nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒09‒21
forty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Bank reserves and broad money in the global financial crisis: a quantitative evaluation By Chadha, Jagjit S.; Corrado, Luisa; Meaning, Jack; Schuler, Tobias
  2. The great lockdown: pandemic response policies and bank lending conditions By Altavilla, Carlo; Barbiero, Francesca; Boucinha, Miguel; Burlon, Lorenzo
  3. Limitations on the Effectiveness of Monetary Policy Forward Guidance in the Context of the COVID-19 Pandemic By Andrew T. Levin; Arunima Sinha
  4. Narrative monetary policy surprises and the media By ter Ellen, Saskia; Larsen, Vegard H.; Thorsrud, Leif Anders
  5. Did the Federal Reserve Break the Phillips Curve? Theory and Evidence of Anchoring Inflation Expectations By Brent Bundick; Andrew Lee Smith
  6. 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
  7. Monetary Policy Announcements and Expectations: Evidence from German Firms By Enders, Zeno; Hünnekes, Franziska; Müller, Gernot J.
  8. Why Do Central Banks Make Public Announcements of Open Market Operations? By Narayan Bulusu
  9. Reading a central banker's preference: A non parametric regression approach By Cheolbeom Park; Sookyung Park
  10. International Evidence on Shock-Dependent Exchange Rate Pass-Through By Kristin Forbes; Ida Hjortsoe; Tsvetelina Nenova
  11. The role of information and experience for households' inflation expectations By Conrad, Christian; Enders, Zeno; Glas, Alexander
  12. Monetary Policy and Economic Performance Since the Financial Crisis By Dario Caldara; Etienne Gagnon; Enrique Martínez-García; Christopher J. Neely
  13. Monetary Policy Independence and the Strength of the Global Financial Cycle By Jonathan Witmer
  14. Average is Good Enough: Average-inflation Targeting and the ELB By Robert Amano; Stefano Gnocchi; Sylvain Leduc; Joel Wagner
  15. Does Publication of Interest Rate Paths Provide Guidance? By Natvik, Gisle J.; Rime, Dagfinn; Syrstad, Olav
  16. Implementing Monetary Policy in an "Ample-Reserves" Regime: Maintaining an Ample Quantity of Reserves (Note 2 of 3) By Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
  17. Redistributive Policy Shocks and Monetary Policy with Heterogeneous Agents By Bahl, Ojasvita; Ghate, Chetan; Mallick, Debdulal
  18. Fading the effects of coronavirus with monetary policy By MALATA, Alain K.; PINSHI, Christian P.
  19. Country default in a monetary union By Lovleen Kushwah
  20. Optimal Dynamic Capital Requirements and Implementable Capital Buffer Rules By Matthew B. Canzoneri; Behzad T. Diba; Luca Guerrieri; Arsenii Mishin
  21. Inflation at risk in advanced and emerging economies By Ryan Niladri Banerjee; Juan Contreras; Aaron Mehrotra; Fabrizio Zampolli
  22. Monetary Policy and Cross-Border Interbank Market Fragmentation: Lessons from the Crisis By Tobias Blattner; Jonathan Swarbrick
  23. Central Bank Independence and Inflation: An Empirical Analysis By Chiquiar Daniel; Ibarra-Ramírez Raúl
  24. The Real Interest Rates Across Monetary Policy Regimes By Hernán D. Seoane
  25. Monetary rules in an open economy with distortionary subsidies and inefficient shocks: A DSGE approach for Bolivia By Jemio Hurtado, Valeria
  26. Public Bonds as Money Substitutes at Near-Zero Interest Rates: Disequilibrium Analysis of the Current and Future Japanese Economy By Saito, Makoto
  27. Nonlinear Exchange Rate Pass-Through in Mexico By Jaramillo Rodríguez Jorge; Pech Moreno Luis Alberto; Ramírez Claudia; Sanchez-Amador David
  28. Marshall Lerner condition for money demand By Saccal, Alessandro
  29. Dynamics of Mexican Inflation: A Wavelet Analysis By Cortés Espada Josué Fernando; Sámano Daniel; Gutiérrez Villanueva Rubí
  30. Commodity Prices and Policy Stabilisation in South Africa By Byron Botha; Eric Schaling
  31. Monetary Stimulus Amidst the Infrastructure Investment Spree: Evidence from China's Loan-Level Data By Kaiji Chen; Haoyu Gao; Patrick C. Higgins; Daniel F. Waggoner; Tao Zha
  32. A preferred-habitat model of the term structure of interest rates By Vayanos, Dimitri; Vila, Jean-Luc
  33. Modelling the Inflation Process in Nigeria By Olusanya E. Olubusoye; Rasheed Oyaromade
  34. Sliding Down the Slippery Slope? Trends in the Rules and Country Allocations of the Eurosystem’s PSPP and PEPP By Annika Havlik; Friedrich Heinemann
  35. How puzzling is the forward premium puzzle? A meta-analysis By Havranek, Tomas; Novak, Jiri; Zigraiova, Diana
  36. Covered Interest Parity: A Stochastic Volatility Approach to Estimate the Neutral Band By Juan Ramón Hernández
  37. The role of IMF conditionality for central bank independence By Rau-Goehring, Matthias; Reinsberg, Bernhard; Kern, Andreas
  38. Climate Actions and Stranded Assets: The Role of Financial Regulation and Monetary Policy By Francesca Diluiso; Barbara Annicchiarico; Matthias Kalkuhl; Jan C. Minx
  39. Relative Price Variability and Inflation: Evidence from the Agricultural Sector in Nigeria By Obasi O. Ukoha
  40. The Effect of Price Stability on Real Sector Performance in Ghana By Peter Quartey

  1. By: Chadha, Jagjit S.; Corrado, Luisa; Meaning, Jack; Schuler, Tobias
