nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒07‒20
forty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Casting Light on Central Bank Digital Currencies By Tommaso Mancini Griffoli; Maria Soledad Martinez Peria; Itai Agur; Anil Ari; John Kiff; Adina Popescu; Celine Rochon
  2. Average Inflation Targeting and the Interest Rate Lower Bound By Budianto, Flora; Nakata, Taisuke; Schmidt, Sebastian
  3. Does a Big Bazooka Matter? Quantitative Easing Policies and Exchange Rates By Dedola, Luca; Georgiadis, Georgios; Gräb, Johannes; Mehl, Arnaud
  4. Patterns of Foreign Exchange Intervention under Inflation Targeting By Gustavo Adler; Kyun Suk Chang; Zijiao Wang
  5. Raising the Inflation Target: How Much Extra Room Does It Really Give? By Jean-Paul L'Huillier; Raphael Schoenle
  6. Estimating the Neutral Interest Rate in the Kyrgyz Republic By Iulia Ruxandra Teodoru; Asel Toktonalieva
  7. Negative interest rates, capital flows and exchange rates By Romina Ruprecht
  8. Monetary Policy and Macroeconomic Stability Revisited By Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
  9. Estimated Policy Rules for Capital Controls By Gurnain Kaur Pasricha
  10. A New Daily Federal Funds Rate Series and History of the Federal Funds Market, 1928-1954 By Sriya Anbil; Mark A. Carlson; Christopher Hanes; David C. Wheelock
  11. Impact of Negative Interest Rate Policy on Emerging Asian markets: An Empirical Investigation. By Anand, Abhishek; Chakraborty, Lekha
  12. Why is the Euro Punching Below its Weight By Ilzetzki, Ethan; Reinhart, Carmen M.; Rogoff, Kenneth
  13. Reading between the lines - Using text analysis to estimate the loss function of the ECB By Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha; Vänni, Ilona
  14. Rethinking Communication in Monetary Policy: Towards a Strategic leaning for the BCC By KIBADHI, Plante M; PINSHI, Christian P.
  15. Monetary Policies and Destabilizing Carry Trades under Adaptive Learning By Cyril Dell'eva; Eric Girardin; Patrick Pintus
  16. Robustly Optimal Monetary Policy in a New Keynesian Model with Housing By Adam, Klaus; Woodford, Michael
  17. Has the Information Channel of Monetary Policy Disappeared? Revisiting the Empirical Evidence By Hoesch, Lukas; Rossi, Barbara; Sekhposyan, Tatevik
  18. Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers By Altavilla, Carlo; Boucinha, Miguel; Peydró, José Luis; Smets, Frank
  19. Monetary and Macroprudential Policy with Endogenous Risk By Adrian, Tobias; Duarte, Fernando; Liang, Nellie; Zabczyk, Pawel
  20. Idiosyncratic Shocks, Lumpy Investment and the Monetary Transmission Mechanism By Reiter, Michael; Sveen, Tommy; Weinke, Lutz
  21. Managing Households' Expectations with Unconventional Policies By Francesco D’Acunto; Daniel Hoang; Michael Weber
  22. Analysis of financial stability as an additional goal of the policy of central banks By Kiyutsevskaya, Anna (Киюцевская, Анна); Trunin, Pavel (Трунин, Павел); Dzhaokhadze, Elena (Джаохадзе, Елена); Gadiy, Lyudmila (Гадий, Людмила); Chembulatova, Maria (Чембулатова, Мария)
  23. Optimal Monetary Policy According to HANK By Acharya, Sushant; Challe, Edouard; Dogra, Keshav
  24. Synergies Between Monetary and Macroprudential Policies in Thailand By Ichiro Fukunaga; Manrique Saenz
  25. Exchange rate predictive densities and currency risks: A quantile regression approach By Niango Ange Joseph Yapi
  26. Measuring the Impact of a Failing Participant in Payment Systems By Ronald Heijmans; Froukelien Wendt
  27. Credibility Dynamics and Disinflation Plans By Rumen Kostadinov; Francisco Roldán
  28. The Stability of Demand for Money in the Proposed Southern African Monetary Union By Asongu, Simplice; Folarin, Oludele; Biekpe, Nicholas
  29. Shock dependence of exchange rate pass-through: a comparative analysis of BVARs and DSGEs By Mariarosaria Comunale
  30. Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity By Cesa-Bianchi, Ambrogio
