nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒11‒30
fifty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Above, but close to two percent. Evidence on the ECB’s inflation target using text mining By Johannes Zahner
  2. The role of long-term inflation expectations for the transmission of monetary policy shocks By Diegel, Max; Nautz, Dieter
  3. Bank reserves and broad money in the global financial crisis: a quantitative evaluation By Jagjit S. Chadha; Luisa Corrado; Jack Meaning; Tobias Schuler
  4. Investment funds, monetary policy, and the global financial cycle By Kaufmann, Christoph
  5. INSTITUTIONAL DESIGN AND CREDIBILITY By Jyotsana Kala; Naveen Srinivasan
  6. Oil Price Shock and Fiscal-Monetary Policy Variables in Nigeria: A Structural VAR Approach By Okunoye, Ismaila; Hammed, Sabuur
  8. Sudden Stops and Optimal Foreign Exchange Intervention By J. Scott Davis; Michael B. Devereux; Changhua Yu
  9. Central bank tone and the dispersion of views within monetary policy committees By Paul Hubert; Fabien Labondance
  10. Refinancing, Monetary Policy, and the Credit Cycle By Gene Amromin; Neil Bhutta; Benjamin J. Keys
  11. Which Firms Benefit from Corporate QE during the COVID-19 Crisis? : The Case of the ECB’s Pandemic Emergency Purchase Program By Demirguc-Kunt, Asli; Horvath, Balint L.; Huizinga, Harry
  12. JAMAICA'S CURRENCY BOARD, 1920-1961, AND A COMPARISON WITH ITS CENTRAL BANK By Gupta, Eashan; Auran, Matthew; Frankenfield, Dylan
  13. Inflation and Economic Activity in Suriname By Ooft, Gavin
  14. The asymmetric effects of monetary policy on stock price bubbles By Christophe Blot; Paul Hubert; Fabien Labondance
  15. Monetary policy inertia and the paradox of flexibility By Bonciani, Dario; Oh, Joonseok
  16. A MODEL OF PARALLEL CURRENCIES UNDER FREE FLOATING EXCHANGE RATES By Castañeda, Juan; Damrich, Sebastian; Schwartz, Pedro
  17. MMT: Modern Monetary Theory or Magical Monetary Thinking? The Empirical Evidence By Emilio Ocampo
  18. An early stablecoin? The Bank of Amsterdam and the governance of money By Jon Frost; Hyun Song Shin; Peter Wierts
  20. Macroeconomic Changes with Declining Trend Inflation: Complementarity with the Superstar Firm Hypothesis By Takushi Kurozumi; Willem Van Zandweghe
  21. Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange By Jonathan Chiu; Miguel Molico
  22. Fiscal And Monetary Policy Interactions In A Liquidity Trap When Government Debt Matters By Charles de Beauffort
  23. Preference Heterogeneity and Optimal Monetary Policy By Uras, Burak; van Buggenum, Hugo
  24. The role of households' borrowing constraints in the transmission of monetary policy By Fergus Cumming; Paul Hubert
  25. Effective Policy Communication: Targets versus Instruments By D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
  27. The Balance Sheets of the Bank of the United States By Baker, Zackary; Gulino, George; Javat, Adil; Schuler, Kurt
  28. Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics By Dirk Niepelt
  29. Income inequality and monetary policy in the Euro Area By Jérôme Creel; Mehdi El Herradi
  30. Monetary Policy Rule and Taylor Principle by GMM and DSGE Approaches: The Case of Mongolia By Taguchi, Hiroyuki
  31. Monetary Capacity By Adam Brzezinski; Roberto Bonfatti; K. KıvançKaraman; Nuno Palma
  33. Monetary policy transmission and income inequality in Sub-Saharan Africa By Ahiadorme, Johnson Worlanyo
  34. The Fed Funds Market during the 2007-09 Financial Crisis By Adam Copeland
  35. Time-Varying Trend Models for Forecasting Inflation in Australia By Bo Zhang; Jamie Cross; Na Guo
  36. Setting New Priorities for the ECB’s Mandate By Christophe Blot; Jérôme Creel; Emmanuelle Faure; Paul Hubert
  37. Price Level Risk and Some Long-Run Implications of Alternative Monetary Policy Strategies By James A. Clouse
  38. An early stablecoin? The Bank of Amsterdam and the governance of money By Jon Frost; Hyun Song Shin; Peter Wierts
  39. SHILNIKOV CHAOS, LOW INTEREST RATES, AND NEW KEYNESIAN MACROECONOMICS By Barnett, William A.; Bella, Giovanni; Ghosh, Taniya; Mattana, Paolo; Venturi, Beatrice
  40. Inequality and imbalances: a monetary union agent-based model By Alberto Cardaci; Francesco Saraceno
  41. Leaning against the wind and crisis risk By Moritz Schularick; Lucas ter Steege; Felix Ward
  43. Liquidity in resolution: estimating possible liquidity gaps for specific banks in resolution and in a systemic crisis By Parisi, Laura; Chalamandaris, Dimitrios; Amamou, Raschid; Torstensson, Pär; Baumann, Andreas
  44. APP vs PEPP: Similar, But With Different Rationales By Christophe Blot; Jérôme Creel; Paul Hubert
  45. Inflation Targeting in the United Kingdom: Is there evidence for Asymmetric Preferences? By Parthajit Kayal; Naveen Srinivasan
  46. "A Note Concerning Government Bond Yields" By Tanweer Akram
  47. Central bank digital currency in an open economy By Ferrari, Massimo Minesso; Mehl, Arnaud; Stracca, Livio
  48. The Power of the Federal Reserve Chair By Alessandro Riboni; Francisco Ruge-Murcia
  50. Reversal interest rate and macroprudential policy By Darracq Pariès, Matthieu; Kok, Christoffer; Rottner, Matthias
  51. Econ 101: Currency Manipulation By Coats, Warren
  52. If Monetary Aggregates, then Divisia By Naveen Srinivasan; Parush Arora

  1. By: Johannes Zahner (Philipps University Marburg)
    Abstract: Due to its official mandate, the European Central Bank (ECB) is assumed to maximize an implied objective function that leads it to pursue inflation with a subordinate focus on supporting the general economic policy of the European Union. This objective is – by its very nature – difficult to quantify. My paper tries to decipher information regarding the ECB’s objective through the use of text mining on all public speeches between 2002 and 2020. The estimation of a sentiment index through a ’bag-of-words’-approach yields the following results. First, the findings of my analysis suggest a concave objective regarding the inflation rate. The implied inflation target is best summarized as an inflation rate of ’above, but close to 2%’. Deviations from this target lead to a reduction in the sentiment of the institutions’ communication. Second, my findings suggest a convex objective towards output growth and a linear objective towards the unemployment rate, with a preference for higher GDP growth and employent independently of the current level. Furthermore, the hierarchical order in the the European Central Bank (ECB)’s mandate does not always appear to be consistent with my findings. Deviations from its primary objective, the inflation rate, appear to be of no greater concern than deviations in its subordinate objective. Third, in periods of heightened uncertainty, there is an additional decrease in the sentiment of speech. Last, over the last two decades, speeches have become more pessimistic, even when controlling for macroeconomic conditions.