    Abstract: The Federal Reserve responded to the global financial crisis by initiating an unprecedented expansion of central bank money (bank reserves) once the policy rate had reached the lower bound. To capture the salient features of the crisis, we develop a model where the central bank can provide reserves on demand and also use reserves to buy government bonds. We show that the provision of reserves through either channel reduces the cost of providing loans as they act as a substitute for private sector collateral and costly monitoring activity. We illustrate this mechanism by examining the role of reserves in projecting stable growth in broad money after the financial crisis. We also run a counterfactual which suggests that, if the Federal Reserve had not provided bank reserves on such a large scale, broad money would have fallen, the economy might have experienced a deeper contraction, and the recovery would have been more protracted, taking perhaps twice as long to return to equilibrium. JEL Classification: E31, E40, E51
    Keywords: liquidity provision, non-conventional monetary policy, quantitative easing
    Date: 2020–08
  2. By: Altavilla, Carlo; Barbiero, Francesca; Boucinha, Miguel; Burlon, Lorenzo
    Abstract: This study analyses the policy measures taken in the euro area in response to the outbreak and the escalating diffusion of new coronavirus (COVID-19) pandemic. We focus on monetary, microprudential and macroprudential policies designed specifically to support bank lending conditions. For identification, we use proprietary data on participation in central bank liquidity operations, high-frequency reactions to monetary policy announcements, and confidential supervisory information on bank capital requirements. The results show that in the absence of the funding cost relief and capital relief associated with the pandemic response measures, banks’ ability to supply credit would have been severely affected. The results also indicate that the coordinated intervention by monetary and prudential authorities amplified the effects of the individual measures in supporting liquidity conditions and helping to sustain the flow of credit to the private sector. Finally, we investigate the potential real effects of the joint pandemic response measures by estimating the adjustment in labour input variables for firms that in the past have been more exposed to similar policies. We find that, in absence of monetary and prudential policies, the pandemic would lead to a significantly larger decline in firms’ employment. JEL Classification: E51, E52, E58, G01, G21, G28
    Keywords: bank lending, COVID-19 crisis, monetary policy, prudential policy
    Date: 2020–09
  3. By: Andrew T. Levin; Arunima Sinha
    Abstract: We examine the effectiveness of forward guidance at the effective lower bound (ELB) in the context of the COVID-19 pandemic. Survey evidence underscores the myopia of professional forecasters at the initial stages of the pandemic and the extraordinary dispersion of their recent forecasts. Moreover, financial markets are now practically certain that U.S. short-term nominal interest rates will remain at the ELB for the next several years; consequently, forward guidance would have to refer to a much longer time horizon than in previous experience. To analyze the effects of these issues, we consider a canonical New-Keynesian model with three modifications: (1) expectations formation incorporates the mechanisms that have been proposed for addressing the forward guidance puzzle; (2) the central bank has imperfect credibility in making longer-horizon commitments regarding the path of monetary policy; and (3) the central bank may not have full knowledge of the true structure of the economy. In this framework, providing substantial near-term monetary stimulus hinges on making promises of relatively extreme overshooting of output and inflation in subsequent years, and hence forward guidance has only tenuous net benefits and may even be counterproductive.
    JEL: E52 E58
    Date: 2020–08
  4. By: ter Ellen, Saskia; Larsen, Vegard H.; Thorsrud, Leif Anders
    Abstract: We propose a method to quantify narratives from textual data in a structured manner, and identify what we label "narrative monetary policy surprises" as the change in economic media coverage that can be explained by central bank communication accompanying interest rate meetings. Our proposed method is fast and simple, and relies on a Singular Value Decomposition of the different texts and articles coupled with a unit rotation identification scheme. Identifying narrative surprises in central bank communication using this type of data and identification provides surprise measures that are uncorrelated with conventional monetary policy surprises, and, in contrast to such surprises, have a significant effect on subsequent media coverage. In turn, narrative monetary policy surprises lead to macroeconomic responses similar to what recent monetary policy literature associates with the information component of monetary policy communication. Our study highlights the importance of written central bank communication and the role of the media as information intermediaries.
