nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒10‒26
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Surveying the survey: What can we learn about the effects of monetary policy on inflation expectations? By Michael Pedersen
  2. Optimal Foreign Reserves and Central Bank Policy Under Financial Stress By Luis Felipe Céspedes; Roberto Chang
  3. Quantitative Easing and Direct Lending in Response to the COVID-19 Crisis By Filippo Occhino
  4. Is There a Stable Relationship between Unemployment and Future Inflation? By Terry J. Fitzgerald; Callum Jones; Mariano Kulish; Juan Pablo Nicolini
  5. Empirical Evidence of the Lending Channel of Monetary Policy under Negative Interest Rates By Whelsy BOUNGOU
  6. Payment Innovations, the Shadow Economy and Cash Demand of Households in Euro Area Countries By Hans-Eggert Reimers; Friedrich Schneider; Franz Seitz
  7. Central bank information effects and transatlantic spillovers By Jarociński, Marek
  8. Macroprudential Policy, Monetary Policy and the Bank Interest Rate Margin By E Philip Davis; Dilruba Karim; Dennison Noel
  9. Unconventional Monetary Policy, Leverage & Default Dynamics By Edoardo Palombo
  10. Can Households Predict where the Macroeconomy is Headed? By Kladivko, Kamil; Österholm, Pär
  11. Fixed and Flexible Exchange-rates in Two Matching Models: Non-equivalence Results By Zhu, Tao; Wallace, Neil
  12. Exchange Rates and the Information Channel of Monetary Policy By Oliver Holtemöller; Alexander Kriwoluzky; Boreum Kwak
  13. Islamic Monetary Economics: Insights from the Literature By Uddin, Md Akther
  14. Central Bank Communication with a Financial Stability Objective By David M. Arseneau
  15. Implementing Monetary Policy in an "Ample-Reserves" Regime: When in Crisis (Note 3 of 3) By Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
  16. Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters By Mary Amiti; Oleg Itskhoki; Jozef Konings
  17. Estimates of r* Consistent with a Supply-Side Structure and a Monetary Policy Rule for the U.S. Economy By Manuel Gonzalez-Astudillo; Jean-Philippe Laforte
  18. Can GDP Growth Linked Instrument Be Used For Islamic Monetary Policy? By Uddin, Md Akther; Ali, Md Hakim; Radwan, Maha
  19. Forward Guidance Matters: Disentangling Monetary Policy Shocks By Leonardo N. Ferreira
  20. Macroprudential Policy in the Euro Area By Alvaro Fernandez-Gallardo; Ivan Paya
  21. "The Trade-off between Inflation and Unemployment in an MMT World: An Open Economy Perspective" By Emilio Carnevali; Matteo Deleidi
  22. Mortgage Prepayment, Race, and Monetary Policy By Kristopher S. Gerardi; Paul S. Willen; David Hao Zhang
  23. The FOMC’s New Individual Economic Projections and Macroeconomic Theories By Natsuki Arai
  24. Alternative Models of Interest Rate Pass-Through in Normal and Negative Territory By Mauricio Ulate
  25. Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the early 1900s By Mark Carlson; Matthew S. Jaremski
  26. A Class of Time-Varying Vector Moving Average (infinity) Models By Yayi Yan; Jiti Gao; Bin peng
  27. A note on the impact of news on US household inflation expectations By Ben Zhe Wang; Jeffrey Sheen; Stefan Tr\"uck; Shih-Kang Chao; Wolfgang Karl H\"ardle
  28. Finance as Perpetual Orgy. How the ‘new alchemists’ twisted Kindleberger’s cycle of “manias, panics and crashes” to “manias, panics and renewed-manias”. By Palma, J. G.
