nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒04‒27
37 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation and Exchange Rate Pass-Through By Jongrim Ha; M. Marc Stocker; Hakan Yilmazkuday
  2. How do monetary policy announcements affect inflation expectations? By Olsson, Kerstin
  3. Average inflation targeting and the interest rate lower bound By Nakata, Taisuke; Schmidt, Sebastian; Budianto, Flora
  4. Forward-Looking Monetary Policy and the Transmission of Conventional Monetary Policy Shocks By Chunya Bu; John Rogers; Wenbin Wu
  5. Money demand stability, monetary overhang and inflation forecast in the CEE countries By Claudiu Tiberiu Albulescu; Dominique Pépin
  6. Capacity Choice, Monetary Trade, and the Cost of Inflation By Garth Baughman; Stanislav Rabinovich
  7. A program for strengthening the Federal Reserve's ability to fight the next recession By David Reifschneider; David Wilcox
  8. Reviving the potency of monetary policy with recession insurance bonds By Julia Coronado; Simon Potter
  9. The impact of credit for house price overvaluations in the euro area: Evidence from threshold models By Dreger, Christian; Gerdesmeier, Dieter; Roffia, Barbara
  10. News and Uncertainty about COVID-19: Survey Evidence and Short-Run Economic Impact By Alexander Dietrich; Keith Kuester; Gernot J. Muller; Raphael Schoenle
  11. Payment Dollarization and Foreign Exchange Market Development in Cambodia: The Role of Money Changers By Koji Kubo; Vichet Sam; Yuthan Chea
  12. The International Spillover Effects of US Monetary Policy Uncertainty By Lakdawala, Aeimit; Moreland, Timothy; Schaffer, Matthew
  13. The money demand and the loss of interest for the euro in Romania By Claudiu Albulescu; Dominique Pépin
  14. Attention to the tail(s): global financial conditions and exchange rate risks By Sokol, Andrej; Eguren-Martin, Fernando
  15. The COVID-19 Pandemic and the Fed’s Response By Michael J. Fleming; Asani Sarkar; Peter Van Tassel
  17. Securing macroeconomic and monetary stability with a Federal Reserve–backed digital currency By Julia Coronado; Simon Potter
  18. Monetary policy, investment and firm heterogeneity By Ferrando, Annalisa; Vermeulen, Philip; Durante, Elena
  19. Central Bank Capital and Credibility: A Literature Survey By Atsushi Tanaka
  20. Understanding helicopter money By Delis, Manthos
  21. Economic Liberalization, Monetary Policy and Money Demand in Rwanda: 1980–2005 By Rutayisire Musoni J.
  22. How the banking system is creating a two-way inflation in an economy By Nizam, Ahmed Mehedi
  23. What role does the housing market play for the transmission mechanism? By Wilhelmsson, Mats
  24. International capital flows at the security level: evidence from the ECB’s Asset Purchase Programme By Fidora, Michael; Schmitz, Martin; Bergant, Katharina
  25. Capacity Reduction Policy Under the Interest Rate Peg in China By Bing Tong
  26. Boltzmann Entropy in Cryptocurrencies: A Statistical Ensemble Based Approach By Grilli, Luca; Santoro, Domenico
  27. Monetary policy transmission with downward interest rate rigidity By Grégory LEVIEUGE; Jean-Guillaume SAHUC
  28. Overcoming Borrowing Stigma: The Design of Lending-of-Last-Resort Policies By Zhang, Hanzhe; Hu, Yunzhi
  29. Fiscal operations, money supply and inflation in Tanzania By Kilindo A A L
  30. Capital Controls and Income Inequality By Zheng Liu; Mark M. Spiegel; Jingyi Zhang
  31. Low Inflation Bends the Phillips Curve around the World By Kristin J. Forbes; Joseph E. Gagnon; Christopher G. Collins
  32. With or without you- are central European countries ready for the euro? By Zsolt Darvas
  33. Banking Union, Fiscal Union and Political Union as Pathways to Complete and Sustainable Monetary Integration of Africa By Mogaji, Peter Kehinde
  34. Crisis management for euro-area banks in central Europe By Alexander Lehmann
  35. Cryptocurrency Market Reactions to Regulatory News By Raphael Auer; Stijn Claessens
  36. Speculation and Price Indeterminacy in Financial Markets: An Experimental Study By Shinichi Hirota; Juergen Huber; Thomas Stock; Shyam Sunder
  37. Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach By Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci

  1. By: Jongrim Ha (World Bank); M. Marc Stocker (World Bank); Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates exchange rate pass-through into consumer prices by considering the nature of the shock triggering currency movements. By individually estimating structural factor-augmented vector autoregression models for 55 countries, monetary policy shocks are shown to be associated with higher exchange rate pass-through measures compared to other domestic shocks, while global shocks have widely different effects across countries. Pass-through measures tend to be lower in countries that combine flexible exchange rate regimes and credible inflation targets, where central bank independence can greatly facilitate the task of stabilizing inflation by using the exchange rate as a buffer against external shocks. It is implied that exchange rate pass-through should be investigated by considering the nature of the shock that triggers currency movements and country characteristics that affect the response of prices.