  31. The long-run effects of monetary policy By Jordà, Òscar; Singh, Sanjay R.; Taylor, Alan M.
  32. Central Bank Digital Currency: Central Banking For All? By Fernández-Villaverde, Jesús; Sanches, Daniel; Schilling, Linda Marlene; Uhlig, Harald
  33. Effects of Macroprudential Policy: Evidence from Over 6,000 Estimates By Juliana Dutra Araujo; Manasa Patnam; Adina Popescu; Fabian Valencia; Weijia Yao
  34. A Model of the Fed's View on Inflation By Thomas Hasenzagl; Filippo Pellegrino; Lucrezia Reichlin; Giovanni Ricco
  35. The Non-U.S. Bank Demand for U.S. Dollar Assets By Adrian, Tobias; Xie, Peichu
  36. A simple model of interbank trading with tiered remuneration By Toshifumi Nakamura
  37. Causal Relationships Between Inflation and Inflation Uncertainty By William Barnett; Fredj Jawadi; Zied Ftiti
  38. Investors' Appetite for Money-Like Assets: The MMF Industry after the 2014 Regulatory Reform By Cipriani, Marco; La Spada, Gabriele
  39. How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area By Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
  40. What is keeping housing inflation below the inflation target midpoint? By Koketso Mano; Patience Mathuloe; Nkhetheni Nesengani

  1. By: Tommaso Mancini Griffoli; Maria Soledad Martinez Peria; Itai Agur; Anil Ari; John Kiff; Adina Popescu; Celine Rochon
    Abstract: Digitalization is reshaping economic activity, shrinking the role of cash, and spurring new digital forms of money. Central banks have been pondering wheter and how to adapt. One possibility is central bank digital currency (CBDC)-- a widely accessible digital form of fiat money that could be legal tender. This discussion note proposes a conceptual framework to assess the case for CBDC adoption from the perspective of users and central banks. It discusses possible CBDC designs, and explores potential benefits and costs, with a focus on the impact on monetary policy, financial stability, and integrity. This note also surveys research and pilot studies on CBDC by central banks around the world.
    Keywords: Money;Central banking;Currencies;Monetary policy;Central banks;Bank rates;Bank liquidity;Lender of last resort;Bank accounting;Central Bank Digital Currencies,financial integrity,central bank,token-based,intermediation,bank deposit
    Date: 2018–11–12
  2. By: Budianto, Flora; Nakata, Taisuke; Schmidt, Sebastian
    Abstract: A discretionary central bank with a mandate to stabilize an average inflation rate---rather than period-by-period inflation---increases welfare of a sticky-price economy in which nominal interest rates are occasionally constrained by a lower bound. The welfare gain is driven by two monetary policy motives that arise in the presence of an average inflation objective: the history-dependence motive makes expected future inflation an increasing function of current inflation shortfalls, and vice versa, acting as an automatic stabilizer; and the lower bound risk motive induces the central bank to raise inflation when the risk of hitting the lower bound constraint increases. Under rational expectations, the optimal averaging window is infinitely long, so that the optimal average inflation targeting framework is tantamount to price level targeting. Most of the welfare improvement can, however, be attained by a framework with a finite, but sufficiently long, averaging window. Under boundedly-rational expectations, if cognitive limitations are sufficiently strong, the optimal averaging window is finite, and the welfare gain of adopting an average inflation target can be small.
    Keywords: Average Inflation Targeting; Deflationary Bias; liquidity trap; Makeup Strategies; Monetary Policy Objectives
    JEL: E31 E52 E58 E61
    Date: 2020–02
  3. By: Dedola, Luca; Georgiadis, Georgios; Gräb, Johannes; Mehl, Arnaud
    Abstract: We estimate the effects of quantitative easing (QE) measures by the ECB and the Federal Reserve on the US dollar-euro exchange rate at frequencies and horizons relevant for policymakers. To do so, we derive a theoretically-consistent local projection regression equation from the standard asset pricing formulation of exchange rate determination. We then proxy unobserved QE shocks by future changes in the relative size of central banks' balance sheets, which we instrument with QE announcements in two-stage least squares regressions in order to account for their endogeneity. We find that QE measures have large and persistent effects on the exchange rate. The typical ECB or Federal Reserve expansionary QE announcement in our sample resulted in an increase in the relative balance sheet of about 20% and, in turn, in a persistent exchange rate depreciation of around 7%. Regarding transmission channels, we find that a relative QE shock that expands the ECB's balance sheet relative to that of the Federal Reserve depreciates the euro against the US dollar by reducing euro-dollar short-term money market rate differentials, by widening the cross-currency basis and by eliciting adjustments in "residual" deviations from interest parity. Changes in the expectations about the future monetary policy stance, reflecting the "signalling" channel of QE, also contribute to the exchange rate response to QE shocks.
    Keywords: CIP Deviations; QE Dynamic Effects; Signalling Channel of QE
    JEL: F41
    Date: 2020–01
  4. By: Gustavo Adler; Kyun Suk Chang; Zijiao Wang
    Abstract: The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.
    Date: 2020–05–29
  5. By: Jean-Paul L'Huillier; Raphael Schoenle
    Abstract: Some, but less than intended. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We quantitatively investigate this channel across different models, based on a calibration using micro data. By raising the target from 2 percent to 4 percent, the monetary authority gets only between 0.51 and 1.60 percentage points of effective extra policy room for monetary policy (not 2 percentage points as intended). Getting 2 percentage points of effective extra room requires raising the target to more than 4 percent. Taking this channel into consideration raises the optimal inflation target by roughly 1 percentage points relative to earlier computations.
