nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒12‒21
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Financial Stability and the Fed: Evidence fromCongressional Hearings By Arina Wischnewsky; David-Jan Jansen; Matthias Neuenkirch
  2. Financial Markets and Dissent in the ECB’s Governing Council By Peter Tillmann
  3. Imperfect Credibility versus No Credibility of Optimal Monetary Policy By Jean-Bernard Chatelain; Kirsten Ralf
  4. Policy Maker's Credibility with Predetermined Instruments for Forward-Looking Targets By Jean-Bernard Chatelain; Kirsten Ralf
  5. Financial technologies and the effectiveness of monetary policy transmission By Hasan, Iftekhar; Kwak, Boreum; Li, Xiang
  6. The 100% Reserve Reform: Calamity or Opportunity? By Pfister Christian
  7. Plädoyer für den E-Euro - Implikationen für die Gesellschaft By Berentsen, Aleksander
  8. Dynamic Expectations Formation and U.S. Monetary Policy Regime Change By Xin Wei
  9. Will the Secular Decline In Exchange Rate and Inflation Volatility Survive COVID-19? By Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
  10. Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions By Jean-Bernard Chatelain; Kirsten Ralf
  11. Monetary policy, firm exit and productivity By Hartwig, Benny; Lieberknecht, Philipp
  12. Does Capital-Based Regulation Affect Bank Pricing Policy? By Dominika Ehrenbergerova; Martin Hodula; Zuzana Rakovska
  13. Fiscal Stress and Monetary Policy Stance in Oil-Exporting Countries By Hao Jin; Chen Xiong
  14. Who cares about the Renminbi? By Shekhar Hari Kumar; Vimal Balasubramaniam; Ila Patnaik; Ajay Shah
  15. Sudden Stops and Optimal Foreign Exchange Intervention By J. Scott Davis; Michael B. Devereux; Changhua Yu
  16. Safe Payments By Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Yu Zhu
  17. How New Fed Corporate Bond Programs Dampened the Financial Accelerator in the Covid-19 Recession By Michael D. Bordo; John V. Duca
  18. Liquidity management, fire sale and liquidity crises in banking: the role of leverage By Gomez, Fabiana; Vo, Quynh-Anh
  19. How Economic Crises Affect Inflation Beliefs: Evidence from the COVID-19 Pandemic By Olivier Armantier; Gizem Koşar; Rachel Pomerantz; Daphne Skandalis; Kyle Smith; Giorgio Topa; Wilbert Van der Klaauw
  20. Bull and Bear Markets During the COVID-19 Pandemic By John M. Maheu; Thomas H. McCurdy; Yong Song
  21. Exchange Rates, Stock Prices, and Stock Market Uncertainty By Fatemeh Salimi
  22. The regulatory cycle in banking: what lessons from the U.S. experience? (from the Dodd-Frank Act to Covid-19) By Maurizio Trapanese
  23. The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model By Hamza Bennani; Matthias Neuenkirch
  24. An asymmetrical overshooting correction model for G20 nominal effective exchange rates By Frédérique Bec; Mélika Ben Salem
  25. A Concern Analysis of FOMC Statements Comparing The Great Recession and The COVID-19 Pandemic By Luis Felipe Guti\'errez; Sima Siami-Namini; Neda Tavakoli; Akbar Siami Namin
  26. Interconnected Deviations from Covered Interest Parity By Daniel Felix Ahelegbey; Oyakhilome Wallace Ibhagui
  27. Financial integration and the global effects of China's growth surge By Rod Tyers; Yixiao Zhou
  28. Bury the Gold Standard? A Quantitative Exploration By Anthony M. Diercks; Jonathan Rawls; Eric Sims
  29. Optimally Imprecise Memory and Biased Forecasts By Rava Azeredo da Silveira; Yeji Sung; Michael Woodford
  30. Bank Capital and Real GDP Growth By Nina Boyarchenko; Domenico Giannone; Anna Kovner
  31. Benefits of macro-prudential policy in low interest rate environments By Van der Ghote, Alejandro

  1. By: Arina Wischnewsky; David-Jan Jansen; Matthias Neuenkirch
    Abstract: This paper retraces how financial stability considerations interacted with U.S.monetary policy before and during the Great Recession. Using text-miningtechniques, we construct indicators for financial stability sentiment expressedduring testimonies of four Federal Reserve Chairs at Congressional hearings.Including these text-based measures adds explanatory power to Taylor-rulemodels. In particular, negative financial stability sentiment coincided with amore accommodative monetary policy stance than implied by standard Taylor-rule factors, even in the decades before the Great Recession. These findings areconsistent with a preference for monetary policy reacting to financial instabil-ity rather than acting pre-emptively to a perceived build-up of risks.