    Keywords: communication, monetary policy, factor idenification, textual data
    JEL: C01 C55 C82 E43 E52 E58
    Date: 2019–10–04
  5. By: Brent Bundick; Andrew Lee Smith
    Abstract: In a macroeconomic model with drifting long-run inflation expectations, the anchoring of inflation expectations manifests in two testable predictions. First, expectations about inflation far in the future should no longer respond to news about current inflation. Second, better-anchored inflation expectations weaken the relationship between unemployment and inflation, flattening the reduced-form Phillips curve. We evaluate both predictions and find that communication of a numerical inflation objective better anchored inflation expectations in the United States but failed to anchor expectations in Japan. Moreover, the improved anchoring of U.S. inflation expectations can account for much of the observed flattening of the Phillips curve. Finally, we present evidence that initial Federal Reserve communication around its longer-run inflation objective may have led inflation expectations to anchor at a level below 2 percent.
    Keywords: Monetary policy; Inflation; Inflation targeting; Central bank communication; Structural breaks; Phillips Curve
    JEL: E31 E52 E58
    Date: 2020–09–03
  6. 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 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: 2020–08–19
  7. By: Enders, Zeno; Hünnekes, Franziska; Müller, Gernot J.
    Abstract: We assess empirically whether monetary policy announcements impact firm expectations. Two features of our data set are key. First, we rely on a survey of production and price expectations of German firms, that is, expectations of actual price setters. Second, we observe the day on which firms submit their answers to the survey. We compare the responses of firms before and after monetary policy surprises and obtain two results. First, firm expectations respond to policy surprises. Second, the response becomes weaker as the surprise becomes bigger. A contractionary surprise of moderate size reduces firm expectations, while a moderate expansionary surprise raises them. Large surprises, both negative and positive, fail to alter expectations. Consistent with this result, we find that many of the ECB's announcements of non-conventional policies did not affect expectations significantly. Overall, our results are consistent with the notion that monetary policy surprises generate an information effect which is endogenous to the size of the policy surprise.
    Keywords: Monetary policy announcements,Firm expectations,Survey data,European Central Bank,Information effect
    JEL: E31 E52 E58
    Date: 2019
  8. By: Narayan Bulusu
    Abstract: Central banks make public the results of open market operations (OMOs), which they use to adjust the liquidity available to the financial system to maintain the short-term borrowing rate in the range compatible with achieving their monetary policy objectives. This paper shows that such announcements are costly because they moderate the impact of changes in supply achieved through OMOs. Nevertheless, communication of OMOs is desirable because it improves the transparency of the funding market, which makes the price of liquidity—a key input into economic decision making—more reflective of underlying demand and supply of liquidity.
    Keywords: Central bank research; Monetary policy implementation
    JEL: D5 D52 E5 E58 G2 G21
    Date: 2020–09
  9. By: Cheolbeom Park (Department of Economics, Korea University, 145 Anamro, Seongbukgu, Seoul, Korea 02841); Sookyung Park (Institute of Economic Research, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul, 08826, Republic of Korea)
    Abstract: We examine the role of the Fed's preference in the understanding of inflation rate and unemployment rate evolution using US data over the period of 1960-2017. Facing the evidence of instability in a constant-coefficient regression, we run a nonparametric regression, and find that the Fed's preference parameters have moved, implying that its preference can be represented by the asymmetric preference model putting more weights on high unemployment rate approximately before the era of Volcker's chairmanship and by the inflation targeting model during the 1980s and 1990s. The Fed's preferences again seem concerned about higher unemployment after the Global Financial Crisis.
    Keywords: asymmetric preference, inflation, monetary policy, time-varying parameter, unemployment, nonparametric regression
    JEL: E31 E52 E61
    Date: 2020
  10. By: Kristin Forbes; Ida Hjortsoe; Tsvetelina Nenova
    Abstract: We analyse the economic conditions (the “shocks”) behind currency movements and show how that analysis can help address a range of questions, focusing on exchange rate pass-through to prices. We build on a methodology previously developed for the United Kingdom and adapt this framework so that it can be applied to a diverse sample of countries using widely available data. The paper provides three examples of how this enriched methodology can be used to provide insights on pass-through and other questions. First, it shows that exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher pass-through than those caused by demand shocks in a cross-section of countries, confirming earlier results for the UK. Second, it shows that the underlying shocks (especially monetary policy shocks) are particularly important for understanding the time-series dimension of pass-through, while the standard structural variables highlighted in previous literature are most important for the cross-section dimension. Finally, the paper explores how the methodology can be used to shed light on the effects of monetary policy and the debate on "currency wars": it shows that the role of monetary policy shocks in driving the exchange rate has increased moderately since the global financial crisis in advanced economies.
    JEL: E31 E37 E52 F47
    Date: 2020–08
  11. By: Conrad, Christian; Enders, Zeno; Glas, Alexander
    Abstract: Based on a new survey of German households, we investigate the role of information channels and lifetime experience for households' inflation expectations. We show that the types of information channels that households use to inform themselves about monetary policy are closely related to their socio-economic characteristics. These information channels, in turn, have an important influence on the level of perceived past and expected future inflation, as well as uncertainty thereof. The expected future change of inflation and the unemployment rate, however, is strongly influenced by individual experience of these variables. Similarly, the expected response of inflation to a change in the interest rate is also shaped by experience. We propose the interpretation that households obtain inflation numbers from the media, but their 'economic model' is shaped by experience.
