nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒03‒23
forty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy Transmission in Emerging Markets and Developing Economies By Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
  2. Dynamic Impact of Unconventional Monetary Policy on International REITs By Hardik A. Marfatia; Rangan Gupta; Keagile Lesame
  3. Why (or Why Not) Keep Paying Interest on Excess Reserves? By Gara M. Afonso
  4. A fistful of dollars:Transmission of global funding shocks to EMs By Shekhar Hari Kumar; Aakriti Mathur
  5. The Collateral Channel of Monetary Policy: Evidence from China By Hanming Fang; Yongqin Wang; Xian Wu
  6. Counterparty and Collateral Policies of Central Bank Lending Facilities By Helene Lee; Asani Sarkar
  7. Will \\"Quantitative Easing\\" Trigger Inflation? By Kenneth D. Garbade
  8. Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default) By Cristina Arellano; Yan Bai; Gabriel Mihalache
  9. Japan’s Missing Wall of Money By Thomas Klitgaard
  10. Central Bank Tone and the Dispersion of Views within Monetary Policy Committees By Paul Hubert; Fabien Labondance
  11. Anchored inflation expectations By Carlos Carvalho; Stefano Eusepi; Emanuel Moench; Bruce Preston
  12. Standard Elements of a Monetary Policy Implementation Framework By Ylva Søvik; Emily Eisner; Antoine Martin
  13. The FR-BDF Model and an Assessment of Monetary Policy Transmission in France, Working Paper Series no. 736, Banque de France By Matthieu Lemoine; Harri Turunen; Mohammed Chahad; Antoine Lepetit; Anastasia Zhutova; Pierre Aldama; Pierrick Clerc; Jean-Pierre Laffargue
  14. Exchange Rate Pass-Through in Pakistan By Younus, Rijja Ali; Yucel, Eray
  15. Understanding Inflation in Emerging and Developing Economies By Ha,Jongrim; Kose,Ayhan; Ohnsorge,Franziska Lieselotte
  16. Regulating Fintech: Objectives, Principles, and Practices By Amstad, Marlene
  17. Discount Window Stigma By Olivier Armantier
  18. How Do the Fed's MBS Holdings Affect the Economy? By Antoine Martin; Sam Schulhofer-Wohl
  19. Has the Information Channel of Monetary Policy Disappeared? Revisiting the Empirical Evidence By Lukas Hoesch; Barbara Rossi; Tatevik Sekhposyan
  20. 21st Century Macro By Narayana R. Kocherlakota
  21. Managing Global Liquidity as a Global Public Good. A Report of an RTI Working Party By André Icard; Philip Turner
  22. How Do Central Bank Balance Sheets Change in Times of Crisis? By Ylva Søvik; Emily Eisner; Antoine Martin
  23. Large Bank Cash Balances and Liquidity Regulations By Asani Sarkar; Jeffrey Levine
  24. Standing Repo Facilities, Then and Now By Stephen F. Quinn; William Roberds; Charles M. Kahn
  25. A Closer Look at the Fed’s Balance Sheet Accounting By Jennifer Wolgemuth; Antoine Martin; Deborah Leonard
  26. An estimated DSGE model with financial accelerator: the case of Tunisia By Hager Ben Romdhane
  27. Is Stigma Attached to the European Central Bank's Marginal Lending Facility? By Helene Lee; Asani Sarkar
  28. The Effects of Post-Crisis Banking Reforms By Joao A. C. Santos; Richard K. Crump
  29. Gender Roles and the Gender Expectations Gap By Francesco D’Acunto; Ulrike Malmendier; Michael Weber
  30. Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations By Jordi Galí
  31. Forward Guidance and Household Expectations By Coibion, Olivier; Georgarakos, Dimitris; Gorodnichenko, Yuriy; Weber, Michael
  32. Federal Reserve Liquidity Facilities Gross $22 Billion for U.S. Taxpayers By Michael Abrahams
  33. Senior bank loan officers' expectations for loan demand: Evidence from the Euro-area By Anastasiou, Dimitrios
  34. Evaluating the Determinants of Irish Inflation By Byrne, Stephen; Zakipour-Saber, Shayan
  35. International Capital Flows at the Security Level – Evidence from the ECB’s Asset Purchase Programme By Katharina Bergant; Michael Fidora; Martin Schmitz
  36. The U.S. Dollar's Global Roles: Where Do Things Stand? By Robert Lerman; Linda S. Goldberg
  37. Did the Fed’s Term Auction Facility Work? By Asani Sarkar; James J. McAndrews; Zhenyu Wang
  38. Payment vs. Funding: The Law of Reflux for Today By Perry Mehrling
  39. The Effect of Fed Funds Rate Hikes on Consumer Borrowing Costs By Nina Boyarchenko; Matthew Plosser; Sooji Kim
  40. Global Inflation Synchronization By Ha,Jongrim; Kose,Ayhan; Ohnsorge,Franziska Lieselotte
  41. Implementing Monetary Policy Post-Crisis: What Do We Need to Know? By Antoine Martin; Julie Remache; Patricia C. Mosser
  42. How Do Large Banks Manage Their Cash? By Jeffrey Levine; Asani Sarkar
  43. Identifying Price Reviews by Firms: An Econometric Approach By Mark Harris; Hervé Le Bihan; Patrick Sevestre
  44. What to Make of Market Measures of Inflation Expectations? By David O. Lucca; Ernst Schaumburg
  45. Is the Phillips curve dead? International evidence By Alexius, Annika; Lundholm, Michael; Nielsen, Linnea
  46. Creating a History of U.S. Inflation Expectations By Jan J. J. Groen; Menno Middeldorp

  1. By: Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
    Abstract: Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.