    Keywords: monetary policy, financial stability, Taylor rule, text mining
    JEL: E52 E58 N12
    Date: 2019
  2. By: Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: The decision-making process in the ECB’s Governing Council remains opaque as the ECB, in contrast to many other central banks, does not publish the votes for or against a policy proposal. In this paper, we construct an index of dissent based on the ECB presidents’ answers to journalists’ questions during the press conference following each meeting. This narrative account of dissent suggests that dissenting votes are cast frequently. We show that dissent weakens the response of long-term interest rates to policy surprises and thus affects the monetary transmission mechanism. The yield response is significantly stronger under unanimity. This result becomes stronger if we exclude meetings with serial dissent or exclude the period of open-end Forward Guidance. Controlling for newspaper reporting about tensions in the Governing Council leaves the results unchanged.
    Keywords: event studies, monetary policy shock, monetary policy committee, disagreement
    JEL: E42 E43 E58
    Date: 2020
  3. By: Jean-Bernard Chatelain; Kirsten Ralf
    Abstract: A minimal central bank credibility, with a non-zero probability of not renegning his commitment ("quasi-commitment"), is a necessary condition for anchoring inflation expectations and stabilizing inflation dynamics. By contrast, a complete lack of credibility, with the certainty that the policy maker will renege his commitment ("optimal discretion"), leads to the local instability of inflation dynamics. In the textbook example of the new-Keynesian Phillips curve, the response of the policy instrument to inflation gaps for optimal policy under quasi-commitment has an opposite sign than in optimal discretion, which explains this bifurcation.
    Date: 2020–12
  4. By: Jean-Bernard Chatelain; Kirsten Ralf
    Abstract: The aim of the present paper is to provide criteria for a central bank of how to choose among different monetary-policy rules when caring about a number of policy targets such as the output gap and expected inflation. Special attention is given to the question if policy instruments are predetermined or only forward looking. Using the new-Keynesian Phillips curve with a cost-push-shock policy-transmission mechanism, the forward-looking case implies an extreme lack of robustness and of credibility of stabilization policy. The backward-looking case is such that the simple-rule parameters can be the solution of Ramsey optimal policy under limited commitment. As a consequence, we suggest to model explicitly the rational behavior of the policy maker with Ramsey optimal policy, rather than to use simple rules with an ambiguous assumption leading to policy advice that is neither robust nor credible.
    Date: 2020–12
  5. By: Hasan, Iftekhar; Kwak, Boreum; Li, Xiang
    Abstract: This study investigates whether and how financial technologies (FinTech) influencethe effectiveness of monetary policy transmission. We examine regional-level FinTech adoption and use an interacted panel vector autoregression model to explore how the effects of monetary policy shocks change with FinTech adoption. The re-sults indicate that FinTech adoption generally enhances monetary policy transmis-sion to real GDP, bank loans, and housing prices, while the evidence of transmission to consumer prices is mixed. A subcategorical analysis shows that the enhanced effectiveness is the most pronounced in the adoption of FinTech payment, compared to that of insurance and credit.