  29. Pandemic Recession Dynamics: The Role of Monetary Policy in Shifting a U-Shaped Recession to a V-Shaped Rebound By Michael T. Kiley
  30. The Effects of Trend Inflation on Aggregate Dynamics and Monetary Stabilization By Andrey Alexandrov
  31. CRIX an index for cryptocurrencies By Simon Trimborn; Wolfgang Karl H\"ardle
  32. Monetary spillovers and real exchange rate misalignments in emerging markets By Krittika Banerjee; Ashima Goyal
  33. Three essays on foreign exchange rates By Prapassornmanu, Pichittra

  1. By: Michael Pedersen
    Abstract: The replies to a questionnaire that was sent to the participants in the Chilean Financial Traders Survey (FTS) reveal heterogeneity in how they make their forecasts. There are also differences in how the traders understand questions regarding the future monetary policy rate (MPR); some of them answer what they think the central bank will do, while others what they think it should do. The FTS is distinctive from similar surveys in the sense that it is conducted immediately before and after the monetary policy meetings. This study employs a novel dataset that consists of FTS micro observations to assess the extent to which heterogeneity in the replies to the questionnaire affects how agents take into account MPR surprises when updating their inflation expectations. While the should-do traders incorporate MPR surprises in their one-year-ahead inflation expectations, it is not evident that will-do respondents do so. This could imply that the “model” traders have in mind includes an endogenous MPR path, which is not necessarily in accordance with what they think the central bank is going to do in the short run. The baseline estimates suggest that agents that merely base their forecasts on models do not seem to factor in MPR surprises in their inflation expectations updates, but small sample corrected standard errors indicate that the should-do traders might. On the other hand, for those that use information only from financial markets, only the will-do traders adjust inflation expectations in response to MPR surprises, which could be because asset prices incorporate what the market thinks the central bank is going to do. Two-years-ahead inflation expectations are not affected by MPR surprises. The results help to understand heterogeneity in forecasters’ inflation updates and stress the importance of understanding on what basis survey respondents answer the questions.
    Date: 2020–09
  2. By: Luis Felipe Céspedes; Roberto Chang
    Abstract: We study the interaction between optimal foreign reserves accumulation and central bank international liquidity provision in a small open economy under financial stress. Firms and households finance investment and consumption by borrowing from domestic financial intermediaries (banks), which in turn borrow from abroad. Binding financial constraints can cause the domestic rate of interest to rise above the world rate and the real exchange rate to depreciate, leading to inefficiently low investment and consumption. A role then emerges for a central bank that accumulates reserves in order to provide liquidity if financial frictions bind. The optimal level of international reserves in this context depends, among other variables, on the term premium, the depth of financial markets, ex ante financial uncertainty and the precise way the central bank intervenes. The model is consistent with both the increase in international reserves observed during the period 2004-2008 and with policy intervention after the Lehman bankruptcy.
    JEL: E5 F3 F4
    Date: 2020–10
  3. By: Filippo Occhino
    Abstract: When the COVID-19 crisis hit the economy in 2020, the Federal Reserve responded with numerous programs designed to prevent a collapse in bank credit and firms’ available funds. I develop a dynamic general equilibrium model to study how these programs work and to evaluate their effectiveness. In the model, quantitative easing works through three channels: the expansion of bank reserves lowers a liquidity premium, the purchase of assets lowers a volatility risk premium, and the economic stimulus lowers a credit risk premium. Since bank reserves are currently larger than in the past, the liquidity premium channel is weaker, and quantitative easing is less effective. Direct lending to firms at a market rate is also less effective. Direct lending to firms at a subsidized rate can be more stimulative than quantitative easing, provided that it lowers firms’ marginal borrowing rate and user cost of capital.
    Keywords: Quantitative easing; credit easing; liquidity premium; risk premium; COVID-19
    JEL: E32 E43 E51 E52 E58
    Date: 2020–10–05
  4. By: Terry J. Fitzgerald; Callum Jones; Mariano Kulish; Juan Pablo Nicolini
    Abstract: The empirical literature on the stability of the Phillips curve has largely ignored the bias that endogenous monetary policy imparts on estimated Phillips curve coefficients. We argue that this omission has important implications. When policy is endogenous, estimation based on aggregate data can be uninformative as to the existence of a stable relationship between unemployment and future inflation. But we also argue that regional data can be used to identify the structural relationship between unemployment and inflation. Using city-level and state-level data from 1977 to 2017, we show that both the reduced form and the structural parameters of the Phillips curve are, to a substantial degree, quite stable over time.
    Keywords: Endogenous monetary policy; Stability of the Phillips curve
    JEL: E52 E58
    Date: 2020–10–07
  5. By: Whelsy BOUNGOU
    Abstract: Does the lending channel of monetary policy operate under a negative interest rate policy (NIRP)? The purpose of this study is to shed light on the existence of a lending channel of monetary policy under NIRP. To do so, we aim to provide an in-depth analysis of the relationship between NIRP and bank-lending behavior. To achieve this, we employ a large panel dataset of 4072 banks operating in 54 countries over the period 2009-2018 and a Difference-in-Differences methodology. We find that banks located in countries affected by negative interest rates have adjusted their bank-lending behavior by increasing lending activities. Our findings suggest that in response to negative interest rates, banks have reduced their lending cost, and increased lending supply, especially for loans longer than 3 months. Finally, we also find that the transmission of monetary policy under negative interest rates to the real economy depends on banks' specific characteristics such as reliance on retail deposits and size.
