nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒05‒04
forty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Fed's Response to Economic News Explains the "Fed Information Effect" By Michael D. Bauer; Eric T. Swanson
  2. Central bank information and private-sector Expectations By Jochen Güntner
  3. Does the Liquidity Trap Exist? By Stéphane Lhuissier; Benoît Mojon; Juan Rubio-Ramírez
  4. Monetary Policy Transmission with Downward Interest Rate Rigidity By Jean-Guillaume Sahuc; Grégory Levieuge
  5. Shotgun Wedding: Fiscal and Monetary Policy By Marco Bassetto; Thomas J. Sargent
  6. Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money By Hassan Afrouzi
  7. The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response? By Paul R. Bergin; Giancarlo Corsetti
  8. Exchange rate pass-through in the euro area and EU countries JEL Classification: C50, E31, E52, F31, F41 By Ortega, Eva; Osbat, Chiara
  9. ECB and Fed Monetary Policy Measures against the Economic Effects of the Coronavirus Pandemic Have Little Effect By Kerstin Bernoth; Geraldine Dany-Knedlik; Anna Gibert
  10. Karl Helfferich and Rudolf Hilferding on Georg Friedrich Knapp’s State Theory of Money: Monetary Theories during the Hyperinflation of 1923 By Greitens, Jan
  11. Unconventional Monetary Policies: A Stock-Taking Exercise By Jean-Guillaume Sahuc; Christian Pfister
  12. Modern Challenges of Monetary Policy Strategies: Inflation and Devaluation Influence on Economic Development of the Country By Abuselidze, George
  13. Asset Bubbles and Monetary Policy By Feng Dong; Jianjun Miao; Pengfei Wang
  14. Central Bank Profit Distribution As A Monetary Policy Tool By Hiermeyer, Martin
  15. Dollar invoicing, global value chains, and the business cycle dynamics of international trade By David Cook; Nikhil Patel
  16. Bonds, Currencies and Expectational Errors By Granziera, Eleonora; Sihvonen, Markus
  17. Optimal Policy under Dollar Pricing By Konstantin Egorov; Dmitry Mukhin
  18. Should We Be Puzzled by Forward Guidance? By Brent Bundick; Andrew Lee Smith
  19. Monetary policy gradualism and the nonlinear effects of monetary shocks By Luca Metelli; Filippo Natoli; Luca Rossi
  20. Covid-19, cash, and the future of payments By Raphael Auer; Giulio Cornelli; Jon Frost
  21. The missing link: monetary policy and the labor share By Cantore, Cristiano; Ferroni, Filippo; León-Ledesma, Miguel
  22. Negative monetary policy rates and systemic banks’ risk-taking: evidence from the euro area securities register By Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
  23. Monetary Policy and Birth Rates: The Effect of Mortgage Rate Pass-Through on Fertility By Fergus Cumming; Lisa J. Dettling
  24. Macroeconometric Assessment of Monetary Approach to Balance of Payments in a Small Open Economy: The Nigeria Experience By Atoi, Ngozi V
  25. Sticky Capital Controls By Miguel Acosta-Henao; Laura Alfaro; Andrés Fernández
  26. When is Bad News Good News? U.S. Monetary Policy, Macroeconomic News, and Financial Conditions in Emerging Markets By Jasper Hoek; Steven B. Kamin; Emre Yoldas
  27. The Elusive Gains from Nationally-Oriented Monetary Policy By Martin Bodenstein; Giancarlo Corsetti; Luca Guerrieri
  28. The Power of Narratives in Economic Forecasts By Christopher A. Hollrah; Steven A. Sharpe; Nitish R. Sinha
  29. Inflationary household uncertainty shocks By Ambrocio, Gene
  30. The Mystery behind Foreign Reserve Sterilization: Empirical Evidence from The Gambia By Joof, Foday; Tursoy, Turgut
  31. The Financial Accelerator, Wages, and Optimal Monetary Policy By Tobias König
  32. Dollar funding costs during the Covid-19 crisis through the lens of the FX swap market By Stefan Avdjiev; Egemen Eren; Patrick McGuire
  33. Short-term Planning, Monetary Policy, and Macroeconomic Persistence By Christopher J. Gust; Edward P. Herbst; J. David Lopez-Salido
  34. Endogenous Growth and Monetary Policy: How Do Interest-Rate Feedback Rules Shape Nominal and Real Transitional Dynamics? By Gustavo Iglésias; Pedro Mazeda Gil
  35. Is Financial Globalization in Reverse After the 2008 Global Financial Crisis? Evidence from Corporate Valuations By Craig Doidge; G. Andrew Karolyi; René M. Stulz
  36. The fiscal-monetary nexus in Germany By Ehnts, Dirk H.
  37. What’s up with the Phillips Curve? By Marco Del Negro; Michele Lenza; Giorgio E. Primiceri; Andrea Tambalotti
  38. Real implications of Quantitative Easing in the euro area: a complex-network perspective By Chiara Perillo; Stefano Battiston
  39. Forecasting inflation with the New Keynesian Phillips curve : Frequency matters By Martins, Manuel M. F.; Verona, Fabio
  40. The Riddle of the Natural Rate of Interest By Razzak, Weshah
  41. Bank Lending Standards, Loan Demand, and the Macroeconomy: Evidence from the Korean Bank Loan Other Survey By Sangyup Choi

  1. By: Michael D. Bauer; Eric T. Swanson
    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".