    Keywords: zero lower bound; price stability; timidity trap; liquidity traps; central bank design; inflation targeting; Lucas proof
    JEL: E52 E58 E31
    Date: 2020–06–16
  6. By: Iulia Ruxandra Teodoru; Asel Toktonalieva
    Abstract: This paper estimates the neutral interest rate in the Kyrgyz Republic using a range of methodologies. Results indicate that the real neutral rate is about 4 percent based on an average of models and 3.7 percent based on a Quarterly Projection Model. This is higher than in many emerging markets and is likely explained by higher public debt and an elevated risk premium, low creditor rights and contractual enforcement, and low domestic savings. The use of an estimate of the neutral interest rate provides useful guidance to monetary policy and enhances transparency and independence of the central bank. Our estimate provides a quantitative benchmark for the monetary policy stance in the context of a central bank that is building analytical capacity, integrating additional insights in its decision-making process, and working to improve its communication. Strengthening the monetary transmission mechanism will be critical to enhance the effectiveness of monetary policy, including by allowing more exchange rate flexibility to support the transition to a full-fledged inflation targeting regime, and reducing excess liquidity to enhance the credit channel, reducing dollarization and high interest rate spreads that adversely affect the transmission of the policy rate to the economy.
    Date: 2020–06–05
  7. By: Romina Ruprecht
    Abstract: This paper develops a dynamic general equilibrium model with two currencies to study the effect of negative interest rates on domestic money demand and exchange rates. Money demand for a currency depends on the relative ratio of the money market rate and the deposit rate of the central bank. If agents choose to hold only domestic currency, a decrease in the deposit rate of the central bank will not affect the exchange rate. If agents choose to hold both currencies, a decrease in the deposit rate will cause an appreciation (depreciation) if the money market rate decreases to a larger (smaller) extent. If agents are subject to bank deposit rates that are sticky below zero, then a decrease of the central bank deposit rate leads to a depreciation of the currency regardless of the size of the effect on the money market rate.
    Keywords: Monetary policy, negative interest rates, exchange rates
    JEL: E52 E58 F31
    Date: 2020–06
  8. By: Yasuo Hirose (Keio University); Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Cleveland)
    Abstract: A large literature has established the view that the Fed's change from a passive to an active policy response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. We revisit this view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for indeterminacy of equilibrium and adopts a sequential Monte Carlo algorithm. The estimated model empirically outperforms canonical New Keynesian models that confirm the literature's view. It also points to substantial uncertainty about whether the policy response to inflation was active or passive during the Great Inflation. More importantly, a more active policy response to inflation alone does not suffice for explaining the U.S. macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. This extends the literature by emphasizing the importance of the changes in other aspects of monetary policy in addition to its response to inflation.
    Keywords: Monetary policy; Great Inflation; Indeterminacy; Trend inflation; Sequential Monte Carlo
    JEL: C11 C52 C62 E31 E52
    Date: 2020–02–28
  9. By: Gurnain Kaur Pasricha
    Abstract: This paper borrows the tradition of estimating policy reaction functions from monetary policy literature to ask whether capital controls respond to macroprudential or mercantilist motivations. I explore this question using a novel, weekly dataset on capital control actions in 21 emerging economies from 2001 to 2015. I introduce a new proxy for mercantilist motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. This proxy Granger causes future net initiations of non-tariff barriers in most countries. Emerging markets systematically respond to both mercantilist and macroprudential motivations. Policymakers respond to trade competitiveness concerns by using both instruments—inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. Policy is acyclical to foreign debt; however, high levels of this debt reduces countercyclicality to mercantilist concerns. Higher exchange rate pass-through to export prices, and having an inflation targeting regime with non-freely floating exchange rates, increase responsiveness to mercantilist concerns.
    Date: 2020–06–05
  10. By: Sriya Anbil; Mark A. Carlson; Christopher Hanes; David C. Wheelock
    Abstract: This article describes the origins and development of the federal funds market from its inception in the 1920s to the early 1950s. We present a newly digitized daily data series on the federal funds rate that covers the period from April 1928 through June 1954. We compare the behavior of the funds rate with other money market interest rates and the Federal Reserve discount rate. Our federal funds rate series will enhance the ability of researchers to study an eventful period in U.S. financial history and to better understand how monetary policy was transmitted to banking and financial markets. For the 1920s and 1930s, our series is the best available measure of the overnight risk-free interest rate, better than the call money rate which many studies have used for that purpose. For the 1940s-1950s, our series provides new information about the transition away from wartime interest-rate pegs culminating in the 1951 Treasury-Federal Reserve Accord.