    Keywords: Sentiment Analysis, ECB, Monetary Policy, Public Perception
    JEL: E53 E58 E61
    Date: 2020
  2. By: Diegel, Max; Nautz, Dieter
    Abstract: This paper empirically investigates the role of long-term inflation expectations for the monetary transmission mechanism. In contrast to earlier studies, we confirm that U.S. long-term inflation expectations respond significantly to a monetary policy shock. In line with a re-anchoring channel of monetary policy, we find that long-term inflation expectations play an important role for the transmission of monetary policy shocks to the rate of inflation. Our results are robust with respect to the identification strategy and alternative monetary policy indicators applied during the zero lower bound period.
    Keywords: Long-Term Inflation Expectations,Monetary Policy,Structural Vector Autoregression,Sign and Zero Restrictions
    JEL: E31 E52 C32
    Date: 2020
  3. By: Jagjit S. Chadha; Luisa Corrado; Jack Meaning; Tobias Schuler
    Abstract: The Federal Reserve responded to the global financial crisis by initiating an unprecedented expansion of central bank money (bank reserves) once the policy rate had reached the lower bound. To capture the salient features of the crisis, we develop a model where the central bank can provide reserves on demand and also use reserves to buy government bonds. We show that the provision of reserves through either channel reduces the cost of providing loans as they act as a substitute for private sector collateral and costly monitoring activity. We illustrate this mechanism by examining the role of reserves in projecting stable growth in broad money after the financial crisis. We also run a counterfactual which suggests that, if the Federal Reserve had not provided bank reserves on such a large scale, broad money would have fallen, the economy might have experienced a deeper contraction, and the recovery would have been more protracted, taking perhaps twice as long to return to equilibrium.
    Keywords: non-conventional monetary policy, quantitative easing, liquidity provision
    JEL: E31 E40 E51
    Date: 2020–11
  4. By: Kaufmann, Christoph
    Abstract: This paper studies the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital flows receded significantly in the aftermath of the global financial crisis, portfolio flows of investors actively searching for yield on financial markets world-wide gained importance during the post-crisis “second phase of global liquidity” (Shin, 2013). The analysis presented in this paper shows that a loosening of US monetary policy leads to higher investment fund inflows to equities and debt globally. Focussing on the euro area, these inflows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance. The findings demonstrate the growing importance of non-bank financial intermediation over the last decade and have important policy implications for monetary and financial stability. JEL Classification: F32, F42, G15, G23
    Keywords: capital flows, international spillovers, monetary policy, non-bank financial intermediation
    Date: 2020–11
  5. By: Jyotsana Kala (JPMorgan Chase and Co.); Naveen Srinivasan (Professor, Madras School of Economics, Chennai, India)
    Abstract: The optimal design of a monetary institution to achieve policy effectiveness has been of utmost importance to policy-makers. This paper presents an empirical analysis of the link between the structure of a monetary institution and inflation persistence in an economy. It is well established in literature that governance structure of a monetary institution affects the stability of an economy. But the mechanism by which it operates remains unclear. In this paper, we claim this mechanism to be the credibility of the monetary institution. A Central Bank with an autonomous and transparent governance structure is deemed to be more credible by agents, which in turn leads to higher inflation stability in the economy. We investigate this hypothesis using data for the UK. Our results suggest that credibility is the missing link. The institutional design of the Central Bank contributes to its credibility, which subsequently affects the degree of inflation persistence in the economy.
    Keywords: central bank; central bank independence; inflation persistence;monetary policy credibility; policy making; time-inconsistency
    JEL: E52 E58 E31 E61 C32
  6. By: Okunoye, Ismaila; Hammed, Sabuur
    Abstract: The study employed structural vector auto regressive model in a disaggregated analysis to measure the relative response of monetary and fiscal policy variables to the structural Oil price shocks in a small open and oil-dependent economy and identify sequence of appropriate policy response. Data utilized cover annual time series from 1981 to 2019. The study considers SVAR model with better and efficient tool to combine both short run and long run restrictions. Some empirical striking findings are discernible from our analyses. First, we establish that significant variation in monetary policy rate, exchange rate and money supply are explained by oil price shock. Second, we found that oil price shock have a significant impact on inflation rate, oil revenue and government expenditure. Lastly, we found that government expenditure has less innovations (less error term), compared to oil revenue and interest rate, and this indicates the direct policy of the government and not under the influence of monetary policy in Nigeria. Moreso, the result found more importantly, large reaction of inflation rate comes from oil price shock than the independent monetary policy rate and oil price shock caused large variation and reaction in monetary policy variable than fiscal policy variables. It is recommended there should be complementarity of fiscal policy and monetary policy carefully and appropriately, in order to avoid distortion in monetary policies implementation of the CBN in stabilizing the economy; government expenditure should be tailored to internal generated revenue, not oil-generating revenue; and government deposit in the financial sector is reduced as well as strengthen of treasury single account (TSA)policy to track government generated revenue may be a right policy for Nigeria financial sector.
    Keywords: fiscal policy, monetary policy, structural VAR
    JEL: E6 E63
    Date: 2020–07–27
  7. By: Barnett, William A. (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Hu, Jingxian (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Will capital controls enhance macroeconomic stability? How will the results be influenced by the exchange rate regime and monetary policy reaction? Are the consequences of policy decisions involving capital controls easily predictable, or more complicated than may have been anticipated? We will answer the above questions by investigating the macroeconomic dynamics of a small open economy. In recent years, these matters have become particularly important to emerging market economies, which have often adopted capital controls. We especially investigate two dynamical characteristics: indeterminacy and bifurcation. Four cases are explored, based on different exchange rate regimes and monetary policy rules. With capital controls in place, we find that indeterminacy depends upon how the central bank’s response to inflation and its response to output gap coordinate with each other in the Taylor rule. When forward-looking, both passive and active monetary policy can lead to indeterminacy. Compared with flexible exchange rates, fixed exchange rate regimes produce more complex indeterminacy conditions, depending upon the stickiness of prices and the elasticity of substitution between labor and consumption. We show the existence of Hopf bifurcation under capital control with fixed exchange rates and current-looking monetary policy. To determine empirical relevance, we test indeterminacy empirically using Bayesian estimation. Fixed exchange rate regimes with capital controls produce larger posterior probability of the indeterminate region than a flexible exchange rate regime. Fixed exchange rate regimes with current-looking monetary policy lead to several kinds of bifurcation under capital controls. We provide monetary policy suggestions on achieving macroeconomic stability through financial regulation.
