nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒10‒12
twenty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Role of Information and Experience for Households' Inflation Expectations By Christian Conrad; Zeno Enders; Alexander Glas
  2. Monetary Policy Surprises and Exchange Rate Behavior By Refet S. Gürkaynak; A. Hakan Kara; Burcin Kisacikoglu
  3. Time-varying Effect of Monetary Policy on Capital Flows in Korea By Joonyoung Hur; Kyunghun Kim
  4. Measuring Monetary Policy with Residual Sign Restrictions at Known Shock Dates By Harald Badinger; Stefan Schiman
  5. Exchange rate policy and external vulnerabilities in Sub-Saharan Africa: nominal, real or mixed targeting? By Fadia Al Hajj; Gilles Dufrénot; Benjamin Keddad
  6. A Dynamic Evaluation of Central Bank Credibility By Cem Cakmakli; Selva Demiralp
  7. International Spillover Effects of Unconventional Monetary Policies of Major Central Banks By Tomoo Inoue; Tatsuyoshi Okimoto
  8. The Real Effects of Loan-To-Value Limits: Empirical Evidence from Korea By Victor Pontines
  9. On Possible Measures and Processes to Issue Digital Common Currency in ASEAN + 3 Including Challenges and Opportunities By Taiji Inui; Wataru Takahashi; Mamoru Ishida
  10. Uncertainty and Monetary Policy during Extreme Events By Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano
  11. Effect of Monetary Policy on Government Spending Multiplier By Joonyoung Hur; Jong-Suk Han
  12. Equity Premium and Monetary Policy in a Model with Limited Asset Market Participation By Roman Horvath; Lorant Kaszab; Ales Marsal
  13. Impact of the degree of price rigidity on the possibilities of monetary policy By Bozhechkova, Alexandra (Божечкова, Александра); Dobronravova, Elizaveta (Добронравова, Елизавета); Evseev, Alexey (Евсеев, Алексей); Shemyakina, Kira (Шемякина, Кира); Trunin, Pavel (Трунин, Павел)
  14. Retailer markup and exchange rate pass-through: Evidence from the Mexican CPI micro data By Fernando Pérez-Cervantes
  15. The Contribution of Loans to Economic Activity. By Gianluca Cafiso
  16. Investor Sentiment and (Anti-)Herding in the Currency Market: Evidence from Twitter Feed Data By Xolani Sibande; Rangan Gupta; Riza Demirer; Elie Bouri
  17. Fed Communication on Financial Stability Concerns and Monetary Policy Decisions: Revelations from Speeches By Istrefi Klodiana; Odendahl Florens; Sestieri Giulia
  18. Did the absence of a central bank backstop in the sovereign bond markets exacerbate spillovers during the euro-area crisis? By Heather D. Gibson; Stephen G. Hall; Deborah Gefang; Pavlos Petroulas; George S. Tavlas
  19. How Macroeconomists Lost Control of Stabilization Policy: Towards Dark Ages By Jean Bernard Chatelain; Kirsten Ralf
  20. The Welfare Implications of Massive Money Injection: The Japanese Experience from 2013 to 2020 By Tsutomu Watanabe

  1. By: Christian Conrad; Zeno Enders; Alexander Glas
    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
  2. By: Refet S. Gürkaynak; A. Hakan Kara; Burcin Kisacikoglu
    Abstract: Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using eventstudies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy that the central bank is signaling by its policy may explain the abnormality. It turns out that many informational assumptions make a standard two-country New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the eventstudy and model implications for these. We find that there is heterogeneity in this dimension in the eventstudy and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling eventstudy analysis with model-based mechanisms of asset pricing.
    Keywords: exchange rate response to monetary policy, central bank information effect, open economy macro-finance modeling
    JEL: E43 E44 E52 E58 G14
    Date: 2020
  3. By: Joonyoung Hur (Department of Economics, Sogang University, Seoul); Kyunghun Kim (School of Economics, Hongik University)
    Abstract: This paper examines the effect of domestic monetary policy on capital flows after controlling for the effect of conventional push factors (global factors). We conduct a time-varying coefficient vector autoregressive (TVC-VAR) model analysis using monthly data (January 2010−July 2019) from Korea, a representative small open economy with monetary autonomy. Our empirical results show that an expansionary monetary policy shock has a short-run (1- and 3-month) negative impact on gross inflows to the equity market, which is the main driver of gross capital inflows to Korea. This negative effect increases throughout the sample period. Monetary policy easing is also associated with a decrease in outflows of equity, representing a reversal of Korean residents’ foreign equity investment as the domestic policy rate decreases. This effect dampens the negative impact on gross capital inflows, which leads to mild responses of net capital inflows in the short run. We also find a clear relationship between the level of the policy rate and its impact on gross capital inflows. The lower the policy rate, the greater the negative impact of the expansionary monetary policy shock on gross capital inflows. This time-varying effect reflects difficulties that many emerging market economies including Korea face in setting monetary policy when policy rates are low.