    Keywords: monetary policy,financial technology,interacted panel VAR
    JEL: C32 E52 G21 G23
    Date: 2020
  6. By: Pfister Christian
    Abstract: This paper considers the various 100% Reserve plans that have appeared since the interwar period and have since then been adapted. In all formulations of those schemes, Government liabilities (cash, central bank reserves and short-term Treasuries) back banks’ sight deposits. This organization contrasts with current so-called “fractional reserve banking”, in which, as a result of reserve requirements imposed by the central bank (Drumetz et al., 2015), reserves back only a small fraction of sight deposits. The paper briefly presents the six categories of plans. It then highlights their common features as well as their differences, showing that the differences are more numerous than the common features. The criticisms voiced against the different formulations of 100% Reserves are exposed, adding those of the author and distinguishing between the doubts expressed on the validity of the analysis on one hand, and some undesirable consequences of the reform on the other. In spite of these criticisms, it then shown that the 100% Reserve reform is becoming topical, with recent private sector, central banks and political initiatives that relate to it. Overall, the 100% Reserve reform does not appear as a meaningful opportunity to improve the functioning of banking systems. Furthermore, at least one of its variants could easily turn into a calamity. Fortunately, it is not that variant that is getting more topical.
    Keywords: 100% Reserve, Chicago Plan, deposited currency, full-reserve, limited purpose banking, narrow banking, sovereign money
    JEL: E42 E51 E52 E58
    Date: 2020
  7. By: Berentsen, Aleksander (University of Basel)
    Abstract: Unser Geldsystem ist im Umbruch. Gerade erst hat ein von Facebook gegründetes privates Konsortium den Entwurf einer privaten Weltwährung vorgestellt. Auch China testet zur Zeit eine digitale staatliche Währung, vermutlich mit dem Ziel die Vormachtstellung des amerikanischen Dollars zu brechen. Europa darf diesen Wettbewerb ums digitale Geld der Zukunft nicht verschlafen. Die Europäischen Zentralbank soll den Privatpersonen und den Unternehmen den E-Euro in Form von «EZB-Konten für alle» zur Verfügung stellen. Es sprechen zahlreiche Gründe dafür dem Euro einen digitalen Zwilling zur Seite zu stellen. Der E-Euro kommt dem Bedürfnis der Bevölkerung einer sicheren Geldanlage nach. Zudem erhöht er die Stabilität des Finanzsektors und ermöglicht eine einfache und transparente Geldpolitik. Der E-Euro in Form von «EZB-Konten für alle» ist zudem denkbar einfach zu implementieren, weil er sich problemlos in die bestehenden Zahlungssysteme integrieren lässt. Mit einer raschen Umsetzung des E-Euros würde die EZB die Stellung Europas im Konkurrenzkampf um eine Weltwährung festigen und die europäische Wirtschaft für den globalen Wirtschaftswettbewerb stärken.
    Keywords: CBDC, money, monetary policy, digital currency, cryptocurrencies, blockchain
    JEL: E4 E5 G2 G5 D6
    Date: 2020–12
  8. By: Xin Wei (Indiana University)
    Abstract: This essay studies the fundamental causes of the monetary policy regime switches within rational expectations models. I introduce a threshold-switching monetary policy process into the model that links the policy stance to the fundamental shocks by an autoregressive regime strength index. It creates an expectations feedback mechanism between private agents’ policy forecasts and future policy regime outcomes. As demonstrated in a novel threshold-switching Fisherian model, well management of the private sector’s expectations of policy regime change can have the same effect as actually switching the regime. Contrastingly, failure to do so leads to unfavorable outcomes of policy intention. Then, I embed the new mechanism into a New Keynesian model. Along the way, I also develop an efficient non-simulation based threshold-switching Kalman filter, in conjunction with a solution method that accounts for the endogeneity of switching regimes, to estimate the nonlinear New Keynesian model. My key empirical findings are threefold. First, non-policy shocks have been instrumental in driving U.S. monetary policy regime changes during the post-World War II period. Most notably, markup shock explains 65.6% of variations in the policy regimes. Second, absent from markup shocks, eight of the eleven less aggressive regimes would not have happened during this history. Finally, I conclude that linking the private sector’s dynamic expectations formation and the Fed’s dilemma of the dual mandate in the presence of adverse supply shocks is a promising path towards providing micro-foundations for monetary policy regime shifts.
