nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒08‒24
39 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Alternative Monetary-Policy Instruments and Limited Credibility in Small and Open Economies: An Exploration By Javier García-Cicco
  2. Extracting Implicit Country Weights in ECB's Monetary Policy By Pereira, Márcia; Tavares, José
  3. Who takes the ECB’s targeted funding? By Vergote, Olivier; Sugo, Tomohiro
  4. Identifying and Estimating the Effects of Unconventional Monetary Policy: How to Do It And What Have We Learned? By Rossi, Barbara
  5. Average Is Good Enough: Average-Inflation Targeting and the ELB By Robert Amano; Stefano Gnocchi; Sylvain Leduc; Joel Wagner
  6. Are monetary surprises effective? The view of professional forecasters in Israel By Alex Ilek
  7. Quantitative Easing and Financial Risk Taking: Evidence from Agency Mortgage REITs By W. Scott Frame; Eva Steiner
  8. Recent Global Developments and Central Bank Responsibilities in a Changing Risk Landscape By Daleep Singh
  9. The Main Street Lending Program and Other Federal Reserve Actions By Eric S. Rosengren
  10. The Information Content of Capital Controls By Nie,Owen
  11. Asset Price Bubbles and Monetary Policy: Revisiting the Nexus at the Zero Lower Bound By Jacopo Bonchi
  12. Household Heterogeneity and the Transmission of Foreign Shocks By de Ferra, Sergio; Mitman, Kurt; Romei, Federica
  13. The vagaries of the sea: evidence on the real effects of money from maritime disasters in the Spanish Empire By Brzezinski, Adam; Chen, Yao; Palma, Nuno Pedro G.; Ward, Felix
  14. Uncovered interest parity with foreign exchange interventions under exchange rate peg and inflation targeting: The case of Ukraine By Anton Grui
  15. Stock market evidence on the international transmission channels of US monetary policy surprises By Tim D. Maurer; Thomas Nitschka
  16. On the Special Role of Deposits for Long-Term Lending By Perazzi, Elena
  17. Coronavirus panic fuels a surge in cash demand By Goodhart, C. A. E.; Ashworth, Jonathan
  18. Predicting the exchange rate path. The importance of using up-to-date observations in the forecasts By Håvard Hungnes
  19. Monetary Policy, Financial Constraints, and Redistribution By Christian Loenser; Andreas Schabert
  20. International banking and transmission of the 1931 financial crisis By Accominotti, Olivier
  21. Canada; Financial Sector Assessment Program-Technical Note-Systemic Liquidity By International Monetary Fund
  22. New Financial Market Measures of the Neutral Real Rate and Inflation Expectations By Alex Aronovich; Andrew C. Meldrum
  23. What’s up with the Phillips Curve? By Del Negro, Marco; Lenza, Michele; Primiceri, Giorgio E.; Tambalotti, Andrea
  24. The Economics of Helicopter Money By Pierpaolo Benigno; Salvatore Nisticò
  25. Shall we twist? By Sophie Altermatt; Simon Beyeler
  26. Monetary Policy and Housing Loan Default By George Overton; Barbara Castillo Rico
  27. Liquidity Traps in a Monetary Union By Robert Kollmann
  28. (Why) do central banks care about their profits? By Igor Goncharov; Vasso Ioannidou; Martin C. Schmalz
  29. An Index of African Monetary Integration (IAMI) By Samba Diop; Simplice A. Asongu
  30. The Main Street Lending Program and Other Federal Reserve Actions By Eric S. Rosengren
  31. Asymmetric behavior of exchange rate in Tunisia: a nonlinear approach By Boukraine, Wissem
  32. Wage inequality under inflation-targeting in South Africa By Serena Merrino
  33. OPTIMUM CURRENCY AREA INDEX FOR THE ECONOMIC COMMUNITY OF WEST AFRICAN STATES (ECOWAS) By Ngozi E. Egbuna; Ismaila Jarju; Sani Bawa; Ibrahima Diallo; Olukayode S. Odeniran; Isatou Mendy; Edward Nyarko
  34. U.S. Banks and Global Liquidity By Ricardo Correa; Wenxin Du; Gordon Y. Liao
  35. Symmetry, Efficient Markets and Monetary Neutrality By Luo, Yinghao
  36. A COMPOSITE INDEX OF ECONOMIC INTEGRATION IN THE WEST AFRICAN MONETARY ZONE (WAMZ) By Ngozi E. Egbuna; Ismaila Jarju; Sani Bawa; Ibrahima Diallo; Isatou Mendy; Ozolina Haffner; Kormay Adams
  37. Does competence of central bank governors influence financial stability? By Ozili, Peterson K
  38. The need for monetary financing of corona budget deficits By De Grauwe, Paul
  39. The advanced proposed architecture of Eco-currency; technical analysis of West Africa single currency program. By Tweneboah Senzu, Emmanuel

  1. By: Javier García-Cicco
    Abstract: We evaluate the dynamics of a small and open economy under alternative monetary policy instruments, in a model with imperfectly anchored expectations. The consensus under inflation targeting is that rules for an interest rate are preferred, instead of using either some monetary aggregate or the exchange rate. Theses arguments are usually presented assuming rational expectations (RE) hold and there is full credibility. In contrast we consider deviations from RE, where a fraction of agents uses econometric models to form expectations, capturing imperfectly anchored expectations or limited credibility (LC). The model also features a non-trivial banking sector, allowing for different interest rates and monetary aggregates. We compare the dynamics after a shock to the cost of external borrowing (arguably one of the most important sources of fluctuations in emerging countries) under three policy instruments: a Taylor-type rule for the interest rate, a constant-growth-rate rule for base money, and a fixed exchange rate. The analysis allows to identify relevant trade-offs in choosing alternative policy instruments, showing that the differences between the alternatives are exacerbated under LC.