    Keywords: household expectations,inflation expectations,information channels,experience,Bundesbank household survey
    JEL: E31 D84
    Date: 2020
  12. By: Dario Caldara; Etienne Gagnon; Enrique Martínez-García; Christopher J. Neely
    Abstract: We review the macroeconomic performance over the period since the Global Financial Crisis and the challenges in the pursuit of the Federal Reserve’s dual mandate. We characterize the use of forward guidance and balance sheet policies after the federal funds rate reached the effective lower bound. We also review the evidence on the efficacy of these tools and consider whether policymakers might have used them more forcefully. Finally, we examine the post-crisis experience of other major central banks with these policy tools.
    Keywords: Global Financial Crisis 2007–09; monetary policy; effective lower bound; structural changes; forward guidance; balance sheet policies
    JEL: E31 E32 E52 E58
    Date: 2020–08–28
  13. By: Jonathan Witmer
    Abstract: 24/7 payment settlement may impact the demand for central bank reserves and thus could have an effect on monetary policy implementation. Using the standard workhorse model of monetary policy implementation (Poole, 1968), we show that 24/7 payment settlement induces a precautionary demand for central bank balances. Absent any changes or response by the central bank, this will put upward pressure on the overnight interest rate in a standard corridor system of monetary policy implementation. A floor system is much less sensitive to this change, as long as excess balances are large enough.
    Keywords: Monetary policy implementation; Payment clearing and settlement systems
    JEL: E43
    Date: 2020–06
  14. 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: Business fluctuations and cycles; Economic models; Monetary policy framework
    JEL: E52
    Date: 2020–07
  15. By: Natvik, Gisle J.; Rime, Dagfinn; Syrstad, Olav
    Abstract: Does the central bank practice of publishing interest rate projections (IRPs) improve how market participants map new information into future interest rates? Using high-frequent data on Forward Rate Agreements (FRAs) we compute market forecast errors; differences between expected future interest rates and ex post realizations. We assess their change in narrow windows around monetary policy announcements and macroeconomic releases in Norway and Sweden. Overall, communication of future policy plans do not improve markets’ response to information, irrespective of whether or not IRPs are in place. A decomposition of market reactions into responses to the current monetary policy action (“target”) and responses to signals about the future (“path”), reveals that only policy actions lead to improvements in market forecasts.
    Keywords: monetary policy, interest rate paths, forward guidance, high-frequency data, forecasts
    JEL: O13 Q33
    Date: 2019–10–03
  16. By: Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
    Abstract: In this second note, we describe some important influences on the supply of and demand for reserves and how the Fed will need to account for these influences in maintaining an ample quantity of reserves over the long run. These considerations are most relevant in normal times, not in periods in which there are severe strains in financial markets or weakness in economic activity that necessitate aggressive policy actions by the Fed that substantially increase reserves.
    Date: 2020–08–28
  17. By: Bahl, Ojasvita; Ghate, Chetan; Mallick, Debdulal
    Abstract: Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse domestic or external shocks. Such interventions typically involve a large increase in the procurement and redistribution of food, which we call a redistributive policy shock. What is the impact of a redistributive policy shock on the sectoral and aggregate dynamics of inflation, and the distribution of consumption amongst rich and poor households? To address this, we build a tractable two-sector (agriculture and manufacturing) two-agent (rich and poor) New Keynesian DSGE model with redistributive policy shocks. We calibrate the model to the Indian economy. We show that for an inflation targeting central bank, consumer heterogeneity matters for whether monetary policy responses to a variety of shocks raises aggregate welfare or not. Our paper contributes to a growing literature on understanding the role of consumer heterogeneity in monetary policy.
    Keywords: TANK models, HANK Models, Inflation Targeting, Emerging Market and Developing Economies, Food Security, Procurement and Redistribution, DSGE.
    JEL: E31 E32 E44 E52 E63
    Date: 2020–07–07
  18. By: MALATA, Alain K.; PINSHI, Christian P.
    Abstract: The Central Bank of Congo (BCC) reduced the policy rate in response to the uncertain effects of the coronavirus. The impact of the pandemic on the economy is still uncertain and depends on many factors. Using the Bayesian technique of the VAR model we notice that cutting the policy rate would not help the economy to cope with the consequences of COVID-19, we should rethink other tactics and strategies, such as a good communication strategy and / or try unconventional monetary policy measures. However, coordination with fiscal policy is a driver key in blurring the effects of the coronavirus crisis
    Keywords: Monetary policy, coronavirus, coordination
    JEL: C32 E32 E44 E52 E63
    Date: 2020–05
  19. By: Lovleen Kushwah
    Abstract: We develop a simple model of borrowing and lending within the monetary union. We characterize the default decision of the borrowing country and explore the impact that the monetary union has on the amount of borrowing, the rate of interest and the default probability. The key assumptions of the modelling strategy are that in the monetary union, the lender is risk averse with monopoly power rather than risk neutral with perfect competition. We find that the borrowing member country of the monetary union borrows more at cheaper cost vis-`a-vis a standalone borrowing country. Further, we find that forming a monetary union with high initial income disparity between the member countries leads to more and cheaper borrowing and higher default probabilities.