    Date: 2020–02–21
  2. By: Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, BBH 344G, 5500 N. St. Louis Ave., Chicago, IL 60625, USA); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Keagile Lesame (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)
    Abstract: In this paper, we estimate the dynamic impact of unconventional monetary policy in the US on international REITs. Unlike existing studies which are limited to conventional policy tools and/or undertake a static approach, we estimate the dynamic time-varying impact of forward guidance and large-scale asset purchases (LSAP) shocks on the international REIT returns. We compare the effects of these unconventional tools with the effects of conventional federal funds rate shocks. Results show that the response of international REITs to the unconventional policy shocks significantly depends on the time under consideration. Forward guidance shocks have greater time variation in the impact on REIT returns compared to LSAP shocks, particularly in the case of Australia, Belgium, and the US REIT markets. We also find that in most countries, REITs time-varying response is related to the gold price changes.
    Keywords: Unconventional monetary policy, Forward guidance, LSAP, REITs, Time varying parameter model
    JEL: E44 E52 C32 F42 G14
    Date: 2020–02
  3. By: Gara M. Afonso
    Abstract: In the fall of 2008, the Fed added new policy tools to its portfolio of techniques for implementing monetary policy. In particular, since October 9, 2008, depository institutions in the United States have been paid interest on the balances they hold overnight at Federal Reserve Banks (see Federal Reserve Board announcement). Several other central banks, such as the European Central Bank (ECB) and the central banks of Canada, England, and Australia, have somewhat similar deposit facilities allowing banks to earn overnight rates on their balances. In this post, I discuss the benefits and costs of this new tool in an environment where excess reserves in the United States have now exceeded $1.4 trillion and account for close to 95 percent of all reserves.
    JEL: E5 G2
  4. By: Shekhar Hari Kumar (IHEID, Graduate Institute of International and Development Studies, Geneva); Aakriti Mathur (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: In this paper, we study transmission of global funding shocks to emerging economies (EMs) from the perspective of interbank markets. Money markets enable banks to engage in risk-sharing against liquidity shocks and are sensitive to global funding conditions. Accordingly, we first show that interbank rates better reflect the magnitude of transmission of foreign liquidity shocks to EMs as compared to benchmark short-term bond yields. Next, we disentangle the transmission into its various channels, focusing in particular on two pull factors associated with the domestic banking microstructure: dependence on wholesale funding and share of foreign banks. Our results indicate that money market rates in EMs react to global shocks, and that in particular dependence on wholesale funding has a significant role to play. Finally, we provide evidence that tools of macro-prudential policy like reserve requirements can help alleviate liquidity shocks to the EM banking system, weakening this global transmission.
    Keywords: International transmission of liquidity shocks; quantitative easing; wholesale funding; interbank rates; macro-prudential policy; reserve requirements.
    JEL: E43 E44 E52 E58 F42 G15 G21
    Date: 2020–03–02
  5. By: Hanming Fang; Yongqin Wang; Xian Wu
    Abstract: Collateral-based monetary policy tools have been used extensively by major central banks. Lack of proper policy counterfactuals, however, makes it difficult to empirically identify their causal effects on the financial market and the real economy. We exploit a quasi-natural experiment 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 financial institutions to borrow money from its Medium-Term Lending Facility (MLF). This policy shift allows us to implement a triple-difference strategy to estimate the causal impact of the collateral-based unconventional monetary policy. We find 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 find that there is a pass-through effect 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.
    JEL: E44 E52 E58 G12
    Date: 2020–02
  6. By: Helene Lee (Markets Group); Asani Sarkar
    Abstract: In a previous post, we compared the Federal Reserve?s discount window with the standing lending facilities (SLFs) at the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We showed that the Fed?s discount window was less integrated with monetary policy than the SLFs of the other central banks. In this post, we observe that the counterparty and collateral policies of the Fed?s discount window are similarly less integrated with the practices involved in monetary policy operations, in comparison with the other central banks.
