nep-mon New Economics Papers
on Monetary Economics
Issue of 2021‒06‒28
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Evolving Monetary Policy in the Aftermath of the Great Recession By Aymeric Ortmans
  2. The Emergence of Forward Guidance As a Monetary Policy Tool By Edward Nelson
  3. Monetary Policy and Financial Stability By Isabel Cairó; Jae W. Sim
  4. Monetary Policy with Opinionated Markets By Caballero, Ricardo; Simsek, Alp
  5. Monetary Policy Effectiveness under the Ultra-Low Interest Rate Environment: Evidence from Yield Curve Dynamics in Japan By Shigenori Shiratsuka
  6. Understanding a New Keynesian Model with Liquidity By Jia, Pengfei
  7. High-Frequency Estimates of the Natural Real Rate and Inflation Expectations By Alex Aronovich; Andrew C. Meldrum
  8. Monetary policy implementation with an ample supply of reserves By Gara Afonso; Kyungmin Kim; Antoine Martin; Ed Nosal; Simon M. Potter; Sam Schulhofer-Wohl
  9. Constructing Divisia Monetary Aggregates for Singapore By William Barnett; Van H. Nguyen
  10. Monetary Policy, Redistribution, and Risk Premia By Rohan Kekre; Moritz Lenel
  11. Institutional Arrangements and Inflation Bias: A Dynamic Heterogeneous Panel Approach By Diana Lima; Vasco Gabriel; Ioannis Lazopoulos
  12. Leaning against the wind and crisis risk By Schularick, Moritz; Ter Steege, Lucas; Ward, Felix
  13. The Gold Standard and the International Dimension of the Great Depression. By Luca Pensieroso; Romain Restout
  14. Risk Premia at the ZLB: A Macroeconomic Interpretation By Francois Gourio; Phuong Ngo
  15. Deciphering the Macroeconomic Effects of Internal Devaluations in a Monetary Union By Andrés, Javier; Arce, Oscar; Fernández-Villaverde, Jesús; Hurtado, Samuel
  16. Dual labor market and the "Phillips curve puzzle" By Hideaki Aoyama; Corrado Di Guilmi; Yoshi Fujiwara; Hiroshi Yoshikawa
  17. Inflation Dynamics and Forecast: Frequency Matters By Manuel M. F. Martins; Fabio Verona
  18. Voting right rotation, behavior of committee members and financial market reactions: evidence from the U.S. Federal Open Market Committee By Ehrmann, Michael; Tietz, Robin; Visser, Bauke
  19. Monetary Policy and Bubbles in New Keynesian Model with Overlapping Generations By Galí, Jordi
  20. Unexpected Supply Effects of Quantitative Easing and Tightening By Stefania D'Amico; Tim Seida
  21. Jumpstarting an International Currency By Bahaj, Saleem; Reis, Ricardo
  22. Redistribution and the Monetary–Fiscal Policy Mix By Saroj Bhattarai; Jae Won Lee; Choongryul Yang
  23. The Barnett Critique By Barnett, William A.; Park, Hyun; Park, Sohee
  24. Effectives of Monetary Policy under the High and Low Economic Uncertainty States: Evidence from the Major Asian Economies By Balcilar, Mehmet; Ozdemir, Zeynel Abidin; Ozdemir, Huseyin; Aygun, Gurcan; Wohar, Mark E.
  25. Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength By Francesco Bianchi; Renato Faccini; Leonardo Melosi
  26. Exchange Rates and Monetary Policy with Heterogeneous Agents: Sizing up the Real Income Channel By Adrien Auclert; Matthew Rognlie; Martin Souchier; Ludwig Straub
  27. Fiscal versus Monetary Policy in the 1960s By Friedman, Milton
  28. Centralized systemic risk control in the interbank system: Relaxed control and Gamma-convergence By Lijun Bo; Tongqing Li; Xiang Yu
  30. Forward interest rates as predictors of future US and UK spot rates before and after the 2008 financial crisis By Wickens, Michael R.