    Keywords: Capital controls; open economy monetary policy; exchange rate regimes; Bayesian methods; bifurcation; indeterminacy
    JEL: C11 C62 E52 F31 F38 F41
    Date: 2019–10
  8. By: J. Scott Davis; Michael B. Devereux; Changhua Yu
    Abstract: This paper shows how foreign exchange intervention can be used to avoid a sudden stop in capital flows in a small open emerging market economy. The model is based around the concept of an under-borrowing equilibrium defined by Schmitt-Grohe and Uribe (2020). With a low elasticity of substitution between traded and non-traded goods, real exchange rate depreciation may generate a precipitous drop in aggregate demand and a tightening of borrowing constraints, leading to an equilibrium with an inefficiently low level of borrowing. The central bank can preempt this deleveraging cycle through foreign exchange intervention. Intervention is effective due to frictions in private international financial intermediation. Reserve accumulation has ex ante benefits by reducing the risk of a sudden stop, while intervention has ex-post benefits by limiting inefficient deleveraging. But intervention itself faces constraints. When the central bank's stock of reserves is low, even foreign exchange intervention cannot prevent a sudden stop.
    Keywords: Central bank; sudden stops; foreign exchange reserves; capital controls
    JEL: E50 E30 F40
    Date: 2020–11–10
  9. By: Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: Does policymakers’ choice of words matter? We explore empirically whether central bank tone conveyed in FOMC statements contains useful information for financial market participants. We quantify central bank tone using computational linguistics and identify exogenous shocks to central bank tone orthogonal to the state of the economy. Using an ARCH model and a high-frequency approach, we find that positive central bank tone increases interest rates at the 1-year maturity. We therefore investigate which potential pieces of information could be revealed by central bank tone. Our tests suggest that it relates to the dispersion of views among FOMC members. This information may be useful to financial markets to understand current and future policy decisions. Finally, we showthatcentral banktonehelps predicting future policy decisions.
    Keywords: Animal spirits; Optimism; Confidence; FOMC; Central bank communication; Interest rate expectations; ECB; Aggregate effects
    JEL: E43 E52 E58
    Date: 2019–11
  10. By: Gene Amromin; Neil Bhutta; Benjamin J. Keys
    Abstract: We assess the complicated reality of monetary policy transmission through mortgage markets by synthesizing the existing literature on the role of refinancing in policy implementation. After briefly reviewing mortgage market institutions in the U.S. and documenting refinance activity over time, we summarize the links between refinancing and consumption, and describe the frictions impeding the refinancing channel. The paper draws heavily on research emerging from the experience of the financial crisis of 2008-09, as it highlights a combination of market, institutional, and policy-making factors that dulled the transmission mechanism. We conclude with a discussion of potential mortgage market innovations, and the applicability of lessons learned to the ongoing stresses induced by the COVID-19 pandemic.
    JEL: D12 D14 E50 G21 R31
    Date: 2020–10
  11. By: Demirguc-Kunt, Asli; Horvath, Balint L.; Huizinga, Harry (Tilburg University, Center For Economic Research)
    Keywords: quantitative easing; equity returns; Pandemic
    Date: 2020
  12. By: Gupta, Eashan (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Auran, Matthew (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Frankenfield, Dylan (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: We describe the history of Jamaica’s currency board system, which existed from 1920 to 1961; test how orthodox the currency board was; and compare some features of the currency board and the Jamaican economy during the currency board period to the Bank of Jamaica and to the Jamaican economy under central banking.
    Keywords: Jamaica; currency board; central bank
    JEL: E52 N16
    Date: 2019–05
  13. By: Ooft, Gavin (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Maintaining a low rate of inflation and sustainable economic growth are at the core of monetary policymaking. Price stability is considered a condition for a healthy macroeconomic environment which promotes sustainable growth and a low rate of inflation is necessary to maintain stability in the financial sector as well as to boost investment activities. Motivated by the largely-discussed relationship between inflation and output, this paper examines this relationship for the economy of Suriname over the period 1975 to 2015, utilizing a vector autoregressive model and impulse response functions. The findings of the study reveal how the various sources of inflation impact on the economy of Suriname. Domestic price shocks and money-supply shocks, in particular, seem to substantially impact on economic activity. Exchange-rate shocks are detrimental to domestic prices. Based on the findings of this study, it is highly recommended for the Central Bank of Suriname to continue its prudent monetary policies in order to maintain a stable exchange rate and price stability. The study advocates for maintaining a healthy macroeconomic climate with price stability, which is a crucial condition for Suriname to follow a sustained path for economic growth and development.
    Keywords: Economic Growth; Inflation; Time-Series Models
    JEL: C32 E31 E47
    Date: 2019–01
  14. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: Is the effect of US monetary policy on stock price bubbles asymmetric? We use a range of measures of excessive stock price variations that are unrelated to business cycle fluctuations. We find that the effects of monetary policy are asymmetric so responses to restrictive and expansionary shocks must be differentiated. The effects of restrictive monetary policy are more powerful than the effects of expansionary policies. We also find evidence that the asymmetric effect of monetary policy is state-contingent and depends on monetary, credit and business cycles as well as stock price boom-bust dynamics.
    Keywords: Non-linearity; Equity; Booms and busts; Federal reserve
    JEL: E44 G12 E52
    Date: 2020–04
  15. By: Bonciani, Dario (Bank of England); Oh, Joonseok (Freie Universität Berlin)
    Abstract: This paper revisits the paradox of flexibility, ie, the result that, in a liquidity trap, greater price flexibility amplifies output volatility in response to negative demand shocks. We argue this paradox is the consequence of a failure of standard models to correctly characterise monetary policy and that allowing for a smooth adjustment of the shadow policy rate eliminates the paradox and produces output responses to a negative demand shock that are in line with those under optimal monetary policy. The reason is that, under an inertial policy, a decline in the shadow rate implies that the future actual policy rate will remain relatively low, which increases expectations about the economic outlook and inflation. The rise in inflation expectations reduces the real rate, thereby sustaining real activity. As we raise the degree of price flexibility, a negative demand shock causes a sharper fall in the shadow rate and increase in inflation expectations, which leads to a more significant drop in the real rate and, hence, a milder decline in the output gap.
