently?especially M1, the narrow aggregate. In this post, we show that we can attribute most, but not all, of the recent high money growth rate of M1 to low current interest rates as well as the growth in bank reserves that has resulted from the Fed?s asset purchase programs. It?s unlikely that the current high growth rate will continue in the long term, however, as both low interest rates and the Fed?s expansion of bank reserves will likely be reversed as economic growth accelerates.
    Keywords: Money growth; QE2; large scale asset purchases; QE1
    JEL: E5 G2
  13. By: Antoine Martin; Heather Wiggins (Federal Reserve Board of Governors’ Division of Monetary Affairs); Laura Lipscomb (Federal Reserve Board of Governors’ Division of Monetary Affairs)
    Abstract: The Federal Reserve has paid interest on reserves held by banks in their Fed accounts since 2008. Why should it do so? Here, we describe some benefits of paying interest on required reserve balances. Since forcing banks to hold unremunerated reserves would be akin to levying a tax on them, paying interest on these balances is a way to eliminate or greatly reduce that tax and its negative effects.
    Keywords: monetary policy; reserve requirements; Interest on reserves
    JEL: E5
  14. By: Stefano Eusepi; Richard K. Crump
    Abstract: What can disagreement teach us about how private forecasters perceive the conduct of monetary policy? In a previous post, we showed that private forecasters disagree about both the short-term and the long-term evolution of key macroeconomic variables but that the shape of this disagreement differs across variables. In contrast to their views on other macroeconomic variables, private forecasters disagree substantially about the level of the federal funds rate that will prevail in the medium to long term but very little on the rate at shorter horizons. In this post, we explore the possible explanations for what drives forecasts of the federal funds rate, especially in the longer run.
    Keywords: monetary policy rules; survey forecasts; expectations; imperfect information; term structure of disagreement
    JEL: E2 E5
  15. By: Jean-Bernard Chatelain (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    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.
    Keywords: Ramsey optimal policy,Fiscal theory of the Price Level,Frictionless endowment economy,Interest Rate Rule,Fiscal Rule
    Date: 2020–02–05
  16. By: Lukas Hoesch (Univ. Pompeu Fabra, Barcelona School of Economics); Barbara Rossi; Tatevik Sekhposyan
    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: 2020–02–27
  17. By: James J. McAndrews; Antoine Martin; Rod Garratt (University of California Santa Barbara)
    Abstract: The Fedwire Funds Service is a large-value payment system, operated by the Federal Reserve Bank of New York, that facilitates more than $3 trillion a day in payments. Turnover in Fedwire Funds, the value of payments made for every dollar of liquidity provided, has dropped nearly 75 percent since the crisis. Should we be concerned? In this post, we explain why turnover has dropped so much and argue that it is, in fact, a good thing.
    Keywords: Fedwire Funds; Crisis; Liquidity Provision
    JEL: G2
  18. By: Charles Abuka; Ronnie K. Alinda; Camelia Minoiu; José-Luis Peydró; Andrea F. Presbitero
    Abstract: Recent studies of monetary policy in developing countries document a weak bank lending channel based on aggregate data. In this paper, we bring new evidence using Uganda’s supervisory credit register, with microdata on loan applications, volumes and rates, coupled with unanticipated variation in monetary policy. We show that a monetary contraction reduces bank credit supply—increasing loan application rejections and tightening loan volume and rates—especially for banks with more leverage and sovereign debt exposure. There are associated spillovers on inflation and economic activity—including construction permits and trade—and even social unrest.
    Keywords: Bank lending channel of monetary policy; bank credit; real effects; credit register; developing countries
    JEL: E42 E44 E52 E58 G21 G28
    Date: 2018–11
  19. By: Philipp Baumann; Michael Schomaker; Enzo Rossi
    Abstract: Whether a country's central bank independence (CBI) status has a lowering effect on inflation is a controversial hypothesis. To date, this question could not be answered satisfactorily because the complex macroeconomics structure that gives rise to the data has not been adequately incorporated into statistical analyses. We have developed a causal model that summarizes the economic process of inflation. Based on this causal model and recent data, we discuss and identify the assumptions under which the effect of CBI on inflation can be identified and estimated. Given these and alternative assumptions we estimate this effect using modern doubly robust effect estimators, i.e. longitudinal targeted maximum likelihood estimators. The estimation procedure incorporated machine learning algorithms and was tailored to address the challenges that come with complex longitudinal macroeconomics data. We could not find strong support for the hypothesis that a central bank that is independent over a long period of time necessarily lowers inflation. Simulation studies evaluate the sensitivity of the proposed methods in complex settings when assumptions are violated, and highlight the importance of working with appropriate learning algorithms for estimation.