    Keywords: expectations formation effects, monetary policy, regime switching, Bayesian analysis
    Date: 2020–08
  9. By: Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: Over the 21st century, and especially since 2014, global exchange rate volatility has been trending downwards, notably among the core G3 currencies (dollar, euro and the yen), and to some extent the G4 (including China). This stability continued through the Covid-19 recession to date: unusual, as exchange volatility generally rises in US recessions. Compared to measures of stock price volatility, exchange rate volatility rivals the lows reached in the heyday of Bretton Woods I. This paper argues that the core driver is convergence in monetary policy, reflected in a sharp-reduction of inflation and short- and especially long-term interest rate differentials. This unprecedented stability, which partially extends to emerging markets, is strongly reinforced by expectations that the zero bound will be significantly binding for advanced economies for years to come. We consider various hypotheses and suggest that the shutdown of monetary volatility is the leading explanation. The concluding part of the paper cautions that systemic economic crises often produce major turning points, so a collapse of the Extended Bretton Woods II regime cannot be ruled out.
    JEL: E5 F3 F4 N2
    Date: 2020–11
  10. By: Jean-Bernard Chatelain (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: We consider a frictionless constant endowment economy based on Leeper (1991). In this economy, it is shown that, under an ad-hoc monetary rule and an ad-hoc fiscal rule, there are two equilibria. One has active monetary policy and passive fiscal policy, while the other has passive monetary policy and active fiscal policy. We consider an extended setup in which the policy maker minimizes a loss function under quasi-commitment, as in Schaumburg and Tambalotti (2007). Under this formulation there exists a unique Ramsey equilibrium, with an interest rate peg and a passive fiscal policy. We thank John P. Conley, Luis de Araujo and one referree for their very helpful comments.
    Keywords: Ramsey optimal policy,Fiscal theory of the Price Level,Frictionless endowment economy,Interest Rate Rule,Fiscal Rule
    Date: 2020–02–05
  11. By: Hartwig, Benny; Lieberknecht, Philipp
    Abstract: We analyze the influence of monetary policy on firms' extensive margin and productivity. Our empirical evidence for the U.S. based on a macro-financial SVAR suggests that expansionary monetary policy shocks stimulate corporate profits, reduce firm exit and increase firm entry. In the medium run, exit overshoots the baseline. We rationalize these findings in a general equilibrium model featuring endogenous entry and exit. In the model, expansionary monetary policy shocks increase firm profits by stimulating aggregate demand and thereby allow less productive firms to remain in the market. As the monetary stimulus fades, these lessproductive firms become unprofitable such that exit overshoots. This exit channel of monetary policy implies a flatter aggregate supply curve and therefore amplifies output responses, but dampens inflationary effects.
    Keywords: firm exit,firm entry,extensive margin,corporate profits,monetarypolicy
    JEL: E24 E32 E52 E58 L11
    Date: 2020
  12. By: Dominika Ehrenbergerova; Martin Hodula; Zuzana Rakovska
    Abstract: This paper tests whether a series of changes to capital requirements transmitted to a change to banks' pricing policy. We compile a rich bank-level supervisory dataset covering the banking sector in the Czech Republic over the period 2004-2019. We estimate that the changes to the overall capital requirements did not force banks to alter their pricing policy. The impact on bank interest margins and loan rates is found to lie in a narrow range around zero irrespective of loan category. Our estimates allow us to rule out effects even for less-capitalised banks and small banks. The results obtained contradict estimates from other studies reporting significant transmission of capital regulation to lending rates and interest margins. We therefore engage in a deeper discussion of why this might be the case. Our estimates may be used in the ongoing discussion of the benefits and costs of capital-based regulation in banking.