    Keywords: Interest rate smoothing; liquidity trap; zero lower bound; paradox of flexibility
    JEL: E32 E52 E61
    Date: 2020–11–06
  16. By: Castañeda, Juan (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Damrich, Sebastian (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Schwartz, Pedro (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: The production of good money seems to be out of reach for most countries. The aim of this paper is to examine how a country can attain monetary stability by granting legal tender to two freely tradable currencies circulating in parallel. Then we examine how such a system of parallel currencies could be used for any Member State of the Eurozone, with both the euro and a national currency accepted as legal tender, which we argue is a desirable monetary arrangement particularly but not only in times of crisis. The necessary condition for this parallel system to function properly is confidence in the good behaviour of the monetary authorities in charge of each currency. A fully floating exchange rate between the two would keep the issuers of the new local currency in check. This bottom-up solution based on currency choice could also be applied in countries aspiring to enter the Eurozone, instead of the top-down once and for all imposition of the euro as a single currency that has turned out to be very stringent and has shown institutional flaws during the recent Eurozone crisis of 2009 – 2013. Our scheme would have alleviated the plight of Greece and Cyprus. It could also ease the entry of the eight Member States still missing from the Eurozone.
    Keywords: Parallel currency system; monetary competition; inverse Gresham law; Eurozone
    Date: 2020–06
  17. By: Emilio Ocampo
    Abstract: This article presents a summary of the main theoretical arguments and policy recommendations of Modern Monetary Theory (MMT) and traces back its intellectual origins to the writings on money of Georg F. Knapp and on fiscal policy of Abba P. Lerner. It also presents evidence on two countries that followed MMT like policies: Germany between 1939 and 1945 and Argentina with brief interruptions since 1946. The main conclusion of the article is that any country that consistently follows the policy prescriptions of MMT will inevitably experience high inflation and lower (and even negative) economic growth.
    Keywords: Monetary Theory, MMT, Argentina
    JEL: B00 N14 N16 P40 P47
    Date: 2020–11
  18. By: Jon Frost; Hyun Song Shin; Peter Wierts
    Abstract: This paper draws lessons on the central bank underpinnings of money from the rise and fall of the Bank of Amsterdam (1609-1820). The Bank started out as a "stablecoin": it issued deposits backed by silver and gold coins, and settled payments by transfers across deposits. Over time, it performed functions of a modern central bank and its deposits took on attributes of fiat money. The economic shocks of the 1780s, large-scale lending and lack of fiscal support led to its failure. Using monthly balance sheet data, we show how confidence in Bank money gave way to a run equilibrium, where the fall of the premium on deposits over coins ("agio") into negative territory was swift and precipitous. This holds lessons for the governance of digital money.
    Keywords: stablecoins, crypto-assets, central banks, money.
    JEL: E42 E58 N13
    Date: 2020–11
  19. By: Atashbar, Tohid (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: In this study, we classify the unconventional monetary views found in the modern Middle East economic literature into five main categories. These five categories include 1) Full reserve-like approach to the banking system, 2) Commodity/Asset-backed monetary systems or Currency board-like frameworks, 3) Interest-free approach to the banking system, 4) Bank-free approach to the banking industry, and finally 5) Public money or monetary guidance approach to the monetary system. Additionally, we identify a collection of ideas as hybrids or combinations, some of which are in their developmental stage and are receiving significant attention and support. Our review of these approaches summarizes their theoretical foundations, historical and current advocates, and relevant policy recommendations.
    Keywords: Monetary Economics; Unconventional theories; Middle Eastern schools
    Date: 2019–07
  20. By: Takushi Kurozumi; Willem Van Zandweghe
    Abstract: Recent studies indicate that, since 1980, the average markup and the profit share of income have increased, while the labor share and the investment share of spending have decreased. We examine the role of monetary policy in these changes as inflation has concurrently trended down. In a simple staggered price model with a non-CES aggregator of differentiated goods, a decline in trend inflation as measured since 1980 can account for a substantial portion of the changes. Moreover, introducing a rise in the productivity of “superstar firms” in the model can better explain not only the macroeconomic changes but also the micro evidence on the distribution of firms’ markups, including the flat median markup.
    Keywords: average markup; profit share; labor share; trend inflation; Non-CES aggregator; superstar firm hypothesis
    JEL: E52 L16
    Date: 2020–11–12
  21. By: Jonathan Chiu; Miguel Molico
    Abstract: We study the short-run effects of monetary policy in a search-theoretic monetary model in which agents are subject to idiosyncratic liquidity shocks as well as aggregate monetary shocks. Namely, we analyze the role of the endogenous non-degenerate distribution of liquidity, liquidity constraints, and decentralized trade in the transmission and propagation of monetary policy shocks. Money is injected through lump-sum transfers, which have redistributive and persistent effects on output and prices. We propose a new numerical algorithm in the spirit of Algan, Allais and Den Hann. (2008) to solve the model. We find that a one-time expansionary monetary policy shock has persistent positive effects on output, prices, and welfare, even in the absence of nominal rigidities. Furthermore, the effects of positive and negative monetary shocks are typically asymmetric. Negative (contractionary) shocks have bigger effects than positive (expansionary) shocks. In addition, in an economy with larger shocks, the responses tend to be disproportionately larger than those in an economy with smaller shocks. Finally, the effectiveness of monetary shocks depends on the steady-state level of inflation. The higher the average level of inflation (money growth), the bigger the impact effect of a shock of a given size but the smaller its cumulative effect. These results are consistent with existing empirical evidence.
    Keywords: Inflation and prices; Monetary policy; Monetary policy transmission
    JEL: E50
    Date: 2020–11
  22. By: Charles de Beauffort (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: What does central bank independence imply for the optimal conduct of time-consistent fiscal and monetary policy in a liquidity trap? To provide an answer, I consider a stochastic noncooperative game in which the lower bound on nominal rates is an occasionally binding constraint and in which government debt serves as a tool to influence future policy trade-offs. I show that a transitory consolidation of debt in the liquidity trap optimally reduces expected real rates and stimulates current consumption and inflation via an expectation channel. The reaction function of the independent central bank outside the lower bound is pivotal in obtaining this result - considering instead coordinated policy produces the opposite effect of an optimal increase in debt. Lengthening the debt maturity allows to mitigate issues related to lack of coordination.
    Keywords: Optimal Time-Consistent Policy, Distortionary Taxation, Liquidity Trap, Fiscal and Monetary Policy Interactions
    Date: 2020–11–10
  23. By: Uras, Burak (Tilburg University, Center For Economic Research); van Buggenum, Hugo (Tilburg University, Center For Economic Research)
    Keywords: Heterogeneous Consumption Preferences; Optimal Policy; Zero Lower Bound; Negative Interest Rates
    Date: 2020
  24. By: Fergus Cumming; Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: This paper investigates how the transmission of monetary policy to the real economy depends on the distribution of household debt. Using an original loan-level dataset covering the universe of UK mortgages, we assess the effect of monetary shocks on aggregate consumption by exploiting time variation in a measure of the proportion of households close to their borrowing constraint. We find that monetary policy is most potent when there is a large share of constrained households. In contrast, we find noevidence that the average level of borrowing relative-to-income of the household sector affects the transmission of monetary policy.