    Keywords: Negative interest rates; Lending cost; Lending supply; Lending maturity; Difference-in-Differences estimation
    JEL: E43 E51 E52 F34 G21
    Date: 2020
  6. By: Hans-Eggert Reimers; Friedrich Schneider; Franz Seitz
    Abstract: We analyze for the first time cash holdings of private households in all euro area countries from 2002 to 2019 within a panel cointegration framework. Besides the traditional determinants of cash demand like transactions balances and opportunity costs, we concentrate on cashless payments media as substitutes to cash payments and the role of the shadow economy. Moreover, we take due account of country-specific repercussions of the financial and economic crisis of 2008/09, time series properties and distinguish between small and large countries. We find a significant and positive relationship among households' cash holdings, the volume of transactions and the size of the shadow economy irrespective of country size for all euro area countries over our sample period. Additionally, there is a substitution relationship between the accessibility and availability of cashless payments media and cash demand. And a decreasing number of ATMs reduces cash holdings. These results have important political and financial implications.
    Keywords: cash, cashless payments, shadow economy, cash demand function, panel cointegration
    JEL: C23 E41 E58
    Date: 2020
  7. By: Jarociński, Marek
    Abstract: The news about the economy contained in a central bank announcement can affect public expectations. This paper shows, using both event studies and vector autoregressions, that such central bank information effects are an important channel of the transatlantic spillover of monetary policy. They account for a part of the co-movement of German and US government bond yields around Fed policy announcements, for most of this co-movement around ECB policy announcements, and significantly affect a range of financial and macroeconomic quantities on both sides of the Atlantic. These findings shed new light on the nature of central bank information. JEL Classification: E52, F31, F42
    Keywords: high-frequency identification, international policy transmission, monetary policy shocks, structural VAR
    Date: 2020–10
  8. By: E Philip Davis; Dilruba Karim; Dennison Noel
    Abstract: Against the background of the policy interest in the interaction of monetary policy and macroprudential policy, we present empirical estimates of effects of macroprudential policies alongside monetary policy on banks' interest rate margins (net interest income/average assets). This is an important determinant of banks' profitability and accordingly their ability to accumulate capital, as well as a key aspect of the transmission mechanism of monetary policy. To our knowledge, such an analysis has not been undertaken in the research literature to date. The empirical results for a sample of over 1,300 banks from 15 advanced countries over 2000-13 suggest that the level and difference of interest rates and the yield curve affect the margin, in line with existing work. Meanwhile a number of macroprudential policy measures have an effect on the margin, firstly when they are introduced, secondly in levels and thirdly when leveraged in combination with the level of the interest rate. Some differences are found in the response of small and large banks to macroprudential policy but less so for monetary policy. We contend that these results are of considerable relevance to policymakers and regulators, notably in gauging the overall stance of macroeconomic policy.
    Keywords: macroprudential policy, monetary policy, short term interest rate, yield curve, bank interest margin
    JEL: E44 E58 G17 G28
    Date: 2020–10
  9. By: Edoardo Palombo (Queen Mary University of London)
    Abstract: The objective of this paper is to investigate the effectiveness of credit easing policy in mitigating the economic fallout from a financial recession using a model that can account for the observed default and leverage dynamics during the financial crisis of 2007. A general equilibrium model is developed with a financial sector and endogenous asset defaults able to account for the observed default and leverage dynamics. Following an adverse aggregate shock, banks deleverage through two channels: (i) higher non-performing loans provisions, and (ii) lower the marginal return of assets. Credit policy is modelled as an expansion of the central bank’s balance sheet countering the disruption in private financial intermediation. Unconventional monetary policy, namely credit easing policy, is shown to be ineffective in mitigating the effects of a financial crisis due to its crowding out effect on the private asset market. Other non-monetary policy tools such as credit subsidies and their efficacy considered.
    Keywords: unconventional monetary policy, credit easing, credit subsidies, financial frictions, default, leverage, financial sector.
    JEL: E20 E32 E44 E52 E58
    Date: 2020–06–25
  10. By: Kladivko, Kamil (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: In this paper, we evaluate households’ directional forecasts of inflation and the unemployment rate in Sweden. The analysis is conducted using monthly forecasts from the National Institute of Economic Research’s Economic Tendency Survey that range from January 1996 until August 2019. Results indicate that households have statistically significant ability to forecast where the unem-ployment is headed, but they fail in predicting the direction of future inflation.