    Keywords: Bank pricing policy, capital requirements, interest margins, loan rates
    JEL: E58 G21 G28
    Date: 2020–11
  13. By: Hao Jin (Wang Yanan Institute for Studies in Economics (WISE) and School of Economics, Xiamen University); Chen Xiong (Wang Yanan Institute for Studies in Economics (WISE) and School of Economics, Xiamen University)
    Abstract: We documented that for some oil-exporting countries, the correlation between exchange rates and oil prices is strongly negative during periods of significant oil price drop but is much weaker during other periods. To interpret this time-varying asymmetric correlation, we develop and estimate a Markov-switching small open economy New Keynesian model with oil income as a source of government revenue. In particular, we allow monetary and fiscal policy coefficients to switch across "active" and "passive" regimes. Using data on Russia, our result shows that the policy combinations fluctuate. We find that active monetary policy isolates the exchange rate from oil price variations but changes to passively tolerate depreciation and inflation to support government debt when oil price drops place fiscal policy in a state of stress. Counterfactual policy experiments suggest policy regime switching is crucial to account for the observed asymmetric impact of oil prices on the exchange rate and that the trans-mission channels of oil price shocks differ significantly across policy regimes.
    Keywords: Fiscal Policy; Monetary Policy; Exchange Rate; Oil Price
    JEL: E63 F41 Q43
    Date: 2020–06
  14. By: Shekhar Hari Kumar; Vimal Balasubramaniam; Ila Patnaik; Ajay Shah
    Abstract: Many researchers have examined the role of the Renminbi as an international currency, particularly after the Chinese authorities undertook policy initiatives for Renminbi internationalisation. We measure one aspect of Renminbi internationalisation: its role in de facto exchange rate arrangements as an anchor. We find that over 70 currencies have shown significant co-movements with the Renminbi over 2005-2017. Most of this global role is the response of some national currencies to unanticipated Renminbi depreciation. However, the contribution to explained variance by the Renminbi for detected currency-regime periods is very small, less than 2% on average, even in East Asian and Pacific-Rim countries who are known to closely track the Renminbi. This suggests that the Renminbi has thus far achieved a very small role in global exchange rate arrangements. Local currency co-movement with the Renminbi is strongest for countries with export exposure to China and Belt and Road initiative linkages. There is heterogeneity in this effect when conditioning on continent, exporter-type, net trade exposure and policy linkages like Belt and Road initiative suggesting multiple modes of future Renminbi internationalisation.
    JEL: F15 F31 F33 F36
    Date: 2020–12–10
  15. By: J. Scott Davis; Michael B. Devereux; Changhua Yu
    Abstract: This paper shows that 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.
    JEL: E30 E50 F40
    Date: 2020–11
  16. By: Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Yu Zhu
    Abstract: We use a simple model to study whether private payment systems based on bank deposits can provide the optimal level of safety. In the model, bank deposits backed by projects are subject to default risk that can be mitigated by a depositor's ex ante and ex post monitoring. Safe payment instruments issued by a narrow bank can also be used as a back-up payment system when the risky bank fails. Private adoption of safe payment instruments is generally not socially optimal when buyers do not fully internalize the externalities of their adoption decision on sellers, or when the provision of deposit insurance distorts their adoption incentives. Using this framework, we discuss the optimal subsidy policy conditional on the level of deposit insurance.
    Keywords: Central bank research; Digital currencies and fintech; Financial institutions; Payment clearing and settlement systems
    JEL: E42 E50 G21
    Date: 2020–12
  17. 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 at spreads roughly 1 percentage point above non-recession averages. 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 the Covid Recession. Findings indicate that the announcement of forthcoming corporate bond backstop facilities have capped risk premia at levels 100 basis points above non-recession averages, akin to a “penalty rate” for lender of last resort interventions during financial crises. 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.