    Keywords: Heterogeneity; Distribution; Mortgage debt; State-dependence
    JEL: E21 E52 E58
    Date: 2019–11
  25. By: D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
    Abstract: Communication targeting households and firms has become a stand-alone policy tool of many central banks. But which forms of communication, if any, can reach ordinary people and manage their economic expectations effectively? In a large-scale randomized control trial, we show that communication manages expectations when it focuses on policy targets and objectives rather than on the instruments designed to reach such objectives. It is especially the least sophisticated demographic groups, whom central banks typically struggle to reach, who react more to target-based communication. When exposed to target-based communication, these groups are also more likely to believe that policies will benefit households and the economy. Target-based communication enhances policy effectiveness and contributes to strengthen the public’s trust in central banks, which is crucial to ensure the effectiveness of their policies.
    JEL: D12 D84 D91 E21 E31 E32 E52 E65
    Date: 2020–11–10
  26. By: Ooft, Gavin (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: An accurate forecast for inflation is mandatory in the conduction of monetary policy. This paper presents models that forecast monthly inflation utilizing various economic techniques for the economy of Suriname. The paper employs Autoregressive Integrated Moving Average models (ARIMA), Vector Autoregressive models (VAR), Factor Augmented Vector Autoregressive models (FAVAR), Bayesian Vector Autoregressive models (BVAR) and Vector Error Correction (VECM) models to model monthly inflation for Suriname over the period from 2004 to 2018. Consequently, the forecast performance of the models is evaluated by comparison of the Root Mean Square Error and the Mean Average Errors. We also conduct a pseudo out-of-sample forecasting exercise. The VECM yields the best results forecasting up to three months ahead, while thereafter, the FAVAR, which includes more economic information, outperforms the VECM, based on the assessment of the pseudo out-of-sample forecast performance of the models.
    Keywords: Inflation; Forecasting; Time-Series Models; Suriname
    JEL: C32 E31
    Date: 2020–01
  27. By: Baker, Zackary (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Gulino, George (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Javat, Adil (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Schuler, Kurt (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: The Bank of the United States was the closest the United States came to having a central bank before establishing the Federal Reserve System. What was later called the First Bank of the United States operated from 1791 until its charter lapsed in 1811. After bad experience without a national bank during the War of 1812, the federal government chartered what was termed the Second Bank of the United States in 1816. When its charter lapsed in 1836, the bank continued as the United States Bank of Pennsylvania, which failed in 1841 following recessions and financial panics. We present digitized balance sheet data for all three institutions.
    Keywords: First Bank of the United States; Second Bank of the United States; United States Bank of Pennsylvania; Pennsylvania Bank of the United States; balance sheet; assets; liabilities; central banking
    JEL: E50 N11
    Date: 2019–01
  28. By: Dirk Niepelt (Study Center Gerzensee, University of Bern, CEPR, CESifo)
    Abstract: We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with "pseudo wedges" and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.
    Date: 2020–11
  29. By: Jérôme Creel (Observatoire français des conjonctures économiques); Mehdi El Herradi (Université Bordeaux Montaigne)
    Abstract: This paper examines the distributional implications of monetary policy, either standard, non-standard or both, on income inequality in 10 Euro Area countries over the period 2000-2015. We use three different indicators of income inequality in a Panel VAR setting in order to estimate IRFs of inequality to a monetary policy shock. The identification of monetary shocks follows a one-step procedure and relies only on country-specific determinants of income distribution. Results suggest that: (i) the distributional effects of ECB’s monetary policy have been modest and (ii) mainly driven in times of conventional monetary policy measures, especially in countries with a high level of market inequalities, while, overall, (iii) standard and non-standard monetary policies do not significantly differ in terms of impact on income inequality. Results are robust to alternative data sources either for income distribution or for non-standard monetary policies.
    Keywords: Euro Area; Monetary policy; Income distribution; Panel VAR
    JEL: E62 E64 D63
    Date: 2020–06
  30. By: Taguchi, Hiroyuki
    Abstract: This article aims to examine the monetary policy rule under inflation targeting in Mongolia with a focus on its conformity to the Taylor principle, through the two kinds of approaches: a monetary policy reaction function by the generalized-method-of-moments (GMM) estimation and the New Keynesian dynamic stochastic general equilibrium (DSGE) model with a small open economy version by the Bayesian estimation. The main findings are summarized as follows. First, the GMM estimation identified the inflation-responsive rule fulfilling the Taylor principle in the recent phase of the Mongolian inflation targeting. Second, the DSGE-model estimation endorsed the GMM estimation by producing a consistent outcome on the Mongolian monetary policy rule. Third, the Mongolian rule was estimated to have a weaker response to inflation than the rules of the other emerging Asian adopters of inflation targeting.
    Keywords: Monetary policy rule, Taylor Principle, Mongolia, Inflation targeting, monetary policy reaction function, GMM, the New Keynesian DSGE model
    JEL: E52 E58 O53
    Date: 2020–11
  31. By: Adam Brzezinski; Roberto Bonfatti; K. KıvançKaraman; Nuno Palma
    Abstract: Monetary capacity refers to a state’s capacity to circulate money that is accepted by the public, while fiscal capacity refers to its capacity to tax. We argue that monetary and fiscal capacity, and by extension, markets and states are complements. The long-run European evidence since antiquity shows money stocks and tax revenues moving in close synch. History also offers a natural experiment to estimate the causal effect of monetary capacity on fiscal capacity. The discovery of silver in the New World increased money stocks followed by tax revenues, a finding that is robust to controlling for economic growth.
    Keywords: monetary capacity, fiscal capacity, monetization, inflation, taxation, quantity theory of money, monetary non-neutrality
    JEL: E50 E60 H21 N10 O11
    Date: 2020–11–16
  32. By: Bennett, Jonah (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Since 1967, Brunei Darussalam has employed a currency board, capable of regulating inflation and government spending, as its monetary system. This paper examines the history and formation of the currency board in Brunei Darussalam and analyzes its orthodoxy throughout its existence. A workbook with balance sheets compiled from 1967-1987 and 1998-2020 accompanies this paper. An appendix of the legislative history of Brunei Darussalam’s currency board can also be found at the end of this paper.