    Keywords: Survey data; Directional forecasts; Inflation; Unemployment
    JEL: E37
    Date: 2020–10–09
  11. By: Zhu, Tao; Wallace, Neil
    Abstract: There is a presumption that fixed and flexible (floating or market-determined) exchange-rate systems are equivalent if prices are flexible. We show that the presumption does not hold in two matching models of money. In both models, (i) currencies are the only assets and all trade is spot trade; (ii) the trades that directly determine welfare occur in pairwise meetings between buyers and sellers; and (iii) imperfect substitutability (including, as a special case, no substitutability) among currencies is a consequence of the trading protocol in those meetings. The two models are variants of the Lagos-Wright (2005) model and differ regarding the timing of the shock realizations relative to the centralized trade opportunities. One version has a speculative fringe. In it, the unique stationary (monetary) equilibrium under the fixed exchange-rate regime is one of a continuum of equilibria under a flexible exchange-rate regime. The other version has no speculative fringe. In it, there is a unique (monetary) stationary equilibrium under each exchange-rate regime and they differ.
    Keywords: Matching models of money; exchange-rate regimes
    JEL: E4 F3 F31
    Date: 2020–09–13
  12. By: Oliver Holtemöller; Alexander Kriwoluzky; Boreum Kwak
    Abstract: We disentangle the effects of monetary policy announcements on real economic variables into an interest rate shock component and a central bank information shock component. We identify both components using changes in interest rate futures and in exchange rates around monetary policy announcements. While the volatility of interest rate surprises declines around the Great Recession, the volatility of exchange rate changes increases. Making use of this heteroskedasticity, we estimate that a contractionary interest rate shock appreciates the dollar, increases the excess bond premium, and leads to a decline in prices and output, while a positive information shock appreciates the dollar, decreases prices and the excess bond premium, and increases output.
    Keywords: Monetary policy, central bank information shock, identification through heteroskedasticity, high-frequency identification, proxy SVAR
    JEL: C36 E52 E58
    Date: 2020
  13. By: Uddin, Md Akther
    Abstract: This chapter reviews critical early literature of Islamic monetary economics. The prohibition of Riba has imposed challenges on Islamic economists to come up with the viable alternatives to achieve Islamic monetary policy goals. Our extensive review of theoretical and empirical literature indicates that equity based profit- and loss-sharing instruments have been proposed for conducting open market operations in an interest-free economy. Theoretically, the central bank can achieve desired goals by controlling money supply and profit-sharing ratios. The findings from empirical literature suggest that money demand tend to be more stable in an interest-free economy. Whether monetary transmission works through Islamic banking channel is controversial, but the literature is growing. These findings are not surprising as majority Muslim countries lack sustainable and equitable economic growth. Moreover, these countries suffer from higher inflation and unemployment with little or no monetary freedom due to fixed exchange rate regime, shallow financial markets and strict capital control.
    Keywords: Islamic monetary policy, interest-free economy, monetary policy instruments
    JEL: E42 E52 E58
    Date: 2019
  14. By: David M. Arseneau
    Abstract: An endogenous financial crisis is introduced into the canonical model used to study central bank transparency. The central bank is endowed with private information about the real economy and credit conditions which jointly determine financial vulnerabilities. An optimal choice is made regarding whether to communicate this information to the public. A key finding is that the optimal communication strategy depends on the state of the credit cycle and the \ composition of shocks driving the cycle. From a policy perspective, this raises the possibility that central bank communication in the presence of a financial stability objective faces a time inconsistency problem.
    Keywords: Financial stability report; Information disclosure; Survey of economic projections; Time inconsistency problem; Transparency
    JEL: G18 E58 E61
    Date: 2020–10–13
  15. By: Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
    Abstract: Note 1 and Note 2 in this three-part series described how the Federal Reserve (or Fed) implements monetary policy in normal times, with an ample quantity of reserves in the banking system. In this third and final Note in our series, we take a detour in light of current circumstances and describe how the Fed operates amid a crisis—when facing severely strained economic or financial circumstances, or both.