  31. Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873 By Haelim Anderson; Kinda Cheryl Hachem; Simpson Zhang
  32. Measuring price selection in microdata: it’s not there By Karadi, Peter; Schoenle, Raphael; Wursten, Jesse
  33. The COVID-19 Crisis and the Federal Reserve's Policy Response By Richard H. Clarida; Burcu Duygan-Bump; Chiara Scotti
  34. Central Bank Policy and the Concentration of Risk: Empirical Estimates By Nuno Coimbra; Daisoon Kim; Hélène Rey
  35. Forecasting US Inflation in Real Time By Chad Fulton; Kirstin Hubrich
  36. Exits and bailouts in a monetary union By Michal Kobielarz
  37. Lower-Level Substitution Bias in the Japanese Consumer Price Index: Evidence from Government Micro Data By Shiratsuka, Shigenori
  38. The Palestine Currency Board: Its History and Currency By Berlin, Howard

  1. By: Aymeric Ortmans (Université Paris-Saclay, Univ Evry, EPEE)
    Abstract: A Taylor-type monetary policy rule is estimated using a time-varying parameter vector autoregressive model to assess changes in central banks' behavior during and after the Great Recession. Based on US and euro area data, the results show that both the Fed and the ECB have changed their behavior after the 2008 crisis. Contemporaneous coefficients have increased with expansionary monetary policy at the ZLB. Althoughthey do not indicate clear evidence of significant changes inthe systematic component of monetary policy, estimated response coefficients suggest dramatic shifts in monetary policy shocks after the Global Financial Crisis. These departures from rule-based behavior - i.e. monetary policy discretion - are increasingly larger with the implementation of non-standard measures. Unconventional monetary policy shocks are shown to strongly affect the US macroeconomy and to contribute to the variance of inflation and output even more importantly when the Fed eased its monetary policy at the ZLB. This is not the case in the euro area, despite increasing monetary policy shocks in unconventional times. A counterfactual analysis shows however thatthe shift in the systematic component of monetary policy appears to be a key determinant of the level of inflation and output at the ZLB, especially in the euro area that would have suffered a continuous period of deflation from 2014:1 to 2018:1 without any change in ECB's behavior after the 2008 crisis.
    Keywords: Federal Reserve, European Central Bank, Taylor rule, Time-varying parameter VAR, Shadow rate, Zero lower bound
    JEL: C32 E31 E32 E37 E43 E44 E52 E58
    Date: 2020
  2. By: Edward Nelson
    Abstract: Forward guidance—the issuance by a central bank of public statements concerning the likely future settings of its policy instruments—is widely regarded as a new tool of monetary policy. The analysis in this paper shows that Federal Reserve policymakers from the 1950s onward actually accepted the premises of forward guidance: the notion that longer-term interest rates are key yields in aggregate spending decisions; and the proposition that indications of intentions regarding future short-term interest rate policy can affect longer-term rates. Over the same period, they were nevertheless wary about providing forward guidance regarding short-term interest rates, fearing that this could generate untoward market reactions or lock the Federal Open Market Committee into inappropriate rate settings. They concentrated on describing future policy in terms of achievement of economic objectives, with their commentary on interest-rate prospects usually confined to consideration of the longer-term factors affecting rates. Even in these years, however, there were infrequent occasions—notably in 1974 and 1982—when policymakers provided more explicit guidance regarding the path of short-term rates. In the 1990s, a consensus developed in U.S. policy circles that was more receptive toward the notion of guiding longer-term interest rates by providing indications of future FOMC actions. This consensus developed even before concerns about the lower bound on short-term rates became prevalent in U.S. policymaking. The new mindset, which stressed the stabilizing effects on the economy of communication of policy intentions, set the stage for the emergence of forward guidance as a monetary policy tool.