    Keywords: Collateral; Standing Lending Facilities; Counterparty; Central Banks
    JEL: E5
  7. By: Kenneth D. Garbade (Federal Reserve Bank; Bankers Trust Company)
    Abstract: The Federal Reserve announced on November 3, 2010, that in the interest of stimulating economic recovery, it would purchase $600 billion of longer-term Treasury securities. The announcement led some commentators to conjecture that the Fed?s large-scale asset purchase (LSAP) program?popularly known as ?quantitative easing??is more likely to trigger inflation than stimulate recovery. This post discusses why those concerns may be misplaced, and also why they are not without some basis. A recent Liberty Street Economics post by Jamie McAndrews??Will the Federal Reserve's Asset Purchases Lead to Higher Inflation?? addressed the same issue from a broader perspective and came to a substantially similar conclusion.
    Keywords: Quantitative Easing
    JEL: E5
  8. By: Cristina Arellano; Yan Bai; Gabriel Mihalache (State University of New York at Stony Brook)
    Abstract: This paper develops a New Keynesian model with sovereign default risk (NK-Default). We focus on the interaction between monetary policy, conducted according to an interest rate rule that targets inflation, and external defaultable debt issued by the government. Monetary policy and default risk interact since both affect domestic consumption, production, and inflation. We find that default risk amplifies monetary frictions and generates a tension for monetary policy, which increases the volatility of inflation and nominal rates. These monetary frictions in turn discipline sovereign borrowing, slowing down debt accumulation and lowering sovereign spreads. Our framework replicates the positive comovements of spreads with nominal domestic rates and inflation, a salient feature of emerging markets data, and can rationalize the experience of Brazil during the 2015 downturn, with high inflation, nominal rates, and spreads.
    Keywords: Monetary policy; Inflation; Sovereign default; Interest rates
    JEL: E52 F34 F41
    Date: 2020–01–10
  9. By: Thomas Klitgaard
    Abstract: The Bank of Japan announced an open-ended asset purchase program in January 2013 and an unexpectedly ramped-up version of the program was implemented in early April. Market commentary at that time suggested that flooding the economy with liquidity would lead to a ?wall of money? flowing out of Japan in search of higher yields, affecting asset prices worldwide. So far, however, Japan?s wall of money remains missing in action, with no pickup in Japanese foreign investment since the April policy shift. Why is this? Here we explain that while economic theory does not offer clear guidance on how financial outflows might respond to the injection of cash from central bank asset purchases, it does point to an important constraint on the potential size. In particular, monetary expansion will not cause a surge in financial outflows unless it also induces a similar surge in capital flowing into the country.
    Keywords: monetary policy balance of payments financial account current account
    JEL: F00
  10. By: Paul Hubert (Sciences Po-OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté - CRESE - Sciences Po-OFCE)
    Abstract: Does policymakers’ choice of words matter? We explore empirically whether central bank tone conveyed in FOMC statements contains useful information for financial market participants. We quantify central bank tone using computational linguistics and identify exogenous shocks to central bank tone orthogonal to the state of the economy. Using an ARCH model and a high-frequency approach, we find that positive central bank tone increases interest rates at the 1- year maturity. We therefore investigate which potential pieces of information could be revealed by central bank tone. Our tests suggest that it relates to the dispersion of views among FOMC members. This information may be useful to financial markets to understand current and future policy decisions. Finally, we show that central bank tone helps predicting future policy decisions.
    Keywords: Optimism, FOMC, Dissent, Interest rate expectations, ECB
    JEL: E43 E52 E58
    Date: 2020–01
  11. By: Carlos Carvalho; Stefano Eusepi; Emanuel Moench; Bruce Preston
    Abstract: We develop a theory of low-frequency movements in inflation expectations, and use it to interpret joint dynamics of inflation and inflation expectations for the United States and other countries over the post-war period. In our theory long-run inflation expectations are endogenous. They are driven by short-run inflation surprises, in a way that depends on recent forecasting performance and monetary policy. This distinguishes our theory from common explanations of low-frequency properties of inflation. The model, estimated using only inflation and short-term forecasts from professional surveys, accurately predicts observed measures of long-term inflation expectations and identifies episodes of unanchored expectations.
    Keywords: Anchored expectations, inflation expectations, survey data
    JEL: E32 D83 D84
    Date: 2020–03
  12. By: Ylva Søvik; Emily Eisner (Research and Statistics Group); Antoine Martin
    Abstract: In the minutes of the July 2015 Federal Open Market Committee (FOMC) meeting, the chair indicated that Federal Reserve staff would undertake an extended effort to evaluate potential long-run monetary policy implementation frameworks. But what is a central bank?s monetary policy implementation framework? In a series of four posts, we provide an overview of the key elements that typically constitute such a framework.
