nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒09‒28
forty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Lessons from the Swedish Experience with Negative Central Bank Rates By Andersson, Fredrik N.G.; Jonung, Lars
  2. The Impact of Forward Guidance and Large-scale Asset Purchase Programs on Commodity Markets By Gomis-Porqueras, Pedro; Rafiq, Shuddhasattwa; Yao, Wenying
  3. Monetary Policy Tradeoffs and the Federal Reserve's Dual Mandate By Andrea Ajello; Isabel Cairó; Vasco Curdia; Thomas A. Lubik; Albert Queraltó
  4. A note on exit and inflation bias in a currency union By Saito, Yuta
  5. Monetary policy with a state-dependent inflation target in a behavioral two-country monetary union model By Proaño Acosta, Christian; Lojak, Benjamin
  6. Alternative Strategies: How Do They Work? How Might They Help? By Jonas E. Arias; Martin Bodenstein; Hess Chung; Thorsten Drautzburg; Andrea Raffo
  7. Monetary Policy Strategies and Tools: Financial Stability Considerations By Jonathan E. Goldberg; Elizabeth C. Klee; Edward Simpson Prescott; Paul R. Wood
  8. Considerations Regarding Inflation Ranges By Hess Chung; Brian M. Doyle; James Hebden; Michael Siemer
  9. Measuring Monetary Policy with Residual Sign Restrictions at Known Shock Dates By Harald Badinger; Stefan Schiman
  10. Monetary policy disconnect By Angelo Ranaldo; Benedikt Ballensiefen; Hannah Winterberg
  11. Distributional Considerations for Monetary Policy Strategy By Laura Feiveson; Nils Gornemann; Julie L. Hotchkiss; Karel Mertens; Jae W. Sim
  12. The Effectiveness of FX Interventions: A Meta-Analysis By Lucía Arango-Lozano; Lukas Menkhoff; Daniela Rodríguez-Novoa; Mauricio Villamizar-Villegas
  13. Monetary Policy and Economic Performance since the Financial Crisis By Dario Caldara; Etienne Gagnon; Enrique Martínez-García; Christopher J. Neely
  14. Issues Regarding the Use of the Policy Rate Tool By Jeffrey R. Campbell; Thomas B. King; Anna Orlik; Rebecca Zarutskie
  15. Spillovers to exchange rates from monetary and macroeconomic communications events By Enzo Rossi; Vincent Wolff
  16. Monetary Policy and Asset Price Overshooting: A Rationale for the Wall/Main Street Disconnect By Ricardo J. Caballero; Alp Simsek
  17. Optimal fiscal and monetary policy in economies with capital By Wang, Gaowang; Zou, Heng-fu
  18. Monetary Policy and Economic Performance since the Financial Crisis By Dario Caldara; Etienne Gagnon; Enrique Martínez-García; Christopher J. Neely
  19. Monetary Policy, Firm Heterogeneity, and Product Variety By Francesco Zanetti; Masashige Hamano
  20. Strengthening the FOMC’s Framework in View of the Effective Lower Bound and Some Considerations Related to Time-Inconsistent Strategies By Fernando M. Duarte; Benjamin K. Johannsen; Leonardo Melosi; Taisuke Nakata
  21. The Long Run Stability of Money in the Proposed East African Monetary Union By Simplice A. Asongu; Oludele E. Folarin; Nicholas Biekpe
  22. The Quest for Economic Stability: A Study on Swedish Stabilization Policies 1873–2019 By Andersson, Fredrik N. G.
  23. Uncertainty and Monetary Policy in Good and Bad Times: A Replication of the VAR Investigation by Bloom (2009) By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  24. Monetary Integration in West Africa: History, Theory, Policy By Youssef El Jai
  25. Effective Demand Failures and the Limits of Monetary Stabilization Policy By Michael Woodford
  26. Information or Uncertainty Shocks? By Martin Baumgaertner
  27. Issues in the Use of the Balance Sheet Tool By Mark A. Carlson; Stefania D'Amico; Cristina Fuentes-Albero; Bernd Schlusche; Paul R. Wood
  28. Oil Prices, Gasoline Prices and Inflation Expectations: A New Model and New Facts By Lutz Kilian; Xiaoqing Zhou
  29. Monetary policy under imperfect information and consumer confidence By Brenneisen, Jan-Niklas
  30. How does Monetary Policy affect welfare? By Lina El-Jahel; Robert MacCulloch; Hamed Shafiee
  31. Payments Crises and Consequences By Qian Chen; Christoffer Koch; Gary Richardson; Padma Sharma
  32. Interbank Networks in the Shadows of the Federal Reserve Act By Haelim Anderson; Selman Erol; Guillermo Ordoñez
  33. Intermeeting Rate Cuts as a Response to Rare Disasters By David S. Miller
  34. International Financial Regulation: Why It Still Falls Short By William White
  35. Leaning against the Wind and Crisis Risk By Moritz Schularick; Lucas ter Steege; Felix Ward
  36. The Pecking Order of Segmentation and Liquidity-Injection Policies in a Model of Contagious Crises By Alexander Guembel; Oren Sussman
  37. Chinese Exchange Rate Policy: Lessons for Global Investors By Michael Melvin; Frank Westermann
  38. The Impact of China Exchange Rate Policy on its Trading Partners Evidence Based on the GVAR Model By ABBAS, Shah; Nguyen, V.C.; YANFU, Zhu; Nguyen, Huu Tinh
  39. Austrian School of Economics? Suggestion for Introducing Free Private Banking System is So Absurd that It Can Never be Implemented By Naba Kumar Adak
  40. Understanding the greater diffusion of mobile money innovations in Africa By Simplice A. Asongu; Nicholas Biekpe; Danny Cassimon

  1. By: Andersson, Fredrik N.G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: Negative interest rates were once seen as impossible outside the realm of economic theory. However, several central banks have recently adopted negative policy rates. The Federal Reserve is coming under increasing pressure to follow suit in the wake of the coronavirus crisis. This paper investigates the actual effects of negative interest rates using the Swedish experience from 2015 to 2019. The Swedish Riksbank was one of the first central banks to introduce a negative interest rate in 2015 and the first central bank to abandon a negative rate in 2019. We find that negative rates had a modest effect on consumer price inflation due to globalization, but significant effects on the exchange rate and domestic asset prices, thus fostering financial imbalances. We conclude by discussing the implications of our results for larger economies such as the United States.