    JEL: E51 G12
    Date: 2020–11
  18. By: Gomez, Fabiana (University of Bristol); Vo, Quynh-Anh (Bank of England)
    Abstract: This paper proposes a positive theory of the link between banks’ capitalisation and their liquidity-risk taking as well as the severity of fire-sale problems and liquidity crises. In the basic framework of an individual bank’s decisions, we find that banks’ incentives to hold liquidity for precautionary reason are increasing with their capital. In a continuum-of-banks setting in which both precautionary and speculative motives of liquidity holdings are taken into account, we find that while the fire-sale discount is decreasing with the capitalisation of the banking system, the link between the latter and the severity of liquidity crises is not monotonic.
    Keywords: Leverage; Precautionary liquidity holdings; speculative liquidity holdings; wholesale debts; cash-In-the-market pricing
    JEL: D82 G21
    Date: 2020–11–27
  19. By: Olivier Armantier; Gizem Koşar; Rachel Pomerantz; Daphne Skandalis; Kyle Smith; Giorgio Topa; Wilbert Van der Klaauw
    Abstract: This paper studies how inflation beliefs reported in the New York Fed’s Survey of Consumer Expectations have evolved since the start of the COVID-19 pandemic. We find that household inflation expectations responded slowly and mostly at the short-term horizon. In contrast, the data reveal immediate and unprecedented increases in individual inflation uncertainty and in inflation disagreement across respondents. We find evidence of a strong polarization in inflation beliefs and we show differences across demographic groups. Finally, we document a strong link, consistent with precautionary saving, between inflation uncertainty and how respondents used the stimulus checks they received as part of the 2020 CARES Act.
    Keywords: inflation expectations; inflation uncertainty and disagreement; COVID-19 pandemic; COVID-19
    JEL: E31 E21 E16
    Date: 2020–11–01
  20. By: John M. Maheu; Thomas H. McCurdy; Yong Song
    Abstract: The COVID-19 pandemic has caused severe disruption to economic and financial activity worldwide. We assess what happened to the aggregate U.S. stock market during this period, including implications for both short and long-horizon investors. Using the model of Maheu, McCurdy and Song (2012), we provide smoothed estimates and out-of-sample forecasts associated with stock market dynamics during the pandemic. We identify bull and bear market regimes including their bull correction and bear rally components, demonstrate the model's performance in capturing periods of significant regime change, and provide forecasts that improve risk management and investment decisions. The paper concludes with out-of-sample forecasts of market states one year ahead.
    Date: 2020–12
  21. By: Fatemeh Salimi (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université)
    Abstract: While the reference framework for international portfolio choice emphasizes a mean-variance framework, uncovered parity conditions only involve mean stock or bond returns. We propose to augment the empirical specification by using the relative stock market uncertainty of two countries as an extra determinant of their bilateral exchange rate returns. A rise in the relative uncertainty of one stock market will lead capital to flow to the other stock market and generate an appreciation in the currency of the latter. By focusing on the JPY/USD exchange rate returns during the most recent decade (2009-2019) and relying on a nonlinear framework, we provide evidence that the Japanese-US differential stock market uncertainty affects the JPY/USD returns both contemporaneously and with weekly lags. This finding is robust when we control for the stock returns differential and the differential changes in Japanese and US unconventional monetary policy measures.