    Keywords: monetary policy implementation
    JEL: E5
  13. By: Matthieu Lemoine (Centre de recherche de la Banque de France - Banque de France); Harri Turunen (Centre de recherche de la Banque de France - Banque de France); Mohammed Chahad (Centre de recherche de la Banque de France - Banque de France); Antoine Lepetit (Centre de recherche de la Banque de France - Banque de France); Anastasia Zhutova (Centre de recherche de la Banque de France - Banque de France); Pierre Aldama (Centre de recherche de la Banque de France - Banque de France); Pierrick Clerc (Centre de recherche de la Banque de France - Banque de France); Jean-Pierre Laffargue (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper presents the new model for France of the Banque de France (FR-BDF), as well as its key implications for the analysis of monetary policy transmission in France. Relative to our former model, this new semi-structural model has been improved along three dimensions: financial channels are richer, expectations now have an explicit role and simulations now converge toward a balanced growth path. We follow the approach of the FRB/US model, where agents can form their expectations in two different ways, VARbased or model-consistent, and where non-financial behavior react with polynomial adjustment costs. For standard monetary policy shocks, FR-BDF shows a stronger sensitivity than our former model, due to the widespread influence of expectations. Then, we show that, under model-consistent expectations, FR-BDF does not suffer from the forward guidance puzzle. Finally, Eurosystem asset purchase programmes have notable effects in FR-BDF, with a stronger transmission through exchange rates than term premia.
    Keywords: forward guidance,monetary policy,expectations,semi-structural modeling
    Date: 2019–10
  14. By: Younus, Rijja Ali; Yucel, Eray
    Abstract: Exchange rate pass-through, which is the degree of reflection of exchange rate movements on domestic inflation, is a crucial phenomenon especially for the developing economies. In this paper we study the exchange rate pass-through for the Pakistani economy from 2008 to 2019. Using quarterly data for consumer prices and the Pakistani Rupee – USD exchange rate and a simple econometric framework, we estimate the pass-through coefficients to various subgroup and item indices within Pakistani household consumption basket. Our findings indicate that pass-through behavior is limited to only some items, motivating us to develop an exchange rate sensitive items index to allow for better forecasting performance on the side of policymakers.
    Keywords: Exchange rate; ERPT; Pass-through; Pakistan; Inflation; Price level
    JEL: C51 E31 E58
    Date: 2020–03–04
  15. By: Ha,Jongrim; Kose,Ayhan; Ohnsorge,Franziska Lieselotte
    Abstract: Emerging market and developing economies (EMDEs) have experienced an extraordinary decline in inflation since the early 1970s. After peaking in 1974 at 17.3 percent, inflation in these economies declined to 3.5 percent in 2017. Despite a checkered history of managing inflation among many EMDEs, disinflation occurred across all regions. This paper presents a summary of a recent book,"Inflation in Emerging and Developing Economies: Evolution, Drivers, and Policies,"that analyzes this remarkable achievement. The findings suggest that many EMDEs enjoy the benefits of stability-oriented and resilient monetary policy frameworks, including central bank transparency and independence. Such policy frameworks need to be complemented by strong macroeconomic and institutional arrangements. Inflation expectations are more weakly anchored in EMDEs than in advanced economies. In EMDEs that do not operate inflation targeting frameworks, exchange rate movements tend to have larger and more persistent effects on inflation.
    Keywords: Inflation,Macroeconomic Management,Inequality,Financial Structures,International Trade and Trade Rules
    Date: 2019–02–28
  16. By: Amstad, Marlene (Asian Development Bank Institute)
    Abstract: We start by revisiting the true definition of money and identify that electronic money is not a new concept. We explain the spectrum of money in the context of the past, present, and future, and argue that technology can only enhance the way we deal with money and will never change the nature of money. The prospect of digital currency relies on innovation capacity, not only on central banks. We propose that a central bank is similar to a welfare society, and demand for digitalization has always been present due to problems such as nano units and coverage. We recommend tackling each digitization challenge sequentially and with a logical approach.
    Keywords: fintech; financial technology; digital currency
    JEL: F65 G15 O16
    Date: 2019–10–08
  17. By: Olivier Armantier (Board of Governors of the Federal Reserve System (U.S.); Federal Reserve Bank of Philadelphia; Federal Reserve Bank of New York)
    Abstract: One of the main missions of central banks is to act as a lender of last resort to the banking system. In the United States, the Federal Reserve has relied on the discount window (DW) for nearly a century to fulfill this task. Historically, however, the DW has been little used even when banks may have faced acute liquidity shortages, a phenomenon commonly attributed to stigma. In this post, we show that during the last financial crisis banks were willing to pay large premia to avoid borrowing from the DW, suggesting that DW stigma is an economically important phenomenon.