    JEL: E52 E31
    Date: 2019–11
  2. By: Pereira, Márcia; Tavares, José
    Abstract: We propose a new method to estimate implicit country weights in the conduct of monetary policy by the European Central Bank (ECB). We estimate linear and non-linear Taylor rules for 11 countries in the pre-Euro period, and then use the estimated response to produce counterfactual reference interest rates for those same countries in the post-Euro period. The distance between counterfactual interest rates and the ECB's reference rate provides an estimate of a country's implicit weight in Euro area monetary policy, in which the sum of weights adds up to 1. The concept of monetary weight draws on that of monetary stress, initially proposed by Clarida, Gali, and Gertler, 1998, and further developed by Sturm and Wollmershauser, 2008. Our results show that Germany, Belgium and the Netherlands are persistently assigned the largest weights, whereas Greece and Ireland secure the smallest. This is especially so during the Sovereign Debt Crisis (SDC). The estimated country weights increase with the degree of co-movement between each country's and Germany's business cycle.
    Keywords: Aggregate Supply and Demand Shocks; Counterfactual Interest Rates; Monetary Weights; Taylor rule
    JEL: E52 F15 F33 P16
    Date: 2019–10
  3. By: Vergote, Olivier; Sugo, Tomohiro
    Abstract: This paper investigates motives of banks to borrow funds from the ECB through its first two series of targeted longer-term refinancing operations (TLTROs) allotted between September 2014 and March 2017. We quantify that the top-three parameters that determine banks’ take-up decisions are the price of the operation, the amount of eligible collateral of the bank, and the composition of that collateral. In particular, the opportunity for banks to transform their less liquid assets partly into liquid central bank reserves by pledging these assets as collateral with the central bank is a strong motive for take-up and suggests that accepting a broad set of collateral was important for the monetary easing provided by TLTROs. In addition, we find that the conditions attached to TLTRO participation and take-up played an important role in creating broad-based participation across banks of different financial strength and size. JEL Classification: C23, C24, E52, E58, G21
    Keywords: dynamic tobit panel, funding for lending, monetary policy operations, take-up behaviour, targeted longer-term refinancing operations
    Date: 2020–07
  4. By: Rossi, Barbara
    Abstract: The recent financial crisis led central banks to lower their interest rates in order to stimulate the economy until they hit the zero lower bound. How should one identify monetary policy shocks in unconventional times? Are unconventional monetary policies as effective as conventional ones? And has the monetary policy transmission mechanism changed in the zero lower bound era? This article aims at providing an overview of the econometric challenges and solutions to the identification of monetary policy shocks in unconventional times as well as a survey of their empirical effects on the economy.
    Keywords: External Instruments; forward guidance; monetary policy; Shock identification; Unconventional Monetary Policy; VARs; zero lower bound
    JEL: D1 E21 E4 E52 H31 I3
    Date: 2019–10
  5. By: Robert Amano; Stefano Gnocchi; Sylvain Leduc; Joel Wagner
    Abstract: The Great Recession and current pandemic have focused attention on the constraint on nominal interest rates from the effective lower bound. This has renewed interest in monetary policies that embed makeup strategies, such as price-level or average-inflation targeting. This paper examines the properties of average-inflation targeting in a two-agent New Keynesian (TANK) model in which a fraction of firms have adaptive expectations. We examine the optimal degree of history dependence under average-inflation targeting and find it to be relatively short for business cycle shocks of standard magnitude and duration. In this case, we show that the properties of the economy are quantitatively similar to those under a price-level target.
