nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒12‒14
24 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model By Hamza Bennani; Matthias Neuenkirch
  2. Impulse response analysis in conditional quantile models with an application to monetary policy By Dong Jin Lee; Tae-Hwan Kim; Paul Mizen
  3. Asymmetric Shocks, Real Exchange Rate Distortions and Options for the Second Monetary Zone in West Africa By Chukwuma Agu; Uchenna Alexander Nnamani
  4. Short-term determinants of bilateral exchange rates: A decomposition model for the Swiss franc By Fabian Fink; Lukas Frei; Oliver Gloede
  5. How New Fed Corporate Bond Programs Dampened the Financial Accelerator in the COVID-19 Recession By Michael D. Bordo; John V. Duca
  6. Preference Heterogeneity and Optimal Monetary Policy By Uras, Burak; van Buggenum, Hugo
  7. Credit Risk and the Transmission of Interest Rate Shocks By Berardino Palazzo; Ram Yamarthy
  8. The Determinants of Consumers’ Inflation Expectations: Evidence from the US and Canada By Charles Bellemare; Rolande Kpekou Tossou; Kevin Moran
  9. Liquidity in resolution: comparing frameworks for liquidity provision across jurisdictions By Grund, Sebastian; Nomm, Nele; Walch, Florian
  10. Central Bank Communication: Information and Policy shocks By Ostapenko, Nataliia
  11. Complementaries and Tensions between Monetary and Macroprudential Policies in an Estimated DSGE Model (Application to Slovenia) By Lenarčič, Črt
  12. Financial stability policies and bank lending: quasi-experimental evidence from Federal Reserve interventions in 1920-21 By Rieder, Kilian
  13. Inherited Dollarization: Persistence of US Dollar Pricing in Consumer Goods Markets By María Victoria Landaberry; Miguel Mello
  14. The emergence of money: a dynamic analysis By Maurizio Iacopetta
  15. How the Federal Reserve's Central Bank Swap Lines Have Supported U.S. Corporate Borrowers in the Leveraged Loan Market By Annie McCrone; Ralf R. Meisenzahl; Friederike Niepmann; Tim Schmidt-Eisenlohr
  16. The natural rate of interest for an emerging economy: the case of Uruguay By Elizabeth Bucacos
  17. Asymmetric Monetary Policy Transmission in India:Does Financial Friction Matter? By Ranjan Kumar Mohanty; N R Bhanumurthy
  18. Institutions, Liquidity Preference, and Reserve Asset Holding in the Eurozone Core and Periphery Before and After Crises: Some Stylized Facts By Eichacker, Nina
  19. An asymmetrical overshooting correction model for G20 nominal effective exchange rates By Frédérique Bec; Mélika Ben Salem
  20. On the Purchasing Power of Money in an Exchange Economy By Radwanski, Juliusz
  21. Communication, Information and Inflation Expectations By Fernando Borraz; Miguel Mello
  22. Interest rate pass-through and bank risk-taking under negative-rate policies with tiered remuneration of Central Bank Reserves By Christoph Basten; Mike Mariathasan
  23. The Causal Effect of the Dollar on Trade By Sai Ma; Tim Schmidt-Eisenlohr; Shaojun Zhang
  24. Accounting for Low Long-Term Interest Rates: Evidence from Canada By Jens H. E. Christensen; Glenn D. Rudebusch; Patrick Shultz

  1. By: Hamza Bennani; Matthias Neuenkirch
    Abstract: We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area over the period 2003Q1-2019Q4 with a special emphasis on credit conditions. With the help of this model, monetary policy transmission can be described as mixture of two states (e.g., a normal state and a crisis state), using an underlying logit model determining the relative weight of these states over time. We show that shocks to the credit spread and shocks to credit standards directly lead to a reduction of real GDP growth, whereas shocks to the quantity of credit are less important in explaining growth fluctuations. Credit standards and the credit spread are also the key determinants of the underlying state of the economy in the logit submodel. Together with a more pronounced transmission of monetary policy shocks in the crisis state, this provides further evidence for a financial accelerator in the euro area. Finally, the detrimental effect of credit conditions is also reflected in the labor market.