    Date: 2020–10–02
  16. By: Mary Amiti; Oleg Itskhoki; Jozef Konings
    Abstract: Using new data on currency invoicing for Belgian firms, we analyze how firms make their currency choice, for both exports and imports, and the implications of this choice for exchange rate pass-through into prices and quantities. We derive our estimating equations from a theoretical framework featuring variable markups, international input sourcing, and staggered price setting with endogenous currency choice. Our structural specification provides a new test of the allocative consequences of nominal rigidities, by estimating the treatment effect of foreign-currency price stickiness on the dynamic response of prices and quantities, controlling for the endogeneity of the firm's currency choice. We show that flexible-price determinants of exchange rate pass-through are also the key firm characteristics that determine currency choice. In particular, small non-importing firms tend to price their exports in euros (producer currency) and exhibit complete exchange-rate pass-through into destination prices at all horizons. In contrast, large import-intensive firms tend to denominate their exports in foreign currencies, especially in the US dollar, exhibiting a lower pass-through of the euro-destination exchange rate and a pronounced sensitivity to the dollar-destination exchange rate. The effects of foreign-currency price stickiness are still significant beyond the one-year horizon, but gradually dissipate in the long run.
    JEL: E31 F31 F41
    Date: 2020–10
  17. By: Manuel Gonzalez-Astudillo; Jean-Philippe Laforte
    Abstract: We estimate the natural rate of interest (r*) using a semi-structural model of the U.S. economy that jointly characterizes the trend and cyclical factors of key macroeconomic variables such as output, the unemployment rate, inflation, and short- and long-term interest rates. We specify a monetary policy rule and an equation that characterizes the 10-year Treasury yield to exploit the information provided by both interest rates to infer r*. However, the use of a monetary policy rule with a sample that spans the Great Recession and its aftermath poses a challenge because of the effective lower bound. We devise a Bayesian estimation technique that incorporates a Tobit-like specification to deal with the censoring problem. We compare and validate our model specifications using pseudo out-of-sample forecasting exercises and Bayes factors. Our results show that the smoothed value of r* declined sharply around the Great Recession, eventually falling below zero, and has remained negative since then. Our results also indicate that obviating the censoring would imply higher estimates of r* than otherwise.
    Keywords: Natural rate of interest; Natural unemployment rate; Output gap; Shadow interest rate;
    JEL: C32 C34 E32
    Date: 2020–10–08
  18. By: Uddin, Md Akther; Ali, Md Hakim; Radwan, Maha
    Abstract: In this paper, we investigate Islamic monetary policy and proposes an alternative monetary policy instrument, namely gross domestic products (GDP) growth link instrument. The modeling techniques applied are ordinary least square (OLS) and the method is applied to a dataset of 99 countries for the year 2012 and time series data for Malaysia over the period of 1983-2013. Moreover, six months (January – June 2014) daily data on Islamic and conventional interbank rates are used for the correlational study. The results tend to show that GDP growth rate adjusted for interest income and inflation can be set as a benchmark for money market instruments and reference rate for financial and capital market to set the cost of capital or rate of return. Also, we found that real interest rate is mostly not representative across 99 countries as most of the time policy rates are either determined in the money market which is usually disintegrated with the real sector of an economy, or it is fixed by the Central Bank. Islamic and conventional money market rates are found significantly correlated in the presence of dual banking system. Moreover, inflation and employment rate in the Organisation of Islamic Cooperation (OIC) countries are found higher than non-OIC countries. Therefore, the interest rate should be replaced with more representative policy rate like the GDP growth rate linked instrument which could provide a benchmark rate for pricing products in Islamic commercial banking, and an avenue for investment in the Islamic financial market.
    Keywords: Real Economy, Islamic Monetary Policy, Real Interest Rate, GDP Growth Rate, Inflation, Real Exchange Rate, Gross Savings
    JEL: E42 E52 E58
    Date: 2019–08–29
  19. By: Leonardo N. Ferreira (Queen Mary University of London)
    Abstract: Central banks have usually employed short-term rates as the main instrument of monetary policy. In the last decades, however, forward guidance has also become a central tool for monetary policy. In an innovative way this paper combines two sources of extraneous information-high frequency surprises and narrative evidence-with sign restrictions in a structural vector autoregressive (VAR) model to fully disentangle the e ects of forward guidance shocks from the e ects of conventional monetary policy shocks. Results show that conventional monetary policy has the expected e ects even in a recent US sample, in contrast with the evidence reported by Barakchian and Crowe (2013) and Ramey (2016), and that forward guidance is an e ective policy tool. In fact, it is at least as strong as conventional monetary policy.