    Keywords: Monetary policy; inflation targeting; Sweden; United States; negative interest rates; forward guidance; quantitative easing
    JEL: D78 E40 E43 E47 E50 E52 E65
    Date: 2020–08–17
  2. By: Gomis-Porqueras, Pedro; Rafiq, Shuddhasattwa; Yao, Wenying
    Abstract: This paper investigates how different commodity prices are affected by unconventional monetary policies (UMP) implemented by the Federal Reserve of the United States as a response to the Global Financial Crisis. We analyze impulse responses using local projections proposed by Jorda (2005) and follow Swanson (2017)’s identification strategy for UMP shocks. We show that forward guidance (FG) and large-scale asset purchase (LSAP) shocks lead to distinct responses from commodity prices. We find that asset-like commodities, such as gold and silver, respond to these UMP shocks most aggressively. While an easing FG shock leads to increases in their prices, an easing LSAP shock has the opposite effect. This differential response suggests that these asset-like commodities are being used as inflation and exchange rate hedges. In contrast, production-like and agricultural commodities respond to UMP shocks in the same way as conventional monetary policy shocks. Consistent with previous literature, we find that easing LSAP shocks, to some extent, signal a negative economic outlook. Policymakers can exploit these different commodities when evaluating the effectiveness of monetary policy in different sectors of the economy.
    Keywords: Unconventional monetary policy; Commodity price; Impulse response analysis.
    JEL: E5 G0
    Date: 2020–08
  3. By: Andrea Ajello; Isabel Cairó; Vasco Curdia; Thomas A. Lubik; Albert Queraltó
    Abstract: Some key structural features of the U.S. economy appear to have changed in the recent decades, making the conduct of monetary policy more challenging. In particular, there is high uncertainty about the levels of the natural rate of interest and unemployment as well as about the effect of economic activity on inflation. At the same time, a prolonged period of below-target inflation has raised concerns about the unanchoring of inflation expectations at levels below the Federal Open Market Committee’s inflation target. In addition, a low natural rate of interest increases the probability of hitting the effective lower bound during a downturn. This paper studies how these factors complicate the attainment of the objectives specified in the Federal Reserve’s dual mandate in the context of a DSGE (dynamic stochastic general equilibrium) model, taking into account risk-management considerations. We find that these challenges may warrant pursuing more accommodative policy than would be desirable otherwise. However, such accommodative policy could be associated with concerns about risks to financial markets.
    Keywords: U.S. monetary policy; Optimal policy; Discretion
    JEL: E32 E52 E58 E61
    Date: 2020–08–27
  4. By: Saito, Yuta
    Abstract: This note investigates how the threat of a member’s exit from a monetary union affects the inflation bias of the common currency. The canonical Barro-Gordon model is extended to a currency union setting, where the monetary policy is determined by majority voting among the N member countries, which are heterogeneous with respect to the within- country output shocks. Once the policy is selected, each member decides whether to remain in the monetary union or not. If a country decides to exit, it has to pay a fixed social cost. If a member leaves the monetary union, it individually chooses the inflation of its own currency. It is shown that inflation bias is generated if more than one member exits. In other words, the optimal monetary policy, which does not generate inflation bias, can be implemented only if no members exit.
    Keywords: Currency Union; Time-Inconsistency; Barro-Gordon; Committee Policymaking
    JEL: E5
    Date: 2020–08–01
  5. By: Proaño Acosta, Christian; Lojak, Benjamin
    Abstract: In this paper we study the implementation of a state-dependent inflation target in a two-country monetary union model characterized by boundedly rational agents. In particular, we use the spread between the actual policy rate (which is constrained by the zero-lower-bound) and the Taylor rate (which can become negative) as a measure for the degree of ineffectiveness of conventional monetary policy as a stabilizing mechanism. The perception of macroeconomic risk by the agents is assumed to vary according to this measure by means of the Brock-Hommes switching mechanism. Our numerical simulations indicate a) that a state-dependent inflation target may lead to a better macroeconomic and inflation stabilization, and b) the perceived risk-sharing among the monetary union members influences the financing conditions of the member economies of the monetary union.