    Keywords: Credit growth, credit spread, credit standards, euro area, financial accelerator, mixture VAR, monetary policy transmission
    JEL: E44 E52 E58 G21
    Date: 2020
  2. By: Dong Jin Lee; Tae-Hwan Kim; Paul Mizen
    Abstract: This paper presents a new method to analyse the effect of shocks on time series using a quantile impulse response function (QIRF). While conventional impulse response analysis is restricted to evaluation using the conditional mean function, here, we propose an alternative impulse response analysis that traces the effect of economic shocks on the conditional quantile function. By changing the quantile index over the unit interval, it is possible to measure the effects of shocks on the entire conditional distribution of a variable of interest in our framework. Therefore, we can observe the complete distributional consequences of policy interventions, especially at the upper and lower tails of the distribution as well as the mean. Using the new approach, it becomes possible to evaluate two distinct features (called "distributional effects"): (i) a change in the dispersion of the conditional distribution of interest is changed after a shock, and (ii) a change in the degree of skewness of the conditional distribution caused by a policy intervention. None of these features can be observed in the conventional impulse response analysis exclusively based on the conditional mean function. In addition to proposing the QIRF, our second contribution is to present a new way to jointly estimate a system of multiple quantile functions. Our proposal system quantile estimator is obtained by extending the result of Jun and Pinkse (2009) to the time series context. We illustrate the QIFR on a VAR model in a manner similar to Romer and Romer (2004) in order to assess the impact of a monetary policy shock on the US economy.
    Keywords: quantile vector autoregression, monetary policy shock, quantile impulse response function, structural vector autoregression
    Date: 2020
  3. By: Chukwuma Agu; Uchenna Alexander Nnamani (University of Nigeria,)
    Abstract: The West African Monetary Zone (WAMZ) has continued to set targets of monetary integration for member states without success. With 2020 set as the new deadline for the attainment of monetary integration in the zone, it is not clear how the feasible this deadline is. It is clear that there are distortions that possibly affect not only the feasibility of enacting the union but also the potential outcome should the leaders decide to ram through the unification without due consideration to these factors. One such factor is exchange rate alignments. This study therefore investigates the presence of real exchange rate misalignments and the effects of such on the macroeconomic stabilities of the WAMZ countries. Due to paucity of data, the study captures only four of the six countries that make up WAMZ – Nigeria, Ghana, The Gambia, and Sierra Leone. It finds that there are misalignments of real exchange rates in all the four countries. These manifest mostly as real exchange rate (RER) overvaluation in two of the four countries, and as RER undervaluation in the other two countries. The RER misalignments and volatilities affect macroeconomic behaviours of the member countries in various ways and to varying degrees. We evaluate the diverse ways these misalignments affect macroeconomic policies and behaviour of the countries and their implications on the integration effort. The study concludes that efforts at stabilizing the macroeconomic fundamentals that determine RER in the WAMZ member states, beginning with monetary policy tools, will be important steps towards instituting a sustainable monetary union
    Date: 2019
  4. By: Fabian Fink; Lukas Frei; Oliver Gloede
    Abstract: This paper develops an FX factor model to decompose short-term bilateral exchange rate dynamics into different global factors and local uniqueness. We apply the model to the Swiss franc exchange rates against the US dollar (USDCHF) and the euro (EURCHF) between 2006 and 2018 and decompose daily dynamics into three global factors: risk, US dollar, and euro. The model captures daily dynamics well, explaining approximately 73% of the variation in USDCHF and 37% of the variation in EURCHF. The risk factor contributes the most to Swiss franc dynamics, especially in times of a worsening risk environment, highlighting the role of the Swiss franc as a safe-haven currency. Global FX factors had been almost completely reflected in USDCHF dynamics before the euro area debt crisis, but once that crisis began, they also became important for EURCHF. Furthermore, momentum is present in daily Swiss franc returns, especially before the introduction of the EURCHF minimum exchange rate.
    Keywords: Factor model, variance decomposition, safe haven, carry trade, momentum
    JEL: F31 G15 C38
    Date: 2020
  5. By: Michael D. Bordo; John V. Duca
    Abstract: In the financial crisis and recession induced by the COVID-19 pandemic, many investment-grade firms became unable to borrow from securities markets. In response, the Fed not only reopened its commercial paper funding facility but also announced it would purchase newly issued and seasoned bonds of corporations rated as investment grade before the COVID pandemic. A careful splicing of different unemployment rate series enables us to assess the effectiveness of recent Fed interventions in these long-term debt markets over long sample periods, spanning the Great Depression, Great Recession and COVID Recession. Findings indicate that the announcement of forthcoming corporate bond backstop facilities had helped stop risk premia from rising further than they had by late-March 2020. In doing so, these Fed facilities have limited the role of external finance premia in amplifying the macroeconomic impact of the COVID pandemic. Nevertheless, the corporate bond programs blend the roles of the Federal Reserve in conducting monetary policy via its balance sheet, acting as a lender of last resort and pursuing credit policies.