    Keywords: federal funds rate; call loan rate; money market; Federal Reserve System
    JEL: E43 E44 E52 G21 N22
    Date: 2020–06–26
  11. By: Anand, Abhishek (Harvard Kennedy School, Cambridge); Chakraborty, Lekha (National Institute of Public Finance and Policy)
    Abstract: In last few years, several central banks have implemented negative interest rate policies (NIRP) to boost domestic economy. However, such policies may have some unintended consequences for the emerging Asian markets (EAMs). The objective of this paper is to provide an assessment of the domestic and global implications of negative interest rate policy. We also present how the implications differ from that of quantitative easing (QE). The analysis shows that the impact NIRP is heterogeneous; with differential impacts for big Asian economies (India and Indonesia)and small trade dependent economies (STDE) (Hong Kong, Philippines, South Korea, Singapore and Thailand). Nominal GDP and exports are adversely impacted in EMs in response to NIRP, especially in India and Indonesia. The inflation goes significantly high in EMs in response to plausible negative interest rates but the impact is much more severe for India and Indonesia than in STDEs. The local currencies also depreciate in all EAMs in response to negative interest rates. QE, on the other hand, has no significant impact on inflation but nominal GDP growth declines in EAMs. The currency appreciates and exports decline. The impact is much more severe in big emerging economies like India and Indonesia.
    Keywords: Negative interest rate policy ; Quantitative easing ; emerging economies
    JEL: E52 E58
    Date: 2020–06
  12. By: Ilzetzki, Ethan; Reinhart, Carmen M.; Rogoff, Kenneth
    Abstract: On the twentieth anniversary of its inception, the euro has yet to expand its role as an international currency. We document this fact with a wide range of indicators including its role as an anchor or reference in exchange rate arrangements-which we argue is a portmanteau measure-and as a currency for the denomination of trade and assets. On all these dimensions, the euro comprises a far smaller share than that of the US dollar. Furthermore, that share has been roughly constant since 1999. By some measures, the euro plays no larger a role than the Deutschemark and French franc that it replaced. We explore the reasons for this underperformance. While the leading anchor currency may have a natural monopoly, a number of additional factors have limited the euro's reach, including lack of financial center, limited geopolitical reach, and US and Chinese dominance in technology research. Most important, in our view, is the comparatively scarce supply of (safe) euro-denominated assets, which we document. The European Central Bank' lack of policy clarity may have also played a role. We show that the euro era can be divided into a "Bundesbank-plus" period and a "Whatever it Takes" period. The first shows a smooth transition from the European Exchange Rate Mechanism and continued to stabilize German inflation. The second period is characterised by an expanding ECB arsenal of credit facilities to European banks and sovereigns.
    JEL: E5 F3 F4 N2
    Date: 2020–01
  13. By: Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha; Vänni, Ilona
    Abstract: We measure the tone (sentiment) of the ECB’s Governing Council regarding economic outlook at the time of each monetary policy meeting and use this information together with the Eurosystem/ECB staff macroeconomic projections to directly estimate the Governing Council’s loss function. Our results support earlier, more indirect findings, based on reaction function estimations, that the ECB has been either more averse to inflation above 2% ceiling or that the de facto inflation aim has been considerably below 2%. Our results suggest further that an inflation aim of 2% combined with asymmetry is a plausible specification of the ECB’s preferences.
    JEL: E31 E52 E58
    Date: 2020–07–06
  14. By: KIBADHI, Plante M; PINSHI, Christian P.
    Abstract: The ability of a central bank to influence the economy depends on its ability to manage the expectations of the general public and the financial system regarding the future development of macroeconomic indicators. The communication strategy (in this time of crisis and uncertainty) increases transparency, improves public understanding and support for the monetary policy and democratic accountability of the Central Bank of Congo (BCC), serving to convergence towards the balance of expectations. This paper agrees that a strategic direction of communication, focused on coherent messages, can help break down pessimistic expectations, maintain confidence, reduce the cost of the crisis and stabilize the economy. In conclusion, the article suggests a dozen recommendations, to be able to strengthen and redirect the BCC’s communication strategy and contribute to the effectiveness of monetary policy.
    Keywords: Communication, Monetary policy
    JEL: E58
    Date: 2020–05
  15. By: Cyril Dell'eva (University of Pretoria [South Africa]); Eric Girardin (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Patrick Pintus (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper investigates how different monetary policy designs alter the effect of carry trades on a host small open economy. Capital inflows are expansionary, leading the central bank to raise the interest rate, increasing carry trades' returns, and generating further capital inflows (carry trades' vicious circle). This paper shows how monetary authorities can mitigate or suppress this vicious circle, when agents do not have full information about the central bank's objectives. The best way to deal with the destabilizing effect of carry trades is to target both inflation and capital inflows.
    Keywords: Index terms-Capital inflows,Carry trades,interest rate differential,Vicious circle,Inflation targeting JEL classification: E44,E52,E58,F31,G15
    Date: 2020–06
  16. By: Adam, Klaus; Woodford, Michael
    Abstract: We analytically characterize optimal monetary policy for an augmented New Keynesian model with a housing sector. With rational private sector expectations about housing prices and inflation, optimal monetary policy can be characterized by a standard 'target criterion' that refers to inflation and the output gap, without making reference to housing prices. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. For empirically realistic cases, the central bank should then 'lean against' housing prices, i.e., following unexpected housing price increases (decreases), policy should adopt a stance that is projected to undershoot (overshoot) its normal targets for inflation and the output gap. Robustly optimal policy does not require that the central bank distinguishes between `fundamental' and `non-fundamental' movements in housing prices.