    JEL: E43 E52 E58
    Date: 2020–04
  2. By: Jochen Güntner
    Abstract: Jarocinski and Karadi (2020) disentangle a pure information from the interest rate component of monetary policy surprises. This note quantifies the information revealed in FOMC announcements using forecast revisions from Blue Chip Economic Indicators. In response to a positive central bank information shock, survey participants revise their now- and short-term forecasts of real GDP growth upwards, while the corresponding revisions in the growth rate of the GDP deflator are mostly statistically insignificant.
    Keywords: Blue Chip Economic Indicators, Central bank information shocks, Forecast revisions
    JEL: E32 E52 E66
    Date: 2020–04
  3. By: Stéphane Lhuissier; Benoît Mojon; Juan Rubio-Ramírez
    Abstract: The liquidity trap is synonymous with ineffective monetary policy. The common wisdom is that, as the short-term interest rate nears its effective lower bound, monetary policy cannot do much to stimulate the economy. However, central banks have resorted to alternative instruments, such as QE, credit easing and forward guidance. Using state-ofthe-art estimates of the effects of monetary policy, we show that monetary easing stimulates output and inflation, also during the period when short-term interest rates are near their lower bound. These results are consistent across the United States, the euro area and Japan.
    Date: 2020–04
  4. By: Jean-Guillaume Sahuc; Grégory Levieuge
    Abstract: Empirical evidence suggests that the pass-through from policy to retail bank rates is asymmetric in the euro area. Bank lending rates adjust more slowly and less completely to Eonia decreases than to increases. We investigate how this downward interest rate rigidity affects the response of the economy to monetary policy shocks. To this end, we introduce asymmetric bank lending rate adjustment costs in a macrofinance dynamic stochastic general equilibrium model. We find that the initial response of GDP to a negative monetary policy shock is 25% lower than its response to a positive shock of similar amplitude. This implies that a central bank would have to decrease its policy rate by 50% to 75% more to obtain a medium-run impact on GDP that would be symmetric to the impact of the positive shock. We also show that downward interest rate rigidity is stronger when policy rates are stuck at their effective lower bound, further disrupting monetary policy transmission. These findings imply that neglecting asymmetry in retail interest rate adjustments may yield misguided monetary policy decisions.
    Keywords: Downward interest rate rigidity, asymmetric adjustment costs, banking sector, DSGE model, euro area.
    JEL: E32 E44 E52
    Date: 2020
  5. By: Marco Bassetto; Thomas J. Sargent
    Abstract: This paper describes interactions between monetary and fiscal policies that affect equilibrium price levels and interest rates by critically surveying theories about (a) optimal anticipated inflation, (b) optimal unanticipated inflation, and (c) conditions that secure a "nominal anchor'' in the sense of a unique price level path. We contrast incomplete theories whose inputs are budget-feasible sequences of government issued bonds and money with complete theories whose inputs are bond-money strategies described as sequences of functions that map time t histories into time t government actions. We cite historical episodes that confirm the theoretical insight that lines of authority between a Treasury and a Central Bank can be ambiguous, obscure, and fragile.
    JEL: E52 E61 E62 E63
    Date: 2020–04
  6. By: Hassan Afrouzi
    Abstract: How does competition affect information acquisition of firms and thus the response of inflation and output to monetary policy shocks? This paper addresses these questions in a new dynamic general equilibrium model with both dynamic rational inattention and oligopolistic competition. In the model, rationally inattentive firms acquire information about the endogenous beliefs of their competitors. Moreover, firms with fewer competitors endogenously choose to acquire less information about aggregate shocks – a novel prediction of the model that is supported by empirical evidence from survey data. A quantitative exercise disciplined by firm-level survey data shows that firms’ strategic inattention to aggregate shocks associated with oligopolistic competition increases monetary non-neutrality by up to 77% and amplifies the half-life of output response to monetary shocks by up to 30%. Furthermore, the model matches the relationship between the number of firms’ competitors and their uncertainty about inflation as a non-targeted moment.
    Keywords: rational inattention, oligopolistic competition, inflation dynamics, inflation expectations, monetary non-neutrality
    JEL: E31 E32
    Date: 2020
  7. By: Paul R. Bergin; Giancarlo Corsetti
    Abstract: In the wake of Brexit and the Trump tariff war, central banks have had to reconsider the role of monetary policy in managing the economic effects of tariff shocks, which may induce a slowdown while raising inflation. This paper studies the optimal monetary policy responses using a New Keynesian model that includes elements from the trade literature, including global value chains in production, firm dynamics, and comparative advantage between two traded sectors. We find that, in response to a symmetric tariff war, the optimal policy response is generally expansionary: central banks stabilize the output gap at the expense of further aggravating short-run inflation---contrary to the prescription of the standard Taylor rule. In response to a tariff imposed unilaterally by a trading partner, it is optimal to engineer currency depreciation up to offsetting the effects of tariffs on relative prices, without completely redressing the effects of the tariff on the broader set of macroeconomic aggregates.