    Keywords: Inflation, Foreign Exchange, Monetary Policy, Exchange Rate Pass Through
    JEL: E31 E42 E52 F31
    Date: 2020–03
  2. By: Olsson, Kerstin (Department of Economics)
    Abstract: This paper examines the effects of policy rate announcements on households' inflation expectations over the time period 2003-2015. The effect is estimated using a two-stage least squares regression model. The announced changes are instrumented by a monetary policy surprise variable obtained from high-frequency swap trade data. The effect of an announced increase in the policy rate on inflation expectations is significant and positive. According to the New-Keynesian model, the effect of an exogenous monetary policy shock depends on the assumptions made on the persistence of the shock process in the model. Alternatively, the results may be interpreted as the policy announcement signalling the central bank's private information on the direction of future inflation. Given the sizeable weight of housing costs in the Swedish CPI basket, the results may also be interpreted as reflecting the direct effect of interest rates on the CPI. In this case, households internalize the effects of interest rates on CPI, when forming expectations about the future rate of inflation.
    Keywords: Monetary policy; Inflationary expectations; Instrumental Variables; Event studies
    JEL: C26 E31 E52 G14
    Date: 2020–04–18
  3. By: Nakata, Taisuke; Schmidt, Sebastian; Budianto, Flora
    Abstract: Assigning a discretionary central bank a mandate to stabilize an average inflation rate—rather than a period-by-period inflation rate—increases welfare in a New Keynesian model with an occasionally binding lower bound on nominal interest rates. Under rational expectations, the welfare-maximizing averaging window is infinitely long, which means that optimal average inflation targeting (AIT) is equivalent to price level targeting (PLT). However, AIT with a finite, but sufficiently long, averaging window can attain most of the welfare gain from PLT. Under boundedly-rational expectations, if cognitive limitations are sufficiently strong, the optimal averaging window is finite, and the welfare gain of adopting AIT can be small. JEL Classification: E31, E52, E58, E61, E71
    Keywords: deflationary bias, expectations, liquidity trap, makeup strategies, monetary policy objectives
    Date: 2020–04
  4. By: Chunya Bu; John Rogers; Wenbin Wu
    Abstract: Standard structural VAR models and estimation using Romer and Romer (2004) monetary policy shocks show that, in samples after the 1980s, a contractionary conventional monetary policy shock generates smaller and sometimes perversely-signed impulse responses compared to earlier samples. Using insights from the central bank information effects literature, we show that the analyses producing these results suffer from an omitted variables problem related to forward-looking information emanating from Federal Reserve forecasts. Transmission of conventional monetary policy shocks takes on the standard signs, and is typically significant, once Fed forward-looking information is taken into account. This reconciliation does not follow from adding private sector forecasts to the estimation frameworks.
    Keywords: Information effect; Monetary policy; VARs
    Date: 2020–02–13
  5. By: Claudiu Tiberiu Albulescu; Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper first shows that the long-run money demand in Central and Eastern European (CEE) countries is better described by an open-economy model (OEM), which considers a currency substitution effect, than by a closed-economy model (CEM) used in several previous studies. Second, from the estimated models we derive two different measures of monetary overhang. Then we compare the ability of the OEM-based and the CEM-based measures of monetary overhang to predict inflation in the CEE countries, namely the Czech Republic, Hungary and Poland. While we cannot detect a significant difference of forecast accuracy between the two competing models, we show that the OEM-based forecast model that reveals a stable long-run money demand encompasses the CEM-based version for the CEE countries.