    JEL: D81 D84 E52
    Date: 2020–02
  17. By: Hoesch, Lukas; Rossi, Barbara; Sekhposyan, Tatevik
    Abstract: Does the Federal Reserve have an "information advantage'' in forecasting macroeconomic variables beyond what is known to private sector forecasters? And are market participants reacting only to monetary policy shocks or also to future information on the state of the economy that the Federal Reserve communicates in its announcements via an "information channel''? This paper investigates the evolution of the information channel over time. Although the information channel appears to be important historically, we find no empirical evidence of its presence in the recent years once instabilities are accounted for.
    Keywords: Forecasting; Information Channel of Monetary Policy; Instabilities; monetary policy
    JEL: C11 C14 C22 E52 E58
    Date: 2020–02
  18. By: Altavilla, Carlo; Boucinha, Miguel; Peydró, José Luis; Smets, Frank
    Abstract: We analyse the effects of supranational versus national banking supervision on credit supply, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change leading to the centralisation of European banking supervision; (iii) high-frequency monetary policy surprises; (iv) differences across euro area countries, also vis-à-vis non-euro area countries. We show that supranational supervision reduces credit supply to firms with very high ex-ante and ex-post credit risk, while stimulating credit supply to firms without loan delinquencies. Moreover, the increased risk-sensitivity of credit supply driven by centralised supervision is stronger for banks operating in stressed countries. Exploiting heterogeneity across banks, we find that the mechanism driving the results is higher quantity and quality of human resources available to the supranational supervisor rather than changes in incentives due to the reallocation of supervisory responsibility to the new institution. Finally, there are crucial complementarities between supervision and monetary policy: centralised supervision offsets excessive bank risk-taking induced by a more accommodative monetary policy stance, but does not offset more productive risk-taking. Overall, we show that using multiple credit registers - first time in the literature - is crucial for external validity.
    Keywords: AnaCredit; Banking; euro area crisis; monetary policy; Supervision
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2020–01
  19. By: Adrian, Tobias; Duarte, Fernando; Liang, Nellie; Zabczyk, Pawel
    Abstract: We extend the New Keynesian (NK) model to include endogenous risk. Lower interest rates not only shift consumption intertemporally but also conditional output risk via the impact on risk-taking, giving rise to a vulnerability channel of monetary policy. The model fits the conditional output gap distribution and can account for medium-term increases in downside risks when financial conditions are loose. The policy prescriptions are very different from those in the standard NK model: monetary policy that focuses purely on inflation and output-gap stabilization can lead to instability. Macroprudential measures can mitigate the intertemporal risk-return tradeoff created by the vulnerability channel.
    Keywords: Macro-Finance; macroprudential policy; monetary policy
    JEL: E32 E44 E52 G28
    Date: 2020–02
  20. By: Reiter, Michael (Institute for Advanced Studies, Vienna, and NYU Abu Dhabi); Sveen, Tommy (BI Norwegian Business School); Weinke, Lutz (Humboldt-Universitaet zu Berlin)
    Abstract: Standard (S,s) models of lumpy investment allow us to match many aspects of the micro data, but it is well known that the implied interest rate sensitivity of investment is unrealistically large. The monetary transmission mechanism is therefore a particularly clean experiment to assess the macroeconomic relevance of any investment theory. Our results show that lumpy investment can coexist with a realistic monetary transmission mechanism, but that we are nevertheless still a step away from a micro-founded theory of monetary policy.
    Keywords: Lumpy Investment, Sticky Prices
    JEL: E22 E31 E32
    Date: 2020–05
  21. By: Francesco D’Acunto; Daniel Hoang; Michael Weber
    Abstract: With a binding effective lower bound on interest rates and large government deficits, conventional policies are unviable and policymakers resort to unconventional policies, which target households' expectations directly. Using unique micro data and a difference-in-differences strategy, we assess the effectiveness of unconventional fiscal policy and forward guidance, both of which aim to stimulate consumption via raising households' inflation expectations. All households' inflation expectations and spending plans react to unconventional fiscal policy. Instead, households, contrary to experts, do not react to forward guidance. We argue that policies aiming to affect households directly are ineffective if (non-expert) households do not understand them.
    JEL: D12 D84 D91 E21 E31 E52 E65
    Date: 2020–06
  22. By: Kiyutsevskaya, Anna (Киюцевская, Анна) (The Russian Presidential Academy of National Economy and Public Administration); Trunin, Pavel (Трунин, Павел) (The Russian Presidential Academy of National Economy and Public Administration); Dzhaokhadze, Elena (Джаохадзе, Елена) (The Russian Presidential Academy of National Economy and Public Administration); Gadiy, Lyudmila (Гадий, Людмила) (The Russian Presidential Academy of National Economy and Public Administration); Chembulatova, Maria (Чембулатова, Мария) (Gaidar Institute for Economic Policy)
    Abstract: After the global financial crisis, financial stability became an additional goal of monetary authorities. The complexity of implementation of this goal stems not only from the absence of a generally accepted definition of financial stability, but also from the lack of its quantitative indicators. Moreover, there is no consensus about the link between the main central bank goal of ensuring price stability and financial stability. Our estimates of the link betweeen the Bank of Russia's goals of price and financial stability sgow that contradictions between these goals arise only in adverse conditions (crisis periods). This allows the Bank of Russia to use its interest rate policy to maintain the stability of the financial market.