    Keywords: Monetary Policy,Monetary Unions,Zero Lower Bound,Inflation Targets,Behavioral Macroeconomics
    JEL: E52 F02
    Date: 2020
  6. By: Jonas E. Arias; Martin Bodenstein; Hess Chung; Thorsten Drautzburg; Andrea Raffo
    Abstract: Several structural developments in the U.S. economy—including lower neutral interest rates and a flatter Phillips curve—have challenged the ability of the current monetary policy framework to deliver on the Federal Open Market Committee’s (FOMC) dual-mandate goals. This paper explores whether makeup strategies, in which policymakers seek to stabilize average inflation around the inflation target over some horizon, could strengthen the FOMC’s ability to fulfill its dual mandate. The quantitative analysis discussed here suggests that credible makeup strategies may provide some moderate stabilization gains. The practical implementation of these strategies, however, faces a number of challenges that would have to be surmounted for the full benefit of these strategies to be realized.
    Keywords: Inflation stabilization; Effective lower bound; Taylor rule; Alternative monetary policy strategies; Monetary policy communication
    JEL: E31 E52 E58
    Date: 2020–08–27
  7. By: Jonathan E. Goldberg; Elizabeth C. Klee; Edward Simpson Prescott; Paul R. Wood
    Abstract: This paper examines potential interactions between financial stability and the monetary policy strategies and tools considered in the Federal Reserve’s review of monetary policy strategy, tools, and communication practices. Achieving the Federal Reserve’s goals of full employment and price stability promotes financial stability. A key concern, however, is that with a low equilibrium real interest rate, a low policy rate will be necessary, and in turn, these low rates may contribute to an increase in financial system vulnerabilities. Our analysis suggests that there are typically significant macroeconomic and financial stability benefits of using these tools and strategies, but there are plausible situations in which financial vulnerabilities are such that it would be desirable to limit their use. A clear communications strategy can help minimize financial vulnerabilities. Should vulnerabilities arise, they are often best addressed with macroprudential tools.
    Keywords: U.S. monetary policy; Financial stability; Macroprudential policy
    JEL: E52 E58 G28
    Date: 2020–08–27
  8. By: Hess Chung; Brian M. Doyle; James Hebden; Michael Siemer
    Abstract: We consider three ways that a monetary policy framework may employ a range for inflation outcomes: (1) ranges that acknowledge uncertainty about inflation outcomes (uncertainty ranges), (2) ranges that define the scope for intentional deviations of inflation from its target (operational ranges), and (3) ranges over which monetary policy will not react to inflation deviations (indifference ranges). After defining these three ranges, we highlight a number of costs and benefits associated with each. Our discussion of the indifference range is accompanied by simulations from the FRB/US model, illustrating the potential for long-term inflation expectations to drift within the range.
    Keywords: Forward guidance; Monetary policy
    JEL: E31 E52 E58
    Date: 2020–08–27
  9. By: Harald Badinger (Department of Economics, Vienna University of Economics and Business); Stefan Schiman (Austrian Institute of Economic Research (WIFO))
    Abstract: We propose a novel identification strategy to measure monetary policy in a structural VAR. It is based exclusively on known past policy shocks, which are uncovered from high-frequency data, and does not rely on any theoretical a-priori restrictions. Our empirical analysis for the euro area reveals that interest rate decisions of the ECB surprised financial markets at least fifteen times since 1999. This information is used to restrict the sign and magnitude of the structural residuals of the policy rule equation at these shock dates accordingly. In spite of its utmost agnostic nature, this approach achieves strong identification, suggesting that unexpected ECB decisions have an immediate impact on the short-term money market rate, the narrow money stock, commodity prices, consumer prices and the Euro-Dollar exchange rate, and that real output responds gradually. Our close to assumption-free approach obtains as an outcome what traditional sign restrictions on impulse responses impose as an assumption.
    Keywords: Structural VAR, Set Identification, Monetary Policy, ECB
    JEL: C32 E52 N14
    Date: 2020–07
  10. By: Angelo Ranaldo; Benedikt Ballensiefen; Hannah Winterberg
    Abstract: We analyze and quantify how two forms of segmentation lead to the monetary policy disconnect. To do this, we study the monetary policy transmission through the main short-term funding market, the repurchase agreement (repo) market. First, the lending rates of banks with access to the central bank's deposit facility are less responsive to the monetary policy target rate. Second, rates of repos secured by assets eligible Quantitative Easing programs diverge more from the target rate. We also find that both forms of segmentation add to one another, suggesting an amplifying effect in weakening monetary policy transmission.