    JEL: F4
    Date: 2020–04
  8. By: Ortega, Eva; Osbat, Chiara
    Keywords: consumer prices, euro area, exchange rates, import prices, inflation, monetary policy, pass-through
    Date: 2020–04
  9. By: Kerstin Bernoth; Geraldine Dany-Knedlik; Anna Gibert
    Abstract: To cushion the economic effects of the coronavirus pandemic, central banks have taken far-reaching monetary policy measures. The US Federal Reserve has lowered its interest rates and, like the European Central Bank, has expanded its bond purchase programs. However, it is questionable whether these measures are having the desired effect of calming the markets and supporting the real economy. It is true that the macroeconomic effects cannot yet be quantified, but initial indications of their effectiveness can be seen in the short-term reactions of stock prices and bond yields. The following article shows how interest rates and prices have reacted directly to the central bank announcements and what conclusions can be drawn from this for future measures
    Date: 2020
  10. By: Greitens, Jan
    Abstract: The monetary ideas of Georg Friedrich Knapp have recently resurfaced in the context of the Modern Monetary Theory whose representatives see themselves in his tradition. The historical debate on Knapp's "State Theory of Money," which divided opinion when it was first published in 1905 as well as during the period of German inflation that peaked in 1923, is therefore of particular interest. Knapp describes money largely from a legal perspective, labelling it a "creature of the legal order". The principle "Mark = Mark" reflects his nominalistic approach. However, he opposed monetary state financing, and favoured balanced governmental budgets. One of his students, Karl Helfferich, was the most influential monetary theorist in the German Reich during the first decades of the 20th century. In defining Knapp's view as an ultimate ideal that might be realised at some point, and his own metallist approach as a practical necessity, he tries to reconcile his teacher's nominalistic theory on the one hand with his own gold currency-principles on the other.The monetary theory of the Marxist Rudolf Hilferding was eclectic, but he moved closer to a nominalistic approach after studying Knapp's theory. During inflation, Helfferich, a representative of the Balance of Payments Theory, and Hilferding, more of the Quantity Theory of Money, also held opposing views in the public debate on the monetary reforms required. The relationship between the three authors was highly complex. While Helfferich and Knapp were personally close, they were far apart in their theories although Helfferich tried to conceal this fact. Hilferding and Helfferich, meanwhile, held similar views on some practical points, such as the necessity of a gold-based currency, but clashed vehemently on a personal level. (English version of: Karl Helfferich und Rudolf Hilferding über Georg Friedrich Knapps "Staatliche Theorie des Geldes": Geldtheorien zur Zeit der Hyperinflation von 1923“, IBF Paper Series 04-19, 928/)
    Keywords: Helfferich,Hilferding,Knapp,State Theory of Money,Hyperinflation,Modern Monetary Theory
    JEL: B31 E31 N14
    Date: 2020
  11. By: Jean-Guillaume Sahuc; Christian Pfister
    Abstract: This paper takes stock of the literature on unconventional monetary policies, from their implementation to their effects on the economy. In particular, we discuss in detail the two main measures implemented in most developed economies, namely forward guidance and large-scale asset purchases. Overall, there is near consensus that these measures have been useful, although there are a few dissenting views. Because unconventional monetary policies have left their mark on economies and on the balance sheets of central banks, we offer insights into their legacy and ask whether they have led to a change in “the rules of the game” for setting interest rates and choosing the size and composition of central banks’ balance sheets. Finally, we discuss whether to modify the objectives and the instruments of monetary policy in the future, in comparison with the pre-crisis situation.
    Keywords: Unconventional monetary policies.
    JEL: E52 E58
    Date: 2020
  12. By: Abuselidze, George
    Abstract: The article discusses causes and socio-economic peculiarities of one of the most difficult and undesirable condition for the economy-inflation and devaluation. The purpose of the research is to analyze the socio-economic results of inflation and devaluation in Georgia and to determine the main directions to overcome it. Due to study purposes was investigated the causes of inflation and devaluation, as well as was examined its influence on economic development of the country and its influence on welfare of each citizen. In the article are discussed main models of anti-inflation regulation, as well as foreign experience of monetary regulation of inflationary processes and is an evaluated possibility of their use in Georgia. The National Bank monetary regulation effectiveness is assessed and recommendations have been developed.
    Keywords: Inflation; Devaluation; Monetary Policy; Welfare; Economical Activity; Economic Development; Georgia.