    Keywords: ELB; make-up strategies; inflation targeting; price level targeting
    JEL: E31 E32 E52
    Date: 2020–06–24
  6. By: Alex Ilek (bank of Israel)
    Abstract: In this study we analyze the effect of the Bank of Israel (BOI) monetary surprises on inflation and the exchange rate, in the eyes of professional forecasters (PF) in Israel. We exploit a unique daily dataset in Israel containing various forecasts of the PF in sample from April 2001 to October 2016 and derive the monetary surprises of the BOI by exploiting the specific timing of expectations formation. We found that although the PF-perceived effect of monetary surprises on the exchange rate was stable over the past two decades, the pass-through from the exchange rate to inflation significantly declined after 2007, primarily due to a full dissociation of rent prices from the shekel-dollar exchange rate. We also provide indirect and partial evidence that the effect of the BOI monetary surprises on real activity did not change after 2007. That is, we didn't find evidence that the information channel introduced by Nakamura and Steinsson (2018) intensified in Israel despite a decline in natural rates worldwide and the establishment of a monetary committee at the BOI. We found, however, that after the establishment of the monetary committee there was a significant increase in interest-rate inertia. Finally, we found an asymmetric pattern of the PF's assessment of the CB interest rate after the global financial crisis. Following a positive surprise in the BOI interest rate, the PFs significantly updated upward their forecasts for the interest rate for the coming year. In contrast, when the monetary surprise was negative, the PFs barely updated downward their forecast for the interest rate.
    Date: 2020–07
  7. By: W. Scott Frame; Eva Steiner
    Abstract: An emerging literature documents a link between central bank quantitative easing (QE) and financial institution credit risk-taking. This paper tests the complementary hypothesis that QE may also affect financial risk-taking. We study Agency MREITs – levered shadow banks that invest in guaranteed U.S. Agency mortgage-backed securities (MBS) principally funded with repo debt. We show that Agency MREIT growth is inversely related to the Federal Reserve’s Agency MBS purchases, reflecting investor portfolio rebalancing. We also find that these institutions increased leverage during the later stages of QE, consistent with “reaching for yield” behavior. Agency MREITs seem to concurrently adjust their liquidity and interest rate risk profiles.
    Keywords: Quantitative Easing; Risk Taking; GSEs; Mortgages; Agency MBS
    JEL: E58 G21 G23 G28
    Date: 2020–06–30
  8. By: Daleep Singh
    Abstract: Remarks at the Official Sector Service Providers (OSSP)-Bank Negara Malaysia (BNM)-South East Asian Central Banks (SEACEN) Research and Training Centre Forum on Central Bank Foreign Currency Operations.
    Keywords: central banks; payments; operations; standards; liquidity; markets; controls; central bank digital currencies (CBDCs); Official Sector Service Providers (OSSPs); COVID-19; reserve currency service providers
    Date: 2020–08–05
  9. By: Eric S. Rosengren
    Abstract: The economy has suffered a truly severe shock from the COVID-19 public health crisis. The unemployment rate has risen very significantly in response to necessary shutdowns intending to limit the health impact of the pandemic. However, even when businesses are free to open, many may face diminished demand until customers once again feel secure leaving their homes, which underlines that public health is at the root of this crisis and its solutions.
    Keywords: COVID-19; employment; money market mutual funds; fiscal policy; monetary policy; pandemic; economic shock; public health; Main Street Lending Program
    Date: 2020–05–19
  10. By: Nie,Owen
    Abstract: Capital controls, policy measures used by governments to regulate cross-country financial flows, have become standard policy options in many emerging market economies. This paper will focus on what capital controls reveal about the state of the economy and the implications of such revelation for policy efficacy. Using a small open economy model with a collateral constraint and overborrowing relative to the social optimum, this paper incorporates a representative agent's Bayesian updating of information in response to change in policy and show that the efficacy of capital controls to contain financial crises and improve welfare could be undermined if the agent rationally learns from policy. Empirically, this paper finds that capital controls convey important information market participants use to improve their understanding of fundamentals. This paper highlights the need for policymakers to consider the unintended consequences of information revelation in the design of capital flow management policies.
    Keywords: Macroeconomic Management,Banks&Banking Reform,Fiscal&Monetary Policy,Consumption,International Trade and Trade Rules
    Date: 2020–07–30
  11. By: Jacopo Bonchi (Department of Social Sciences and Economics, Sapienza University of Rome)
    Abstract: Asset price bubbles are a major source of macroeconomic instability, but can they play a stabilizing role in a low interest rates environment? To answer this question, I study an economy in which the natural rate of interest declines permanently and a long-lasting zero lower bound (ZLB) episode makes risk-free interest rates persistently low. Asset price bubbles redistribute wealth across generations because of the life-cycle pattern of net worth. In this way, they increase the natural interest rate by serving as a store of value for older cohorts and as a collateral for the younger ones, and the central bank can escape from the ZLB with consequent output gains. Therefore, the redistribution of wealth/consumption across generations, which would be welfare-reducing in normal times, becomes welfare-enhancing. However, asset price bubbles affect mainly the natural interest rate through their role of collateral, and a leveraged bubble is the most detrimental for output when it crashes (Jordá et al., 2015).
    Keywords: Asset price bubbles; Natural interest rate; Zero lower bound
    JEL: E13 E44 E52
    Date: 2020–05
  12. By: de Ferra, Sergio; Mitman, Kurt; Romei, Federica
    Abstract: We study the role of heterogeneity in the transmission of foreign shocks. We build a Heterogeneous-Agent New-Keynesian Small Open Model Economy (HANKSOME) that experiences a current account reversal. Households' portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows. The contraction is more severe when households are leveraged and owe debt in foreign currency. In this setting, the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households. Closing the output gap via an exchange-rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation. Our HANKSOME framework can rationalize the observed "fear of floating" in emerging market economies, even in the absence of contractionary devaluations.