    Keywords: Interest rate pass-through, Monetary policy, Market segmentation, Short-term interest rates, Repo
    JEL: E40 E43 E50 E52 E58 G18
    Date: 2020–09
  11. By: Laura Feiveson; Nils Gornemann; Julie L. Hotchkiss; Karel Mertens; Jae W. Sim
    Abstract: We show that makeup strategies, such as average inflation targeting and price-level targeting, can be more effective than a flexible inflation targeting strategy in overcoming the obstacles created by the effective lower bound in a heterogeneous agent New Keynesian (HANK) model. We also show that the macroeconomic stabilization benefits from such alternative strategies can be substantially larger in a HANK environment than in a representative agent New Keynesian model. We argue that gains in employment outcomes from switching to an alternative strategy would generate disproportionate improvements for historically disadvantaged households and thus have potentially long-lasting effects on the economic well-being of these groups.
    Keywords: Heterogeneous agent New Keynesian model; Representative agent New Keynesian model; Effective lower bound; Inequality; Hand to mouth; Average inflation targeting; Price-level targeting
    JEL: D31 E30 E52
    Date: 2020–08–27
  12. By: Lucía Arango-Lozano; Lukas Menkhoff; Daniela Rodríguez-Novoa; Mauricio Villamizar-Villegas
    Abstract: There is ample empirical literature centering on the effectiveness of foreign exchange intervention (FXI). Given the mix of objectives and country-heterogeneity, the general lack of consensus thus far is no surprise. We shed light on this debate by conducting the first comprehensive meta-analysis in the FXI literature, with 279 reported effects that stem from 74 distinct empirical studies. We cover estimations conducted in 19 countries across five decades. Overall, our meta-survey reports an average depreciation of domestic currency of 1% and a reduction of exchange rate volatility of 0.6%, in response to a $1 billion US dollar purchase. Results are qualitatively confirmed but smaller in size under fixed and random-effect estimations. When narrowing in on different economic factors, we find that effects are magnified for cases consistent with the monetary trilemma (greater if financial openness and monetary independence are low). Effects are also larger in emerging than advanced economies, when banking crises remain mild, and when interventions are large in size and are announced.
    Keywords: Foreign exchange intervention, exchange rate, meta-analysis
    JEL: C83 E58 F31
    Date: 2020
  13. By: Dario Caldara; Etienne Gagnon; Enrique Martínez-García; Christopher J. Neely
    Abstract: We review 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: 2020–08–27
  14. By: Jeffrey R. Campbell; Thomas B. King; Anna Orlik; Rebecca Zarutskie
    Abstract: We review two nonstandard uses of the policy rate tool, which provide additional stimulus when interest rates are close to or at the effective lower bound—forward guidance and negative interest rate policy. In particular, we survey the use of these tools since the star otf the Great Recession, review evidence of their effectiveness, and discuss key considerations that confront monetary policymakers while using them.
    Keywords: Monetary policy; Effective lower bound; Forward guidance; Central bank communication; Negative interest rate policy
    JEL: E32 E43 E44 E52 E58
    Date: 2020–08–27
  15. By: Enzo Rossi; Vincent Wolff
    Abstract: We study the tightness of the link between U.S. monetary and macroeconomic communication events and the exchange rate movements against the USD of four major currencies - the euro, the Swiss franc, the Brazilian real and the Mexican peso - since the global financial crisis (GFC). We find three main results. Approximately 20 percent of the U.S. communications events were associated with statistically significant exchange rate effects. Unconventional and conventional monetary policy announcements had equal impacts. The reactions of the advanced countries' currencies were more in line with each another than with those of the emerging markets' currencies.
    Keywords: Central bank communication, macroeconomic news, exchange rates, event study
    JEL: C22 E58 F31 G14
    Date: 2020
  16. By: Ricardo J. Caballero; Alp Simsek
    Abstract: We analyze optimal monetary policy when asset prices influence aggregate demand with a lag (as is well documented). In this context, as long as the central bank's main objective is to minimize the output gap, the central bank optimally induces asset price overshooting in response to the emergence of a negative output gap. In fact, even if there is no output gap in the present but the central bank anticipates a weak recovery dragged down by insufficient demand, the optimal policy is to preemptively support asset prices today. This support is stronger if the acute phase of the recession is expected to be short lived. These dynamic aspects of optimal policy give rise to potentially large temporary gaps between the performance of financial markets and the real economy. One vivid example of this situation is the wide disconnect between the main stock market indices and the state of the real economy in the U.S. following the Fed's powerful response to the Covid-19 shock.
    JEL: E21 E32 E43 E44 E52 G12
    Date: 2020–08
  17. By: Wang, Gaowang; Zou, Heng-fu
    Abstract: We reexamine the optimal fiscal and monetary policy in combined shopping-time monetary models with capital accumulation. Four models are constructed to examine how the production cost of money and the utility from physical capital affect the toolbox of the fiscal and monetary policy. It is shown that the optimality of the Friedman rule hinges on the producing cost of money and capital-in-utility overturns the Chamley-Judd zero capital income taxation theorem. When the production cost of money approaches zero, the Friedman rule is optimal; and when the consumer cares about the utility from capital, the limiting capital income tax is not zero in general.
    Keywords: Transactions technology; Inflation tax; Capital income tax; Friedman rule; Capital in utility.