    Keywords: inflation forecasts,monetary overhang,money demand stability,CEE countries,currency substitution
    Date: 2018–12
  6. By: Garth Baughman; Stanislav Rabinovich
    Abstract: Firms often make production decisions before meeting a buyer. We incorporate this often-overlooked fact into an otherwise standard monetary search model and show that it has important implications for the set of equilibria, efficiency, and the cost of inflation. Our model features a strategic complementarity between the buyers' ex ante choice of money balances and sellers' ex ante choice of productive capacity. When resale value of unsold inventories is high, sellers carry excess capacity and the equilibrium is unique. But, when resale value is low, there is a continuum of equilibria, all of which are inefficient and welfare-ranked. Effects of inflation are highly nonlinear. When inflation is high, the buyer's money holdings bind, and inflation therefore reduces trade through a standard real-balance channel. When inflation is low, the seller's capacity constraint binds, real balances have no effect at the margin, and inflation has no effect on output or welfare.
    Keywords: Search; Money; New monetarism; Inflation
    JEL: D43 E31 E40
    Date: 2020–02–24
  7. By: David Reifschneider (former Federal Reserve); David Wilcox (Peterson Institute for International Economics)
    Abstract: If the Federal Reserve does not decisively change the way it conducts monetary policy, it will probably not be capable of fighting recessions in the future as effectively as it fought them in the past. This reality helped motivate the Fed to undertake the policy framework review in which it is currently engaged. Researchers have suggested many steps the Fed could take to improve its recession-fighting ability; however, no consensus has emerged as to which of these steps would be both practical and maximally effective. This paper aims to fill that gap. It recommends that the Fed commit as soon as possible to a new approach for fighting recessions, involving two key elements. First, the Fed should commit that whenever it runs out of room to cut the federal funds rate further, it will leave the rate at its minimum level until the labor market recovers and inflation returns to 2 percent. Second, the Fed should commit that under the same circumstances, it will begin to purchase longer-term assets in volume and will continue such purchases until the labor market recovers. If the forces driving the next recession are not unusually severe, this framework might allow the Fed to be as effective at fighting that recession as it was in the past. If the next recession is more severe, however, the Fed will probably run out of ammunition even if it takes the two steps recommended here. Therefore, both monetary and fiscal policymakers should consider yet other steps they could take to enhance their ability to fight future recessions.
    Keywords: Monetary policy, Federal Reserve, framework review, effective lower bound
    JEL: E43 E44 E52 E58
    Date: 2020–03
  8. By: Julia Coronado (Macropolicy Perspectives); Simon Potter (Peterson Institute for International Economics)
    Abstract: In the second part of their Policy Brief, Coronado and Potter discuss how the system of digital payment providers (DPPs) proposed in their first Policy Brief on this topic adds a new weapon to the monetary toolkit that could be implemented in a timely, effective, and inclusive manner. They describe how a digital currency backed by the Federal Reserve could augment automatic fiscal stabilizers and—more importantly—harness the power of “helicopter†money or quantitative easing directly to consumers in a disciplined manner. To implement QE directly to consumers, Coronado and Potter propose the creation of recession insurance bonds (RIBs)—zero-coupon bonds authorized by Congress and calibrated as a percentage of GDP sufficient to provide meaningful support in a downturn. Congress would create these contingent securities; Treasury would credit households’ digital accounts with them. The Fed could purchase them from households in a downturn after its policy rate hits zero. The Fed’s balance sheet would grow by the value of RIBs purchased; the initial matching liability would be deposits into the DPP system. The mechanism is easy for consumers to understand and could boost inflation expectations more than a debt-financed fiscal stimulus could.
    Date: 2020–04
  9. By: Dreger, Christian; Gerdesmeier, Dieter; Roffia, Barbara
    Abstract: The critical role of house prices for macroeconomic and financial stability is widely acknowl-edged since the global financial crisis. While house prices showed spectacular increases and even a bubble-like behaviour in the pre-crisis years, their fall thereafter was accompanied by deep recessions in many countries. Loose monetary conditions, such as the easy availability of credit, are often blamed to be fuelling such booms. In this paper, the link between credit and house prices is investigated for the euro area in a nonlinear model framework. This choice is motivated by the idea that the linkages between these two variables can be governed by a regime-switching behaviour. Threshold VAR (TVAR) models are estimated, which comprise real house price and credit developments, business and monetary conditions. Optimal breakpoints are determined via a grid search. The relationship between the variables is not stable. If output growth and interest rate changes serve as thresholds, two regimes can be distinguished. Conversely, if house prices and credit control the regime change, three regimes are more appropriate. Nonlinear impulse responses suggest that credit developments respond to house prices, while the reverse causality is less significant. Thus, the modest recovery of credit at the current edge can only be partially attributed to the recent acceleration of house prices in the euro area.