    Keywords: Exchange Rate Policy; foreign currency debt; incomplete markets; Sudden stops
    JEL: E21 F32 F41
    Date: 2019–10
  13. By: Brzezinski, Adam; Chen, Yao; Palma, Nuno Pedro G.; Ward, Felix
    Abstract: We exploit a recurring natural experiment to identify the effects of money supply shocks: maritime disasters in the Spanish Empire (1531-1810) that resulted in the loss of substantial amounts of monetary silver. A one percentage point reduction in the money growth rate caused a 1.3% drop in real output that persisted for several years. The empirical evidence highlights nominal rigidities and credit frictions as the primary monetary transmission channels. Our model of the Spanish economy confirms that each of these two channels explain about half of the initial output response, with the credit channel accounting for much of its persistence.
    Keywords: DSGE; financial accelerator; Local projection; minimum-distance estimation; Monetary shocks; Natural Experiment; Nominal Rigidity
    JEL: E43 E44 E52 N10 N13
    Date: 2019–10
  14. By: Anton Grui (National Bank of Ukraine)
    Abstract: In this study, I modify the uncovered interest parity condition to account for foreign exchange interventions in the context of a small open economy. This is done in a framework of a semistructural New Keynesian model. I examine the case of Ukraine, which de facto transitioned to inflation targeting with a managed float in 2015 after a long period of pegged exchange rate. I simulate model-consistent foreign exchange interventions and use them to quantify the effectiveness of those actually observed. The proposed modification is relevant for inflation targeting regimes with foreign exchange interventions as an additional instrument and those in transition.
    Keywords: New Keynesian model, UIP, exchange rate, FX interventions
    JEL: E12 E17 E52 F31
    Date: 2020–08–18
  15. By: Tim D. Maurer; Thomas Nitschka
    Abstract: We decompose unexpected movements in the stock market returns of 40 countries into different news components to assess why expansionary US monetary policy surprises are good news for stock markets. Our results suggest that prior to the zero lower bound (ZLB) period, federal funds rate surprises affect foreign stock markets mainly because such surprises are associated with news about future real interest rates. The effects of forward guidance surprises are negligible. At the ZLB, large-scale asset purchases (LSAP) reflect more than commitment to forward guidance. LSAP surprises constitute cash-flow news, while unanticipated forward guidance primarily reflects real interest rate news.
    Keywords: International spillovers, news, monetary policy, stock returns, vector autoregression
    JEL: E44 E52 F36 G15
    Date: 2020
  16. By: Perazzi, Elena
    Abstract: In contrast to narrow banking proposals, I argue that deposits are a special form of financing, that makes banks more suitable to extend long-term loans when confronted with the risks of monetary policy. The synergy between deposit-taking and long-term lending arises because profits on deposits are highest after a contractionary monetary policy shock, precisely when the banks' balance sheets deteriorate due to maturity mismatch, and equity-constrained banks deleverage by cutting their lending. I quantify the impact of this mechanism in a dynamic bank model embedded in general equilibrium, and find that deposits mitigate the contraction of new lending at high interest rates by a factor between 25% and 50%.
    Keywords: Deposits, Banks, Long-Term Lending, Narrow Banking
    JEL: E5 G21
    Date: 2019–10–25
  17. By: Goodhart, C. A. E.; Ashworth, Jonathan
    Abstract: Over the past decade the media have regularly reported on the imminent death of cash amid rapid innovation in payment technologies. However, cash in circulation has actually been growing strongly in many counties. Perhaps unsurprisingly given Coronavirus-related health concerns, there have been renewed calls to abandon cash and some observers have argued the virus will accelerate its demise. Data thus far suggest, however, that currency in circulation has actually surged in a number of countries. While the economic shutdowns and increased use of online retailing are currently diminishing cash's traditional function as a medium of exchange, it seems that this is being more than offset by panic driven hoarding of banknotes.
    Keywords: coronavirus; Covid-19; currency usage; payment technologies; hoarding in panics
    JEL: E40 E41 E49 E63 N10
    Date: 2020–06–20
  18. By: Håvard Hungnes (Statistics Norway)
    Abstract: Central banks, private banks, statistical agencies and international organizations such as the IMF and OECD typically use information about the exchange rate some weeks before the publication date as the basis for their exchange rate forecasts. In this paper, we test if forecasts can be made more accurate by utilizing information about exchange rate movements closer to the publication date. To this end, we apply new tests for equal predictability and encompassing for path forecasts. We find that the date when the exchange rate forecast is based on is crucial and this finding should be taken into account when evaluating exchange rate forecasts. Using forecasts made by Statistics Norway over the period 2001 - 2016 we find that the random walk, when based on the exchange rate three days ahead of the publication date, encompassed the predicted path by Statistics Norway. However, when using the exchange rate two weeks before the publication deadline, which is the information used by Statistics Norway in practice when making their forecasts, the random walk path and the predicted exchange rate path by Statistics Norway have equal predictability.