    JEL: F45 F41 F34 F33 E43
    Date: 2020–09
  20. By: Matthew B. Canzoneri; Behzad T. Diba; Luca Guerrieri; Arsenii Mishin
    Abstract: We build a quantitatively relevant macroeconomic model with endogenous risk-taking. In our model, deposit insurance and limited liability can lead banks to make risky loans that are socially inefficient. This excessive risk-taking can be triggered by aggregate or sectoral shocks that reduce the return on safer loans. Excessive risk-taking can be avoided by raising bank capital requirements, but unnecessarily tight requirements lower welfare by limiting liquidity producing bank deposits. Consequently, optimal capital requirements are dynamic (or state contingent). We provide examples in which a Ramsey planner would raise capital requirements: (1) during a downturn caused by a TFP shock; (2) during an expansion caused by an investment-specific shock; and (3) during an increase in market volatility that has little effect on the business cycle. In practice, the economy is driven by a constellation of shocks, and the Ramsey policy is probably beyond the policymaker's ken; so, we also consider implementable policy rules. Some rules can mimic the optimal policy rather well but are not robust to all the calibrations we consider. Basel III guidance calls for increasing capital requirements when the credit to GDP ratio rises, and relaxing them when it falls; this rule does not perform well. In fact, slightly elevated static capital requirements generally do about as well as any implementable rule.
    Keywords: Countercylical capital buffer; DSGE models; Bank capital requirements; Ramsey policy
    JEL: C51 E58 G28
    Date: 2020–08–06
  21. By: Ryan Niladri Banerjee; Juan Contreras; Aaron Mehrotra; Fabrizio Zampolli
    Abstract: We examine how inflation risks have changed over time in a large panel of advanced and emerging market economies (EMEs). Quantile regressions show a general decline in upside inflation risks over time, reflecting successful disinflationary processes and the adoption of inflation targeting regimes. But important non-linearities remain. In advanced economies, the zero lower bound represents a prominent source of downside inflation risk. In EMEs, the exchange rate remains a powerful source of nonlinearity, with large exchange rate depreciations associated with upside inflation risks. Tightening financial conditions increase both up- and downside inflation risks.
    Keywords: inflation risk, monetary policy framework, zero lower bound, inflation targeting
    JEL: E31 E37 E52
    Date: 2020–09
  22. By: Tobias Blattner; Jonathan Swarbrick
    Abstract: We present a two-country model featuring risky lending and cross-border interbank market frictions. We find that (i) the strength of the financial accelerator, when applied to banks operating under uncertainty in an interbank market, will critically depend on the economic and financial structure of the economy; (ii) adverse shocks to the real economy can be the source of banking crisis, causing an increase in interbank funding costs, aggravating the initial shock; and (iii) asset purchases and central bank long-term refinancing operations can be effective substitutes for, or supplements to, conventional monetary policy.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates; International financial markets; Monetary policy framework; Transmission of monetary policy
    JEL: E52 F36
    Date: 2020–08
  23. By: Chiquiar Daniel; Ibarra-Ramírez Raúl
    Abstract: This paper analyzes the relationship between central bank independence and inflation in a panel of 182 countries for the period from 1970 to 2018. To measure the degree of independence, two measures are used, the Garriga (2016) index, constructed from the laws and internal regulations of central banks, and the Dreher et al. (2008) index, based on the turnover rate of governors. The results indicate that greater central bank independence is associated with lower levels of inflation, both for highincome countries and for low and middle-income countries. There is also a negative relationship between inflation volatility and central bank independence, although the results are statistically significant only when using the full sample of countries. The results are robust to the use of the two alternative measures of Independence and to the use of two alternative approaches to avoid simultaneity.
    Keywords: Central Bank Independence;Inflation
    JEL: E31 E52 E58
    Date: 2019–12
  24. By: Hernán D. Seoane
    Abstract: This paper reviews the main theories of interest rate determination and studies the dynamics of the real interest rate in US. Using cointegration techniques we search for equilibrium relationships between the real interest rate, monetary factors and real factors and we study how these relationships change with the policy regimes. We analyze monthly US data since early 20th century and find equilibrium relationships between a measure of the real interest rate, the policy interest rate and industrial production growth only after the end of the Bretton Woods. Moreover, we find that the equilibrium relationships between these variables are not invariant to changes in the monetary policy regime.