    Keywords: Forward Guidance, Monetary Policy, Narrative Sign Restrictions, High-frequency identification
    JEL: E30 E32 E43 E52 E58 C11 C50
    Date: 2020–09–15
  20. By: Alvaro Fernandez-Gallardo; Ivan Paya
    Abstract: It is now widely accepted that monetary authorities should have a mandate to safeguard financial stability and that macroprudential policies should be an integral part of such a mandate. However, our understanding of the effectiveness of macroprudential policies and their impact on monetary policy target variables and, more broadly, on macroeconomic outcomes, is still limited. This paper addresses that gap and examines the development and impact of macroprudential policies in the euro area. The contribution of the paper is twofold. First, we construct a novel index that captures the stance of the macroprudential policy and we highlight its main stylised facts since the inception of the euro in 1999. Second, we employ a combination of a narrative approach and a structural VAR method to identify both unanticipated and anticipated exogenous variations in macroprudential policies. Our results show that unanticipated or surprise shocks and anticipated or news macroprudential policy shocks exhibit differentiated effects on macroeconomic variables and that they both contribute over the medium term to safeguard financial stability. We also nd significant linkages between monetary and macroprudential policies over a sample period that includes events such as the great financial crisis and the sovereign debt crisis.
    Keywords: macroprudential policy, financial stability, euro area, monetary policy
    JEL: E58 E61
    Date: 2020
  21. By: Emilio Carnevali; Matteo Deleidi
    Abstract: This paper is focused on Modern Monetary Theory's (MMT) treatment of inflation from an open economy perspective. It analyzes how the inflation process is explained within the MMT framework and provides empirical evidence in support of this vision. However, it also makes use of a stock-flow consistent (open economy) model to underline some limits of the theory when it is applied in the context of a non-US (relatively) open economy with a flexible exchange rate regime. The model challenges the contention made by MMTers that measures such as the job guarantee program can achieve full employment without facing an inflation-unemployment trade-off.
    Keywords: Central Banking; Post-Keynesian; Open Economy Model; Modern Money Theory
    JEL: E51 E12 F41
    Date: 2020–10
  22. By: Kristopher S. Gerardi; Paul S. Willen; David Hao Zhang
    Abstract: This paper documents large differences in mortgage prepayment behavior across racial and ethnic groups in the United States, which have significant implications for monetary policy, inequality, and pricing. Using a novel data set that combines administrative data on mortgage performance with information on race and ethnicity, we show that Black and Hispanic white borrowers have significantly lower prepayment rates compared with Non-Hispanic white borrowers, holding income, credit score, and equity constant. This gap is on the order of 50 percent and largely reflects different sensitivities to movements in market interest rates, and was particularly pronounced during QE1. Differences in prepayment speeds result in large disparities between white and minority borrowers in the distribution of rates paid on outstanding mortgages, which widens during periods of low mortgage rates and high refinance volumes. From 2010 to 2014, Black borrowers were paying 30 to 45 basis points more on average than Non-Hispanic whites despite only a small gap of about 5 basis points between the groups at the time of mortgage origination. The large differences in prepayment behavior have important pricing implications, as they suggest that minority borrowers are overpaying for their prepayment option. Our results show that inequality in mortgage markets is larger than previously realized and is exacerbated by expansionary monetary policy.
    Keywords: race; quantitative easing; monetary policy; mortgage rate; refinance; prepayment; default
    JEL: E52 G21
    Date: 2020–09–01
  23. By: Natsuki Arai (National Chengchi University)
    Abstract: This paper examines whether the individual economic projections made by the Federal Open Market Committee’s (FOMC) policymakers are consistent with macroeconomic theories: Okun’s law, the Phillips curve, and the Taylor rule. By analyzing the FOMC’s individual economic projections between 2007 and 2014, I find that they are consistent with Okun’s law, revealing a significantly negative relationship between unemployment and output growth projections. On the other hand, the relationship between inflation and unemployment projections associated with the Phillips curve is much weaker and more dispersed. The results on the FOMC’s reaction function, the Taylor rule, are mixed: The response of the projections of the federal funds rate against the inflation gap projections—the deviation of inflation projections from the target—is significantly positive, whereas the response against the corresponding output gap projections varies depending on the specification.