    JEL: G2
  18. By: Antoine Martin; Sam Schulhofer-Wohl
    Abstract: In our previous post, we discussed the meaning of the term ?credit allocation? and how it relates to the Federal Reserve?s holdings of agency mortgage-backed securities (MBS). We concluded that the Fed?s MBS holdings do not pose significant credit risk but that the Fed does influence the relative market price of credit when it purchases agency MBS, and this indirectly influences decisions by investors. Today, we take the next step and discuss how the Fed?s MBS purchases affect the U.S. economy and, in particular, how the effect of MBS purchases can differ from the effect of purchases of Treasury securities.
    Keywords: Federal Reserve; MBS; economy
    JEL: E5
  19. By: Lukas Hoesch; 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: 2020–03
  20. By: Narayana R. Kocherlakota
    Abstract: In the 21st century, many key macroeconomic variables in the developed world have been persistently low, including inflation, output, growth, interest rates (both real and nominal), and labor share. I consider a class of standard representative agent rational expectations models in which fundamentals are deterministic and constant over time. I show that for any level of nominal frictions (no matter how small) and for any monetary policy rule (regardless of how active), there is a large set of stochastic equilibria that exhibit permanently low inflation, low output, low labor share, and low nominal interest rates. If the Phillips curve is sufficiently flat, then these equilibria also exhibit low growth and real interest rates.
    JEL: E12 E31 E52
    Date: 2020–02
  21. By: André Icard (former Deputy Géneral Manager of BIS); Philip Turner (National Institute of Economic and Social Research (NIESR); University of Basel)
    Abstract: The cumulative balance sheet effects of a decade of low interest rates, long as well as short, have become very large. This report (of an RTI Working Party chaired by Bernard Snoy) examines the magnitudes of such effects through the many dimensions of global liquidity. This is not purely a monetary policy phenomenon as regulatory policies, restrictive fiscal policies in some advanced economies and structural factors have all had important impacts. Several indicators suggest increased financial vulnerabilities and higher risks of destabilising market dynamics. The dollar debt of non-banks outside the United States is at a new record: currency mismatches and leverage in the private sector have increased. The dollar funding of non-US banks looks fragile. Greater reliance on international bond markets has created new, opaque risks. There is widespread unease about the domination of the dollar, and about the inadequacy of the Global Financial Safety Net. The search for alternative multi-currency arrangements continues. But the need to address the risk of a new dollar liquidity crunch is urgent. International oversight of this issue is at present too fragmented. Policy responses at national level may require action by several bodies – central banks, regulators and Treasuries. The report therefore proposes that the Financial Stability Board, with inputs from the BIS, the IMF, the OECD and others, report regularly on global liquidity to G20 Ministers and Governors so they can act in time to avert a crisis.
    Keywords: Global liquidity, lender of last resort, currency mismatches, G20, Triffin dilemma, international monetary system
    JEL: E43 E58 F33 F38 F41 F42 G15
    Date: 2019–12
  22. By: Ylva Søvik; Emily Eisner (Research and Statistics Group); Antoine Martin
    Abstract: The 2007-09 financial crisis, and the monetary policy response to it, have greatly increased the size of central bank balance sheets around the world. These changes were not always well understood and some were controversial. We discuss these crisis-induced changes, following yesterday?s post on the composition of central bank balance sheets in normal times, and explain the policy intentions behind some of them.
    Keywords: Central bank balance sheet
    JEL: E5
  23. By: Asani Sarkar; Jeffrey Levine (Markets Group)
    Abstract: The liquidity needs of the largest U.S. commercial banks play an important role in understanding the banking system?s appetite for actual reserve holdings?bank reserve demand. In this post, the authors discuss the recent evolution of large bank cash balances, the effect of liquidity regulations on these balances, and how banks might react to changes in the supply of reserves.
    Keywords: cash management; large banks; LCR
    JEL: E5 G2
  24. By: Stephen F. Quinn (Texas Christian University; Federal Reserve Bank of Dallas); William Roberds; Charles M. Kahn (University of Illinois at Urbana-Champaign; Federal Reserve Bank of New York; University of Chicago; Harvard University; University of Illinois; Department of Finance)
    Abstract: Recently there have been discussions, both within the FOMC and more broadly, about whether the FOMC should set up a standing repo facility. Such a facility would allow banks to sell safe assets (U.S. Treasury securities) to the Fed, with the assurance of subsequent repurchase, in unlimited quantities at an administered rate. This is not a new idea. In fact, a similar facility was implemented in 1683by the Bank of Amsterdam, the leading central bank of the time, and operated for more than a century afterward. In this article, we describe the motivations, operations, and limitations of the Bank of Amsterdam’s facility and what lessons this historical experience offers for modern-day central banks.