    Date: 2020
  25. By: Jemio Hurtado, Valeria
    Abstract: Through an estimated and calibrated DSGE model with imperfect competition and nominal rigidities, this work aims to assess the dynamic effects of exogenous perturbations in a small open economy to provide a prescription of a simple monetary policy rule associated with the minimal welfare losses in the case of Bolivia. Following Gali and Monacelli (2005) and De Paoli (2009), I display the baseline model in a canonical representation. Yet, unlike them, I consider the presence of efficient and inefficient perturbations, namely government spending, productivity, foreign demand, and cost-push shocks, to analyze its effects in terms of observable variables but also on the relevant output gap. Moreover, considering the significance of raw materials as a proportion of the Bolivian exports, I extend the model by taking into account a distortionary subsidy on consumption financed by the positive profits of the commodity sector, Further, in the style of Gali and Monacelli (2005), I compare the welfare implications under two scenarios: A monetary rule focus on maintain a nominal exchange rate peg (fixed) regime and a Taylor rule. The main results reveal that the latter outperforms the former when the full set of shocks occurs simultaneously, showing the importance of inflation targeting. Yet, by focusing only on inefficient exogenous perturbations, and taking into account a pegged regime and a simple Taylor rule based on consumer and producer price inflation, the ranking of monetary policy aligns in the first place an exchange rate peg. This scenario shows the potential success of alternative simple monetary rules under these circumstances.
    Keywords: Macroeconomics; Monetary Policy; Business Cycles; Bayessian Estimation
    JEL: C11 C13 C15 E0 E12 E32 E52 E58 F41 F44
    Date: 2020–07–14
  26. By: Saito, Makoto
    Abstract: In the past quarter century, Japan’s economy has seen rates of interest, including those on long-term public bonds, remain quite low despite colossal accumulation of public debt, while the price level has been mildly deflationary or almost constant despite rapid monetary expansion. In this chapter, these puzzling phenomena are interpreted using a simple disequilibrium analysis framework. The major reasons for adopting disequilibrium analysis are that 1) Japan’s economy often fell into excess supply in both goods and labor markets after short-term rates of interest were controlled below 0.5% in mid-1995, and 2) public bonds markets were clearly in serious excess supply given the expectation that the primary fiscal balance was not going to turn into surpluses in the future relevant to those bonds being issued. In the proposed disequilibrium model, excess supply in goods, labor, and public bonds markets is absorbed by excess demand in money markets, induced by strong money demand at near-zero interest rates. In particular, strong money demand absorbs public bonds not as investment instruments, but as money substitutes. This chapter also demonstrates that excess demand in money markets in disequilibrium analysis can be interpreted as public bond pricing bubbles in equilibrium analysis. Given the analogy between the two approaches, as long as a bubble is sustained, mild deflation and near-zero interest rates continue in spite of massive issues of public bonds and rapid expansion of money stocks. On the other hand, once a bubble bursts, money demand shrinks drastically, a wide range of interest rates rise suddenly, and the price level jumps abruptly. With the government’s credible commitment to future fiscal reforms, a one-off price surge would stop immediately at a level two or three times higher than before, but without the reforms, the price process would be hyperinflationary.
    Keywords: disequilibrium analysis, strong money demand, zero interest rate policy, fiscal sustainability, the quantity theory of money, the fiscal theory of the price level, public bond pricing bubbles
    Date: 2020–09
  27. By: Jaramillo Rodríguez Jorge; Pech Moreno Luis Alberto; Ramírez Claudia; Sanchez-Amador David
    Abstract: This paper aims to investigate if the exchange rate pass-through (ERPT) to consumer prices follows a nonlinear behavior in Mexico. To look for nonlinearities, we employ a Threshold VAR approach (TVAR). The threshold allows us to differentiate regimes of "high" or "low" depreciation and the effect of exchange rate movements onto prices in each of these regimes. Our results suggest the existence of nonlinearities in Mexico only for the merchandise inflation measure, including the food and non-food subindices, with an estimated threshold that varies from an annual depreciation rate of 7.20 to 7.30 percent. Even though we find that these ERPT coefficients differ between regimes from a statistical point of view, the effect over headline inflation is small. Our results are consistent with the consolidation of a low ERPT in Mexico.
    Keywords: Exchange-Rate Pass-through;Threshold VAR;Inflation;Foreign Exchange
    JEL: C32 E31 F31
    Date: 2019–11
  28. By: Saccal, Alessandro
    Abstract: This article derives a twofold Marshall Lerner condition for money demand such that the current account may increase or decrease upon respective decrements or increments in the real exchange rate.
    Keywords: current account; exchange rate; Marshall Lerner condition; money demand; money supply; prices.
    JEL: E12 F13 F41 F52
    Date: 2020–07–03
  29. By: Cortés Espada Josué Fernando; Sámano Daniel; Gutiérrez Villanueva Rubí
    Abstract: This paper uses the wavelet methodology to analyze the dynamics of inflation in Mexico at different frequencies over time. First, we analyze the monthly behavior of the headline, core, and noncore inflation from January 2007 to December 2018. Subsequently, the decomposition shows that the shocks on headline inflation in 2017 were mainly associated with the high-frequency component and they did not generate changes in its low-frequency component.