    Keywords: Forward guidance; Monetary policy tools; Monetary policy strategy; Interest-rate forecasts; Interest-rate lower bound; Federal Open Market Committee; Federal Reserve Board and Federal Reserve System; Federal Reserve
    JEL: E43 E58
    Date: 2021–05–17
  3. By: Isabel Cairó; Jae W. Sim
    Abstract: The 2008 Global Financial Crisis called into question the narrow focus on price stability of inflation targeting regimes. This paper studies the relationship between price stability and financial stability by analyzing alternative monetary policy regimes for an economy that experiences endogenous financial crises due to excessive household sector leverage. We reach four conclusions. First, a central bank can improve both price stability and financial stability by adopting an aggressive inflation targeting regime, in the absence of the zero lower bound (ZLB) constraint on nominal interest rates. Second, in the presence of the ZLB constraint, an aggressive inflation targeting regime may undermine both price stability and financial stability. Third, an aggressive price-level targeting regime can improve both price stability and financial stability, regardless of the presence of the ZLB constraint. Finally, a leaning against the wind policy can be detrimental to both price stability and financial stability when the credit cycle is driven by countercyclical household sector leverage. In this environment, leaning with credit spreads can be more effective.
    Keywords: Inflation targeting; Financial crises; Zero lower bound
    JEL: E32 E52 G01
    Date: 2020–12–18
  4. By: Caballero, Ricardo; Simsek, Alp
    Abstract: Central banks (the Fed) and markets (the market) often disagree about the path of interest rates. We develop a model where these different views stem from disagreements between the Fed and the market about future aggregate demand. We then study the implications of these disagreements for monetary policy, the term structure of interest rates, and economic activity. In our model, agents learn from the data but not from each other-they are opinionated. In this context, the market perceives monetary policy "mistakes" and the Fed partially accommodates the market's view to mitigate the impact of perceived "mistakes" on output and inflation. The Fed plans to implement its own view gradually, as it expects the market to receive more information and move closer to the Fed's belief. Disagreements about future demand, together with learning, translate into disagreements about future interest rates. Disagreements also provide a microfoundation for monetary policy shocks: after a surprise policy announcement, the market (partially) learns the Fed's belief and the extent of future "mistaken" interest rate changes. We categorize these shocks into three groups: Fed belief shocks, market reaction shocks, and tantrum shocks, and analyze their impact on forward interest rates and economic activity. Tantrum shocks are the most damaging, as they arise when the Fed fails to forecast the forward rates' reaction. These shocks motivate additional gradualism as well as communication policies that reveal the Fed's belief, not to persuade the market (which is opinionated) but to prevent a misinterpretation of the Fed's belief. Finally, we also find that disagreements affect inflation and create a policy trade-off between stabilizing output and inflation.
    Keywords: aggregate demand shocks; belief shocks; communication; confident disagreement; forward curve; Gradualism; monetary policy and shocks; taper tantrum; the Fed's dot plot; the term structure of interest rates
    JEL: E00 E12 E21 E32 E43 E44 G11 G12
    Date: 2020–05
  5. By: Shigenori Shiratsuka (Faculty of Economics, Keio University)
    Abstract: In this paper, I examine the effectiveness of monetary policy under the ultra-low interest rate environment in Japan through the lens of yield curve dynamics. To that end, I employ the dynamic Nelson-Siegel model with time-varying parameters, thereby computing indicators for tracing the easing effects of monetary policy. I show that the estimation performance of the yield curve models is sufficiently improved even under the ultra-low interest rate environment by extending the dynamic Nelson-Siegel model to allow a loading parameter to vary over time, in addition to three parameters of yield curve dynamics: level, slope, and curvature. However, I also demonstrate that the identification of the level and loading parameters is critical in assessing monetary policy effects based on the estimation results for the yield curve dynamics. I reveal that monetary easing effects under the Quantitative and Qualitative Monetary Easing (QQE) are produced by flattening the yield curve in the ultra-long-term maturities over 10-year while easing effects from maturities shorter than 10-year remain almost unchanged. I argue that monetary policy fails to produce sufficient easing effects within the time frame of the standard macroeconomic stabilization policy, even with the full-fledged implementation of unconventional monetary policy measures under the current ultra-low interest rate environment.