    Keywords: Monetary policy, Capital flows, Push factors, Time-varying effect
    JEL: F3 F4 E5
    Date: 2020
  4. By: Harald Badinger; Stefan Schiman
    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
  5. By: Fadia Al Hajj (College of Business Administration - GUST - Gulf University for Science and Technology); Gilles Dufrénot (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, AMU - Aix Marseille Université); Benjamin Keddad (PSE - Paris School of Economics)
    Abstract: This paper discusses the theoretical choice of exchange rate regimes in Sub-Saharan African countries that are facing external vulnerabilities. To reduce instability, policymakers choose among promoting external competitiveness using a real anchor, lowering the burden of foreign debt using a nominal anchor or using a policy mix of both anchors. We observe that these countries tend to adopt mixed anchor policies. We solve a state space model to explain the determinants of and the strategy behind this policy. We find that the mixed targeting policy is a two-step strategy: First, monetary authorities choose the degree of nominal exchange rate flexibility according to the velocity of money, trade openness, foreign debt, degree of exchange rate pass-through and exchange rate target zone. Second, authorities seek to stabilize the real exchange rate depending on the degree of competition in the domestic goods market and the degree of foreign exchange intervention. We conclude with regime-switching estimations to provide empirical evidence of how these economic fundamentals influence exchange rate policy in Sub-Saharan Africa.
    Keywords: regime-switching model,external vulnerabilities,exchange rate policy,Sub-Saharan Africa
    Date: 2020
  6. By: Cem Cakmakli (Department of Economics, Koc University); Selva Demiralp (Department of Economics, Koc University)
    Abstract: Central bank credibility is critical for the effectiveness of monetary policy. The measures of credibility that are based on the changes in actual inflation rate do not perform very well in environments of chronic inflation. We design an alternative measure that allows us to track the evolution of credibility in an inflationary environment. Credibility is defined as the central bank’s ability to lower inflation expectations towards its inflation target via current interest rate decisions. We adopt a Bayesian set up to exploit this definition and document how credibility changes over time. Our measure differs from the existing measures that are based on the deviation of inflation expectations from the inflation target. We show that the latter tests may be too blunt in the EM context and either overlook marginal improvements in credibility or incorrectly attribute the temporary reductions in the inflation rate to improvements in credibility. Utilizing a time varying parameters modeling structure, we show that the credibility of the Central Bank of the Republic of Turkey (CBRT) has declined significantly over time. Potential reasons for this deterioration could be the CBRT’s disappointing performance in hitting the inflation target and its exposure to political pressures. We apply our methodology to Brazil as well to highlight its advantages and draw a comparison to the existing literature.
    Keywords: Credibility, inflation expectations, Central Bank of the Republic of Turkey, Unobserved component models, TVP-VAR, Central Bank of Brazil.
    JEL: E52 E58 C32
    Date: 2020–10
  7. By: Tomoo Inoue (Seikei University); Tatsuyoshi Okimoto (ANU - Australian National University)
    Abstract: This study examines the effects of unconventional monetary policies (UMPs) by the major central banks, namely the Bank of England (BOE), Bank of Japan (BOJ), European Central Bank (ECB) and the Federal Reserve (Fed) on the international financial markets, taking global spillovers into account. To this end, we apply the Global Vector Autoregressive (GVAR) model to 35 countries and one region for the period from March 2009 to July 2019. Our results indicate that the effects vary across four asset classes and central banks. For example, the UMPs of the Fed and the BOJ have signicant impacts on the regional sovereign bond markets, while the ECB UMPs show relatively stronger and broader effects on global bond markets. The global equity markets were also considerably affected by UMPs of the Fed, ECB, and BOJ. Furthermore, we found some evidence of monetary policy interactions amongst the four major central banks. This resulted in the effects being less persistent on the global bond markets for the Fed and the ECB, but more persistent on equity and foreign exchange markets for the Fed and the BOJ.