    Keywords: Threshold models, house prices and credit, regime switching
    JEL: C34 E31 E52
    Date: 2020–03
  10. By: Alexander Dietrich; Keith Kuester; Gernot J. Muller; Raphael Schoenle
    Abstract: We survey households about their expectations of the economic fallout of the COVID-19 pandemic, in real time and at daily frequency. Our baseline question asks about the expected impact on output and inflation over a one-year horizon. Starting on March 10, the median response suggests that the expected output loss is still moderate. This changes over the course of three weeks: At the end of March, the expected loss amounts to some 15 percent. Meanwhile, the pandemic is expected to raise inflation considerably. The uncertainty about these effects is very large. In the second part of the paper we feed the survey data into a New Keynesian business cycle model. Because the economic costs of the pandemic have not fully materialized yet but are nonetheless (a) anticipated and (b) uncertain, private expenditure collapses, thereby amplifying and bringing forward in time the economic costs of the pandemic. The short-run economic impact of the pandemic depends critically on whether monetary policy accommodates the drop in the natural rate of interest or not.
    Keywords: corona; zero lower bound; uncertainty; news shocks; COVID-19; monetary policy; household expectations; natural rate; survey
    JEL: C83 E43 E52
    Date: 2020–04–09
  11. By: Koji Kubo; Vichet Sam; Yuthan Chea
    Abstract: Cambodia's foreign exchange market is cash-based, overshadowed by the retail transactions of money changers. Based on the original dataset of the enterprise survey on uses of currency exchange services, we elucidate the structure of the foreign exchange market and investigate how payment dollarization is related to the prosperity of money changers. The empirical evidence indicates that firms in the domestic business sector confront currency mismatch situations that mean they have to undertake currency exchange. Besides, cash transactions are the most common means of payment in the country. The combination of prevalent currency mismatch and cash-based transactions is considered to give rise to retail currency exchange transactions with which money changers are more compatible than banks are. The empirical results also suggest that the recent regulation to promote bank lending in Khmer Riels will boost banks' currency exchange services, a situation conducive to foreign exchange market development.
    Keywords: Cash-based transaction, Money changer, Currency mismatch, Payment dollarization, Cambodia
    Date: 2019–10
  12. By: Lakdawala, Aeimit (Michigan State University, Department of Economics); Moreland, Timothy (Michigan State University, Department of Economics); Schaffer, Matthew (UNC Greensboro)
    Abstract: An extensive literature studies the international transmission of US monetary policy surprises (shifts in expected path of the policy rate). In this paper we show that changes in uncertainty around the expected path constitute an important additional dimension of spillover effects to global bond yields. In advanced countries, it is the term premium component of yields that responds to uncertainty. We find that this can be explained by an international portfolio balance mechanism. In contrast, for emerging countries it is the expected component of yields that reacts to uncertainty. This can be rationalized from a flight to safety channel. We find heterogeneity in the country-level response to uncertainty only in emerging economies and it is driven by the degree of financial openness. Finally, equity markets in both advanced and emerging countries also respond to US monetary policy uncertainty, but only since the financial crisis.
    Keywords: monetary policy uncertainty; international spillover; international portfolio balance; flight to safety
    JEL: E43 E58 G12 G15
    Date: 2020–04–17
  13. By: Claudiu Albulescu (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: We generalize a money demand micro-founded model to explain Romanians' recent loss of interest for the euro. We show that the reason behind this loss of interest is a severe decline in the relative degree of the euro liquidity against that of the Romanian leu.