    Keywords: FOMC, Individual Economic Projections, Okun’s law, Phillips Curve,Taylor rule
    JEL: C32 C53 E58
    Date: 2020–10
  24. By: Mauricio Ulate
    Abstract: In the aftermath of the Great Recession, many countries used low or negative policy rates to stimulate the economy. These policies gave rise to a rapidly growing literature that seeks to understand and quantify their impact. A fundamental step when studying the effectiveness of low and negative policy rates is to understand their transmission to loan and deposit rates. This paper proposes two models of pass-through from policy rates to loan and deposit rates that can match important stylized facts while remaining parsimonious. These models can be used to study the transition between positive and negative policy rates and to quantify the impact of negative rates on banks.
    Keywords: Negative Interest Rates; ZLB; Monetary Policy; Bank Profitability
    JEL: E32 E44 E52 E58 G21
    Date: 2020–09–09
  25. By: Mark Carlson; Matthew S. Jaremski
    Abstract: Maintaining sufficient liquidity in the financial system is vital for its stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent.
    JEL: D40 G38 N21 N41
    Date: 2020–10
  26. By: Yayi Yan; Jiti Gao; Bin peng
    Abstract: Multivariate time series analyses are widely encountered in practical studies, e.g., modelling policy transmission mechanism and measuring connectedness between economic agents. To better capture the dynamics, this paper proposes a class of multivariate dynamic models with time-varying coefficients, which have a general time-varying vector moving average (VMA) representation, and nest, for instance, time-varying vector autoregression (VAR), time–varying vector autoregression moving–average (VARMA), and so forth as special cases. The paper then develops a unified estimation method for the unknown quantities before an asymptotic theory for the proposed estimators is established. In the empirical study, we investigate the transmission mechanism of monetary policy using U.S. data, and uncover a fall in the volatilities of exogenous shocks. In addition, we find that (i) monetary policy shocks have less influence on inflation before and during the so-called Great Moderation, (ii) inflation is more anchored recently, and (iii) the long-run level of inflation is below, but quite close to the Federal Reserve’s target of two percent after the beginning of the Great Moderation period.
    Keywords: multivariate time series model, nonparametric kernel estimation, trending stationarity
    Date: 2020
  27. By: Ben Zhe Wang; Jeffrey Sheen; Stefan Tr\"uck; Shih-Kang Chao; Wolfgang Karl H\"ardle
    Abstract: Monthly disaggregated US data from 1978 to 2016 reveals that exposure to news on inflation and monetary policy helps to explain inflation expectations. This remains true when controlling for household personal characteristics, perceptions of government policy effectiveness, future interest rates and unemployment expectations, and sentiment. We find an asymmetric impact of news on inflation and monetary policy after 1983, with news on rising inflation and easier monetary policy having a stronger effect in comparison to news on lowering inflation and tightening monetary policy. Our results indicate the impact on inflation expectations of monetary policy news manifested through consumer sentiment during the lower bound period.
    Date: 2020–09
  28. By: Palma, J. G.
    Abstract: The analysis will focus on how the traditional Kindlebergian financial-crisis cycle of “manias, panics and crashes” has been twisted so that now policymakers make sure that any panic is immediately followed by a renewed mania. Due to a “secular-stagnationists”-style thinking, central bankers, treasury officials and politicians - the ‘new alchemists’ - now believe that only a perpetual-mania can deliver some resemblance of growth. So, they persist in pumping liquidity and relaxing monetary conditions, no matter how much this violates every possible principle of markets economics, and regardless of the fact that the current policies to reactivate mature economies (rocketing the net-worth of a few individuals) have already been tried and failed post-2008. One by-product of this new perpetual-mania is that emerging markets have become what I have labelled “the financial markets of last resort”, and commodities “the financial asset of last resort”. That is, most emerging markets now don’t have to put up anymore with international finance being a “sellers” market (where they had to knock and beg); now, it is the international speculator who has been pushed into a yield-chasing frenzy in emerging markets. This new “buyers” market has proved to be a mixed blessing for emerging markets, as many of them have joined the ‘everything rally’ - in which you have nothing to lose but your real economy.
    Keywords: manias, panics, financialisation, QE, excess liquidity, ‘disconnect’ between the financial and the real worlds, emerging markets, Latin America, Asia, Keynes, Kindleberger, Minsky, Buchanan
    JEL: E22 D70 D81 E24 E51 F02 F21 F32 F40 F44 F63 G15 G20 G28 G30 G38 L51 N20 O16
    Date: 2020–10–08
  29. By: Michael T. Kiley
    Abstract: COVID-19 has depressed economic activity around the world. The initial contraction may be amplified by the limited space for conventional monetary policy actions to support recovery implied by the low level of nominal interest rates recently. Model simulations assuming an initial contraction in output of 10 percent suggest several policy lessons. Adverse effects of constrained monetary policy space are large, changing a V-shaped rebound into a deep U-shaped recession absent large-scale Quantitative Easing (QE). Additionally, the medium-term scarring on economic potential can be large, and mitigation of such effects involves persistently accommodative monetary policy to support investment and long-run productive capacity. The simulations also illustrate the importance of coordinating QE and interest rate policy. Finally, the simulations, conducted within a model developed prior to the pandemic, illustrate limitations in economists’ understanding of QE and the channels through which shocks like a pandemic affect medium-term economic performance.