    Date: 2020–01–01
  25. By: Jennifer Wolgemuth; Antoine Martin; Deborah Leonard
    Abstract: An earlier post on how the Fed changes the size of its balance sheet prompted several questions from readers about the Federal Reserve?s accounting of asset purchases and the payment of principal by the Treasury on Treasury securities owned by the Fed. In this post, we provide a more detailed explanation of the accounting rules that govern these transactions.
    Keywords: Federal Reserve; Accounting; Balance Sheet
    JEL: E5
  26. By: Hager Ben Romdhane (Central Bank of Tunisia)
    Abstract: This paper estimates an open economy DSGE model with financial accelerator à la Bernanke et al. (1999)2, enriched with wage rigidities and imperfect exchange rate pass through. The objective of this paper is to assess the importance of financial frictions and their role in the transmission of transitory shocks in the Tunisian Economy. The model is estimated by Bayesian technics via Metropolis Hasting algorithm. Using Tunisian data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and the potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, results of the impulse responses functions model support that the inclusion of the financial accelerator magnifies the impact of shocks thereby increasing real fluctuations.
    Keywords: DSGE, Financial frictions, Bayesian estimation
    Date: 2020–03–03
  27. By: Helene Lee (Markets Group); Asani Sarkar
    Abstract: The European Central Bank (ECB)?s marginal lending facility has been used by banks to borrow funds both in normal times and during the crisis that started in 2007. In this post, we argue that how a central bank communicates the purpose of a facility is important in determining how users of the facility are perceived. In particular, the ECB never refers to the marginal lending facility as a back-up source of funds. The ECB?s neutral approach may be a key factor in explaining why financial institutions are less reluctant to use the marginal lending facility than the Fed?s discount window.
    Keywords: Crisis; ECB; Standing Lending Facility
    JEL: E5
  28. By: Joao A. C. Santos; Richard K. Crump
    Abstract: The financial crisis of 2007-08 exposed many limitations of the regulatory architecture of the U.S. financial system. In an attempt to mitigate these limitations, there has been a wave of regulatory reforms in the post-crisis period, especially in the banking sector. These include tighter bank capital and liquidity rules; new resolution procedures for failed banks; the creation of a stand-alone consumer protection agency; greater transparency in money market funds; and a move to central clearing of derivatives, among other measures. As these reforms have been finalized and implemented, a healthy debate has emerged in the policy and academic communities over the degree to which they have achieved their intended goals and the extent of any unintended consequences that might have arisen in the process.
    Keywords: jl21
    JEL: G2
  29. By: Francesco D’Acunto; Ulrike Malmendier; Michael Weber
    Abstract: Expectations about macro-finance variables, such as inflation, vary significantly across genders, even within the same household. We conjecture that traditional gender roles expose women and men to different economic signals in their daily lives, which in turn produce systematic variation in expectations. Using unique data on the contributions of men and women to household grocery chores, their resulting exposure to price signals, and their inflation expectations, we show that the gender expectations gap is tightly linked to participation in grocery shopping. We also document a gender gap in other economic expectations and discuss how it might affect economic choices.
    JEL: C90 D14 D84 E31 E52 G11
    Date: 2020–03
  30. By: Jordi Galí
    Abstract: I analyze an extension of the New Keynesian model that features overlapping generations of finitely-lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I study the conditions under which bubble-driven fluctuations may emerge and the type of monetary policy rules that may prevent them. I conclude by discussing some of the model's welfare implications.
    JEL: E44 E52
    Date: 2020–02
  31. By: Coibion, Olivier (University of Texas at Austin); Georgarakos, Dimitris (European Central Bank); Gorodnichenko, Yuriy (University of California, Berkeley); Weber, Michael (World Bank)
    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: 2020–02
  32. By: Michael Abrahams
    Abstract: During the 2007-09 crisis, the Federal Reserve took many measures to mitigate disruptions in financial markets, including the introduction or expansion of liquidity facilities. Many studies have found that the Fed?s lending via the facilities helped stabilize financial markets. In addition, because the Fed?s loans were well collateralized and generally priced at a premium to the cost of funds, they had another, less widely noted benefit: they made money for U.S. taxpayers. In this post, I bring information together from various sources and time periods to show that the facilities generated $21.7billion in interest and fee income.