    JEL: E42 E52 E58 I31 O11
    Date: 2018–05–10
  13. By: Feng Dong (Tsinghua University); Jianjun Miao (Boston University); Pengfei Wang (Peking University)
    Abstract: We provide a model of rational bubbles in a DNK framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade bubble assets to raise their net worth. The bubble assets command a liquidity premium and can have a positive value. Monetary policy affects the conditions for the existence of a bubble, its steady-state size, and its dynamics including the initial size. The leaning-against-the-wind interest rate policy reduces bubble volatility, but could raise inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule and exogenous shocks.
    Keywords: asset bubble, monetary policy, Dynamic New Keynesian model, credit constraints, multiple equilibria, sentiment
    JEL: E32 E44 E52 G12
    Date: 2020–04
  14. By: Hiermeyer, Martin
    Abstract: Next to conventional and unconventional monetary policy, there may be another form of monetary policy: Central bank profit distribution to the government. By distributing a higher profit than normal if inflation is below target, and a lower profit than normal if inflation is above target, central bankers may achieve their inflation target better. To guard against excessive inflation, lawmakers might stipulate that central bankers can only distribute higher profits than nor-mal if conventional monetary policy is exhausted (0% policy rate).
    Keywords: Monetary Policy; Central Banks and Their Policies
    JEL: E52 E58
    Date: 2020–04–25
  15. By: David Cook; Nikhil Patel
    Abstract: Recent literature has highlighted that international trade is mostly priced in a few key vehicle currencies, and is increasingly dominated by intermediate goods and global value chains (GVCs). Taking these features into account, this paper reexamines the business cycle dynamics of international trade and its relationship with monetary policy and exchange rates. Using a three country dynamic stochastic general equilibrium (DSGE) framework, it finds key differences between the response of final goods and GVC trade to both internal and external shocks. In particular, the model shows that in response to a dollar appreciation triggered by a US interest rate increase, direct bilateral trade between non-US countries contracts more than global value chain oriented trade which feeds US final demand. We use granular data on GVC at the sector level to document empirical evidence in favor of this prediction.
    Keywords: dollar invoicing, exchange rates, monetary policy, global value chains
    JEL: E2 E5 E6
    Date: 2020–04
  16. By: Granziera, Eleonora; Sihvonen, Markus
    Abstract: We propose a model in which sticky expectations concerning shortterm interest rates generate joint predictability patterns in bond and currency markets. Using our calibrated model, we quantify the effect of this channel and find that it largely explains why short rates and yield spreads predict bond and currency returns. The model also creates the downward sloping term structure of carry trade returns documented by Lustig et al. (2019), difficult to replicate in a rational expectations framework. Consistent with the model, we find that variables that predict bond and currency returns also predict surveybased expectational errors concerning interest and FX rates. The model explains why monetary policy induces drift patterns in bond and currency markets and predicts that long-term rates are a better gauge of market’s short rate expectations than previously thought.
    JEL: E43 F31 D84
    Date: 2020–04–28
  17. By: Konstantin Egorov (New Economic School); Dmitry Mukhin (WISC)
    Abstract: Recent empirical evidence shows that most international prices are sticky in dollars. This paper studies the optimal policy implications of this fact in the context of an open economy model, allowing for an arbitrary structure of asset markets, general preferences and technologies, timeor state-dependent price setting, a rich set of shocks, and endogenous currency choice. We show that although monetary policy is less ecient and cannot implement the exible-price allocation, ination targeting remains robustly optimal in non-U.S. economies. The implementation of this non-cooperative policy results in a “global monetary cycle†with other countries partially pegging their exchange rates to the dollar and importing the monetary stance of the U.S. In spite of the aggregate demand externality, capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. The optimal U.S. policy, on the other hand, deviates from ination targeting to take advantage of its eects on global product and asset markets, generating negative spillovers on the rest of the world. International cooperation benets other countries by improving global demand for dollar-invoiced goods, but may be hard to sustain because it is not in the self-interest of the U.S. At the same time, countries can still gain from local forms of policy coordination — such as forming a currency union like the Eurozone.
    Date: 2020–04–25
  18. By: Brent Bundick; Andrew Lee Smith
    Abstract: Although a growing literature argues output is too sensitive to future interest rates in standard macroeconomic models, little empirical evidence has been put forth to evaluate this claim. In this paper, we use a range of vector autoregression models to answer the central question of how much output responds to changes in interest rate expectations following a monetary policy shock. Despite distinct identification strategies and sample periods, we find surprising agreement regarding this elasticity across empirical models. We then show that in a standard model of nominal rigidity estimated using impulse response matching, forward guidance shocks produce an elasticity of output with respect to expected interest rates similar to our empirical estimates. Our results suggest that standard macroeconomic models do not overstate the observed sensitivity of output to expected interest rates.
    Keywords: Forward Guidance; Monetary Policy Shocks; Zero Lower Bound; Impulse Response Matching
    JEL: E32 E52
    Date: 2020–04–30
  19. By: Luca Metelli (Bank of Italy); Filippo Natoli; Luca Rossi (Bank of Italy)
    Abstract: Monetary policy in the United States has often followed a gradual approach by changing policy rates through multiple small adjustments rather than all-at-once hikes or cuts. This conduct could provide a signal about the extent of the intended policy change. We quantify the state-dependent effects of monetary shocks in times of more and less gradual policy. We propose two indicators of high vs. low gradualism periods and use local projections to estimate the effects of identified high-frequency shocks in the two states. Our findings suggest that monetary policy transmission is stronger when the perception of gradualism is high.