    Date: 2020–03
  23. By: Acharya, Sushant; Challe, Edouard; Dogra, Keshav
    Abstract: We study optimal monetary policy in a Heterogenous-Agent New-Keynesian economy. A utilitarian planner seeks to reduce consumption inequality, in addition to stabilizing output gaps and inflation. The planner does so both by reducing income risk faced by households, and by reducing the pass-through from income to consumption risk, trading-off the benefits of lower inequality against productive inefficiency and higher inflation. When income risk is countercyclical, policy curtails the fall in output in recessions to mitigate the increase in inequality. We uncover a new form of time-inconsistency of the Ramsey-plan - the temptation to exploit households' unhedged interest-rate exposure to lower inequality.
    Keywords: incomplete markets; New Keynesian Model; Optimal monetary policy
    JEL: E21 E30 E52 E62 E63
    Date: 2020–02
  24. By: Ichiro Fukunaga; Manrique Saenz
    Abstract: A dynamic stochastic general equilibrium (DSGE) model tailored to the Thai economy is used to explore the performance of alternative monetary and macroprudential policy rules when faced with shocks that directly impact the financial cycle. In this context, the model shows that a monetary policy focused on its traditional inflation and output objectives accompanied by a well targeted counter-cyclical macroprudential policy yields better macroeconomic outcomes than a lean-against-the-wind monetary policy rule under a wide range of assumptions.
    Date: 2020–06–05
  25. By: Niango Ange Joseph Yapi
    Abstract: We investigate the ability of the Fama equation to compute proper conditional densities and currency risks. Based on quantile regressions, we fit a Skewed t-distribution to estimate the conditional densities on the monetary policy of eight currency pairs. We demonstrate that the conditional densities are highly sensitive to the monetary policy stances. Then, we use the estimated conditional densities to measure the currency risks. Our results highlight that the depreciation/appreciation risks are extremely heterogeneous and that the currencies are more exposed to depreciation risks, especially during turmoils. Our findings can be used as a supplementary tool to assess whether a currency behaves as a safe-haven currency. We also investigate the relative and absolute performance of our model in forecasting densities. We find that the predictive densities are perfectly well-calibrated. Moreover, our results also demonstrate that our methodology can outperform the random walk in forecasting densities.
    Keywords: Quantile regressions, Predictive densities, Currency risks, Safe-haven currency.
    JEL: C22 C53 F31
    Date: 2020
  26. By: Ronald Heijmans; Froukelien Wendt
    Abstract: Banks and financial market infrastructures (FMIs) that are not able to fulfill their payment obligations can be a source of financial instability. This paper develops a composite risk indicator to evaluate the criticality of participants in a large value payment system network, combining liquidity risk and interconnections in one approach, and applying this to the TARGET2 payment system. Findings suggest that the most critical participants in TARGET2 are other payment systems, because of the size of underlying payment flows. Some banks may be critical, but this is mainly due to their interconnectedness with other TARGET2 participants. Central counterparties and central securities depositories are less critical. These findings can be used in financial stability analysis, and feed into central bank policies on payment system access, oversight, and crisis management.
    Date: 2020–06–05
  27. By: Rumen Kostadinov; Francisco Roldán
    Abstract: We study the optimal design of a disinflation plan by a planner who lacks commitment. Having announced a plan, the Central banker faces a tradeoff between surprise inflation and building reputation, defined as the private sector's belief that the Central bank is committed to the plan. Some plans are harder to sustain: the planner recognizes that paving out future grounds with temptation leads the way for a negative drift of reputation in equilibrium. Plans that successfully create low inflationary expectations balance promises of lower inflation with dynamic incentives that make them more credible. When announcing the disinflation plan, the planner takes into account these anticipated interactions. We find that, even in the zero reputation limit, a gradual disinflation is preferred despite the absence of inflation inertia in the private economy.
    Date: 2020–06–05
  28. By: Asongu, Simplice; Folarin, Oludele; Biekpe, Nicholas
    Abstract: This study investigates the stability of demand for money in the proposed Southern African Monetary Union (SAMU). The study uses annual data for the period 1981 to 2015 from ten countries making-up the Southern African Development Community (SADC). A standard function of demand for money is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across countries in the stability of money. This divergence is articulated in terms of differences in cointegration, CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long-term determinants and error correction in event of a shock. Policy implications are discussed in the light of the convergence needed for the feasibility of the proposed SAMU. This study extends the debate in scholarly and policy circles on the feasibility of proposed African monetary unions.