    Keywords: open economy model,money demand,currency substitution,Romania
    Date: 2019
  14. By: Sokol, Andrej; Eguren-Martin, Fernando
    Abstract: We document how the distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Based on quantile regression results, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating (and quantifying) some of the prevailing narratives about safe haven and risky currencies. Our approach delivers a more nuanced picture than one based on standard OLS regression. We then carry out a portfolio sorting exercise to identify the macroeconomic fundamentals associated with such different tail behaviour, and find that currency portfolios sorted on the basis of net foreign asset positions, relative interest rates, current account balances and levels of international reserves display a higher likelihood of large losses in response to a tightening of global financial conditions. JEL Classification: F31, G15
    Keywords: exchange rates, financial conditions indices, global financial cycle, quantile regression, tail risks
    Date: 2020–04
  15. By: Michael J. Fleming; Asani Sarkar; Peter Van Tassel
    Abstract: The Federal Reserve has taken unprecedented actions to mitigate the effects of the COVID-19 pandemic on U.S. households and businesses. These measures include cutting the Fed’s policy rate to the zero lower bound, purchasing Treasury and mortgage-backed securities (MBS) to promote market functioning, and establishing several liquidity and credit facilities. In this post, we briefly review the developments motivating these actions, summarize what the Fed has done and why, and compare the Fed’s response with its response to the 2007-09 financial crisis.
    Keywords: COVID-19; coronavirus; pandemic; Federal Reserve
    JEL: E52
    Date: 2020–04–15
  16. By: Nataliia Ostapenko
    Abstract: I propose a new approach to identifying exogenous monetary policy shocks that requires no priors on the underlying macroeconomic structure, nor any observation of monetary policy actions. My approach entails directly estimating the unexpected changes in the federal funds rate as those which cannot be predicted from the internal Federal Open Market Committee's (FOMC) discussions. I employ deep learning and basic machine learning regressors to predict the effective federal funds rate from the FOMC's discussions without imposing any time-series structure. The result of the standard three variable Structural Vector Autoregression (SVAR) with my new measure shows that economic activity and inflation decline in response to a monetary policy shock.
    Keywords: monetary policy, identification, shock, deep learning, FOMC, transcripts
    Date: 2020
  17. By: Julia Coronado (Macropolicy Perspectives); Simon Potter (Peterson Institute for International Economics)
    Abstract: The US monetary system faces significant challenges from advances in technology and changes in the macroeconomy that, left unaddressed, will threaten the stability of the US economy and financial system. At the same time, low interest rates mean that central banks will not have the policy ammunition they had in the past during the next recession. The Federal Reserve needs new tools to meet its mandates of price stability and maximum employment. It also needs to preserve the safety and soundness of the financial system in a rapidly digitizing world. The authors propose a Fed-backed digital currency to solve both problems. Their proposal creates a regulated system of digital currency accounts for consumers managed by digital payment providers and fully backed by reserves at the Fed. The system would be limited in size, to preserve the functions and stability of the existing banking system. Fed backing would mean low capital requirements, which would in turn facilitate competition. Low fees and no minimum balance requirements in the new system would also help financial institutions reach the roughly 25 percent of the US population that is currently either unbanked or underbanked. Digital accounts for consumers could also provide a powerful new stabilization tool for both monetary and fiscal policies. For fiscal policy, it could facilitate new automatic stabilizers while also allowing the Fed to provide quantitative easing directly to consumers. This tool could be used in a timely manner with broad reach to all Americans.
    Date: 2020–03
  18. By: Ferrando, Annalisa; Vermeulen, Philip; Durante, Elena
    Abstract: This paper provides new evidence on the channels of monetary policy transmission combining 9 million observations on firm level investment and high-frequency identified monetary policy shocks. We show that the reaction of firms’ investment to a monetary policy shock is heterogeneous along dimensions that correspond to the two main channels of monetary policy transmission. First, we show that young firms are more sensitive to monetary policy shocks, supporting the existence of a credit channel of monetary policy. Second, we document large cross-sectional heterogeneity related to the industry the firm operates in. We find that firms producing durable goods react more than others, which is consistent with traditional interest rate channel effects of monetary policy. Third, we find that the effect of monetary policy shocks is longer lived for firms that are durable goods producers than for young firms indicating that demand effects last longer than credit effects. JEL Classification: E22, E52
    Keywords: investment, monetary policy shocks, monetary policy transmission
    Date: 2020–04
  19. By: Atsushi Tanaka (School of Economics, Kwansei Gakuin University)
    Abstract: Research on central bank capital and credibility evolved from the interests of developing countries to those of developed countries after the global financial crisis of the late 2000s. There is growing concern about central bank balance sheets at exit from quantitative easing. This paper surveys the literature in such a context. It starts by citing early literature which suggests that a central bank with insufficient capital may be pressured to pursue an inflationary policy at a time of crisis that jeopardizes its credibility. A theoretical analysis of this problem is carried out by the use of the central bank budget constraints and its intertemporal variant, leading to discussions on the solvency of the central bank. Several central banks make fiscal transfers to the government, and their solvency situation is influenced by whether a central bank has fiscal transfers to and from the government.