    Keywords: gradualism, inertia, monetary policy transmission, state dependence, local projections.
    JEL: C22 C26 E44 E52 E58
    Date: 2020–04
  20. By: Raphael Auer; Giulio Cornelli; Jon Frost
    Abstract: The Covid-19 pandemic has fanned public concerns that the coronavirus could be transmitted by cash. Scientific evidence suggests that the probability of transmission via banknotes is low when compared with other frequently-touched objects, such as credit card terminals or PIN pads. To bolster trust in cash, central banks are actively communicating, urging continued acceptance of cash and, in some instances, sterilising or quarantining banknotes. Some encourage contactless payments. Looking ahead, developments could speed up the shift toward digital payments. This could open a divide in access to payments instruments, which could negatively impact unbanked and older consumers. The pandemic may amplify calls to defend the role of cash - but also calls for central bank digital currencies.
    Date: 2020–04–03
  21. By: Cantore, Cristiano (Bank of England, Centre for Macroeconomics and University of Surrey); Ferroni, Filippo (Federal Reserve Bank of Chicago); León-Ledesma, Miguel (University of Kent and CEPR)
    Abstract: The textbook New Keynesian (NK) model implies that the labor share is procyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages during the Great Moderation period in the US, the euro area, the UK, Australia and Canada. We show that this is inconsistent not only with the basic NK model, but with medium-scale NK models commonly used for monetary policy analysis and where it is possible to break the direct link between the labor share and the inverse mark-up.
    Keywords: Labor share; monetary policy shocks; DSGE models
    JEL: C52 E23 E32
    Date: 2020–04–24
  22. By: Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
    Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans. JEL Classification: E43, E52, E58, G01, G21
    Keywords: banks, negative rates, non-standard monetary policy, reach-for-yield, securities
    Date: 2020–04
  23. By: Fergus Cumming; Lisa J. Dettling
    Abstract: This paper examines whether monetary policy pass-through to mortgage interest rates affects household fertility decisions. Using administrative data on mortgages and births in the UK, our empirical strategy exploits variation in the timing of when families were eligible for a rate adjustment, coupled with the large reductions in the monetary policy rate that occurred during the Great Recession. We estimate that each 1 percentage point drop in the policy rate increased birth rates by 2 percent. In aggregate, this pass-through of accommodative monetary policy to mortgage rates was sufficiently large to outweigh the headwinds of the Great Recession and prevent a “baby bust” in the UK, in contrast to the US. Our results provide new evidence on the nature of monetary policy transmission to households and suggest a new mechanism via which mortgage contract structures can affect both aggregate demand and supply.
    Keywords: Mortgages; Monetary policy; Birth rates; Fertility; Natality; Interest rates
    JEL: D12 E43 E52 J13 R31
    Date: 2020–01–03
  24. By: Atoi, Ngozi V
    Abstract: Monetary approach to balance of payment establishes a link between foreign reserve assets and money supply. This link is important for managing balance of payment disequilibrium through adjustment of monetary aggregates. This study relies on the Polak (1957, 1997) monetary model with data from 2007:Q1 to 2018:Q4 to examine the link between monetary factors and balance of payment in Nigeria. To circumvent simultaneity, the reduced form coefficients of the structural form of the Polak model are estimated using Two Stage Least Squares (TSLS) technique, while the structural parameters are recovered from the estimated reduced form coefficients. The results are enriching and robust. The Johansen cointegration procedure suggests a long run relationship among the macroeconomic variables in the balance of payment function. The estimated balance of payment model reveals that domestic credit is statistically significant and negatively related to foreign reserve assets, implying that balance of payment is a monetary phenomenon in Nigeria. The velocity of money circulation and the marginal propensity to import are approximately 120 per cent and 14 per cent, respectively. The study therefore recommends that the monetary authority should consider the use of domestic credit for management of balance of payment disequilibrium. It is also pertinent to increase domestic credit to grow the economy since such action will marginally decrease external reserve assets through increase in import, however, the net effect will enhance the overall economy.