    Keywords: exchange rate determination,implied volatility,UEP,flight to safety,flight to quality
    Date: 2020–11
  22. By: Maurizio Trapanese (Bank of Italy)
    Abstract: This paper analyses the interactions between financial regulation and crises with reference to the experience of the United States in the period after the global financial crisis up to the Covid-19 emergency. In the last few years, a new regulatory system for large banks has arisen in the U.S., reversing some elements of the Dodd-Frank Act and introducing deviations from the international rules. This approach is also confirmed by some of the measures adopted in response to Covid-19. If this trend were to spread to other jurisdictions, the globally harmonized approach to regulation could break down. In the current exceptional circumstances as well, the international standards must not be breached, as they provide the resilience needed to sustain lending to the economy, and to keep banks safe. With the memory of the global financial crisis fading and the long post-crisis economic expansion coming to an end, the pressures to dilute the G-20 rules could grow stronger. The importance of maintaining a consistent approach to banking regulation needs to be emphasized.
    Keywords: financial crises, international regulation
    JEL: F53 G01 G20
    Date: 2020–11
  23. 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 specialemphasis on credit conditions. With the help of this model, monetary policy trans-mission can be described as mixture of two states (e.g., a normal state and a crisisstate), using an underlying logit model determining the relative weight of thesestates over time. We show that shocks to the credit spread and shocks to creditstandards directly lead to a reduction of real GDP growth, whereas shocks to thequantity of credit are less important in explaining growth fluctuations. Creditstandards and the credit spread are also the key determinants of the underlyingstate of the economy in the logit submodel. Together with a more pronouncedtransmission of monetary policy shocks in the crisis state, this provides further ev-idence for a financial accelerator in the euro area. Finally, the detrimental effect ofcredit 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
  24. By: Frédérique Bec (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique); Mélika Ben Salem (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - UNIV GUSTAVE EIFFEL - Université Gustave Eiffel)
    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: asymmetrical overshooting correction,nominal exchange rate
    Date: 2020–07–29
  25. By: Luis Felipe Guti\'errez; Sima Siami-Namini; Neda Tavakoli; Akbar Siami Namin
    Abstract: It is important and informative to compare and contrast major economic crises in order to confront novel and unknown cases such as the COVID-19 pandemic. The 2006 Great Recession and then the 2019 pandemic have a lot to share in terms of unemployment rate, consumption expenditures, and interest rates set by Federal Reserve. In addition to quantitative historical data, it is also interesting to compare the contents of Federal Reserve statements for the period of these two crises and find out whether Federal Reserve cares about similar concerns or there are some other issues that demand separate and unique monetary policies. This paper conducts an analysis to explore the Federal Reserve concerns as expressed in their statements for the period of 2005 to 2020. The concern analysis is performed using natural language processing (NLP) algorithms and a trend analysis of concern is also presented. We observe that there are some similarities between the Federal Reserve statements issued during the Great Recession with those issued for the 2019 COVID-19 pandemic.
    Date: 2020–12
  26. By: Daniel Felix Ahelegbey (University of Pavia); Oyakhilome Wallace Ibhagui (Baum Tenpers Research Institute)
    Abstract: We investigate the dynamic interconnectedness among the major world cross-currency basis swap spreads during tranquil and turbulent times. We examine whether movements in the bases are merely anecdotal or provide evidence of contagion, the most central basis for spillover propagation, and implications for market participants. The result shows a high degree of interconnectedness among the bases in crisis periods with mark-to-market losses for existing exposures and large arbitrage opportunities for investors seeking new positions. We find evidence that spillovers in the bases propagate from the Euro, the Swiss franc, and the Danish krone to other bases.
    Keywords: Covered Interest Parity, Cross-currency Basis, Currency Swaps, Dollar Funding, Financial Crisis, Interconnectedness, VAR Model.
    JEL: C11 C32 F31 G01 G15
    Date: 2020–09
  27. By: Rod Tyers; Yixiao Zhou
    Abstract: China’s financial openness, as measured by cross border flows and asset ownership, peaked during its 2000s growth surge, as did downward pressure on global interest rates and price levels. This was despite China’s restriction of financial inflows to approved FDI and tight controls on private outflows. We analyze the global effects of the growth surge and their dependence on these financial policies by employing a global macro model with national portfolio rebalancing, in which flexibility in asset differentiation is used to index financial integration. The results suggest that, globally, the growth surge raised asset prices, reduced yields and bolstered deflationary pressures, while improving aggregate economic welfare. It is shown that, without capital controls, most surge effects on China would have been moderated substantially while the global impacts would have been larger.