    Keywords: Inflation;Wavelet decomposition;Wavelet variance;Trend inflation
    JEL: C19 C49 C65 E31
    Date: 2019–12
  30. By: Byron Botha; Eric Schaling
    Abstract: In order to account for the effects of commodity exports on the South African business cycle we use a multivariate extension of the Hodrick Prescott (HP) filter that incorporates commodity prices. We find that ignoring commodity prices results in a monetary policy stance that is more dovish than the one implied by our multivariate measure of the business cycle. This may partly explain why inflation breached the inflation target from 2007Q2 to 2009Q4, and overshot the upper bound of the target again by mid-2014. In addition we find that incorporating information about commodity prices implies smaller revisions of the estimated output gap. This in turn, enables a more consistent narrative around economic slack and monetary policy over time.
    Date: 2020–09–04
  31. By: Kaiji Chen; Haoyu Gao; Patrick C. Higgins; Daniel F. Waggoner; Tao Zha
    Abstract: We study the impacts of the 2009 monetary stimulus and its interaction with infrastructure spending on credit allocation. We develop a two-stage estimation approach and apply it to China's loan-level data that covers all sectors in the economy. We find that except for the manufacturing sector, monetary stimulus itself did not favor SOEs over non-SOEs in credit access. Infrastructure investment driven by non-monetary factors, however, enhanced the monetary transmission to bank credit allocated to LGFVs in infrastructure and at the same time weakened the impacts of monetary stimulus on bank credit to non-SOEs in sectors other than infrastructure.
    JEL: C13 C3 E02 E5
    Date: 2020–08
  32. By: Vayanos, Dimitri; Vila, Jean-Luc
    Abstract: We model the term structure of interest rates that results from the interaction between investors with preferences for specific maturities and risk-averse arbitrageurs. Shocks to the short rate are transmitted to long rates through arbitrageurs’ carry trades. Arbitrageurs earn rents from transmitting the shocks, through bond risk premia that relate positively to the slope of the term structure. When the short rate is the only risk factor, changes in investor demand have the same relative effect on interest rates across maturities regardless of the maturities where they originate. When investor demand is also stochastic, demand effects become more localized. A calibration indicates that long rates under-react severely to forward-guidance announcements about short rates. Large-scale asset purchases can be more effective in moving long rates, especially if they are concentrated at long maturities.
    JEL: F3 G3 J1
    Date: 2020–09–06
  33. By: Olusanya E. Olubusoye; Rasheed Oyaromade (Addis Ababa University, Ethiopia)
  34. By: Annika Havlik; Friedrich Heinemann
    Abstract: The Eurosystem has become one of the crucial players in the market for euro area government bonds. After first substantive purchases through the Securities Market Programme (SMP) in 2010, the Eurosystem’s involvement has reached a new breadth and magnitude with the establishment of the Public Sector Purchase Programme (PSPP) in 2015. On top of this, the ECB Council has set up the Pandemic Emergency Purchase Programme (PEPP) in March 2020 in order to stabilize the euro area economy in the crisis and to contain the rise of sovereign risk premia.This study analyzes trends in the rules, volumes and country allocations of the two active sovereign purchase programmes, the PSPP and the PEPP. For an economic assessment, it is of importance to which extent the purchase programmes are of an asymmetric nature and whether the Eurosystem increasingly accepts the role of a strategic creditor who has veto power in debt negotiations.
    Date: 2020
  35. By: Havranek, Tomas; Novak, Jiri; Zigraiova, Diana
    Abstract: A key theoretical prediction in financial economics is that under risk neutrality and rational expectations a currency's forward rates should form unbiased predictors of future spot rates. Yet scores of empirical studies report negative slope coefficients from regressions of spot rates on forward rates. We collect 3,643 estimates from 91 research articles and using recently developed techniques investigate the effect of publication and misspecification biases on the reported results. Correcting for these biases yields slope coefficients of 0.31 and 0.98 for developed and emerging currencies respectively, which implies that empirical evidence is in line with the theoretical prediction for emerging economies and less puzzling than commonly thought for developed economies. Our results also suggest that the coefficients are systematically influenced by the choice of data, numeraire currency, and estimation method.
    Date: 2020–09–07
  36. By: Juan Ramón Hernández
    Abstract: The neutral band is the interval where deviations from Covered Interest Parity (CIP) are not considered meaningful arbitrage opportunities. The band is determined by transaction costs and risk associated to arbitrage. Seemingly large deviations from CIP in the foreign exchange markets for the US Dollar crosses with Sterling, Euro and Mexican Peso have been the norm since the Global Financial Crisis. The topic has attracted a lot of attention in the literature. There are no estimates of the neutral band to assess whether deviations from CIP reflect actual arbitrage opportunities, however. This paper proposes an estimate of the neutral band based on the one-step-ahead density forecast obtained from a stochastic volatility model. Comparison across models is made using the log-score statistic and the probability integral transformation. The stochastic volatility models have the best fit and forecasting performance, hence superior neutral band estimates.