    Keywords: financial crises; Federal Reserve; credit easing; lender of last resort; corporate bonds; corporate bond facility
    JEL: E51 G12
    Date: 2020–11–19
  6. By: Uras, Burak (Tilburg University, School of Economics and Management); van Buggenum, Hugo (Tilburg University, School of Economics and Management)
    Date: 2020
  7. By: Berardino Palazzo (Board of Governors of the Federal Reserve System); Ram Yamarthy (Office of Financial Research)
    Abstract: Using daily credit default swap (CDS) data going back to the early 2000s, we find a positive and significant relation between corporate credit risk and unexpected interest rate shocks around FOMC announcement days. Positive interest rate movements increase the expected loss component of CDS spreads as well as a risk premium component that captures compensation for default risk. Not all firms respond in the same manner. Consistent with recent evidence, we find that firm-level credit risk (as proxied by the CDS spread) is an important driver of the response to monetary policy shocks - both in credit and equity markets - and plays a more prominent role in determining monetary policy sensitivity than other common proxies of firm-level risk such as leverage and market size. A stylized corporate model of monetary policy, firm investment, and financing decisions rationalizes our findings.
    Keywords: credit risk, CDS, monetary policy, shock transmission, equity returns
    Date: 2020–12–03
  8. By: Charles Bellemare; Rolande Kpekou Tossou; Kevin Moran
    Abstract: We propose and estimate a dynamic and individual model of expectations formation that links individual consumers’ inflation expectations to their own lagged forecasts as well as proxies for the rational expectation forecasts. The model builds on the existing rational inattention literature and extends it in several dimensions. We explicitly model the expectations updating rule which consumers use to incorporate new information in their experience and take seriously heterogeneity in inflation expectations extensively documented in the literature. We estimate the model using data from two important new surveys — the Federal Reserve Bank of New York’s Survey of Consumer Expectations and the Bank of Canada’s Canadian Survey of Consumer Expectations. We find that inflation expectations appear to correlate more strongly to measures of rational expectations forecasts in Canada than in the US, and conversely less to lagged expectations. More specifically, the median respondent assigns overall weights of roughly 75% to proxies for the rational expectation forecasts and 25% to lagged expectations in Canada, while these weights are around 50-50 for the US. We show that these differences in weights are not explained by differences in the characteristics of their stand-in consumers. Given this finding, one candidate explanation could be related to the explicit inflation target in Canada in comparison to the dual mandate in the US.
    Keywords: Central bank research, Econometric and statistical methods, Inflation and prices, Inflation targets
    JEL: C33 D83 D84 E31
    Date: 2020–11
  9. By: Grund, Sebastian; Nomm, Nele; Walch, Florian
    Abstract: As a response to the global financial crisis that started in 2008, many countries established dedicated resolution regimes that seek to limit the use of taxpayer money while maintaining the functions of failing banks that are critical for financial stability. This paper extends the existing research by zooming in on the specific topic of liquidity provision to banks in resolution. It examines the provision of liquidity in the United States, the United Kingdom, Japan, Canada and the banking union of the European Union (thereafter: the “banking union”). The paper observes the differences and commonalities of policy choices across jurisdictions with regard to both the relationship between private prefunding and temporary public liquidity provision and the roles of the public budget and the central bank. The comparison also reveals that the role of fiscal authorities is strong and that guarantees from a public budget are a common feature. The framework for the provision of liquidity in the banking union is not yet complete as the construction of a public sector backstop of sufficient size and speed is comparatively more complex in the banking union than in other jurisdictions. Therefore, the idea of establishing a European-level guarantee framework – which would allow access to Eurosystem liquidity for banks coming out of resolution with limited collateral – is being further investigated. JEL Classification: G01, G21, G28, G33, E58
    Keywords: banking union, European Central Bank, liquidity, resolution
    Date: 2020–12
  10. By: Ostapenko, Nataliia
    Abstract: The study proposes a novel way to identify the effects of monetary policy shocks taking into account time-varying signals of the central bank. I augment the standard monetary policy Bayesian Vector Autoregression (BVAR) with additional information variables from Fed statements, which allows us to study the information-free effects of monetary policy shocks and to take into account forward-looking information released by the central bank. The results show that, compared to surprises in 3-month federal funds futures, the policy shock identified in this study has a more negative effect on GDP, a more prolonged negative effect on inflation, and a greater impact effect on the excess bond premium. In the short-run it causes S&P500 to decline and the Fed to raise its interest rate. Furthermore, the results of large-scale Bayesian VAR confirm the standard transmission channels of monetary policy.