    Keywords: Brunei; currency board; orthodox
    JEL: E59 N15
    Date: 2020–08
  33. By: Ahiadorme, Johnson Worlanyo
    Abstract: This paper evaluates the monetary policy transmission and income inequality in Sub-Saharan Africa (SSA) countries. We find procyclical response of income inequality to unanticipated monetary easing in the last two decades. Countercyclical monetary measures may have been efficient, but they have been dis-equalising as well. Taking cognisance of the explanations of the earnings heterogeneity channel, this evidence signals high concentration of assets and resources, limited employment of labour and limited distributive capacity of the state in SSA countries. Economic outturns may have favoured chiefly, the top of the distribution - entrepreneurs and their profit margin. Three main channels distinguish the transmission of standard and non-standard monetary measures: the reaction in the stock market, the response of the exchange rate and the fiscal response. Unconventional monetary policies appear to rely more on wealth effects than conventional policy measures. Unexpected non-standard monetary easing depreciates the exchange rate while unanticipated conventional accommodative monetary action appreciates the currency. Fiscal transfers increase in reaction to expansionary unconventional monetary policy shock. In contrast, a surprised standard monetary expansion decreases fiscal distributions, an effect that appears to underscore the limited fiscal space and tax revenues in most developing and emerging economies. The evidence demonstrates that the fiscal reaction to monetary policy action is important to the overall transmission of monetary policy to macroeconomic aggregates. Instructively, we find that the inflation cost of countercyclical monetary measures is comparatively less severe for standard monetary measures than non-standard monetary actions.
    Keywords: Monetary policy, Income inequality, Distributive channels
    JEL: D30 D31 D63 E50 E52 E58
    Date: 2020–08–20
  34. By: Adam Copeland
    Abstract: The U.S. federal funds market played a central role in the financial system during the 2007-09 crisis, because it was the market which provided banks with immediate liquidity, even late in the day. Interpreting changes in fed funds rates is notoriously difficult, however, as many of the economic drivers behind the rates are simultaneously changing. In this post, I highlight results from a working paper which untangles the impact of these economic drivers and measures their respective effects on the marketplace using data over a sample period leading up to and during the financial crisis. The analysis shows that the spread between fed funds sold and bought widened because of increases in counterparty risk. Further, there was a large increase in the supply of cash into this market, suggesting that banks viewed fed funds as a relatively safe place to invest cash in a crisis environment.
    Keywords: asymmetric information; fed funds; financial crisis; intermediation
    JEL: E5 G21 G01
    Date: 2020–11–10
  35. By: Bo Zhang; Jamie Cross; Na Guo
    Abstract: We investigate whether a class of trend models with various error term structures can improve upon the forecast performance of commonly used time series models when forecasting CPI inflation in Australia. The main result is that trend models tend to provide more accurate point and density forecasts compared to conventional autoregressive and Phillips curve models. The best short term forecasts come from a trend model with stochastic volatility in the transitory component, while medium to long-run forecasts are better made by specifying a moving average component. We also find that trend models can capture various dynamics in periods of significance which conventional models can not. This includes the dramatic reduction in inflation when the RBA adopted inflation targeting, the a one-off 10 per cent Goods and Services Tax inflationary episode in 2000, and the gradually decline in inflation since 2014.
    Keywords: trend model, inflation forecast, Bayesian analysis, stochastic volatility
    Date: 2020–11
  36. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Emmanuelle Faure (Laboratoire Dynamiques Sociales et Recomposition des Espaces); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Beyond price stability, the EU Treaties assign to the ECB a range of secondary objectives. We investigate the linkages between price stability and these objectives to assess whether they are independent, complementary or substitutable, which is important to refine the definition of the mandate. Keeping the current mandate would not provide leeway for the ECB to reach other objectives. We propose to broaden the mandate to include employment and financial stability. Enhanced coordination should contribute to fulfilling the objectives. This document was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the committee on Economic and Monetary Affairs.
    Keywords: ECB’s Mandate; Financial stability; Employment
    Date: 2020–06
  37. By: James A. Clouse
    Abstract: This note focuses on the longer-run implications of alternative monetary policy strategies for the evolution of the price level. The analysis compares the properties of optimal policy in regimes ranging from pure inflation targeting (IT), to a form of weighted-average inflation targeting (WAIT), to pure price level targeting (PLT). Strategies such as WAIT and PLT tend to limit the downward drift in the path of the price level and also mitigate the uncertainty surrounding the expected path of the price level. The influence of alternative monetary policy strategies on the evolution of the price level may have some important long-run implications for entities or groups that rely heavily on long-term nominal debt. Some simple empirical estimates suggest the real value of existing Treasury debt could be boosted significantly in moving from a world in which the ZLB constraint rarely binds to one in which it regularly binds. Similarly, data from the Survey of Consumer Finances indicate that households at lower income levels, and particularly those with mortgage or educational loans outstanding, are exposed to significant price level risk. As a result, such households can experience a significant reduction in their real wealth, on average, in the transition to a world with frequently binding ZLB constraints. The WAIT and PLT regimes significantly mitigate these potential costs for these groups.
    Keywords: Household debt; Inflation; Monetary policy; Wealth distribution
    JEL: E31 E52 E58
    Date: 2020–11–09
  38. By: Jon Frost; Hyun Song Shin; Peter Wierts
    Abstract: This paper draws lessons on the central bank underpinnings of money from the rise and fall of the Bank of Amsterdam (1609-1820). The Bank started out as a "stablecoin": it issued deposits backed by silver and gold coins, and settled payments by transfers across deposits. Over time, it performed functions of a modern central bank and its deposits took on attributes of fiat money. The economic shocks of the 1780s, large-scale lending and lack of fiscal support led to its failure. Using monthly balance sheet data, we show how confidence in Bank money gave way to a run equilibrium, where the fall of the premium on deposits over coins ("agio") into negative territory was swift and precipitous. This holds lessons for the governance of digital money.
    Keywords: stablecoins; crypto-assets; central banks; money
    JEL: E42 E58 N13
    Date: 2020–11
  39. By: Barnett, William A. (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Bella, Giovanni (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Ghosh, Taniya (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Mattana, Paolo (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Venturi, Beatrice (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: The paper shows that in a New Keynesian (NK) model, an active interest rate feedback monetary policy, when combined with a Ricardian passive fiscal policy, à la Leeper-Woodford, may induce the onset of a Shilnikov chaotic attractor in the region of the parameter space where uniqueness of the equilibrium prevails locally. Implications, ranging from long-term unpredictability to global indeterminacy, are discussed in the paper. We find that throughout the attractor, the economy lingers in particular regions, within which the emerging aperiodic dynamics tend to evolve for a long time around lower-than-targeted inflation and nominal interest rates. This can be interpreted as a liquidity trap phenomenon, produced by the existence of a chaotic attractor, and not by the influence of an unintended steady state or the Central Bank's intentional choice of a steady state nominal interest rate at its lower bound. In addition, our finding of Shilnikov chaos can provide an alternative explanation for the controversial “loanable funds” oversaving theory, which seeks to explain why interest rates and, to a lesser extent inflation rates, have declined to current low levels, such that the real rate of interest is below the marginal product of capital. Paradoxically, an active interest rate feedback policy can cause nominal interest rates, inflation rates, and real interest rates unintentionally to drift downwards within a Shilnikov attractor set. Policy options to eliminate or control the chaotic dynamics are developed.