    Date: 2020–03
  20. By: Jan J. J. Groen
    Abstract: Global asset market developments during the summer of 2013 have been attributed to changes in the outlook for U.S. monetary policy, starting with former Chairman Bernanke?s May 22 comments concerning future curtailing of the Federal Reserve?s asset purchase programs. A previous post found that the signal of a possible change in U.S. monetary policy coincided with an increase in global risk aversion which put downward pressure on global asset prices. This post revisits this episode by measuring the impact of changes in Fed?s expected policy rate path and in the economic outlook on the U.S. dollar and emerging market equity prices. The analysis suggests that changes in the U.S. and foreign outlooks had a meaningful role in explaining global asset price movements during the so-called taper tantrum.
    Keywords: Policy expectations; emerging market equities.; growth expectations; exchange rates
    JEL: G1 F00 E5
  21. By: David O. Lucca (Federal Reserve Bank); Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich)
    Abstract: We had previously documented large excess returns on equities ahead of scheduled announcements of the Federal Open Market Committee (FOMC)?the Federal Reserve?s monetary policy-making body?between 1994 and 2011. This post updates our original analysis with more recent data. We find evidence of continued large excess returns during FOMC meetings, but only for those featuring a press conference by the Chair of the FOMC.
    Keywords: G15; G10; G12
    JEL: G1
  22. By: Pascal Paul
    Abstract: Banks engage in maturity transformation and the term premium compensates them for bearing the associated duration risk. Consistent with this view, I show that banks’ net interest margins and term premia have comoved in the United States over the last decades. On monetary policy announcement days, banks’ stock prices fall in response to an increase in expected future short-term interest rates but rise if term premia increase. These effects are reflected in the response of banks’ net interest margins and amplified for institutions with a larger maturity mismatch. The results reveal that banks are not immune to interest rate risk.
    Keywords: Banks; Maturity Transformation; Monetary Policy; Term Premium; Interest Rate Risk; Bank Profitability
    JEL: E43 E44 E52 E58 G21 G32
    Date: 2020–02–28
  23. By: Mogaji, Peter Kehinde
    Abstract: In proposing monetary integration, the fifteen-member Economic Community of West African States (ECOWAS) resolved to evolve and adopt a single currency, ‘eco’ across the African sub-continent by January 2020.This proposed monetary region is consequently styled by this author as ‘proposed Ecozone’. This paper appraised the international parity conditions in the proposed monetary union with specific focus on purchasing power parity (PPP), international Fisher Effect (IFE) and uncovered interest parity (UIP). The examination of simultaneous validity of these postulations and theories in the cases of the 15-countries were performed through the investigation of directions of bilateral relationship of the countries of the Ecozone. Monthly, quarterly and annual data spanning averagely over a period of 28 years between 1990 and 2017 were employed in this study. Residual-based cointegration test methods of Engle-Granger, Philip-Ouliaris and Park’s Added Variable and the Johansen cointegration tests were applied in evaluating these parity conditions. Results generated by various empirical estimations generally revealed that the international parity theoretical propositions of absolute PPP, relative PPP, international Fisher Effects and the uncovered interest parity are hugely not valid across the proposed ‘Ecozone’. However, the cointegration of real exchange rate, based on the possible anchor country for the proposed monetary union, Nigeria, holds, thus implying positive implications for the proposed monetary integration of the West African sub-continent as there are evidences to conclude that there are long run association and co-movements of these real exchange rates which more importantly have bearings and relationships with the lead economy in the region. One crucial implications of the failure of the validity of PPP to hold across the proposed Ecozone is that monetary models of exchange rate determination will be inappropriate for the proposed monetary union because purchasing power parity is a crucial building block of these monetary models of exchange rate determination.
    Keywords: International Parity Conditions, Purchasing Power Parity, International Fisher Effect, Uncovered Interest Rate Parity, WAMZ, WAEMU
    JEL: E43 E66 F36 F45 P52
    Date: 2019–06–10
  24. By: Kose,Ayhan; Matsuoka,Hideaki; Panizza,Ugo G.; Vorisek,Dana Lauren
    Abstract: This paper presents a comprehensive examination of the determination and evolution of inflation expectations, with a focus on emerging market and developing economies (EMDEs). The results suggest that long-term inflation expectations in EMDEs are not as well anchored as those in advanced economies, despite notable improvements over the past two decades. Indeed, in EMDEs, long-term inflation expectations are more sensitive to both domestic and global inflation shocks. However, EMDEs tend to be more successful in anchoring inflation expectations in the presence of an inflation targeting regime, high central bank transparency, strong trade integration, and a low level of public debt.