    Keywords: central bank, solvency, financial strength, monetary policy, quantitative easing
    JEL: E52 E58
    Date: 2020–04
  20. By: Delis, Manthos
    Abstract: What are the policy tools in times of economic crises? What are the tools that governments and central banks have against the coronavirus crisis? This article briefly explains how several types of monetary policy can currently work, placing an emphasis on a form of helicopter money directed to affected firms. The proposition is that this type of monetary policy should be avoided in general, but it might yield beneficial results in the current European economy.
    Keywords: Monetary policy; Helicopter money; Unconventional tools; Government debt
    JEL: E5 E50 G0 G01
    Date: 2020–04–07
  21. By: Rutayisire Musoni J. (National Bank of Rwanda)
  22. By: Nizam, Ahmed Mehedi
    Abstract: Here we argue that due to the difference between real GDP growth rate and nominal deposit rate, a demand pull inflation is induced into the economy. On the other hand, due to the difference between real GDP growth rate and nominal lending rate, a cost push inflation is created. We compare the performance of our proposed model to the Fisherian one by using Toda and Yamamoto approach of testing Granger Causality in the context of non-stationary data. We then use ARDL Bounds Testing approach to cross-check the results obtained from T-Y approach.
    Keywords: banking; interest rate; deposit rate; lending rate; demand pull inflation; cost push inflation;
    JEL: E31 E43 E44 E52 E58
    Date: 2020–04–02
  23. By: Wilhelmsson, Mats (Department of Real Estate and Construction Management, Royal Institute of Technology)
    Abstract: The main objective is to answer the question of what role does the housing market play for the transmission mechanism and especially is the impact constant over time. The research question also includes analyzing the importance of the housing market for the transmission mechanism. We estimate an eight-variable structural vector autoregression (SVAR) model of the Swedish economy over the period 1993 and 2018, covering both the internet bubble in 2000 and the financial crises in 2008. The results indicate that interest rates have both a direct effect on housing prices and an indirect impact through the bank lending channel. Overtime has the traditional interest rate channel importance has been stable. On the other hand, the role of the bank lending channel has increased over time. Household debt has increased substantially in Sweden and elsewhere. That means that the interest rate sensitivity in society has increased. Based on the results, it is possible to evaluate and forecast potential house price effects (both direct and indirect) when the interest rate changes.
    Keywords: Monetary policy; transmission mechanism; bank lending; house prices; structured VAR; Granger causality
    JEL: C54 E52 E63 R31 R32
    Date: 2020–04–14
  24. By: Fidora, Michael; Schmitz, Martin; Bergant, Katharina
    Abstract: We analyse euro area investors' portfolio rebalancing during the ECB's Asset Purchase Programme at the security level. Based on net transactions of domestic and foreign securities, we observe euro area sectors' capital flows into individual securities, cleaned from valuation effects. Our empirical analysis – which accounts for security-level characteristics – 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. JEL Classification: F21, F42, E52, G15
    Keywords: capital flows, international investment patterns, investor heterogeneity, quantitative easing, sovereign debt
    Date: 2020–04
  25. By: Bing Tong (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: Capacity reduction has been a recurrent theme in China’s economic policy. This paper proves in a New Keynesian model that the effects of the decapacity policy depend on its persistence and monetary policy regime (interest rate flexibility). Under an interest rate peg, a temporary policy is ineffective and even expansionary, whereas a permanent policy is effective due to a negative wealth effect. When the nominal interest rate is pegged, the real rate moves oppositely with inflation, which adds positive feedback to the economy. Thus the de-capacity policy has greater uncertainty under the interest rate peg. As a policy tool, it may easily deviate from its target and bring about excessive volatility. Last, long-run price stability and a gradually advanced de-capacity policy are helpful to the achievement of policy targets.