    Keywords: Unconventional Monetary policy,Financial linkage,International spillover,Global VAR
    Date: 2020–09
  8. By: Victor Pontines (The South East Asian Central Banks (SEACEN) Research and Training Centre)
    Abstract: This study adds to a recent and growing literature that assess the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation targeting economy and an active user of loan-to-value limits. We identify shocks using sign-restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects on different measures of credit, i.e., real bank credit, real total credit and real household credit. We also find that both shocks have non-negligible effects on real house prices, including effects on real output, real consumption and real investment. We do, however, find that loan-to-value ratio shocks have negligible effects on the price level. These findings indicate that for the period covered by this study, limits on loan-to-value achieved its financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-to-value have important aggregate consequences despite it being a sectoral, targeted policy instrument.
    Keywords: Macroprudential Policy, Limits on Loan-to-Value, Monetary Policy, Sign Restrictions, Impulse Response, Forecast Error Variance Decomposition
    JEL: E31 E32 E52 E58 G28
    Date: 2019–12
  9. By: Taiji Inui (Japan International Cooperation Agency (JICA) advisor for Central Bank of Myanmar and Asian Development Bank (ADB) consultant for Cross-border Settlement Infrastructure Forum (CSIF)); Wataru Takahashi (Faculty of Economics, Osaka University of Economics and Research Fellow, Research Fellow, Research Institute for Economics and Business Administration, Kobe University, Japan); Mamoru Ishida (Itochu Corporation, Japan)
    Abstract: Following the previous paper by Inui, Takahashi, and Ishida (2020), this paper discusses possible measures and processes of Asia (ASEAN+3) digital common currency (ADCC) issued by central banks in ASEAN+3 countries/economies backed by the ADCC denominated bonds issued by an international organization (such as AMRO). This paper also tries to explain authors' views on some possible challenges which need to be solved from practical perspective such as anonymity, counterfeit, AML/CFT, etc. as well as weight of local currencies for the basket currency ACU which could be used as a currency unit for ADCC (AMRO coin for example). In recent years, central banks in many countries are interested in developing the individual digital currencies as their legal tenders. Also, considering the trend of borderless economy, a borderless (cross-border) currency will naturally be focused on sooner or later to meet such an economic trend. Because of the development of digital technologies, it is getting easier to issue and circulate such a borderless currency in a digital form. This paper is trying to propose an idea to meet such a trend.
    Keywords: Digital currency; Asia common currency; Anonymity; AML/CFT
    JEL: E42 F33 F36
    Date: 2020–09
  10. By: Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano
    Abstract: How damaging are uncertainty shocks during extreme events such as the great recession and the Covid-19 outbreak? Can monetary policy limit output losses in such situations? We use a nonlinear VAR framework to document the large response of real activity to a financial uncertainty shock during the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We employ the DSGE model to quantify the impact on real activity of an uncertainty shock under different Taylor rules estimated with normal times vs. great recession data (the latter associated with a stronger response to output). We find that the uncertainty shock-induced output loss experienced during the 2007-09 recession could have been twice as large if policymakers had not responded aggressively to the abrupt drop in output in 2008Q3. Finally, we use our estimated DSGE framework to simulate different paths of uncertainty associated to different hypothesis on the evolution of the coronavirus pandemic. We find that: i) Covid-19-induced uncertainty could lead to an output loss twice as large as that of the great recession; ii) aggressive monetary policy moves could reduce such loss by about 50%.
    Keywords: house price prediction, machine learning, genetic algorithm, spatial aggregation
    JEL: G22 Q54 R11 R31
    Date: 2020
  11. By: Joonyoung Hur (Department of Economics, Sogang University, Seoul); Jong-Suk Han (Department of Tax Policy Research, Korea Institute of Public Finance,)
    Abstract: This paper empirically examines the effect of the monetary policy stance toward inflation on the government spending multiplier when the nominal interest rate is not bound to zero. We estimate a time-varying coefficient vector autoregressive (TVC-VAR) model using 2000:Q1 to 2019:Q3 quarterly data of Korea, whose policy rate is distant from zero. We find that the medium-run government spending multiplier is dampened as the anti-inflationary stance of the central bank becomes more aggressive. The TVC-VAR estimate shows that Korea’s monetary policy became more hawkish until 2009 and attenuated afterward, which is consistent with the narrative evidence from the Bank of Korea. Meanwhile, the medium-run government spending multiplier declined until 2009, after which it started to increase. Our empirical result supports existing theoretical work such as Christiano et al. (2011) that posits a negative relationship between the degree of the monetary authority’s anti-inflationary stance and the size of government spending multipliers.