    Keywords: Covered interest parity; stochastic volatility; forward filtering backward smoothing; auxiliary particle filter; density forecast
    JEL: C53 C58 F31 F37
    Date: 2020–03
  37. By: Rau-Goehring, Matthias; Reinsberg, Bernhard; Kern, Andreas
    Abstract: This paper studies the role of the International Monetary Fund (IMF) in promoting central bank independence (CBI). While anecdotal evidence suggests that the IMF has been playing a vital role for CBI, the underlying mechanisms of this influence are not well understood. We argue that the IMF has ulterior motives when pressing countries for increased CBI. First, IMF loans are primarily transferred to local monetary authorities. Thus, enhancing CBI aims to insulate central banks from political interference to shield loan disbursements from government abuse. Second, several loan conditionality clauses imply a substantial transfer of political leverage over economic policy making to monetary authorities. As a result, the IMF through pushing for CBI seeks to establish a politically insulated veto player to promote its economic policy reform agenda. We argue that the IMF achieves these aims through targeted lending conditions. We hypothesize that the inclusion of these loan conditions leads to greater CBI. To test our hypothesis, we compile a unique dataset that includes detailed information on CBI reforms and IMF conditionality for up to 124 countries between 1980 and 2014. Our findings indicate that targeted loan conditionality plays a critical role in promoting CBI. These results are robust towards varying modeling assumptions and withstand a battery of robustness checks. JEL Classification: E52, E58, F5
    Keywords: central bank independence, conditionality, International Monetary Fund, international political economy
    Date: 2020–08
  38. By: Francesca Diluiso; Barbara Annicchiarico; Matthias Kalkuhl; Jan C. Minx
    Abstract: Limiting global warming to well below 20C may result in the stranding of carbon-sensitive assets. This could pose substantial threats to financial and macroeconomic stability. We use a dynamic stochastic general equilibrium model with financial frictions and climate policy to study the risks a low-carbon transition poses to financial stability and the different instruments central banks could use to manage these risks. We show that, even for very ambitious climate targets, transition risks are limited for a credible, exponentially growing carbon price, although temporary “green paradoxes” phenomena may materialize. Financial regulation encouraging the decarbonization of the banks’ balance sheets via tax-subsidy schemes significantly reduces output losses and inflationary pressures but it may enhance financial fragility, making this approach a risky tool. A green credit policy as a response to a financial crisis originated in the fossil sector can potentially provide an effective stimulus without compromising the objective of price stability. Our results suggest that the involvement of central banks in climate actions must be carefully designed in compliance with their mandate to avoid unintended consequences.
    Keywords: climate policy, financial instability, financial regulation, green credit policy, monetary policy, transition risk
    JEL: E50 H23 Q43 Q50 Q58
    Date: 2020
  39. By: Obasi O. Ukoha (Michael Okpara University of Agriculture, Abia State, Nigeria)
    Abstract: The main objective of this study is to establish quantitative relationships among the relative price volatility of agricultural commodities, inflation and agricultural polices in Nigeria. The data for the study, covering the period 1970–2003, were obtained from publications of the Central Bank of Nigeria, Federal Office of Statistics, and Federal Ministry of Agriculture and Rural Development. Our results show that the effect of inflation on relative price variability among agricultural commodities in Nigeria is non-neutral. Inflation has a significant positive impact on relative price variability in both the long run and the short run. The findings suggest the need for policies that will buffer the agricultural sector from the effects of inflation in the short run, and in addition the crops subsector from the long-run effect of inflation. Similarly, policies that reduce the rate of inflation will minimize relative price variability among agricultural commodities and consequently reduce inefficiency, distortions and misallocation of resources in agriculture that might be caused by inflation. No data points in the study period showed negative inflation. As a result of this, the data could not provide evidence for the effect of deflation on relative price variability. Policies like the Green Revolution and structural adjustment programmes and post-SAP policies increased relative price variability among cash crops in the long run, but influenced food crop prices only in the short run. In addition to this, the Operation Feed the Nation project (OFN) had a significant positive short-run effect on food prices. Thus the agricultural policies under SAP, post-SAP and Green Revolution caused price changes that led to efficient reallocation of resources among cash crops in the long run and food crops in the short run. The policies should be considered in planning for the agricultural sector. On the other hand, the price control policy brought about a reduction in relative price variability among cash crops and consequently led to a misallocation of resources in the sector. Cash crop prices should be allowed to be determined by market forces of demand and supply, and no attempts should be made to fix prices administratively
  40. By: Peter Quartey (University of Ghana,Ghana)
    Abstract: Monetary policy in Ghana has, over the years, focused on ensuring price stability or low inflation. The aim of the price stability policy is to provide a stable environment for real sector activities to flourish. However, the outcome of the policy on real sector activities has not been subjected to any empirical investigation and this forms the focus of this study. The study, specifically, examines how the policy of price stability, pursued by the Bank of Ghana, has affected real sector performance. It also examines the revenue and "growth maximizing" rate of inflation for Ghana using data from Bank of Ghana as well as from World Development Indicators (WDI). Subsequently, the relationship between inflation thresholds and real sector performance is examined. This is complemented with bimonthly data to discuss the trends in business confidence during the recent price stability regime. The study finds that economic performance is higher under low inflation periods than when inflation is high. It also establishes the existence of threshold effects of inflation on economic growth.

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