    JEL: E40 E52 H20 H21
    Date: 2020–09–04
  18. By: Dario Caldara; Etienne Gagnon; Enrique Martínez-García; Christopher J. Neely
    Abstract: The analysis in this paper was presented to the Federal Open Market Committee as background for its discussion of the Federal Reserve’s review of monetary policy strategy, tools, and communication practices. The Committee discussed issues related to the review at five consecutive meetings from July 2019 to January 2020. References to the FOMC’s current framework for monetary policy refer to the framework articulated in the Statement on Longer-Run Goals and Monetary Policy Strategy first issued in January 2012 and reaffirmed each January, most recently in January 2019.
    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
  19. By: Francesco Zanetti; Masashige Hamano
    Abstract: This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts a non-trivial reallocation effect by cleansing unproductive firms and enhancing aggregate productivity. At the same time, however, reallocation involves a reduction in the number of product variety that is central to consumer preferences and hurts welfare. A contractionary policy prevents the entry of new firms and insulates existing firms from competition, reducing aggregate productivity. Under demand uncertainty, the gain of the optimal monetary policy diminishes in firm heterogeneity and increases in the preference for product variety. We provide empirical evidence on US data, which corroborates the relevance of monetary policy for product variety that results from firm entry and exit, and provides limited support to the cleansing effect of monetary policy.
    Keywords: Monetary policy; firm heterogeneity; product variety; reallocation
    JEL: E32 E52 L51 O47
    Date: 2020–09–17
  20. By: Fernando M. Duarte; Benjamin K. Johannsen; Leonardo Melosi; Taisuke Nakata
    Abstract: We analyze the framework for monetary policy in view of the effective lower bound (ELB). We find that the ELB is likely to bind in most future recessions and propose some ways that theoretical models imply that the framework could be strengthened. We also discuss ways that commitment strategies, which are not part of the framework, may improve economic outcomes. These policies can suffer from a time-inconsistency problem, which we analyze.
    Keywords: Monetary policy; Effective lower bound; Forward guidance; Balance sheet policies; Commitment policies; Time inconsistency
    JEL: E31 E32 E52 E58
    Date: 2020–08–27
  21. By: Simplice A. Asongu (Yaounde, Cameroon); Oludele E. Folarin (University of Ibadan, Ibadan, Nigeria); Nicholas Biekpe (Cape Town, South Africa)
    Abstract: This study investigates the stability of money in the proposed East African Monetary Union (EAMU). The study uses annual data for the period 1981 to 2015 from five countries making up the East African Community (EAC). A standard money demand function is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across countries. This divergence is articulated in terms of differences in CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long term determinants and error correction in event of a shock. Specifically, the results show that the demand for money is stable in the cases of Burundi, Rwanda and Tanzania based on the CUSUM and CUSUMSQ tests, while for the remaining countries (Kenya and Uganda) only partial stability is apparent. In event of a shock, Kenya will restore its long run equilibrium fastest, followed by Tanzania and Burundi.
    Keywords: Stable; demand for money; bounds test
    JEL: E41 C22 O55
    Date: 2020–01
  22. By: Andersson, Fredrik N. G. (Department of Economics, Lund University)
    Abstract: There is a never-ending quest for a stable economy with full employment and low inflation. Economists have suggested and policymakers have experimented with different fiscal and monetary policy regimes since at least the beginning of the industrial revolution. In this paper, we study Swedish stabilization policies through six policy regimes between 1873 and 2019. We focus on discretionary stabilization policies by estimating policy shocks. We then explore how Swedish stabilization policies have evolved over time through these shocks: how different institutional setups affected the policies and how policymakers responded to key economic events such as financial crises and wars.
    Keywords: monetary policy; fiscal policy; policy shocks; stabilization policies: financial crisis
    JEL: E42 E43 E52 E58 E62 E65
    Date: 2020–08–26
  23. By: Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
    Abstract: This paper revisits the well-known VAR evidence on the real effects of uncertainty shocks by Bloom (Econometrica 2009(3): 623-685. doi: 10.3982/ECTA6248). We replicate the results in a narrow sense using Eviews. In a wide sense, we extend his study by working with a smooth transition-VAR framework that allows for business cycle-dependent macroeconomic responses to an uncertainty shock. We find a significantly stronger response of real activity in recessions. Counterfactual simulations point to a greater effectiveness of systematic monetary policy in stabilizing real activity in expansions.
    Keywords: uncertainty shocks, nonlinear smooth transition Vector AutoRegressions, generalized impulse response functions, systematic monetary policy
    JEL: C32 E32
    Date: 2020
  24. By: Youssef El Jai
    Abstract: Prior to the colonial era, money issuance in West Africa depended on slave trade. With the advent of the colonial rule, silver coins were imported then progressively imposed as a tool of coercion. The post-colonial trajectory was different for former British and French colonies. While the former regained their monetary sovereignty, the latter continued under a monetary union under the auspices of France. The proposal of the Eco as a single currency for ECOWAS is therefore a whole new step for some countries and a simple exercise of adaptation for others. Hence, a bold policy agenda is needed if the currency union is to be a success.