    Keywords: Shilnikov chaos criterion; l global indeterminacy; long-term un-predictability; liquidity trap
    JEL: C61 C62 E12 E52 E63
    Date: 2019–12
  40. By: Alberto Cardaci (Lombardy Advanced School of Economics Milan); Francesco Saraceno (Observatoire français des conjonctures économiques)
    Abstract: Our paper investigates the impact of rising inequality in a two-country macroeconomic model with an agent-based household sector characterized by peer effects in consumption. In particular, the model highlights the role of inequality in determining diverging balance of payments dynamics within a currency union. Inequality may drive the two countries into different growth patterns: where peer effects in consumption interact with higher credit availability, rising income inequality leads to the emergence of a debt-led growth. Where social norms determine weaker emulation and credit availability is lower, an export-led regime arises. Eventually, a crisis emerges endogenously due to the sudden-stop of capital flows from the net lending country, triggered by the excessive risk associated with the dramatic amount of private debt accumulated by households in the borrowing country. Monte Carlo simulations for a wide range of calibrations confirm the robustness of our results.
    Keywords: Inequality; Current account; Currency union; Agent-based model
    JEL: C63 D31 E21 F32 F43
    Date: 2019–07
  41. By: Moritz Schularick (Federal Reserve Bank of New York and Department of Economics, University of Bonn; and CEPR); Lucas ter Steege (Department of Economics, University of Bonn); Felix Ward (Erasmus School of Economics, Erasmus University Rotterdam; and Tinbergen Institute)
    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 crisis risk. Based on the near-universe of advanced economy gonancial 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 stability, monetary policy, local projections
    JEL: E44 E50 G01 G15 N10
    Date: 2020–11
  42. By: Atashbar, Tohid (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Monetary policies like QE that were once seen as unconventional are now prevalent and almost “conventional”. This study tries to answer the question that in an ultimate crisis scenario, where available conventional and currently “conventional unconventional” tools are exhausted, what would be a Middle East-style “non-conventional unconventional” solution to such a crisis, given that the pseudo-magic unconventional concepts like MMT, which have been on the rise in recent times, would be deemed counter-productive in such circumstances? Based on the “3-No” or “Triple freedom” theorem which is the product of a comprehensive study of the monetary theories in the region, we propose a three-part solution called 3Fs (FFF): 1- “Full-reserve banking” on the system level, which means “No to (freedom from) credit creation from thin air in the banking system,'' 2- “Free Banking on Currency Board” or “Currency Board” on the instrument level, which means “No to (freedom from) thin air in the value of money” and 3- “Free from Subsidy” arrangement on the contract level through “Profit and Loss (and Risk) Sharing or PL(R)S” mechanism, which—by eliminating the risk and gain subsidies—means “No to (freedom from) gain from thin air on the contract level”.
    Keywords: Unconventional theories; non-conventional unconventional models; monetary economics; Middle-Eastern schools
    Date: 2019–11
  43. By: Parisi, Laura; Chalamandaris, Dimitrios; Amamou, Raschid; Torstensson, Pär; Baumann, Andreas
    Abstract: This paper contributes to the debate on liquidity in resolution by providing a quantitative assessment of liquidity gaps of banks in resolution in the euro area. It estimates possible ranges of liquidity gaps for significant banks under different assumptions and scenarios. The findings suggest that, while the average liquidity gaps in resolution are limited, the averages hide significant outliers. The paper thus shows that, under adverse circumstances, the instruments currently available to provide liquidity support to financial institutions in the euro area would be insufficient JEL Classification: G01, G21, G28, G33, C63
    Keywords: bank runs, contagion, Liquidity, Monte Carlo simulations, resolution, systemic crisis
    Date: 2020–11
  44. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: ECB’s asset purchase programmes have been implemented at different times in different economic environments and may pursue different objectives. From the point of view of removing financial fragmentation and taming sovereign stress in the euro area, the PEPP has been successful so far. Moreover, this outcome was obtained without fully using its potential resources. To date and contingent on the available set of information, the current monetary stance has not gone too far and it retains some ammunitions. This document was provided by Policy Department A at the request of the Committee on Economic and Monetary Affairs (ECON).
    Keywords: APP; PEPP; ECB’s asset purchase programmes
    Date: 2020–09
  45. By: Parthajit Kayal (Madras School of Economics, Chennai, India); Naveen Srinivasan (Professor, Madras School of Economics, Chennai, India)
    Abstract: In recent times, inflation targeting has been one of the most successful monetary frameworks in advanced economics. However, critics claim that policy rates have been kept higher than necessary. They claim that central banks did not pursue a symmetric inflation target. If a central bank pursues symmetric inflation and output targets, the optimal monetary policy response is a linear forward-looking Taylor rule (Clarida et,. al 1999). We use the Linex Loss function as outlined in Nobay and Peel (2003) to relax the assumption of symmetric preferences. The presence of asymmetric preferences implies that monetary policy reacts not only to the conditional expectation of inflation and output gap but also to their conditional variances. Non-linear Taylor rules are estimated on UK data from 1995: Q2 and 2003: Q3. The results support the critics. Inflation targeting was indeed pursued with asymmetric preferences. The findings are robust to the Bank of England‘s ex-ante forecasts, ‗real-time‘ estimates of the output gap, non-linearities in the supply curve, and alternative forecast horizons. Policy rates have been about 30 basis points higher than necessary due to asymmetric preferences
    Keywords: Phillips curve; Taylor Rules; Asymmetric Preferences;Deflationary Bias; GMM estimation; Linex Loss Function; Rational Expectations; Monetary Policy
    JEL: E31 E52 E6
  46. By: Tanweer Akram
    Abstract: This paper relates Keynes's discussions of money, the state theory of money, financial markets, investors' expectations, uncertainty, and liquidity preference to the dynamics of government bond yields for countries with monetary sovereignty. Keynes argued that the central bank can influence the long-term interest rate on government bonds and the shape of the yield curve mainly through the short-term interest rate. Investors psychology, herding behavior in financial markets, and uncertainty about the future reinforce the effects of the short-term interest rate and the central bank's monetary policy actions on the long-term interest rate. Several recent empirical studies that examine the dynamics of government bond yields substantiate the Keynesian perspective that the long-term interest rate responds markedly to the short-term interest rate. These empirical studies not only vindicate the Keynesian perspective but also have relevance for macroeconomic theory and policy.