    Keywords: Quantitative easing; Effective lower bound; Unconventional monetary policy;
    JEL: E52 E58 E44 E37
    Date: 2020–10–07
  30. By: Andrey Alexandrov
    Abstract: I derive a set of new analytic results for the effects of trend inflation on aggregate price and output dynamics in menu cost models. I find that positive trend inflation: (1) induces asymmetry in price and output responses to monetary shocks, (2) leads to price overshooting after large shocks, and (3) destroys the monetary neutrality result for large shocks. Under positive trend inflation, large expansionary monetary interventions lead to output contractions, and smaller expansionary interventions have substantially reduced potency. Using U.S. sectoral data, I provide supporting evidence for these model predictions. Calibrating a general equilibrium model to the U.S. economy, I find sizable effects of trend inflation on monetary stabilization policy. Raising the inflation target from 2% to 4% increases the economy's sensitivity to an adverse markup shock and worsens the stabilization trade-off.
    Keywords: trends, asymmetry, trend inflation, aggregate dynamics
    JEL: E32 E52
    Date: 2020–10
  31. By: Simon Trimborn; Wolfgang Karl H\"ardle
    Abstract: The cryptocurrency market is unique on many levels: Very volatile, frequently changing market structure, emerging and vanishing of cryptocurrencies on a daily level. Following its development became a difficult task with the success of cryptocurrencies (CCs) other than Bitcoin. For fiat currency markets, the IMF offers the index SDR and, prior to the EUR, the ECU existed, which was an index representing the development of European currencies. Index providers decide on a fixed number of index constituents which will represent the market segment. It is a challenge to fix a number and develop rules for the constituents in view of the market changes. In the frequently changing CC market, this challenge is even more severe. A method relying on the AIC is proposed to quickly react to market changes and therefore enable us to create an index, referred to as CRIX, for the cryptocurrency market. CRIX is chosen by model selection such that it represents the market well to enable each interested party studying economic questions in this market and to invest into the market. The diversified nature of the CC market makes the inclusion of altcoins in the index product critical to improve tracking performance. We have shown that assigning optimal weights to altcoins helps to reduce the tracking errors of a CC portfolio, despite the fact that their market cap is much smaller relative to Bitcoin. The codes used here are available via
    Date: 2020–09
  32. By: Krittika Banerjee (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: After the adoption of unconventional monetary policies (UMP) in advanced economies (AEs) there weremany studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extentof contribution of EMEs and AEs respectively in real exchange rate (RER) misalignments has not been addressed. Using fixed effects, pooled mean group and common correlated effects we address the gap ina cross-country panel set-up with country specific controls. Multi-way clustering is used to ensure robust statistical inferences. Robust evidence is found for significant monetary spillovers over 1998-2017 in the form of RER overvaluation of EMEs against AEs especially through the portfolio rebalancing channel. EME RER against US saw significantly more overvaluation in UMP years indicating greater role of US in monetary spillovers. However, in the long run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER. Export diversification reduces EME mercantilist motives against US. That AE monetary policy significantly appreciates EMERER should be kept in mind for future policy cooperation between EMEs and AEs.
    Keywords: Unconventional monetary policies, monetary spillovers, mercantilist, precautionary, pooled mean group, common correlated effects, cluster robust
    JEL: E4 E5 F3 F42
    Date: 2020–09
  33. By: Prapassornmanu, Pichittra
    Abstract: This dissertation focuses on the behavior of the exchange rate and the currency risk premium. The first chapter studies the problem of exchange rate disconnect from economic fundamentals by analyzing the role of heterogeneous information among investors. The second paper examines the relationship between currency risk premia, interest rate differentials, real exchange rates, and external imbalances. The third chapter investigates the violation of uncovered interest rate parity, the exchange rate, and the currency risk premium in a model where consumption growth prospects contain a long-run risk component with the stochastic volatility.
    Date: 2019–01–01

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