    Keywords: Federal Reserve; Liquidity Facilities; crisis; lender-of-last-resort
    JEL: E5 G1
  33. By: Anastasiou, Dimitrios
    Abstract: We employ senior bank loan officers' responses regarding actual and expected loan demand from enterprises linking successive surveys in order to determine the dominant expectation formation mechanism that best describes European senior bank loan officers’ expectations. We utilize quarterly data for loan demand from enterprises from the European Bank Lending Survey for 14 Euro-area countries spanning the period 2003Q1 to 2019Q4. Our findings suggest that the adaptive expectations mechanism is compatible with senior bank loan officers' expectations for loan demand from enterprises. Our study contributes to the understanding of the formation of loan demand expectations and hence our findings can be very useful for monetary policy purposes.
    Keywords: Adaptive expectations; bank lending survey; loan demand; survey‐based expectations
    JEL: C33 C5 D84 G2 G21
    Date: 2020–01
  34. By: Byrne, Stephen (Central Bank of Ireland); Zakipour-Saber, Shayan (Central Bank of Ireland)
    Abstract: During the period from 1970 to the early 2000s, there was a consensus that Irish inflation was primarily determined by external factors. In this letter, we evaluate the relative importance of domestic factors, external factors, and inflation expectations and specify how these have changed over time. We find that since the crisis, external factors remain the most important determinants of inflation. However, domestic factors such as labour slack have been increasingly important in recent years. Evaluating published forecasts against a benchmark statistical model, the Central Bank performs best at shorter horizons, i.e. less than one year. This validates an approach that combines model-evidence with expert judgement.
    Date: 2020–02
  35. By: Katharina Bergant; Michael Fidora; Martin Schmitz
    Abstract: We analyse euro area investors' portfolio rebalancing during the ECB's Asset Purchase Programme at the security level. Our empirical analysis shows that euro area investors (in particular investment funds and households) actively rebalanced away from securities targeted under the Public Sector Purchase Programme and other euro-denominated debt securities, towards foreign debt instruments, including `closest substitutes', i.e. certain sovereign debt securities issued by non-euro area advanced countries. This rebalancing was particularly strong during the first six quarters of the programme. Our analysis also reveals marked differences across sectors as well as country groups within the euro area, suggesting that quantitative easing has induced heterogeneous portfolio shifts.
    Date: 2020–02–28
  36. By: Robert Lerman; Linda S. Goldberg
    Abstract: Previous Liberty Street Economics analysis and New York Fed research addressed the potential implications for the United States if the dollar?s global role changed, noting that the currency might not retain its dominance forever. This post checks the status of the dollar, considering whether any erosion in the dollar?s international standing has occurred. The evidence to date is that the dollar remains the world?s dominant currency by broad margins. Alternatives have not gained extensive traction, albeit this does not rule out potential future pressures.
    Keywords: pass through; Dollar role; reserve currency
    JEL: F00
  37. By: Asani Sarkar; James J. McAndrews; Zhenyu Wang
    Abstract: The Federal Reserve introduced the Term Auction Facility (TAF) in December 2007 to provide term loans to banks during the recent financial crisis. In this post, we report on the effectiveness of the TAF during the early stages of the crisis. We find that the TAF was associated with a decrease in the ?liquidity premium,? one component of a bank's borrowing cost. In other words, the TAF worked as intended.
    Keywords: crisis; Federal Reserve; money market; term funding.; Libor; Term Auction Facility
    JEL: G2 G1
  38. By: Perry Mehrling (Pardee School of Global Studies, Boston University)
    Abstract: The analytical tension in post-Keynesian thought between the theory of endogenous (credit) money and the theory of liquidity preference, brought to our attention by Dow and Dow (1989), can be viewed through the lens of the money view (Mehrling 2013) as a particular case of the balance between the elasticity of payment and the discipline of funding. Further, updating FullartonÕs 1844 Òlaw of refluxÓ for the modern condition of financial globalization and market based credit, the same money view lens offers a critical entry point into TobinÕs fateful 1963 intervention ÒCommercial Banks as Creators of ÔMoneyÕÓ which established post-war orthodoxy, and also to the challenge offered by so-called Modern Money Theory.
    Keywords: credit creation, financial intermediation, law of reflux
    JEL: B2 E5
    Date: 2020–01
  39. By: Nina Boyarchenko; Matthew Plosser; Sooji Kim
    Abstract: The target federal funds rate has hovered around zero for nearly a decade, and observers are questioning what effect an increase could have on both the financial markets and the real economy. In this post, we examine the historical reaction of loan rates to target rate increases. Specifically, we examine the interest rates that banks offer on residential mortgages and home equity lines of credit (HELOCs).