    Keywords: monetary policy, shock, transmission, statements, Latent Dirichlet Alloca- tion, information
    JEL: E52
    Date: 2020–05–22
  11. By: Lenarčič, Črt
    Abstract: Recent financial crisis has shown that the prior belief that the active monetary policy in pursuing price stability may not be sufficient enough to maintain financial stability as well as macroeconomic stability in an economy. Introducing a new economic policy, the macroprudential policy gave space to a complete new sphere of a�ecting an economy through a policy maker's perspective. Constructing a dynamic stochastic general equilibrium model, which incorporates a banking sector block, enables us to study the effects of financial frictions on the real economy. Taking the case of Slovenia, the simulation results show that taking into account the interplay between the monetary and macroprudential policies in a form of financial shocks matter in the economy.
    Keywords: monetary policy, macroprudential policy, DSGE model, banking sector
    JEL: E30 E32 E52
    Date: 2019–07
  12. By: Rieder, Kilian
    Abstract: I estimate the comparative causal effects of monetary policy \leaning against the wind" (LAW) and macroprudential policy on bank-level lending and leverage by drawing on a single natural experiment. In 1920, when U.S. monetary policy was still decentralized, four Federal Reserve Banks implemented a conventional rate hike to address financial stability concerns. Another four Reserve Banks resorted to macroprudential policy with the same goal. Using sharp geographic regression discontinuities, I exploit the resulting policy borders with the remaining four Federal Reserve districts which did not change policy stance. Macroprudential policy caused both bank-level lending and leverage to fall significantly (by 11%-14%), whereas LAW had only weak and, in some areas, even perverse effects on these bank-level outcomes. I show that the macroprudential tool reined in over-extended banks more effectively than LAW because it allowed Federal Reserve Banks to use price discrimination when lending to highly leveraged counterparties. The perverse effects of the rate hike in some areas ensued because LAW lifted a pre-existing credit supply friction by incentivizing regulatory arbitrage. My results highlight the importance of context, design and financial infrastructure for the effectiveness of financial stability policies. JEL Classification: E44, E51, E52, E58, G21, N12, N22
    Keywords: bank lending, credit boom, Federal Reserve System, financial crisis, leaning against the wind, leverage, macroprudential policy, monetary policy, progressive discount rate, recession of 1920/1921
    Date: 2020–12
  13. By: María Victoria Landaberry (Banco Central del Uruguay); Miguel Mello (Banco Central del Uruguay)
    Abstract: This is an empirical study of price setting dollarization in Uruguay using product level data. Using web scraping we developed a unique dataset for online e-commerce. We describe price setting in US dollars by categories, sub-categories and value of more than 9 million announcements for consumer goods. We conclude that dollarization is determined principally by the value and by the type of products. The persistence of dollarization in the used products market, is also determined by its value. These implies that high value goods are perceived as goods with a reserve of value by consumers, so they set the price of that residual value of second hand products in dollars. This result is in line with previous research on the cultural dollarization of Uruguayan consumers.
    Keywords: price setting, foreign currency, dollarization, Uruguay, web scraping, persistence, R, data analysis
    JEL: D40 D49 E30
    Date: 2019
  14. By: Maurizio Iacopetta (Observatoire français des conjonctures économiques)
    Abstract: This paper studies the role of liquidity in triggering the emergence of money in a Kiyotaki-Wright economy. A novel method computes the dynamic Nash equilibria of the economy by setting up an iteration of the agents' profile of (pure) strategies and of the distribution of commodities across agents. The analysis shows that the evolving state of liquidity can spark the acceptance of a high-cost-storage commodity as money or cause the disappearance of a commodity money. It also reveals the existence of multiple dynamic equilibria with pure strategies. Several simulations clarify how history and the coordination of beliefs matter for the selection of a particular equilibrium.
    Keywords: Money; Strategies; Simulations
    Date: 2019–10
  15. By: Annie McCrone; Ralf R. Meisenzahl; Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: The cost of borrowing U.S. dollars through foreign exchange (FX) swap markets increased significantly in the beginning of the Covid-19 pandemic in February 2020, indicated by larger deviations from Covered Interest Rate Parity (CIP). CIP deviations narrowed again when the Federal Reserve expanded its swap lines to support U.S. dollar liquidity globally—by enhancing and extending its swap facility with foreign central banks and introducing the new temporary Foreign and International Monetary Authorities (FIMA) repurchase agreement facility.