    Date: 2020–06
  25. By: Michael Woodford
    Abstract: The COVID-19 pandemic presents a challenge for stabilization policy that is different from those resulting from either “supply” or “demand” shocks that similarly affect all sectors of the economy, owing to the degree to which the necessity of temporarily suspending some (but not all) economic activities disrupts the circular flow of payments, resulting in a failure of what Keynes (1936) calls “effective demand.” In such a situation, economic activity in many sectors of the economy can be much lower than would maximize welfare (even taking into account the public health constraint), and interest-rate policy cannot eliminate the distortions — not because of a limit on the extent to which interest rates can be reduced, but because monetary stimulus fails to stimulate demand of the right sorts. Fiscal transfers are instead well-suited to addressing the fundamental problem, and can under certain circumstances achieve a first-best allocation of resources without any need for a monetary policy response.
    JEL: E12 E52 E63
    Date: 2020–09
  26. By: Martin Baumgaertner (THM Business School)
    Abstract: This paper shows that uncertainty has an impact on the effectiveness of monetary policy shocks. As uncertainty increases, so does the risk that a restrictive forward guidance shock will increase rather than decrease stock prices. This effect can be seen not only in high-frequency variables, but also in VAR models with external instruments. The results suggest that uncertainty is an alternative approach to explain the phenomena previously known as "information shock" and should therefore receive more attention in monetary policy measures.
    Keywords: Uncertainty, High-Frequency Identication, Structural VAR, ECB
    JEL: E44 E52 E58 G14
    Date: 2020
  27. By: Mark A. Carlson; Stefania D'Amico; Cristina Fuentes-Albero; Bernd Schlusche; Paul R. Wood
    Abstract: This paper considers various ways of using balance sheet policy (BSP) to provide monetary policy stimulus, including the BSPs put in place by the Federal Reserve in the wake of the Global Financial Crisis, the choice between fixed-size and flow-based asset purchase programs, policies targeting interest rate levels rather than the quantity of asset purchases, and programs aimed at increasing more direct lending to households and firms. For each of these BSP options, we evaluate benefits and costs. We conclude by observing that BSPs’ relative effectiveness and thus optimal configuration will depend on the shocks affecting the economy. Consequently, it would be valuable for the Federal Reserve to keep a variety of tools at its disposal and employ the ones that best fit the situation that it faces.
    Keywords: Balance sheet policy; Quantitative easing; Yield curve control; Credit easing; Central bank lending authority
    JEL: E43 E44 E58 G12 G21
    Date: 2020–08–27
  28. By: Lutz Kilian; Xiaoqing Zhou
    Abstract: The conventional wisdom that inflation expectations respond to the level of the price of oil (or the price of gasoline) is based on testing the null hypothesis of a zero slope coefficient in a static single-equation regression model fit to aggregate data. Given that the regressor in this model is not stationary, the null distribution of the t-test statistic is nonstandard, invalidating the use of the normal approximation. Once the critical values are adjusted, these regressions provide no support for the conventional wisdom. Using a new structural vector regression model, however, we demonstrate that gasoline price shocks may indeed drive one-year household inflation expectations. The model shows that there have been several such episodes since 1990. In particular, the rise in household inflation expectations between 2009 and 2013 is almost entirely explained by a large increase in gasoline prices. However, on average, gasoline price shocks account for only 39% of the variation in household inflation expectations since 1981.
    Keywords: inflation, expectations, anchor, missing disinflation, oil price, gasoline price, household survey
    JEL: E31 E52 Q43
    Date: 2020
  29. By: Brenneisen, Jan-Niklas
    Abstract: Although it is generally accepted that consumer confidence measures are informative signals about the state of the economy, theoretical macroeconomic models designed for the analysis of monetary policy typically do not provide a role for them. I develop a framework with asymmetric information in which the efficacy of monetary policy can be improved, when the imperfectly informed central banks include confidence measures in their information set. The beneficial welfare effects are quantitatively substantial in both a stylized New Keynesian model with optimal monetary policy and an estimated medium-scale DSGE model.
    Keywords: Consumer confidence,Monetary policy,Asymmetric information,Imperfect Information,New Keynesian macroeconomics,DSGE models
    JEL: D82 D83 D84 E52 E58
    Date: 2020
  30. By: Lina El-Jahel (University of Auckland Business School); Robert MacCulloch (University of Auckland Business School); Hamed Shafiee (New Zealand Productivity Commission)
    Abstract: Models on the optimal design of monetary policy typically rely on a social welfare loss function defined over inflation and unemployment. Our estimates of such a function use measures of two different dimensions of well-being that have been distinguished by recent research. The first is Cantril’s ‘ladder-of-life’ question. The second captures the emotional quality of everyday experiences. Our Gallup World Poll sample includes one million people in 138 nations over 12 years. Unemployment and inflation reduce well-being, although the ratio of the size of the effect varies dramatically between 2 and 4.6, depending upon which dimension of well-being is chosen.
    Keywords: Social welfare; well-being; inflation; unemployment.