    Keywords: Federal Funds; Consumer Lending; Monetary Policy; Taper Tantrum
    JEL: D1 E5
  40. By: Ha,Jongrim; Kose,Ayhan; Ohnsorge,Franziska Lieselotte
    Abstract: The paper studies the extent of global inflation synchronization using a dynamic factor model in a large set of countries over a half century. The authors'methodology allows them to account for differences across groups of countries (advanced economies and emerging market and developing economies) and to analyze commonalities in inflation synchronization across a wide range of inflation measures. The paper reports three major results. First, inflation movements have become increasingly synchronized internationally over time: a common global factor has accounted for about 22 percent of variation in national inflation rates since 2001. Second, inflation synchronization has also become more broad-based: while it was previously much more pronounced among advanced economies than among emerging market and developing economies, it has become substantial in both groups over the past two decades. In addition, inflation synchronization has become significant across all inflation measures since 2001, whereas it was previously prominent only for inflation measures that included mostly tradable goods.
    Date: 2019–03–07
  41. By: Antoine Martin; Julie Remache; Patricia C. Mosser
    Abstract: Columbia University?s School of International and Public Affairs and the New York Fed co-sponsored a recent workshop to discuss important issues related to monetary policy implementation. The May 4 event, held at Columbia, supports the extended effort that the Federal Reserve has undertaken to evaluate potential long-run monetary policy implementation frameworks, which was announced at a Federal Open Market Committee meeting last July.
    Keywords: Monetary policy implementation
    JEL: E5
  42. By: Jeffrey Levine (Markets Group); Asani Sarkar
    Abstract: As the aggregate supply of reserves shrinks and large banks implement liquidity regulations, they may follow a variety of liquidity management strategies depending on their business models and the interest rate differences between alternative liquid instruments. In this post, the authors provide new evidence on how large banks have managed their cash?the largest component of reserves?on a daily basis since the implementation of liquidity regulations.
    Keywords: cash management; large banks; LCR
    JEL: E5 G2
  43. By: Mark Harris (Curtin Univ, Sch Econ Finance & Property); Hervé Le Bihan (Centre de recherche de la Banque de France - Banque de France); Patrick Sevestre (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, Curtin Univ, Sch Econ Finance & Property)
    Abstract: Price reviews are a potentially costly activity. A significant fraction of unchanged prices may stem from firms not reviewing prices, rather than from obstacles to changing prices per se, such as menu costs. In this paper, we disentangle these two causes of price stickiness by estimating an inflated ordered probit model on a panel of French manufacturing firms. The results point to a low frequency of price reviews, suggestive of the relevance of information costs as a determinant of the observed price stickiness. In view of the "inattentive producers" literature, pointing that the source of price rigidity matters, this is suggestive of a large real effect of monetary policy.
    Keywords: price stickiness,price reviews,price changes,inflated ordered probit model
    Date: 2019–12–03
  44. By: David O. Lucca (Federal Reserve Bank); Ernst Schaumburg
    Abstract: Central banks and investors around the world closely monitor developments in financial markets to gauge expectations of future interest rates and inflation. In this post, we argue that two of the most commonly used market-based inflation expectations measures?TIPS breakevens and inflation swaps?are noisy. Although movements in both measures provide policymakers with valuable information, readings should always be interpreted with care.
    Keywords: TIPS breakevens; Inflation swaps; inflation expectations
    JEL: E2 G1
  45. By: Alexius, Annika (Dept. of Economics, Stockholm University); Lundholm, Michael (Dept. of Economics, Stockholm University); Nielsen, Linnea (Wahlstedt Sageryd)
    Abstract: As the struggle against low inflation intensifies, renewed attention is focusing on the potential instability of the relationship between labor market demand pressure and inflation. A weaker Phillips curve has mainly been documented for the United States. Since it is unlikely that this phenomenon is limited to a single country, more international evidence is required. We analyse changes in the slope of the Phillips curve in eleven OECD countries (including the United States for comparison). Bayesian VAR models with time varying parameters indicate that relationship between inflation and unemployment has strengthened rather than weakened. Shocks to unemployment typically have significant effects on inflation in 2018, indicating that the Phillips curve is still alive and well. The statistical method may matter for the results as rolling window estimation shows a weakened relationship in six out of ten non-US countries.
    Keywords: Inflation; Phillips Curve; Bayesian time-varying parameter VARs;
    JEL: E31 F41
    Date: 2020–03–10
  46. By: Jan J. J. Groen; Menno Middeldorp
    Abstract: Central bankers closely monitor inflation expectations because they?re an important determinant of actual inflation. Treasury inflation-protected securities (TIPS) are commonly used to measure bond market inflation expectations. Unfortunately, they were only introduced in 1997, so historical data are limited. We propose a solution to this problem by using the relationship between TIPS yields and other data with a longer history to construct synthetic TIPS rates going back to 1971.
    Keywords: backcasting; inflation expectations; PLS regression
    JEL: E2 G1

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