    Date: 2020–11–12
  16. By: Elizabeth Bucacos (Banco Central del Uruguay)
    Abstract: Vast evidence indicates that the so-called natural rate of interest (NRI) has experienced a sustained fall in both advanced and emerging economies over the last 25 years. This situation threatens the central bank’s ability to guide relevant macroeconomic variables close to their welfare-maximizing path because the range of maneuver is reduced a great deal when interest rates descend to the zero lower bound. In this document, I provide an estimation of the natural interest rate for Uruguay, a small, open and dollarized emerging economy where the monetary policy instrument changes from interest rate to money aggregates in 2013, splitting the sample in two. The fundamentals-based model points a locus for the natural interest rate in the [0.98 2.06] range with 95 percent degree of certainty. This methodological approach is aimed at providing a novel framework for the Uruguayan case that allows to analyze the long-run fundamentals of the NIR and also to explain the reasons for short-run discrepancies between the real rate and its long-run equilibrium value. It is hoped that the fundamentals-based model adds to the myriad methods current in use at the Banco Central del Uruguay to estimate the NIR.
    Keywords: interest rate determination, monetary policy, Uruguay
    JEL: C10 E43 E52
    Date: 2020
  17. By: Ranjan Kumar Mohanty (Xavier Institute of Management, Bhubaneshwar(XIMB)); N R Bhanumurthy (BASE University)
    Abstract: In the context of adoption of flexible inflation targeting regime in India since 2016 and is about to be reviewed soon, it is necessary to understand the effectiveness of monetary transmission mechanism. The paper investigates if there are any asymmetries in the transmission during different regimes, and also verify the role of financial frictions in such asymmetries, if it exists. By using Markov-Switching Vector Autoregression (MS-VAR) models, our results suggest that there are asymmetries in the monetary transmission mechanism during highly volatile and low volatile regimes with respect to both output and inflation. It also finds that financial frictions do influence the extent of policy transmission process in India. From a policy perspective, while the Reserve Bank of India (RBI) may continue to target inflation especially during high volatile regimes, it could have output growth as an additional target especially during the low volatile regimes.
    Keywords: Monetary Transmission Mechanism, Financial Frictions, Bank Credit Channel, Interest Rate Channel, Markov-Switching Vector Autoregression (MS-VAR), India
    JEL: E52 E44 E58 C32
    Date: 2020–11
  18. By: Eichacker, Nina
    Abstract: The monetary integration of the Eurozone initially accommodated endogenous money creation across its members; however, liquidity crises that followed the Global Financial Crisis (GFC) revealed structural disparities in liquidity provision in response to funding crises. By refusing to act as a lender of last resort, the European Central Bank pushed governments across the Eurozone to guarantee domestic financial liabilities. The importance of repurchase agreements to fund Eurozone banking and the predominance of European government bonds in general collateral left peripheral governments vulnerable to decreased private demand for their debt, and financially constrained by private intermediaries’ refusal of peripheral sovereign bonds in general collateral. This constraint created accelerated the sovereign debt crises driving the Eurozone crisis. This paper analyzes Eurozone banks’, National Central Banks’, and governments’ balance sheets to show how they have internalized the lessons from the GFC. We find that these entities have returned to holding larger concentrations of reserve assets, a practice that some architects of the Eurozone had hoped monetary integration at the supranational level would end. As Eurozone governments consider how to respond to the Covid-19 pandemic, liquidity crunches that hurt financial and fiscal activity across the Eurozone remain a risk.
    Date: 2020–11–24
  19. By: Frédérique Bec; Mélika Ben Salem (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper develops an asymmetrical overshooting correction autoregressive model to capture excessive nominal exchange rate variation. It is based on the widely accepted perception that open economies might react differently to under-evaluation or over-evaluation of their currency because of the trade-off between fostering their net exports and maintaining their international purchasing power. Our approach departs from existing works by considering explicitly both size and sign effects: the strength of the overshooting correction mechanism is indeed allowed to differ between large and small depreciations and appreciations. Evidence of overshooting correction is found in most G20 countries. Formal statistical tests confirm sign and/or size asymmetry of the overshooting correction mechanism in most countries. It turns out that the overshooting correction specification is heterogeneous among countries, even though most of Emerging Market and Developing Economies are found to adjust to over-depreciation whereas the Euro Area and the US are shown to adjust to over-appreciation only.