    Keywords: Inflation,Macroeconomic Management,Financial Structures,International Trade and Trade Rules,Public Sector Economics,Public Finance Decentralization and Poverty Reduction,Economic Adjustment and Lending,Macro-Fiscal Policy
    Date: 2019–03–20
  25. By: Marina Glushenkova; Marios Zachariadis
    Abstract: Not that different. Based on a unique dataset of semi-annual microeconomic price levels of goods and services across and within countries for 1990:1-2018:2, we show that time-series volatility and cross-sectional dispersion of law-of-one-price deviations is similar for pairs of cities within the same country and within the European Monetary Union. Our empirical analysis reveals that inflation and nominal exchange rate volatility/dispersion across locations have a positive impact on the volatility/dispersion across locations of law-of-one-price deviations across the globe. Furthermore, dispersion of law-of-one-price deviations across goods falls when the relative inflation rate between these locations rises, suggesting that the degree of price adjustment in individual product markets within a country has an international component shaped by international trade and arbitrage considerations. According to this measure of price integration, economies within the monetary union are half-way to the level of integration characterizing national economies. Moreover, monetary union membership reduces the volatility of law-of-one-price deviations, taking member countries more than half-way towards the volatility levels characterizing national economies.
    Keywords: Law-of-one-price, border effect, economic integration
    JEL: F4
    Date: 2020–03
  26. By: Ylva Søvik; Antoine Martin; Emily Eisner (Research and Statistics Group)
    Abstract: There has been unusually high activity on central banks? balance sheets in recent years. This activity, which has expanded beyond the core operations and collateral of the central bank, has been called ?unconventional,? ?nonstandard,? ?nontraditional,? and ?active.? But what constitutes a normal central bank balance sheet? How does central bank asset and liability composition vary across countries and how did the crisis change this composition? In this post, we focus on the main characteristics of central bank balance sheets before the crisis. In our next piece, we describe how this composition has changed in response to the crisis.
    Keywords: Central bank balance sheet
    JEL: E5
  27. By: Seon Tae Kim; Alessandro Marchesiani
    Abstract: The observed money demand in the U.S. had a stable negative relation with the interest rate up until the 1990s. After this period, this relation fell apart and has never been restored. We show that the central bankís ability to gather information, referred to as market intelligence, matters to generate an upward-sloping money demand curve. We calibrate the model to the U.S. data for the period from 1990 to 2019 and show that market intelligence helps to match the money demand. We also show that it is beneficial for the society, since it mitigates the inefficiency associated with asymmetric information.
    Keywords: Money demand, asymmetric information, mechanism design
    JEL: D9 E4 E5
    Date: 2020–02
  28. By: Mehdi El Herradi (University of Bordeaux); Aurelien Leroy (University of Bordeaux)
    Abstract: While a growing line of research has assessed the distributional consequences of monetary policy, most of these studies rely on survey-based estimates of inequality and feature a shorter time coverage. This paper examines the distributional implications of monetary policy on top income shares in 12 advanced economies between 1920 and 2015. We exploit the implications of the macroeconomic policy trilemma with an external instrument approach to identify exogenous variations in monetary conditions. The obtained results indicate that contractionary monetary policy strongly decreases the share of national income held by the top one percent and vice versa, irrespective of the state of the economy. Our findings also suggest that the effect of monetary tightening on top income shares is likely to be channeled via lower asset prices.
    Keywords: Monetary policy, Top income shares, Macroeconomic Policy Trilemma, External Instrument.
    JEL: E25 E42 E52
    Date: 2020–01
  29. By: Sara Shahanaghi (Research and Statistics Group); Argia M. Sbordone
    Abstract: Inflation dynamics are often described by some form of the Phillips curve. Named after A. W. Phillips, the British economist whose study of U.K. wage and unemployment data laid the groundwork, the Phillips curve denotes an inverse relationship between inflation and some measure of economic slack. A much-discussed issue in the literature is how forward-looking this relationship is. In this post, we address this question using a flexible version of the New Keynesian Phillips curve (NKPC) to illustrate the key role that expectations play in inflation dynamics.