    Keywords: Macroeconomic forecasts; Econometric models; Forecast performance; Forecast evaluation; Forecast comparison
    JEL: C53 F31
    Date: 2020–06
  19. By: Christian Loenser (University of Cologne, Center for Macroeconomic Research); Andreas Schabert (University of Cologne, Center for Macroeconomic Research)
    Abstract: This paper examines how financial constraints affect redistribution via monetary policy. We explore a novel mechanism of monetary non-neutrality, which is based on debt limits imposed in nominal terms. Speci cally, when debt is constrained by current income, monetary policy can alter the real terms of borrowing. Changes in ination exert ambiguous effects, depending on the initial debt/wealth position and the willingness to borrow. We show analytically that borrowers can bene t from increased debt limits under lower inflation rates. This novel effect can dominate conventional debt deflation effects. We find that particularly less indebted borrowers as well as potential future borrowers gain and that aggregate welfare can be enhanced under a permanent reduction in inflation.
    Keywords: Monetary policy, redistribution, borrowing limits, non-state contingent nominal debt, heterogeneous agents
    JEL: D52 E44 E52
    Date: 2020–06
  20. By: Accominotti, Olivier
    Abstract: In May to July 1931, a series of financial panics shook central Europe before spreading to the rest of the world. This article explores the role of cross-border banking linkages in propagating the central European crisis to Britain and the US. Using archival bank-level data, the article documents US and British banks’ exposure to central European frozen credits in 1931. Central European lending was mostly done by large and diversified commercial banks in the US and by small and geographically specialized merchant banks/acceptance houses in Britain. Differences in the organization of international bank lending explain why the central European crisis disturbed few US banks but endangered many British financial institutions.
    JEL: N24
    Date: 2019–02–19
  21. By: International Monetary Fund
    Abstract: This Technical Note on Financial Safety Net and Crisis Management for the Canada examines systematic liquidity issues. The review evaluated the Bank of Canada’s (BOC’s) operational framework and its ability to manage liquidity conditions in normal times and in times of stress. The review also assessed the functioning and resilience of key funding markets in Canada. The paper highlights that the BOC’s framework for market operations and liquidity provision in normal times is comprehensive and well-articulated. System-wide liquidity conditions are stable, market rates are closely aligned with the announced policy rate, and the BOC has many channels to provide liquidity against a broad range of collateral. Foreign exchange markets appear liquid, and their resilience is increasingly important given the growing reliance on external, foreign-currency funding. Contingency plans for market-wide liquidity support regarding intervention in securities markets and provision of foreign-currency liquidity should be developed further and tested.
    Date: 2020–01–24
  22. By: Alex Aronovich; Andrew C. Meldrum
    Abstract: Long-term U.S. interest rates have fallen substantially over the last two decades. The 5-to-10-year nominal forward interest rate implied by the prices of U.S. Treasury securities is now about 7 percentage points lower than it was at the start of the 1990s.
    Date: 2020–08–03
  23. By: Del Negro, Marco; Lenza, Michele; Primiceri, Giorgio E.; Tambalotti, Andrea
    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 Classification: E31, E32, E37, E52
    Keywords: DSGE models, inflation, monetary policy trade-off, unemployment, VARs
    Date: 2020–07
  24. By: Pierpaolo Benigno (Department of Economics, University of Bern); Salvatore Nisticò (Department of Social Sciences and Economics, Sapienza University of Rome)
    Abstract: An economy plagued by a slump and in a liquidity trap has some options to exit the crisis. We discuss "helicopter money" and other equivalent policies that can reflate the economy and boost consumption. In the framework analysed - where lump-sum transfers may be the only effective fiscal response, like in the current pandemic crisis - the central bank, and only the central bank, is the rescuer of last resort of the economy. Fiscal policy is bounded by solvency constraints unless the central bank backs treasury's debt.
    Keywords: Helicopter money, ZLB, Pandemic Crisis
    JEL: E50
    Date: 2020–04
  25. By: Sophie Altermatt; Simon Beyeler
    Abstract: We study the implementation and effectiveness of Operation Twist, which represents the origin of today's unconventional monetary policy measures. Operation Twist serves as a perfect laboratory to assess the usefulness of such balance sheet policies because at that time interest rates were not at their lower bound and the economy was not in a historic turmoil. We assess the actions of the Fed and the Treasury under Operation Twist based on balance sheet data and evaluate the success of the operation using modern time series techniques. We find that the joint policy actions, despite being of rather moderate scale, were effective in compressing the long-short spreads of Treasury bond rates.