    Keywords: Monetary approach, Balance of payment, Two stage least square, Simultaneous equation, Reduced form equation
    JEL: C51 E5 E51
    Date: 2020–04–17
  25. By: Miguel Acosta-Henao; Laura Alfaro; Andrés Fernández
    Abstract: There is much ongoing debate on the merits of capital controls as effective policy instruments. The differing perspectives are due in part to a lack of empirical studies that look at the intensive margin of controls, which in turn has prevented a quantitative assessment of optimal capital control models against the data. We contribute to this debate by addressing both positive and normative features of capital controls. On the positive side, we build a new dataset using textual analysis, from which we document a set of stylized facts of capital controls along their intensive and extensive margins for 21 emerging markets. We document that capital controls are “sticky”; that is, changes to capital controls do not occur frequently, and when they do, they remain in place for a long time. Overall, they have not been used systematically across countries or time, and there has been considerable heterogeneity across countries in terms of the intensity with which they have been used. On the normative side, we extend a model of capital controls relying on pecuniary externalities augmented by including an (S; s) cost of implementing such policies. We illustrate how this friction goes a long way toward bringing the model closer to the data. When the extended model is calibrated for each of the countries in the new dataset, we find that the size of these costs is large, thus substantially reducing the welfare-enhancing effects of capital controls compared with the frictionless Ramsey benchmark. We conclude with a discussion of the structural interpretations of such costs, which calls for a richer set of policy constraints when considering the use of capital controls in models of pecuniary externalities.
    JEL: E44 F38 F41 G01
    Date: 2020–04
  26. By: Jasper Hoek; Steven B. Kamin; Emre Yoldas
    Abstract: Rises in U.S. interest rates are often thought to generate adverse spillovers to emerging market economies (EMEs). We show that what appears to be bad news for EMEs might actually be good news, or at least not-so-bad news, depending on the source of the rise in U.S. interest rates. We present evidence that higher U.S. interest rates stemming from stronger U.S. growth generate only modest spillovers, while those stemming from a more hawkish Fed policy stance or inflationary pressures can lead to significant tightening of EME financial conditions. Our identification of the sources of U.S. rate changes is based on high-frequency moves in U.S. Treasury yields and stock prices around FOMC announcements and U.S. employment report releases. We interpret positive comovements of stocks and interest rates around these events as growth shocks and negative comovements as monetary shocks, and estimate the effect of these shocks on emerging market asset prices. For economies with greater macroeconomic vulnerabilities, the difference between the impact of monetary and growth shocks is magnified. In fact, for EMEs with very low levels of vulnerability, a growth-driven rise in U.S. interest rates may even ease financial conditions in some markets.
    Keywords: Monetary policy; Spillovers; Emerging markets; Growth shock; Monetary shock; Financial conditions
    JEL: E50 F30
    Date: 2020–01–31
  27. By: Martin Bodenstein; Giancarlo Corsetti; Luca Guerrieri
    Abstract: The consensus in the recent literature is that the gains from international monetary cooperation are negligible, and so are the costs of a breakdown in cooperation. However, when assessed conditionally on empirically-relevant dynamic developments of the economy, the welfare cost of moving away from regimes of explicit or implicit cooperation may rise to multiple times the cost of economic fluctuations. In economies with incomplete markets, the incentives to act non-cooperatively are driven by the emergence of global imbalances, i.e., large net-foreign-asset positions; and, in economies with complete markets, by divergent real wages.
    Keywords: Monetary policy cooperation; Global imbalances; Open-loop Nash games
    JEL: E44 E61 F42
    Date: 2020–02–25
  28. By: Christopher A. Hollrah; Steven A. Sharpe; Nitish R. Sinha
    Abstract: We apply textual analysis tools to the narratives that accompany Federal Reserve Board economic forecasts to measure the degree of optimism versus pessimism expressed in those narratives. Text sentiment is strongly correlated with the accompanying economic point forecasts, positively for GDP forecasts and negatively for unemployment and inflation forecasts. Moreover, our sentiment measure predicts errors in FRB and private forecasts for GDP growth and unemployment up to four quarters out. Furthermore, stronger sentiment predicts tighter than expected monetary policy and higher future stock returns. Quantile regressions indicate that most of sentiment’s forecasting power arises from signaling downside risks to the economy and stock prices.
    Keywords: Text analysis; Economic forecasts; Monetary policy; Stock returns; Narratives
    JEL: C53 E17 E27 E37 E52 G14
    Date: 2020–01–03
  29. By: Ambrocio, Gene
    Abstract: I construct a novel measure of household uncertainty based on survey data for European countries. I show that household uncertainty shocks are not universally like negative demand shocks. Notably, household uncertainty shocks are largely inflationary in Europe. These results lend support to a pricing bias mechanism as an important transmission channel. A comparison of results across countries suggest that demographics and factors related to average markups along with monetary policy play a role in the transmission of household uncertainty to inflation. I develop an Overlapping Generations New Keynesian model with Deep Habits to rationalize these results.
    JEL: D84 E20 E30
    Date: 2020–04–24
  30. By: Joof, Foday; Tursoy, Turgut
    Abstract: This paper investigates the impact of the foreign reserve on the domestic money supply and the level of sterilization by employing the Auto Regressive Distributed Lag for short-run estimation, the Fully Modified OLS for long run estimation and Granger Causality on a monthly data from 2002 to 2019. The short-run and long-run results revealed that foreign reserve has a positive statistically significant impact on money supply; this suggests a total lack of sterilization on the part of Central Bank of The Gambia. The Granger causality confirms a feedback association between the foreign reserve and broad money supply.