    Keywords: Inflation expectations; Inflation; New Keynesian Phillips Curve
    JEL: E2 E5
  30. By: Selva Bahar Baziki; Tanju Capacioglu
    Abstract: We study the effects of monetary policy decisions on banks’ loan issuance and maturity decisions using a unique matched firm-bank-loan level granular database. We find that changes in the policy rate impact both credit and maturity channels - an increase of 100 basis points reduces commercial loan volumes by 1.6% and maturities by 1.2%, with tighter monetary policy having a larger effect on both. Small banks, banks with relatively weaker capital and liquidity structures, and with weaker access to foreign funding are more sensitive to policy changes. Bank ownership types and loan currency denomination also create asymmetries in responses. Banks reflect these changes to firms with which they have longer established relationships or which have a healthier past credit performance to a lesser extent. A quasi-experimental analysis adds that the intense use of a collateral guarantee scheme has increased maturities at the time of tight monetary policy stance, reversing their long-run negative relationship. These results highlight the importance of the financial regulatory process on banks’ risk taking behavior, search-for yield appetites, identifying areas of potential systemic risk buildup, and finally policy design and coordination.
    Keywords: Monetary policy, Transmission channel, Credit guarantee fund, Loan maturity, Bank type
    JEL: E51 E58 G20 G21 G28
    Date: 2020
  31. By: Linda S. Goldberg; David R. Skeie
    Abstract: To help contain the economic damage caused by the recent financial crisis, the Federal Reserve extended large amounts of liquidity to financial firms through traditional lending facilities such as the discount window as well as through newly designed facilities. Recently released Federal Reserve data on discount window borrowing show that some U.S. branches and agencies of foreign banks were among the most active users of the window. In this post, we explain why U.S. branches borrow at the discount window. We also discuss two main reasons why these branches had a large need for dollars during the crisis and how discount window loans to them helped stabilize the financial system and the real economy in the United States.
    Keywords: currency mismatch; discount window; foreign banking organizations; wholesale funding
    JEL: E5 G2
  32. 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.
    JEL: C83 D84 E31
    Date: 2020–02
  33. By: Batista, Catia (Universidade Nova de Lisboa); Vicente, Pedro C. (Universidade Nova de Lisboa)
    Abstract: Who uses mobile money? What is mobile money used for? This paper describes the mobile money adoption patterns following the experimental introduction of mobile money for the first time in rural areas of Southern Mozambique. We use a combination of administrative and household survey data to characterize early and late adopters, as well as their mobile money usage patterns during the three years after mobile money was introduced. We find that a large proportion of the individuals who were offered mobile money services actively adopted this technology. Adopters of mobile money (and early adopters in particular) are more educated than non-adopters, and they are also more likely to already hold a bank account. Positive self-selection of mobile money adopters raises questions about the effectiveness of mobile money as a tool for financial inclusion.
    Keywords: fintech, mobile money, technology adoption, self-selection, financial inclusion, financial deepening, Mozambique, Africa
    JEL: O16 O33 G20
    Date: 2020–01
  34. By: Antoine Martin; Sam Schulhofer-Wohl
    Abstract: It is sometimes said that the Federal Reserve should not engage in ?credit allocation.? But what does credit allocation actually mean? And how do current Fed policies affect the allocation of credit? In this post, we describe two separate ideas often associated with credit allocation. The first idea is that the Fed should not take credit risk, which taxpayers would ultimately have to bear. The second idea is that the Fed?s actions should not influence the flow of credit to particular sectors. We consider whether the Fed?s holdings of agency mortgage-backed securities (MBS) could affect the allocation of credit. In a companion post, we discuss how the economic effects of the Fed?s MBS holdings compare with the economic effects of more traditional holdings.
    Keywords: credit allocation; MBS; asset purchases
    JEL: E5
  35. By: Marc Giannoni; Micah Smith (Research and Statistics Group); Marco Del Negro
    Abstract: Credit conditions tightened considerably in the second half of 2015 and U.S. growth slowed. We estimate the extent to which tighter credit conditions last year were responsible for the slowdown using the FRBNY DSGE model. We find that growth would have slowed substantially more had the Federal Reserve not delayed liftoff in the federal funds rate.
    Keywords: DSGE; Monetary Policy; Spreads; Financial Conditions
    JEL: E2 E5 G1
  36. By: Roosevelt D. Bowman (Markets Group); Jan J. J. Groen
    Abstract: Although the dollar strengthened somewhat recently, its level relative to the currencies of the United States? main trading partners is nonetheless 11 percent lower than it was at the start of 2009. This represents one of the more pronounced periods of dollar weakness over the past two decades and consequently has garnered considerable attention from market participants and policymakers alike. In this post, we examine the role of market uncertainty and currency risk premia in the pace and size of episodes of dollar weakness since 1991. We find that the most recent bout of U.S. dollar declines largely can be attributed to the recovery in global economic activity from the most recent recession.
    Keywords: implied volatility; currency risk premium; exchange rates
    JEL: F00 G1

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