    Keywords: Government spending multiplier; Monetary policy; Time-varying coefficient VAR
    JEL: C11 E32 E62 E52
    Date: 2020
  12. By: Roman Horvath (Charles University in Prague); Lorant Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary)); Ales Marsal (Vienna University of Economics and Business)
    Abstract: We develop a dynamic stochastic general equilibrium model calibrated to US data to examine how monetary policy shocks affect income inequality and the equity premium. The model features Ricardian and non-Ricardian households and shows that a monetary policy tightening causes an endogenous redistribution of income from non-Ricardians to Ricardians. Ricardians' consumption comoves more strongly with asset returns, giving rise to high equity premia. We extend our model with several frictions and estimate it with generalized method of moments using US macroeconomic and financial data from 1960-2007. We find that the estimated model jointly matches the bond and equity premia. We complement our theoretical model with vector autoregression estimations and show that a tightening of US monetary policy increases equity premia.
    Keywords: Limited Asset Market Participation, Monetary Policy, DSGE, Equity Premium
    JEL: E32 E44 G12
    Date: 2020
  13. By: Bozhechkova, Alexandra (Божечкова, Александра) (The Russian Presidential Academy of National Economy and Public Administration); Dobronravova, Elizaveta (Добронравова, Елизавета) (The Russian Presidential Academy of National Economy and Public Administration); Evseev, Alexey (Евсеев, Алексей) (The Russian Presidential Academy of National Economy and Public Administration); Shemyakina, Kira (Шемякина, Кира) (The Russian Presidential Academy of National Economy and Public Administration); Trunin, Pavel (Трунин, Павел) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: In this paper we estimate the level of price rigidity in Russian economy. First we review the main theoretical models of price setting, the methods used to estimate the level of price rigidity using micro-data on the prices of particular goods and services and indirectly using the data on the dynamics of macroeconomic indicators. Then we present the results of microestimates of price rigidity based on online-prices, which were collected using web-scrapping techniques. The average price duration for food commodities is estimated at 2.6 months. We also do the calibration of price rigidity parameters in a structural model of the production sector using macroeconomic data. According to our estimates, the average price duration in Russian economy doesn’t exceed 4.5 months, which is much less than standard values (3-4 quarters) used in DSGE-models.
    Date: 2020–05
  14. By: Fernando Pérez-Cervantes
    Abstract: I develop a structural model with nested CES preferences to obtain optimal markups for heterogeneous retailers when the prices of all their inputs are exogenous. The model predicts that, if the taste parameters are constant over time, the markups for retailers with higher market share are higher but have more flexibility, implying an incomplete pass-through of retailer input price into final retailer prices. I then focus on the exchange rate pass-through (ERPT) and use a unique data set of all the price changes of tradeable merchandise in the Mexican Consumer Price Index (CPI) data by store type to test the model. I find, consistent with the model, that (1) ERPT is different by store type; and (2) products sold in stores with negligible market share have the same ERPT regardless of the store type. Both results imply that the ERPT is estimated with bias when the store information is not used.
    Keywords: exchange rate pass-through, markups, retailers
    Date: 2020–09
  15. By: Gianluca Cafiso
    Abstract: We study the contribution of loans, granted to different borrower groups, to economic activity in the USA over the period 1971q1-2018q4. Significant economic recessions occurred along the period considered, we center our discussion around the recent Global Financial Crisis. Results are delivered through a historical decomposition analysis based on the estimation of a large VAR through Bayesian techniques. Loans to households emerge as the most important driver of economic activity when compared to other groups, mortgages contribute the most with respect to other typologies. The analysis shows that loan shocks have truly undermined economic activity during the Global Financial Crisis.