    Keywords: Foreign reserve, Money supply, Sterilisation, Central Bank of The Gambia
    JEL: C1 E5
    Date: 2020–04–28
  31. By: Tobias König
    Abstract: This paper studies the effects of labor market outcomes on firms’ loan demand and on credit intermediation. In a first step, I investigate how wages in the production sector affect bank net worth and the process of financial intermediation in partial equilibrium. Second, the role of the identified channels are studied in general equilibrium using a new- Keynesian DSGE-model with financial frictions and an endogenous financial accelerator mechanism. Third, I investigate how perfect and imperfect labor markets, in a setting with interactions between production factor costs and the intermediation of credit, affect the transmission mechanism of monetary policy. The analysis reveals that financial frictions reduce the factor demand elasticity of capital to a change in wages. This finding is relevant for the determination of optimal monetary policy, both for financial shocks and supply shocks inflation stabilization imposes high welfare costs. At the same time, stabilizing nominal wages becomes welfare beneficial by reducing both the volatility of the credit spread and the output gap.
    Keywords: Financial accelerator, monetary policy, nominal rigidities, factor costs
    JEL: E31 E44 E52 E58
    Date: 2020
  32. By: Stefan Avdjiev; Egemen Eren; Patrick McGuire
    Abstract: Since the start of the Covid-19 pandemic, indicators of dollar funding costs in foreign exchange markets have risen sharply, reflecting both demand and supply factors. The demand for dollar funding has grown in recent years, reflecting the currency hedging needs of corporates and portfolio investors outside the United States. Against this backdrop, the financial turbulence of recent weeks has crimped the supply of dollar funding from financial intermediaries, sharply lifting indicators of dollar funding costs. These costs have narrowed after central banks deployed dollar swap lines, but broader policy challenges remain in ensuring that dollar funding markets remain resilient and that central bank liquidity is channelled beyond the banking system.
    Date: 2020–04–01
  33. By: Christopher J. Gust; Edward P. Herbst; J. David Lopez-Salido
    Abstract: This paper uses aggregate data to estimate and evaluate a behavioral New Keynesian (NK) model in which households and firms plan over a finite horizon. The finite-horizon (FH) model outperforms rational expectations versions of the NK model commonly used in empirical applications as well as other behavioral NK models. The better fit of the FH model reflects that it can induce slow-moving trends in key endogenous variables which deliver substantial persistence in output and inflation dynamics. In the FH model, households and firms are forward-looking in thinking about events over their planning horizon but are backward looking regarding events beyond that point. This gives rise to persistence without resorting to additional features such as habit persistence and price contracts indexed to lagged inflation. The parameter estimates imply that the planning horizons of most households and firms are less than two years which considerably dampens the effects of expected future changes of monetary policy on the macroeconomy.
    Keywords: Finite-horizon planning; Learning; Monetary policy; New keynesian model; Bayesian estimation
    JEL: C11 E52
    Date: 2020–01–08
  34. By: Gustavo Iglésias; Pedro Mazeda Gil
    Abstract: Monetary authorities have followed interest-rate feedback rules in apparently different ways over time and across countries. The literature distinguishes, in particular, between active and passive monetary policies in this regard. We address the nominal and real transitional-dynamics implications of these different types of monetary policy, in the context of a monetary growth model of R&D and physical capital accumulation. In this setup, well-behaved transitional dynamics occurs under both active and passive monetary policies. We carry out our study from three perspectives: the convergence behaviour of catching-up economies; a structural monetary-policy shock (i.e., a change in the long-run inflation target); and real industrialpolicy shocks (i.e., a change in R&D subsidies or in manufacturing subsidies). We uncover a new channel through which institutional factors (the characteristics of the monetary-policy rule) influence the economies’ convergence behaviour and through which monetary authorities may leverage (transitional) growth triggered by structural shocks.
    JEL: E41 O31 O41
    Date: 2020
  35. By: Craig Doidge; G. Andrew Karolyi; René M. Stulz
    Abstract: For the last two decades, non-US firms have lower valuations than similar US firms. We study the evolution of this valuation gap to assess whether financial markets are less integrated after the 2008 global financial crisis (GFC). The valuation gap for firms from developed markets increases by 31% after the GFC – a reversal in financial globalization – while the gap for firms from emerging markets (excluding China) stays stable. There is no evidence of greater segmentation for non-US firms cross-listed on major US exchanges and the typical valuation premium of such firms relative to domestic counterparts stays unchanged. However, the number of such firms shrinks sharply, so that the importance of US cross-listings as a mechanism for market integration diminishes.
    JEL: F21 F65 G10 G15 G34
    Date: 2020–04
  36. By: Ehnts, Dirk H.
    Abstract: In this paper, the focus lies on the way the German government spends, how it spends and what the connection between finance ministry and central bank is. The institutions involved in the process are identified and discussed. As a member of the Eurozone, Germany's national central bank is not allowed to buy sovereign securities on its own account. The German government uses taxes and revenues from sovereign security issues to finance its spending, continuing the institutional framework that existed during the era of the deutsch mark. This description confirms the idea that 'the state spends first' also in the Eurozone and that it makes sense to consolidate central bank and government(s) even when a government is not issuing a sovereign currency.
    Keywords: government spending,fiscal,monetary,Treasury,sovereign default,Eurozone
    JEL: E63 B52 E42
    Date: 2020
  37. By: Marco Del Negro; Michele Lenza; Giorgio E. Primiceri; Andrea Tambalotti
    Abstract: The business cycle is alive and well, and real variables respond to it more or less as they always did. Witness the Great Recession. Inflation, in contrast, has gone quiescent. This paper studies the sources of this disconnect using VARs and an estimated DSGE model. It finds that the disconnect is due primarily to the muted reaction of inflation to cost pressures, regardless of how they are measured—a flat aggregate supply curve. A shift in policy towards more forceful inflation stabilization also appears to have played some role by reducing the impact of demand shocks on the real economy. The evidence rules out stories centered around changes in the structure of the labor market or in how we should measure its tightness.
    JEL: E31 E32 E37 E52
    Date: 2020–04
  38. By: Chiara Perillo (University of Zurich, Department of Banking and Finance, Zurich, Switzerland); Stefano Battiston (University of Zurich, Department of Banking and Finance, Zurich, Switzerland)
    Abstract: The long-lasting socio-economic impact of the global financial crisis has questioned the adequacy of traditional tools in explaining periods of financial distress, as well as the adequacy of the existing policy response. In particular, the effect of complex interconnections among financial institutions on financial stability has been widely recognized. A recent debate focused on the effects of unconventional policies aimed at achieving both price and financial stability. In particular, Quantitative Easing (QE, i.e., the large-scale asset purchase programme conducted by a central bank upon the creation of new money) has been recently implemented by the European Central Bank (ECB). In this context, two questions deserve more attention in the literature. First, to what extent, by injecting liquidity, the QE may alter the bank-firm lending level and stimulate the real economy. Second, to what extent the QE may also alter the pattern of intra-financial exposures among financial actors (including banks, investment funds, insurance corporations, and pension funds) and what are the implications in terms of financial stability. Here, we address these two questions by developing a methodology to map the macro-network of financial exposures among institutional sectors across financial instruments (e.g., equity, bonds, and loans) and we illustrate our approach on recently available data (i.e., data on loans and private and public securities purchased within the QE). We then test the effect of the implementation of ECB's QE on the time evolution of the financial linkages in the macro-network of the euro area, as well as the effect on macroeconomic variables, such as output and prices.
    Date: 2020–04
  39. By: Martins, Manuel M. F.; Verona, Fabio
    Abstract: We show that the New Keynesian Phillips Curve (NKPC) outperforms standard benchmarks in forecasting U.S. inflation once frequency-domain information is taken into account. We do so by decomposing the time series (of inflation and its predictors) into several frequency bands and forecasting separately each frequency component of inflation. The largest statistically significant forecasting gains are achieved with a model that forecasts the lowest frequency component of inflation (corresponding to cycles longer than 16 years) flexibly using information from all frequency components of the NKPC inflation predictors. Its performance is particularly good in the returning to recovery from the Great Recession.
    JEL: C53 E31 E37
    Date: 2020–04–21
  40. By: Razzak, Weshah
    Abstract: We provide a general equilibrium model with optimizing agents to compute the natural rate of interest for the G7 countries over the period 2000 to 2017. The model is solved for the equilibrium natural rate of interest, which is determined by a parsimonious equation that is easily computed from raw observable data. The model predicts that the natural rate depends positively on the consumption – leisure growth rates gap, and negatively on the capital – labor growth rates gap. Given our computed natural rate, the short-term nominal interest rates in the G7 have been higher than the natural rate since 2000, except for Germany and the U.S. during the period 2009-2017. In addition, the data do not support the prediction of the Wicksellian theory that prices tend to increase when the short-term nominal rate is lower than the natural rate. Projections of the natural rate over the period 2018 to 2024 are positive in Germany, Italy, Japan, and the U.K. and negative in Canada, France, and the U.S. The model predicts that fiscal expansion is an expensive policy to achieve a 2 percent inflation target when the Zero Lower Bound (ZLB) constraint is binding.
    Keywords: natural rate of interest, monetary policy
    JEL: C68 E43 E52
    Date: 2020–04–21
  41. By: Sangyup Choi (Yonsei University)
    Abstract: Using the bank loan officer surveys from 12 countries, we document a novel cyclical pattern found in bank lending standards and loan demand, which differs between market-based and bank-based economies; in particular, the lending rate fails to reflect the credit market conditions in bank-based economies. Using the Korean economy as an example, we demonstrate the failure of identification of loan supply shocks when relying on the lending rate and propose novel identifying schemes by exploiting the information from the survey. Our findings suggest that disentangling the supply and demand factors of credit shocks is crucial to understand their macroeconomic effects.
    Keywords: Bank loan officer survey, Sign-restriction VARs, Bank lending shocks, Credit market disequilibrium, Bank-based economies
    JEL: E32 E44 E51
    Date: 2020–04–12

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