    JEL: E24 E31 E52 I31
    Date: 2020–06
  31. By: Qian Chen; Christoffer Koch; Gary Richardson; Padma Sharma
    Abstract: Banking-system shutdowns during contractions scar economies. Four times in the last forty years, governors suspended payments from state-insured depository institutions. Suspensions of payments in Nebraska (1983), Ohio (1985), and Maryland (1985), which were short and occurred during expansions, had little measurable impact on macroeconomic aggregates. Rhode Island’s payments crisis (1991), which was prolonged and occurred during a recession, lengthened and deepened the downturn. Unemployment increased. Output declined, possibly permanently relative to what might have been. We document these effects using a novel Bayesian method for synthetic control that characterizes the principal types of uncertainty in this form of analysis. Our findings suggest policies that ensure banks continue to process payments during contractions – including the bailouts of financial institutions in 2008 and the unprecedented support of the financial system during the COVID crisis – have substantial value.
    Keywords: Payments crisis; Money and banking; Depository institutions; Bank suspension; Synthetic control; Bayesian inference
    JEL: E51 E52 E58 G18 G21
    Date: 2020–08–18
  32. By: Haelim Anderson; Selman Erol; Guillermo Ordoñez
    Abstract: Central banks provide public liquidity to traditional (regulated) banks with the intention of stabilizing the financial system. Shadow banks are not regulated, yet they indirectly access such liquidity through the interbank system. We build a model that shows how public liquidity provision may change the linkages between traditional and shadow banks, increasing systemic risk through three channels: reducing aggregate liquidity, expanding fragile short-term borrowing, and crowding out of private cross-bank insurance. We show that the creation of the Federal Reserve System and the provision of public liquidity changed the structure and nature of the U.S. interbank network in ways that are consistent with the model and its implications. We provide empirical evidence by constructing unique data on balance sheets and detailed disaggregated information on payments and funding connections in Virginia.
    JEL: D53 D85 E02 E44 G11 G21 G23 N21
    Date: 2020–08
  33. By: David S. Miller
    Abstract: This paper measures the probability of rare disasters by measuring the probability of the intermeeting federal funds rate cuts they provoke. Differentiating between months with Federal Open Market Committee (FOMC) meetings and months without identifies excess returns on federal funds futures averaging -1.5 bps per horizon month-ahead at short horizons, corresponding to a 3-5% per month risk-neutral probability of an intermeeting rate cut. The excess returns differ between months with and without meetings, suggesting a positive risk premium associated with meetings. The federal funds excess returns explain a significant portion of equity excess returns, and hence the equity premium puzzle.
    Keywords: Rare disasters; Equity premium; Risk premium; Federal funds futures;
    JEL: E44 G12
    Date: 2020–08–28
  34. By: William White (C D Howe Institute)
    Abstract: While recent reforms are welcome in many ways, there are still significant reasons to doubt that the post-crisis tightening of international financial regulation guarantees future financial and economic stability. The most important reason is that the reforms have focused too narrowly on ensuring that an unstable financial sector will not aggravate downturns by restricting the supply of credit. More attention needs to be paid to ensuring that an overly exuberant financial system does not weaken other parts of the economy by encouraging a rapid buildup of debt during upturns. Some combination of time-varying monetary and regulatory policies (a macrofinancial stability framework) will be required to do this. In addition, many of the individual regulatory measures taken to date, both macroprudential and microprudential, have shortcomings. Their coherence as a package has also been questioned.
    Keywords: Too big to fail, financial safety, financial reform, financial crises, implicit subsidies, political economy
    JEL: E02 E32 E42 E52 E58
    Date: 2020–07–25
  35. By: Moritz Schularick; Lucas ter Steege; Felix Ward
    Abstract: Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies the state-dependent effects of monetary policy on financial stability. Based on the near-universe of advanced economy financial cycles since the 19th century, we show that discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them.
    Keywords: financial crises, instrumental variable, open economy trilemma, local projections
    JEL: E44 E50 G01 G15 N10
    Date: 2020
  36. By: Alexander Guembel (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Oren Sussman (University of Oxford [Oxford])
    Abstract: We study a two-country setting in which leveraged investors generate fire-sale externalities, leading to financial crises and contagion. Governments can affect the incidence of financial crisis and the degree of contagion by injecting public liquidity and, additionally, by segmenting the countries' liquidity markets. We show that segmentation allows a country to avoid contagion and fend off mild financial crises caused by a small shock to its liquidity demand, at the cost of exposing it to more severe financial crises caused by a large shock. We derive a "pecking order" result, whereby segmentation is a second-best measure that coordinated governments should use only when tax capacity constrains them from injecting liquidity. Even when segmentation is welfare-enhancing, it should be applied to public liquidity alone, never restricting the free ow of private liquidity across countries. Uncoordinated governments tend to use segmentation excessively.
    Keywords: Contagion,fire sales,financial crisis,financial stability,segmentation,liquidity injection
    Date: 2020–05
  37. By: Michael Melvin; Frank Westermann
    Abstract: Chinese currency policy has had a strong impact on the value of investors’ portfolios in recent years. On August 11, 2015, the People’s Bank of China announced a new exchange rate policy where the RMB central parity rate against the USD would be determined each morning by the previous day’s closing rate, market demand and supply, and valuations of other currencies. This new policy suggests an implementable investment strategy for trading the CNH. In this paper we create a forecasting model based on information regarding the central parity rate, implied volatilities and other control variables which correctly predicts the direction of change on about 60 percent of days. The exchange rate forecast is then used to manage the global investor’s problem of mitigating the currency risk inherent in Chinese equity positions. All currency hedging strategies are shown to add value to the equity portfolio. A dynamic currency overlay strategy, where the forecasting model is used as a trading signal to take long and short positions in CNH, performs particularly well.