    Keywords: Operation Twist, monetary policy, interest rates, yield curve, time series
    JEL: C22 E43 E52 E63 E65
    Date: 2020
  26. By: George Overton; Barbara Castillo Rico
    Abstract: The most direct channel of transmission of monetary policy to households is the modification of ECB lending and deposit facilities rates. Outstanding borrowers with adjustable rate loans face affordability conditions changes with important consequences on their financial situation. In this paper, we study the impact of monetary policy changes on housing credit default over the period 2004-2015. We use an extensive panel of French housing loans to reconstruct amortization tables over the life of each loan and compute changes in quarterly payments due to monetary policy action, later using hazard models to map changes in interest rates to default. Importantly, our data set allows the assumption of the absence of strategic default our analysis, which isolates involuntary default in our estimates. First, we find that a 100 bp increase in quarterly payment induced by variations in the 3-month Euribor increases the probability of default by around 5\%. Second, we identify employment stability as a major insurance factor against rising policy rates during contractionary monetary policy action. Finally, we provide evidence about the existence of a self-selection of riskier borrower profiles into adjustable rate loans. The concern regarding payment size on adjustable-rate loans is of heightened importance in a monetary policy context characterized by uncertainty over the timing of a rate increase following a sustained period of low or negative rates.
    Keywords: Housing loans, Monetary policy, Default
    JEL: R30 H81 E52
    Date: 2020
  27. By: Robert Kollmann
    Abstract: The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low (Benhabib et al. (2001)). This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, country-specific productivity shocks induce synchronized responses of domestic and foreign output, while country-specific aggregate demand shocks trigger asymmetric domestic and foreign responses. A rise in government purchases in an individual country lowers GDP in the rest of the union. The result here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery (e.g. Blanchard et al. (2016)).
    Keywords: Zero lower bound; liquidity trap; monetary union; terms of trade; international fiscal spillovers; Euro Area
    JEL: E30 E40 F20 F30 F40
    Date: 2020–08
  28. By: Igor Goncharov (Lancaster University); Vasso Ioannidou (Lancaster University); Martin C. Schmalz (University of Oxford, CEPR, and ECGI)
    Abstract: We document that central banks are significantly more likely to report slightly positive profits than slightly negative profits, especially amid greater political pressure, the public’s receptiveness to more extreme political views, and when governors are reappointable. The propensity to report small profits over small losses is correlated with more lenient monetary policy and higher inflation. We conclude that profitability concerns, although absent from standard theory, are present and effective in practice. These findings inform a debate about the political economy of central banking, monetary stability, and the effectiveness of non-traditional central banking.
    Keywords: Central Banks, Profitability, Non-Traditional Central Banking, Monetary Stability
    JEL: E58
    Date: 2020–07
  29. By: Samba Diop (Alioune Diop University, Bambey, Senegal); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: This study improves the African Regional Integration Index (ARII) proposed by the African Union, the African Development Bank and the United Nations Economic Commission for Africa by providing a theoretical framework and addressing shortcomings related to weighting and aggregation of the indicator. This paper measures monetary integration in the eight African Regional Economic Communities (RECs) by constructing an Index of African Monetary Integration (IAMI). It proposes an Optimal Currency Area as theoretical framework and uses a panel approach to appreciate the dynamics of the index over different periods of time. The findings show that: (i) inflation and finance (trade and mobility) present the highest (lowest) score while ECOWAS is (EAC and IGAD are) the highest (least) performing. (ii) Surprisingly, in most RECs, the highest contributors to wealth creation are not the top performers in regional monetary integration. (iii) The RECs in Africa are characterized by a stable monetary integration which is different from the gradual process usually observed in monetary integration because with the exception of the EAC and UMA, the dynamics of IAMI show a steady trend in the overall index across time. Policy implications are discussed.
    Keywords: Monetary Integration; Currency Unions; Economic Communities; Africa
    JEL: E10 E50 O10 O55 P50
    Date: 2020–01
  30. By: Eric S. Rosengren
    Abstract: Today I’ll focus on two of the Federal Reserve’s lending programs being run by the Boston Fed: the Money Market Mutual Fund Liquidity Facility and the Main Street Lending Program.
    Keywords: COVID-19; employment; money market mutual funds; fiscal policy; monetary policy; pandemic; economic shock; public health; Main Street Lending Program
    Date: 2020–05–20
  31. By: Boukraine, Wissem
    Abstract: This paper employs the smooth transition autoregressive models (STAR) to analyze Tunisian exchange rate pass-through on quarterly data over the period 2011Q4 2019Q4. The non linearity tests suggest that the LSTAR specification describes better the behavior of exchange rate pass-through in Tunisia and our empirical results confirm its nonlinearity. We found evidence on high pass-through to inflation through external debt in both regimes.
    Keywords: Exchange rate pass-through, Regime Change, LSTAR, Tunisia
    JEL: C24 E31 F31 H60
    Date: 2020
  32. By: Serena Merrino
    Abstract: This paper aims at providing new evidence over the effect of conventional monetary policy shocks on wage inequality through the earnings heterogeneity channel under the inflation-targeting regime implemented in South Africa since 2000. The empirical contribution follows previous studies by implementing a multivariate time-series analysis and identifying the structural shocks in a vector error correction model. Impulse response functions show that the overall wage distribution worsens immediately after a positive shock to the prime rate.