    Keywords: Chinese economy, Capacity reduction, De-capacity, New Keynesian Model, Supply shock, Interest rate peg
    JEL: E12 E31 E42 E43 E52 E61
    Date: 2020–04
  26. By: Grilli, Luca; Santoro, Domenico
    Abstract: In this paper we try to build a statistical ensemble to describe a cryptocurrency-based system, emphasizing an "affinity" between the system of agents trading in these currencies and statistical mechanics. We focus our study on the concept of entropy in the sense of Boltzmann and we try to extend such a definition to a model in which the particles are replaced by N agents completely described by their ability to buy and to sell a certain quantity of cryptocurrencies. After providing some numerical examples, we show that entropy can be used as an indicator to forecast the price trend of cryptocurrencies.
    Keywords: Cryptocurrency, Entropy, Prices Forecast, Boltzmann, Blockchain
    JEL: C02 C69 E44 E47 G12 G17 G19
    Date: 2020–04–11
  27. By: Grégory LEVIEUGE; Jean-Guillaume SAHUC
    Date: 2020
  28. By: Zhang, Hanzhe (Michigan State University, Department of Economics); Hu, Yunzhi (Kenan-Flagler Business School, University of North Carolina)
    Abstract: How should the government effectively provide liquidity to banks during periods of financial distress? During the 2008-2010 crisis, banks avoided borrowing from the Fed’s long-standing discount window (DW), but actively participated in its special monetary program, the TermAuction Facility (TAF), although both programs had the same borrowing requirements. Us-ing an adverse selection model with endogenous borrowing decisions, we explain why two programs suffer from different stigma and how the introduction of TAF incentivized banks’ borrowing. Empirically, we combine several data sources to confirm the theoretical prediction that weaker banks borrowed relatively more from the DW.
    Keywords: lending of last resort; discount window stigma; Term Auction Facility; adverse selection
    JEL: D44 E52 E58 G01
    Date: 2020–04–19
  29. By: Kilindo A A L
  30. By: Zheng Liu; Mark M. Spiegel; Jingyi Zhang
    Abstract: We examine the distributional implications of capital account policy in a small open economy model with heterogeneous agents and financial frictions. Households save through deposits in both domestic and foreign banks. Entrepreneurs finance investment with borrowed funds from domestic banks and foreign investors. Domestic banks engage in costly intermediation of deposits from households and loans to entrepreneurs. Government capital account policy consists of taxes on outflows and inflows. Given policy, a temporary decline in the world interest rate leads to a surge in inflows, benefiting entrepreneurs and hurting households. Raising inflow taxes or reducing outflow taxes mitigate this redistribution. However, in the long run liberalization of either inflows or outflows reduces inequality. The model’s short-run implications are supported by empirical evidence. Based on instrumental variable estimation with a panel of emerging market economies, we demonstrate that increases in private capital inflows raise income inequality, while increases in outflows reduce it. These effects are significant and robust to a wide variety of empirical specifications.
    Keywords: Capital flows; income distribution; heterogeneous agents; financial frictions; small open economy
    JEL: D63 F32 F38
    Date: 2020–04–14
  31. By: Kristin J. Forbes (MIT Sloan School of Management); Joseph E. Gagnon (Peterson Institute for International Economics); Christopher G. Collins (Peterson Institute for International Economics)
    Abstract: This paper models inflation by combining the multicountry framework of one of its authors (Forbes) with the nonlinear specification proposed by the other two (Gagnon and Collins). The results find strong support for a Phillips curve that becomes nonlinear when inflation is low, in which case excess economic slack has little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. The estimates also show a significant and economically meaningful Phillips curve relationship between slack and inflation when slack is negative (i.e., when output is above long-run potential). In this nonlinear model, international factors play a large role in explaining headline inflation, a role that has increased over time, supporting the results of Forbes’ linear model.
    Keywords: Economic slack, globalization, output gap, price dynamics
    JEL: E31 E37 E52 E58 F62
    Date: 2020–03
  32. By: Zsolt Darvas
    Abstract: Southern European euro-area members suffered from unsustainable developments after they joined the euro in 1999 and up to 2008, and have had great difficulties since. Inadequate national policies were the main causes of these unsustainable developments, but euro membership played a role before 2008 by leading to low real interest rates (which fuelled credit booms) and by enabling complacency about potential vulnerabilities. Euro-area crisis management was also deficient in a...