    Keywords: financial integration, China, imbalances, macro policy, spill-overs
    Date: 2020
  28. By: Anthony M. Diercks; Jonathan Rawls; Eric Sims
    Abstract: This paper is one of the first to study the present-day properties of the gold standard in a quantitative model commonly used in central banks. We incorporate gold into an otherwise standard estimated New Keynesian model and compare the positive and normative implications of adopting a gold standard to other more commonly advocated policies. We show that under certain conditions, the gold standard is akin to a nominal GDP targeting framework and can at times be considered an improvement. However, unlike more conventional policies, the gold standard must react to shocks to the supply and demand for gold. We estimate the model for the post-2000 period using a novel dataset on the supply of gold and find that following a gold standard would result in dramatic increases in the volatilities of macroeconomic aggregates and a significant deterioration in household welfare. This is because the estimated shocks to gold supply and demand are significantly larger than for other more conventional aggregate shocks. In the end, what buries the gold standard turns out to be instability in the dynamics of gold itself.
    JEL: E31 E32 E42
    Date: 2020–10
  29. By: Rava Azeredo da Silveira; Yeji Sung; Michael Woodford
    Abstract: We propose a model of optimal decision making subject to a memory constraint. The constraint is a limit on the complexity of memory measured using Shannon's mutual information, as in models of rational inattention; but our theory differs from that of Sims (2003) in not assuming costless memory of past cognitive states. We show that the model implies that both forecasts and actions will exhibit idiosyncratic random variation; that average beliefs will also differ from rational-expectations beliefs, with a bias that fluctuates forever with a variance that does not fall to zero even in the long run; and that more recent news will be given disproportionate weight in forecasts. We solve the model under a variety of assumptions about the degree of persistence of the variable to be forecasted and the horizon over which it must be forecasted, and examine how the nature of forecast biases depends on these parameters. The model provides a simple explanation for a number of features of reported expectations in laboratory and field settings, notably the evidence of over-reaction in elicited forecasts documented by Afrouzi et al. (2020) and Bordalo et al. (2020a).
    JEL: D84 E03 G41
    Date: 2020–11
  30. By: Nina Boyarchenko; Domenico Giannone; Anna Kovner
    Abstract: We study the relationship between bank capital ratios and the distribution of future real GDP growth. Growth in the aggregate bank capital ratio corresponds to a smaller left tail of GDP—smaller crisis probability—but at the cost of a smaller right tail of growth outcomes—smaller probability of exuberant growth. This trade-off persists at horizons of up to eight quarters, highlighting the long-range consequences of changes in bank capital. We show that the predictive information in bank capital ratio growth is over and above that contained in real credit growth, suggesting importance for bank capital beyond supplying credit to the nonfinancial sector. Our results suggest that coordination between macroprudential and monetary policy is crucial for supporting stable growth.
    Keywords: capital ratios; growth-at-risk; quantile regressions; threshold regressions
    JEL: E32 G21 C22
    Date: 2020–11–01
  31. By: Van der Ghote, Alejandro
    Abstract: I study macro-prudential policy intervention in economies with secularly low interest rates. Intervention boosts risk-free real interest rates unintentionally, simply as a by-product of containing systemic risk in financial markets. Thus, intervention also boosts the natural rate of return in particular (i.e., the equilibrium risk-free rate that is consistent with inflation on target and production at full capacity). These results point to a novel complementarity between financial stability and macroeconomic stabilization. Complementary is sufficiently strong to generate a divine coincidence if the natural rate is secularly low, but not too low. JEL Classification: E31, E32, E44
    Keywords: macro-prudential policy, natural rate of return, systemic risk
    Date: 2020–12

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