    Keywords: Stable; demand for money; bounds test
    JEL: C22 E41
    Date: 2019–01
  29. By: Mariarosaria Comunale (Bank of Lithuania)
    Abstract: In this paper, we make use of the results from Structural Bayesian VARs taken from several studies for the euro area, which apply the idea of a shock-dependent Exchange Rate Pass-Through, drawing a comparison across models and also with respect to available DSGEs. On impact, the results are similar across Structural Bayesian VARs. At longer horizons, the magnitude in DSGEs increases because of the endogenous response of monetary policy and other variables. In BVARs particularly, shocks contribute relatively little to observed changes in the exchange rate and in HICP. This points to a key role of systematic factors, which are not captured by the historical shock decomposition. However, in the APP announcement period, we do see demand and exogenous exchange rate shocks countribute significantly to variations in exchange rates. Nonetheless, it is difficult to find a robust characterization across models. Moreover, the modelling challenges increase when looking at individual countries, because exchange rate and monetary policy shocks (also taken relative to the US) are common to the whole euro area. Hence, we provide a local projection exercise with common euro area shocks, identified in euro area-specific Structural Bayesian VARs and in DSGE, extrapolated and used as regressors. For common exchange rate shocks, the impact on consumer prices is the largest in some new member states, but there are a wide range of estimates across models. For core consumer prices, the coefficients are smaller. Regarding common relative monetary policy shocks, the impact is larger than for exchange rate shocks in any case. Generally, euro area monetary policy plays a big role for consumer prices, and this is especially so for new member states and the euro area periphery.
    Keywords: euro area, exchange rate pass-through, Bayesian VAR, local projections, monetary policy
    JEL: E31 F31 F45
    Date: 2020–03–26
  30. By: Cesa-Bianchi, Ambrogio
    Abstract: We show that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a unique panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms' expected default -- the excess bond premium. Consistent with the spreads response, we also document that high-leverage firms experience a sharper contraction in debt and investment than low-leverage firms. Our results provide evidence that balance sheet effects are crucial for understanding the transmission mechanism of monetary policy.
    Keywords: Credit channel; credit spreads; event study; Excess Bond Premium; financial accelerator; Heterogeneity; identification; monetary policy
    JEL: E44 F44 G15
    Date: 2020–02
  31. By: Jordà, Òscar; Singh, Sanjay R.; Taylor, Alan M.
    Abstract: Is the effect of monetary policy on the productive capacity of the economy long lived? Yes, in fact we find such impacts are significant and last for over a decade based on: (1) merged data from two new international historical databases; (2) identification of exogenous monetary policy using the macroeconomic trilemma; and (3) improved econometric methods. Notably, the capital stock and total factor productivity (TFP) exhibit hysteresis, but labor does not. Money is non-neutral for a much longer period of time than is customarily assumed. A New Keynesian model with endogenous TFP growth can reconcile all these empirical observations.
    Keywords: hysteresis; instrumental vari- ables; local projections; monetary policy; money neutrality; trilemma
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2020–01
  32. By: Fernández-Villaverde, Jesús; Sanches, Daniel; Schilling, Linda Marlene; Uhlig, Harald
    Abstract: The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bank's contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endangered maturity transformation.
    Keywords: bank runs; Central bank digital currency; central banking; intermediation; lender of last resort; maturity transformation
    JEL: E58 G21
    Date: 2020–01
  33. By: Juliana Dutra Araujo; Manasa Patnam; Adina Popescu; Fabian Valencia; Weijia Yao
    Abstract: This paper builds a novel database on the effects of macroprudential policy drawing from 58 empirical studies, comprising over 6,000 results on a wide range of instruments and outcome variables. It encompasses information on statistical significance, standardized magnitudes, and other characteristics of the estimates. Using meta-analysis techniques, the paper estimates average effects to find i) statistically significant effects on credit, but with considerable heterogeneity across instruments; ii) weaker and more imprecise effects on house prices; iii) quantitatively stronger effects in emerging markets and among studies using micro-level data; and iii) statistically significant evidence of leakages and spillovers. Other findings include relatively stronger impacts for tightening than loosening actions and negative effects on economic activity in the near term.
    Keywords: Systemically important financial institutions;Financial crises;Reserve requirements;Domestic credit;Credit demand;Macroprudential Policy,financial stability,Meta-analysis.,WP,outcome variable,average effect,MPM,micro-level,Claessens
    Date: 2020–05–22
  34. By: Thomas Hasenzagl; Filippo Pellegrino; Lucrezia Reichlin; Giovanni Ricco
    Abstract: We develop a medium-size semi-structural time series model of inflation dynamics that is consistent with the view - often expressed by central banks - that three components are important: a trend anchored by long-run expectations, a Phillips curve and temporary fluctuations in energy prices. We find that a stable long-term inflation trend and a well identified steep Phillips curve are consistent with the data, but they imply potential output declining since the new millennium and energy prices affecting headline inflation not only via the Phillips curve but also via an independent expectational channel. A high-frequency energy price cycle can be related to global factors affecting the commodity market, and often overpowers the Phillips curve thereby explaining the inflation puzzles of the last ten years.