    JEL: F30
    Date: 2020
  38. By: ABBAS, Shah; Nguyen, V.C.; YANFU, Zhu; Nguyen, Huu Tinh
    Abstract: This study is designed to investigate the impact of China exchange rate policy on its trading partners by using a country multi-dataset GVAR model. Our model includes samples of 30 countries, six from high-income, six from middle-income and eighteen from low-income countries. This study used annual time series data over the period 1992 to 2017. We constructed currency misalignment index and it provided some interesting features about the currency undervaluation and overvaluation. The results of the currency misalignment shows that China’s Renminbi is structurally more undervalued over the sample period as compared to other countries, and fluctuation in major currencies effects the global trade around the world. The overall empirical results of the GVAR model indicate that RMB undervaluation affects the trade pattern and macroeconomic performance of China’s trading partners. Overall, China’s exchange rate undervaluation has mixed effects on trading partner’s GDP, exports and imports. The devaluation of China’s RMB efficiently stimulated China’s exports and reduced imports. While, in some countries, this effect is reverse, the RMB undervaluation increases the GDP of partner countries and also increases their exports to China. The results confirm the strong and leading role of the Chinese Renminbi in the global trade.
    Date: 2020–07–31
  39. By: Naba Kumar Adak (Sabang Sajanikanta Mahavidyalaya, West Bengal)
    Abstract: Economists of Austrian School think that a few commodities (ultimately gold and silver) emerged as mediums of exchange out of the barter system. They think if money were commodity-money, only then exchanges will be done smoothly without causing any adverse effect on the economy. The supply of any amount of fiat-money proves to be over-supply of money, as no extra commodity is created corresponding to the creation of the fiat-money. Increase in fiat money reduces the value of the money and the price of commodities rises. They think, that to be able to spend more than its tax-receipts can support, the government will allow the central bank to fraudulently increase fiat-money. Austrian economists also think that the central bank (CB) allows the commercial banks to create credit-money. They think the government and the central bank jointly inflate (increase) the supply of fiat-money. This causes inflationary pressure on the economy and leads the economy to cycles of recessions. So, they prescribe that the government and the CB should be deprived of their monopoly power to create money and that only private banks should be allowed to create money. They think that private bankers will not increase supply of money to that extent that can harm the stability of money and the Consumer Price Index. The Austrian economists suggest how the private bankers will create money and how the people will accept or reject any money to hold. They argue that private banks will manage their own affairs if they were left without any external interference. The purpose of this paper is to show that the alternative processes suggested by the Austrian School of Economists are very much impractical and detrimental to the economy. In their private banking system, different banks will issue notes of different denominations. People will have to be always on alert to see which money becomes more stable than other moneys. Private Banks will also have to remain always on guard lest their money is devalued in competition to other banks? moneys. There is no guarantee that no private bank will fall. Thus, both private banks and the people will be puzzled in deciding what policy or action will be the best choice for keeping the value of their money stable or which money they should hold so that they do not face any future devaluation or any bank-failure. Therefore, the private banking system will lead to uncertainty and complete chaos in the monetary and financial systems.
    Keywords: Fractional reserve free banking, Ma, Mb, Commodity credit, Circulation credit, Fiduciary media, Abolition of Central Bank, Mal-investment, unemployment, concurrent currencies, boom-bust cycle, bunch of commodity reserve standard, ?a collection of raw material prices? standard, sound money, stable money, private banking
    JEL: B53 E52 E62
  40. By: Simplice A. Asongu (Yaounde, Cameroon); Nicholas Biekpe (Cape Town, South Africa); Danny Cassimon (University of Antwerp, Belgium)
    Abstract: The present research extends Lashitew, van Tulder and Liasse (2019, RP) in order to understand the greater diffusion of mobile money innovations in Africa. To make this assessment, a comparative analysis is engaged between sampled African countries and the corresponding sampled developing countries. Three main types of predictor groups are used for the study, namely: demand, supply and macro-level factors. The empirical evidence is based on Tobit regressions. The tested hypothesis is confirmed because from a comparative analysis between African-specific estimates and those of the sampled countries, not all factors driving mobile money innovations in Africa are apparent in the findings of Lashitew et al. (2019). An extended analysis is also performed to take on board the concern of multicollinearity from which, the best estimators from the study are derived. Comparative findings from correlation analysis show that an African specificity is largely traceable to the ‘unique mobile subscription rate’ variable. An in-depth empirical analysis further confirms an African specificity in the outcome variables (especially in the mobile used to send/receive money) which, may be traceable to informal sector variables not documented in Lashitew et al. (2019). Scholarly and policy implications are discussed.
    Keywords: Mobile money; technology diffusion; financial inclusion; inclusive innovation
    JEL: D10 D14 D31 D60 O30
    Date: 2020–01

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