    Keywords: nominal exchange rate, asymmetrical overshooting correction.
    JEL: C22 F31 F41
    Date: 2020
  20. By: Radwanski, Juliusz
    Abstract: A model is constructed in which completely unbacked fiat money, issued by generic supplier implementing realistically specified monetary policy designed to obey certain sufficient conditions, is endogenously accepted by rational individuals at uniquely determined price level. The model generalizes Lucas (1978) to an economy with frictions and specialization in production, without imposing the cash-in-advance constraint. The uniqueness of equilibrium is the consequence of complete characterization of both the environment, and the equilibrium concept. The results challenge the doctrine that equilibria of monetary economies are inherently indeterminate, and that money can become worthless only due to self-fulfilling expectations. The paper shows that monetary policy canonically features two dimensions, one of which corresponds to nominal interest rate, and the other to continuous helicopter drop of net worth, which in the model takes the form of universal basic income.
    Keywords: fiat money, monetary policy, Hahn problem, price level, inflation, sunspots, helicopter drop, universal basic income
    JEL: E10 E31 E41 E51 E52 E58 G12 G21
    Date: 2020–11–19
  21. By: Fernando Borraz (Banco Central del Uruguay); Miguel Mello (Banco Central del Uruguay)
    Abstract: We identify differences in the formation of inflationary expectations, credibility, and prediction errors, depending on the communication and in the level of information of price setters. Estimating dynamic panel data models we identify the relevance of being informed about the inflation target and, about the current inflation rate. We also find that the tone of the monetary policy communication reinforces the bias imposed on the monetary instrument. Through the interaction of information about inflation target and range, and the tone of monetary policy statements of the Central Bank, we conclude that partially informed agents form their expectations differently from non-informed ones, have lower prediction errors, and are more skeptical respect to the inflation target.
    Keywords: inflation, credibility, inflation target, communication, monetary policy
    JEL: E31 E52 E58
    Date: 2020
  22. By: Christoph Basten (University of Zurich; Swiss Finance Institute; CESifo); Mike Mariathasan (KU Leuven- Faculty of Economics & Business)
    Abstract: We identify the effects of negative interest rate policies on bank behavior using difference-in differences identification and data on all Swiss banks. First, we find that going negative can interrupt not only the pass-through from policy to deposit rates, but also that to mortgage rates. Second, banks’ ability to offset negative deposit margins with increased mortgage margins is shown to depend on market power. Third, imposing negative rates on all central bank reserves causes banks to replace one sixth with riskier assets, and cut another sixth without replacement, shortening their balance sheets. Together with increased mortgage margins and fee income, the asset replacement preserves profits, but increases financial stability risks. Fourth, mortgage margin increases, balance sheet contractions and risk increases differ from positive rate policy. Fifth, the interruption in pass-through and the risks to financial stability can be reduced by up to 90% through tiered remuneration, charging marginal reserves only.
    Keywords: negative interest rate policy, tiered remuneration, interest rate pass-through, credit risk, interest rate risk
    JEL: E43 E44 E52 E58 G20 G21
    Date: 2020–11
  23. By: Sai Ma; Tim Schmidt-Eisenlohr; Shaojun Zhang
    Abstract: This paper establishes a causal link between the dollar exchange rate and international trade flows, employing a new instrument for the U.S. Dollar that is based on domestic U.S. housing activity (Ma and Zhang (2019)). In line with the dominant currency paradigm (Gopinath et al. (2020)), import prices and quantities respond strongly to a country’s exchange rate with the U.S. dollar. Once we instrument the dollar, we find evidence for perfect pass-through of the dollar exchange rate to import prices. A dollar appreciation of 1 percent lowers import quantities by 1.5 percent for countries that fully invoice in dollars.
    Keywords: dominant currency, dollar invoicing, international trade
    JEL: F14 F31 G15
    Date: 2020
  24. By: Jens H. E. Christensen; Glenn D. Rudebusch; Patrick Shultz
    Abstract: In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term inflation expectations have edged down, and real bond and inflation risk premiums have fluctuated but shown little longer-run trend. Therefore, the drop in the equilibrium real rate appears largely to account for the lower new normal in interest rates.
    Keywords: liquidity risk; financial market frictions; r-star; affine arbitrage-free term structure model
    JEL: C32 E43 E52 G12 G17
    Date: 2020–12–30

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