    Keywords: Earnings, Earnings inequality, Inequality, Monetary policy, Distributions, vector error correction
    Date: 2020
  33. By: Ngozi E. Egbuna; Ismaila Jarju; Sani Bawa; Ibrahima Diallo; Olukayode S. Odeniran; Isatou Mendy; Edward Nyarko
    Abstract: This study assesses the speed of real convergence in ECOWAS using the Optimal Currency Area (OCA) theory to determine the readiness of member countries for a monetary union. The study leveraged on Bayoumi and Eichengreen (1996) and computed OCA indices utilizing both variables suggested by the traditional OCA criteria and the new variables identified in the literature. Empirical results from the analysis showed that ECOWAS countries could be divided into three groups: those exhibiting high level of real convergence and would be ready to join the monetary union at the proposed date of 2020, those exhibiting medium level of convergence and may be ready for the union shortly after 2020, and those converging slowly and would require more time to achieve convergence. Additional results indicated that UEMOA countries have achieved real convergence and the single currency programme benefitted the countries at least in line with the OCA analysis. The results also showed that small countries stand to benefit most from joining a monetary union than having its own currency. The study recommends that the formation of an ECOWAS monetary union should assume a gradual approach. In the interim, however, WAMZ countries should intensify efforts to meet the ECOWAS nominal macroeconomic convergence criteria on a sustained basis, as this would make the countries move faster towards real convergence.
    Keywords: Optimum Currency Area, real convergence, Business cycle asymmetry, trade linkages, ECOWAS
    JEL: C33 C43 F15 O55
    Date: 2019–06
  34. By: Ricardo Correa; Wenxin Du; Gordon Y. Liao
    Abstract: We characterize how U.S. global systemically important banks (GSIBs) supply short-term dollar liquidity in repo and foreign exchange swap markets in the post-Global Financial Crisis regulatory environment and serve as the "lenders-of-second-to-last-resort". Using daily supervisory bank balance sheet information, we find that U.S. GSIBs modestly increase their dollar liquidity provision in response to dollar funding shortages, particularly at period-ends, when the U.S. Treasury General Account balance increases, and during the balance sheet taper of the Federal Reserve. The increase in the dollar liquidity provision is mainly financed by reducing excess reserve balances at the Federal Reserve. Intra-firm transfers between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to this type of "reserve-draining" intermediation. Finally, we discuss factors that contributed to the repo spike in September 2019 and the subseque nt response of U.S. GSIBs to recent policy interventions by the Federal Reserve.
    Keywords: Liquidity; Global banks; Repos; Reserves; Covered interest rate parity
    JEL: G20 F30 E40
    Date: 2020–07–08
  35. By: Luo, Yinghao
    Abstract: We study the relationship between symmetry, efficient markets and monetary neutrality. We find that information symmetry can lead markets to reach efficient outcomes and will produce the prices which fluctuate randomly. However, information symmetry is almost impossible to achieve without considering the time factor! In addition, efficient markets can lead to monetary neutrality.
    Keywords: information symmetry; communism; efficient markets; value neutrality; monetary neutrality
    JEL: A13 D3 D8 E44 E5 G14
    Date: 2020–04–20
  36. By: Ngozi E. Egbuna; Ismaila Jarju; Sani Bawa; Ibrahima Diallo; Isatou Mendy; Ozolina Haffner; Kormay Adams
    Abstract: Empirical evidence suggests that regional economic integration plays a crucial role in accelerating growth and development, reducing poverty and economic disparity and boosting productivity and employment, in addition to expanding markets, maximising the efficiency of resource allocation and increasing investment opportunities. Consequently, countries across the globe, including those in Africa, participate in regional integration arrangements to derive the huge benefits associated with it. The Economic Community of West African States (ECOWAS) was, therefore, established in May 1975 to promote cooperation and integration among the countries of the West African sub-region. To fast-track the ECOWAS Monetary Cooperation Programme (EMCP), a two-track approach to monetary integration was adopted by the ECOWAS Authority, leading to the establishment of the West African Monetary Zone (WAMZ) in 2000. The second monetary zone was initially scheduled to kick-off in January 2003, but there have been several postponements due to the slow progress in meeting the macroeconomic convergence criteria by Member States. In spite of the slow progress, evidence has shown that WAMZ countries have made considerable progress towards achieving economic integration in the sub-region. This called for the need to measure and assess Member countries’ performance in the WAMZ integration process using a composite index. Against this background, the study seeks to develop an economic integration index to adequately measure the intensity and pace of regional economic integration in the Zone. The index would help to assess each Member State’s efforts towards the WAMZ integration process. The WAMZ Economic Integration Index (WEII) is composed of five dimensions – trade integration, regional infrastructure, compliance with ECOWAS trade-related protocols, compliance with WAMZ macroeconomic convergence criteria and financial integration. Twenty indicators were identified across the five dimensions to compute the composite index for the period 2015 - 2017. Index weights were obtained and assigned to each of the five dimensions using Principal Component Analysis. Results from the analysis showed that the WAMZ trade integration index increased from 0.063 in 2015 to 0.073 in 2016, but declined to 0.032 in 2017. The result indicated that intra-regional trade was significantly low among the WAMZ economies compared to other regions across the world; thus, Member countries would need to expand their intra-regional trade volumes overtime to improve regional economic integration. The WAMZ regional infrastructure index, however, declined marginally from 0.382 in 2015 to 0.381 in 2016 before rising to 0.386 in 2017, with four Member States recording increases in both 2016 and 2017, while the other two recorded declines in 2016 before increasing in 2017. The WAMZ countries have recorded significant progress in their compliance with ECOWAS trade-related protocols, as the WAMZ compliance index increased to 0.698 and 0.740 in 2016 and 2017, respectively, from 0.649 in 2015. Compliance with the WAMZ macroeconomic convergence criteria, however, has been slow, as the compliance index remained at 0.528 in both 2015 and 2016 before rising to 0.667 in 2017. The financial integration index declined from 0.955 in 2015 to 0.927 in 2016 before increasing to 0.943 in 2017. The WAMZ economic integration index showed increased level of integration among Member States, as the index scores rose to 0.536 and 0.571 in 2016 and 2017, respectively, from 0.529 in 2015, indicating increased commitment to the WAMZ integration agenda. The under-performance by some of the Member States in the WAMZ-index is attributable to the twin shocks of the Ebola Virus Disease (EVD) and the fall in world commodity prices, in addition to the massive landslide in Sierra Leone in 2017. In terms of country performances, whereas Nigeria recorded the highest WAMZ-index depicting the country as the most integrated in the sub-region, the composite indexes of Sierra Leone and Liberia were the lowest with the indexes for Sierra Leone being below the sub-regional averages throughout the three years while that of Liberia was below the sub-regional average in 2017.
    Keywords: Economic Integration Index, trade integration, macroeconomic convergence, WAMZ.
    JEL: C38 C43 F15 O55
    Date: 2018–12
  37. By: Ozili, Peterson K
    Abstract: This study investigates whether the competence of central bank governors affect the stability of the financial system they are responsible for. Using publicly available information about central bank governors from 2000 to 2016 together with data on financial stability and the macro-economy, the findings reveal that central bank governors’ competence promotes financial stability, depending on how competence is measured. Specifically, the findings reveal that the financial system is more stable when the central bank governor is older and male. The financial system is also stable during the tenure of a central bank governor that has a combination of cognitive ability, social capital and technical competence in economics. The gender analyses reveal that the financial system is also stable during the tenure of a female central bank governor that has high social capital or high cognitive abilities while the financial system is relatively less stable during the tenure of a male central bank governor that has high social capital or high cognitive abilities. Comparing developed countries to developing and transition countries, the findings reveal that the financial system of developed countries is more stable during the tenure of a central bank governor that has high cognitive ability, social capital and technical competence in economics while the financial system of developing and transition countries is less stable during the tenure of a central bank governor that has high cognitive ability, social capital and technical competence in economics. Also, there is evidence that the financial system of developing and transition countries is more stable during the tenure of a central bank governor that has knowledge in disciplines other than economics. The findings are consistent with the view that certain characteristics of central bankers shape their beliefs, preferences and choice of policy, which in turn, are consequential for policy outcomes during their tenure.
    Keywords: Financial stability, central bank governor, financial system, banking stability, competence, education, gender, financial institutions, economics, financial crisis, loan loss provisions, nonperforming loans, regulatory capital, inflation rate, real interest rate, GDP growth rate.
    JEL: G2 G20 G21 G28 P1
    Date: 2020
  38. By: De Grauwe, Paul
    Abstract: Sooner or later, the ECB must accept that monetary financing in support of deficit spending is a necessity not just for mitigating the coronavirus crisis, but also for averting a downward deflationary cycle that could pull the eurozone apart.
    Keywords: Covid-19; coronavirus
    JEL: J1 F3 G3
    Date: 2020–06–07
  39. By: Tweneboah Senzu, Emmanuel
    Abstract: The different target of the time period has been established over the past two decades in the institutionalization of a single currency union in West Africa. Depending on varied reasons the proposed programs have always failed before the set timelines in respect of ECOWAS monetary unification and single currency adoption. As a result, the paper explored and developed its argument based on the existing studies of structured economic shocks, significant to the failure of the single currency union, and its major causal factors. And with observed structured analysis propose catalytic activator method as a theoretical guide to attain the single currency union within three (3) years ahead, if the necessary requirement as the commitment level of members’ State is applied towards the single currency unification program. It then elaborates in the spirit of precision the process required to sustain the eco-currency program in other to elevate members State in an out-date of its domestic currencies struggling as a subservient economic bloc to the adoption of a new anticipated domineering currency in its own merit to shoulder with the global dominating hard currencies.
    Keywords: Eco-currency, Monetary Union, ECOWAS, Central Bank, Monetary Policy
    JEL: E2 E3 E4 E5 E6
    Date: 2020–08–01

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