    Keywords: Money; State Theory of Money; Chartalism; Monetary Theory; Central Bank; Government Bond Yields; Interest Rate; John Maynard Keynes
    JEL: E12 E40 E43 E50 E58 E60 F30 G10 G12 H62 H63
    Date: 2020–11
  47. By: Ferrari, Massimo Minesso; Mehl, Arnaud; Stracca, Livio
    Abstract: We examine the open-economy implications of the introduction of a central bank digital currency (CBDC).We add a CBDC to the menu of monetary assets available in a standard two-country DSGE model with financial frictions and consider a broad set of alternative technical features in CBDC design. We analyse the international transmission of standard monetary policy and technology shocks in the presence and absence of a CDBC and the implications for optimal monetary policy and welfare. The presence of a CBDC amplifies the international spillovers of shocks to a significant extent, thereby increasing international linkages. But the magnitude of these effects depends crucially on CBDC design and can be significantly dampened if the CBDC possesses specific technical features. We also show that domestic issuance of a CBDC increases asymmetries in the international monetary system by reducing monetary policy autonomy in foreign economies. JEL Classification: E50, F30
    Keywords: central bank digital currency, DSGE model, international monetary system, open-economy, optimal monetary policy
    Date: 2020–11
  48. By: Alessandro Riboni (École Polytechnique); Francisco Ruge-Murcia (McGill University)
    Abstract: Transcripts from the meetings of the Federal Open Market Committee (FOMC) show that the policy proposed by its chair is always adopted with a majority of votes and limited dissent. An interpretation of this observation is that the power of the chair vis-a-vis the other members is so large that the policy selected by the committee is basically that preferred by the chair. Instead, this paper argues that the observation that the chairís proposal is always approved is an equilibrium outcome: the proposal passes because it is designed to pass and it does not necessarily correspond to the policy preferred by the chair. We construct a model of inclusive voting where the chair has agenda-setting powers to make the proposal that is initially put to a vote but is subject to an acceptance constraint that incorporates the preferences of the median and the probability of counter-proposals. The model is estimated by the method of maximum likelihood using real-time data from FOMC meetings. Results for the full sample and sub-samples for each chair between 1974 and 2008 show that the data prefer a version of our model where the chair is moderately inclusive over a dictator model. Thus, the workings of the FOMC appear to be stable over time and no chair, regardless of personality and recognized ability, can deviate far from the median view.
    Keywords: Inclusive-voting, agenda-setting, consensus, FOMC, collective decision-making
    JEL: D7 E5
    Date: 2020–06
  49. By: Nguyen, Huong (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Susilo, Jonathan (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Varier, Dominique (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Information collected from all reachable founding laws (constitutions) of past currency boards— more than 50 in all—is used to better observe changes in features and characteristics implemented in currency boards over time. The founding laws of many currency boards have been highly general, allowing, in principle, for discretionary monetary policy even though, in practice, many currency boards did not implement it. Only a minority of currency boards had founding laws that clearly specified the most important features of currency board orthodoxy: (1) a fixed exchange rate with an anchor currency, (2) full, two-way convertibility into and out of the anchor currency, (3) a ratio of 100% net foreign reserves to monetary liabilities, (4) the board cannot be a lender of last resort to the domestic financial system, and (5) the board must generate its own profits via seigniorage. Additionally, the authors identified five other properties that, although not necessary for a functioning currency board, proved to be beneficial and thus became widely adopted. They are: (1) transparency measures, (2) an upper limit on net foreign reserves, (3) policies for liabilities exceeding assets, (4) escape clauses, and (5) minimum limits on currency exchanges. Comparing constitutions shows that these systems have been adaptable in many different political and economic environments, thus explaining their longstanding success in multiple countries over the last 170 years.
    Keywords: Currency board; constitution; orthodox; exchange rates; anchor currency; foreign reserves; seigniorage
    JEL: E59 N10
    Date: 2020–11
  50. By: Darracq Pariès, Matthieu; Kok, Christoffer; Rottner, Matthias
    Abstract: Could a monetary policy loosening entail the opposite effect than the intended expansionary impact in a low interest rate environment? We demonstrate that the risk of hitting the rate at which the effect reverses depends on the capitalization of the banking sector by using a non-linear macroeconomic model calibrated to the euro area economy. The framework suggests that the reversal interest rate is located in negative territory of around −1% per annum. The possibility of the reversal interest rate creates a novel motive for macroprudential policy. We show that macroprudential policy in the form of a countercyclical capital buffer, which prescribes the build-up of buffers in good times, can mitigate substantially the probability of encountering the reversal rate, improves welfare and reduces economic fluctuations. This new motive emphasizes also the strategic complementarities between monetary policy and macroprudential policy. JEL Classification: E32, E44, E52, E58, G21
    Keywords: macroprudential policy, monetary policy, negative interest rates, reversal interest rate, ZLB
    Date: 2020–11
  51. By: Coats, Warren (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Currency manipulation refers to a country’s interfering with the market’s determination of the exchange rate of its currency in order to influence its trade balance, usually to favor its exports over its imports. In a world in which people and firms trade and invest across borders, i.e. our world, anything a country does (monetary policy, fiscal policy, industrial policy, trade policy) will potentially affect the exchange rate of its currency for other currencies (real and/or nominal exchange rates). This makes it difficult to define what currency manipulation might mean, but it generally refers to a government’s intervention in the foreign exchange market by buying dollars or other foreign currencies thus depreciating its own currency’s exchange rate. This makes its exports cheaper to foreign buyers and its imports more expensive domestically resulting in a trade surplus (or smaller deficit). In the following I compare policy reactions to shocks under three types of exchange rate/monetary policy regimes with an eye on the currency manipulation question. The broad categories of shocks are a) a globally shared recession and b) a single country shock to imports or exports such as from an oil price shock or tariffs, or from changes in capital inflows or out flows such as from a change in the political environment. The three policy regimes are: 1) freely floating exchange rates with no restrictions on capital flows, 2) an adjustable exchange rate peg, and 3) a gold standard with currency board rules. Regimes 1 and 3 are the opposite ends of the range of policy regime options. A strict gold standard (or other hard anchor) with currency board rules removes any question of currency manipulation as it is not possible in such a regime.
    Date: 2019–09
  52. By: Naveen Srinivasan (Professor, Madras School of Economics, Chennai, India); Parush Arora (Madras School of Economics, Chennai, India)
    Abstract: This paper empirically tests whether the inclusion of monetary aggregates in inflation forecasting models helps their forecasting ability or not. We have estimated the P-star model with Divisia M2, Divisia M3, simple sum M2, and simple sum M3 along with Phillips curve and ARIMA specifications to forecast inflation for India from April 1994 to December 2016. We find that inflation forecasting ability of both Divisia monetary aggregate and the simple sum monetary aggregates are similar. Though Divisia fits better than simple sum from 1993-2013, the information contained in Divisia does not explain the behaviour of inflation post-2013.
    Keywords: Divisia, Simple Sum, Monetary Aggregates, Phillips Curve,Inflation forecasting, P star model
    JEL: E31 E37 E47 E52 E58

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