    Date: 2020–06
  35. By: Adrian, Tobias; Xie, Peichu
    Abstract: The USD asset share of non-U.S. banks captures the demand for dollars by these investors. An instrumental variable strategy identifies a causal link from the USD asset share to the USD exchange rate. Cross-sectional asset pricing tests show that the USD asset share is a highly significant pricing factor for carry trade strategies. The USD asset share forecasts the dollar with economically large magnitude, high statistical significance, and large explanatory power, both in sample and out of sample, pointing towards time varying risk premia. It takes 2-5 years for exchange rate risk premia to normalize in response to demand shocks.
    Keywords: Exchange Rate Disconnect; intermediary asset pricing; Safe Asset Demand
    JEL: F3 G1
    Date: 2020–02
  36. By: Toshifumi Nakamura
    Abstract: A negative interest rate policy is often accompanied by tiered remuneration, which allows for exemption from negative rates. This study proposes a basic model of interest rates formed in the interbank market with a tiering system. The results predicted by the model largely mirror actual market developments in late 2019, when the European Central Bank introduced, and the Switzerland National Bank modified, the tiering system.
    Date: 2020–06
  37. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Fredj Jawadi (University of Lille, Lille, 104 Avenue du Peuple Blege, 104 Avenue du Peuple Belge, 59043 Lille Cedex, Office B655, France); Zied Ftiti (EDC Paris Business School, Paris, France)
    Abstract: Since the publication of Friedman’s (1977) Nobel lecture, the relationships between the mean function of the inflation stochastic process and its uncertainty, and between inflation uncertainty (IU) and real output growth have been the subject of much research, with some studies justifying this causality and some reaching the opposite conclusion or finding an inverse correlation between mean inflation and inflation volatility with causation in either direction. We conduct a systematic econometric study of the relationships between the first two moments of the inflation stochastic process and between IU and output growth using state-of-the-art approaches and propose a time-varying inflation uncertainty measure based on stochastic volatility to consider unpredictable shocks. Further, we extend the literature by providing a new econometric specification of this relationship using two semi-parametric approaches: the frequency evolutionary co-spectral approach and continuous wavelet methodology. We theoretically justify their use through an extension of Ball's (1992) model. These frequency approaches have two advantages: they provide the analyses for different frequency horizons and do not impose restriction on the data. While the literature focused on the US data, our study explores these relationships for five major developed and emerging countries/regions (the US, the UK, the euro area, South Africa, and China) over the past five decades to investigate the robustness of our inferences and sources of inconsistencies among prior studies. This selection of countries permits investigation of the inflation versus inflation uncertainty relationship under different hypotheses, including explicit versus implicit inflation targets, conventional versus unconventional monetary policy, independent versus dependent central banks, and calm versus crisis periods. Our findings show a significant relationship between inflation and inflation uncertainty, which varies over time and frequency, and offer an improved comprehension of this ambiguous relationship. The relationship is positive in the short and medium terms during stable periods, confirming the Friedman–Ball theory, and negative during crisis periods. Additionally, our analysis identifies the phases of leading and lagging inflation uncertainty. Our general approach nests within it the earlier approaches, permitting explanation of the prior appearances of ambiguity in the relationship and identifies the conditions associated with the various outcomes.
    Keywords: Inflation, Inflation uncertainty, Output growth, Frequency approach, Wavelet, Semi-parametric approach, Stochastic volatility
    JEL: C14 E31
    Date: 2020–07
  38. By: Cipriani, Marco; La Spada, Gabriele
    Abstract: This paper uses a quasi-natural experiment to estimate the premium for money-likeness. The 2014 SEC reform of the money market fund (MMF) industry reduced the money-likeness of prime MMFs by increasing their information sensitivity, while leaving government MMFs unaffected. Investors fled from prime to government MMFs, with total outflows exceeding 1 trillion dollars. Using a difference-in-differences design, we estimate the premium for money-likeness to be between 20 and 30 basis points. These premiums are not due to changes in investors' risk tolerance or funds' risk taking. Our results support recent developments in monetary theory identifying information insensitivity as a key feature of money.
    Keywords: information sensitivity; Money market funds; Money Market Funds Reform; Money-like Assets
    JEL: E41 G23 G28
    Date: 2020–02
  39. By: Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
    Abstract: This paper builds a model-based dynamic monetary and fiscal conditions index (DMFCI) and uses it to examine the evolution of the joint stance of monetary and fiscal policies in the euro area (EA) and in its three largest member countries over the period 2007-2018. The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models featuring also financial intermediaries and long-term government debt. The analysis highlights a short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left to be the “only game in town” after 2013. Individual countries’ DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at the EA level, due to heterogeneity in the fiscal stance.
    Date: 2020–06–05
  40. By: Koketso Mano; Patience Mathuloe; Nkhetheni Nesengani
    Date: 2020–06–17

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