    Keywords: loans, economic activity, households, corporate business, non-corporate business, Bayesian VAR, historical decomposition
    JEL: E44 E51 G20 G21 C11
    Date: 2020
  16. By: Xolani Sibande (Department of Economics, University of Pretoria, Pretoria, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Riza Demirer (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA); Elie Bouri (Adnan Kassar School of Business, Lebanese American University, Lebanon)
    Abstract: This paper investigates (anti) herding in the US foreign exchange market while assessing the role of investor happiness as a predictor of herding. To achieve this objective, it uses dispersion metrics (CSAD and CSSD) and applies OLS regressions with rolling window and quantile-on-quantile regressions (QQR). The results show that the US foreign exchange market is characterized by a strong anti-herding behavior. In normal times, anti-herding and investor happiness are negatively related. However, in extreme bearish and bullish times, investor happiness is associated with more severe anti-herding. The findings are of particular interest to policymakers who are concerned with the stability of the US foreign exchange market.
    Keywords: Herding, Exchange Rates, Time-varying Regression, Investor Happiness
    JEL: G15
    Date: 2020–09
  17. By: Istrefi Klodiana; Odendahl Florens; Sestieri Giulia
    Abstract: This paper studies the informational content of publicly given speeches of FOMC members with a focus on financial stability, from 1997 to 2018. We document that presidents of Federal Reserve Banks spoke more than Board members around and after the financial crisis, and exhibit more variation in the topics of their speeches. Our speech-based indicators of financial stability-related topics show that, when added to a standard forward-looking Taylor rule, a higher speech intensity on these topics relates to a more accommodative monetary policy. This result is driven by the information in speeches of Fed presidents, not the Board or the Fed Chair. We discuss several channels that can rationalize this finding.
    Keywords: Monetary Policy, Federal Reserve, Financial Stability, Communication.
    JEL: E03 E50 E61
    Date: 2020
  18. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (University of Leicester, Bank of Greece and University of Pretoria); Deborah Gefang (University of Leicester); Pavlos Petroulas (Bank of Greece); George S. Tavlas (Bank of Greece)
    Abstract: The euro-area sovereign debt crisis was characterized by feedback loops between (1) sovereign bond ratings and sovereign spreads in single jurisdictions and (2) sovereign spreads and ratings among jurisdictions. One explanation of this circumstance is that the ECB was unable to perform the role of lender of last resort in the sovereign bond markets during the crisis. We provide a spatial framework that allows us to distinguish among European countries whose central banks were permitted to function as lender of last resort in those markets and countries whose central banks were not permitted to do so. Our results are consistent with the view that the absence of a central bank backstop in the sovereign bond markets exacerbated feedback loops.
    Keywords: euro-area crisis, simultaneous spatial model, European banks, spreads, sovereign ratings
    JEL: E3 G01 G14 G21
    Date: 2020–07
  19. By: Jean Bernard Chatelain; Kirsten Ralf
    Abstract: This paper is a study of the history of the transplant of mathematical tools using negative feedback for macroeconomic stabilization policy from 1948 to 1975 and the subsequent break of the use of control for stabilization policy which occurred from 1975 to 1993. New-classical macroeconomists selected a subset of the tools of control that favored their support of rules against discretionary stabilization policy. The Lucas critique and Kydland and Prescott's time-inconsistency were over-statements that led to the "dark ages" of the prevalence of the stabilization-policy-ineffectiveness idea. These over-statements were later revised following the success of the Taylor rule.
    Date: 2020–10
  20. By: Tsutomu Watanabe (Graduate School of Economics, University of Tokyo)
    Abstract: This paper derives a money demand function that explicitly takes the costs of storing money into account. This function is then used to examine the consequences of the large-scale money injection conducted by the Bank of Japan since April 2013. The main findings are as follows. First, the opportunity cost of holding money calculated using 1-year government bond yields has been negative since the fourth quarter of 2014, and most recently (2020:Q2) was -0.2%. Second, the marginal cost of storing money, which was 0.3% in the most recent quarter, exceeds the marginal utility of money, which was 0.1%. Third, the optimum quantity of money, measured by the ratio of M1 to nominal GDP, is 1.2. In contrast, the actual money-income ratio in the most recent quarter was 1.8. The welfare loss relative to the maximum welfare obtained under the optimum quantity of money in the most recent quarter was 0.2% of nominal GDP. The findings imply that the Bank of Japan needs to reduce M1 by more than 30%, for example through measures that impose a penalty on holding money.
    Date: 2020–09

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