    Date: 2019–10
  33. By: Mogaji, Peter Kehinde
    Abstract: Following the monetary integration trends in Europe, there had been the desire for the African Monetary Union and the creation of a unified currency for the African continent. This proposed African common currency would be known as ‘afro’, a single currency for Africa by 2028. The continent of Africa, characterised by the largest number of countries and the largest number of currencies has consequently embarked on a special project for an African monetary integration. The 1991 Abuja treaty set out six stages in the process of achieving a monetary union and a single currency for Africa. This strategy for African monetary integration is based on progressive economic and monetary integration of African economic communities which are regarded as building blocks of Africa. These economic communities are the East African Community (EAC), the Southern African Development Community (SADC) and the Economic Community of the West African States (ECOWAS). Evidences generated from the analyses of the formation of the European Monetary Union (EMU) prompted many conclusions that there were major defects in its establishment as exposed by the Eurozone crisis. Some of these identified optimum currency area (OCA) related design flaws of the Eurozone are: (i) the absence of effective economic governance mechanism; (ii) the retention of banking supervision and resolution at national levels; (iii) the lack of financial back-stops and crisis resolution mechanisms at the union level; and (iv) defects in the design of the Eurozone's common central bank. Clearly, the Eurozone crisis has obviously revealed that banking union and integrated financial market, fiscal union and integrated fiscal framework and political union are all required in a monetary union, for completeness and sustainability. Unfortunately, these are issues not addressed by the OCA theory. From view-points in various debates on the sustainability and completeness of the EMU as well as various revealed faults in the design of Eurozone and the defects inherent in the original optimum currency area (OCA) theory and its application to monetary integration, this paper consequently discusses and highlights banking union, fiscal union and political union as pathways to complete and sustainable monetary integration in Africa.
    Keywords: Monetary Integration, European Monetary Union, African Monetary Union, Optimum Currency Area, Eurozone Crisis, Banking Union, Fiscal Union, Political Union
    JEL: E6 F36 F45
    Date: 2020–02
  34. By: Alexander Lehmann
    Abstract: The deep involvement of a number of euro-area banking groups in central and southeastern Europe has benefitted the host countries and has strengthened the resilience of those banking groups. But this integration has become less close because of post-financial crisis national rules that require banks to hold more capital at home, or other ring-fencing measures. There is a risk integration might be undermined further by bank resolution planning, which is...
    Date: 2019–11
  35. By: Raphael Auer; Stijn Claessens
    Abstract: Cryptocurrencies are often thought to operate out of the reach of national regulation, but in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions. The impact depends on the specific regulatory category to which the news relates: events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains. These results suggest that cryptocurrency markets rely on regulated financial institutions to operate and that these markets are segmented across jurisdictions.
    JEL: E42 E51 F31 G12 G28 G32 G38
    Date: 2020–04–15
  36. By: Shinichi Hirota (School of Commerce, Waseda University); Juergen Huber (Dept. of Finance, University of Innsbruck); Thomas Stock (Dept. of Banking and Finance, University of Innsbruck); Shyam Sunder (School of Management and Cowles Foundation, Yale University)
    Abstract: To explore how speculative trading influences prices in financial markets, we conduct a laboratory market experiment with speculating investors (who do not collect dividends and trade only for capital gains) and dividend- collecting investors. Moreover, we operate markets at two di?erent levels of money supply. We ?nd that in phases with only speculating investors present (i) price deviations from fundamentals are larger; (ii) prices are more volatile; (iii) mispricing increases with the number of transfers until maturity; and (iv) speculative trading pushes prices upward (downward) when the supply of money is high (low). These results suggest that controlling the money supply can help to stabilize asset prices.
    Keywords: Experimental finance, Speculation, Rational expectations, Price efficiency, Price bubbles, Overlapping generations, Backward and forward induction
    JEL: C91 G11 G12
    Date: 2018–05
  37. By: Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci
    Abstract: We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt Crisis in the early-1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late-2000s. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by plausible combinations of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified.
    Keywords: Financial Crises; Endogenous Regime-Switching; Bayesian Estimation; Business Cycles; Mexico; Occasionally Binding Constraints
    JEL: C11 E3 F41 G01
    Date: 2020–03–30

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