    Keywords: Yield curve, Dynamic Nelson-Siegel model, Loading parameter, Unconventional monetary policy, Monetary policy indicator
    JEL: E43 E52 E58 G12
    Date: 2021–06–12
  6. By: Jia, Pengfei
    Abstract: The Global Financial Crisis of 2007--2009 and its aftermath have called for a rethink of the role of money in shaping business cycle fluctuations. To this end, this paper studies a New Keynesian model with money (liquidity). In the model, agents hold government money and other financial assets. However, there is a "short rate disconnect" (i.e., an interest rate spread) between the policy rate on money and the interest rate on household's savings. The paper shows that there exists a meaningful "liquidity effect" that is quantitatively significant for the macroeconomy. As the spread increases, so does the price of liquidity. In a model where consumption and money are complements, such an increase in the opportunity cost of money induces agents to consume less and work less. Both the effects imply that the real wage can fall, which in turn puts downward pressures on inflation via the New Keynesian Phillips curve. The fall in inflation makes the monetary authority cut the nominal interest rates by more, but at the cost of increasing the spread even further. In addition, the paper compares the dynamic responses to technology shocks and monetary policy shocks for the model with liquidity and the standard New Keynesian model. The results show that the responses can be quantitatively different for the two models. Finally, this paper studies the interaction between the liquidity effect and monetary policy, highlighting the liquidity effect that can play in business cycles.
    Keywords: Liquidity, Money, New Keynesian model, Business cycle fluctuations
    JEL: E32 E41 E51 E52 E62
    Date: 2021–06–14
  7. By: Alex Aronovich; Andrew C. Meldrum
    Abstract: We propose a new method of estimating the natural real rate and long-horizon inflation expectations, using nonlinear regressions of survey-based measures of short-term nominal interest rates and inflation expectations on U.S. Treasury yields. We find that the natural real rate was relatively stable during the 1990s and early 2000s, but declined steadily after the global financial crisis, before dropping more sharply to around 0 percent during the recent COVID-19 pandemic. Long-horizon inflation expectations declined steadily during the 1990s and have since been relatively stable at close to 2 percent. According to our method, the declines in both the natural real rate and long-horizon inflation expectations are clearly statistically significant. Our estimates are available at whatever frequency we observe bond yields, making them ideal for intraday event-study analysis--for example, we show that the natural real rate and long-horizon inflation expectations are not affected by temporary shocks to the stance of monetary policy.
    Keywords: Natural real rate; Term structure model; Nonlinear regression
    JEL: E43 G12
    Date: 2021–05–28
  8. By: Gara Afonso; Kyungmin Kim; Antoine Martin; Ed Nosal; Simon M. Potter; Sam Schulhofer-Wohl
    Abstract: Methods of monetary policy implementation continue to change. The level of reserve supply—scarce, abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007-2009 financial crisis. We find that the optimal level of reserve supply likely lies somewhere between scarce and abundant reserves, thus highlighting the benefits of implementation with what could be called “ample” reserves. The Federal Reserve’s announcement in October 2019 that it would maintain a level of reserve supply greater than the one that prevailed in early September is consistent with the implications of our framework.
    Keywords: federal funds market; monetary policy implementation; ample reserve supply
    JEL: E42 E58
    Date: 2020–01–18
  9. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Van H. Nguyen (Department of Economics, The University of Kansas)
    Abstract: Since Barnett (1978) derived the user cost price of money, the economic theory of monetary services aggregation has been developed and extended into a field of its own with solid foundations in microeconomic theory. Divisia monetary aggregates have repeatedly been shown to be strictly preferred to their simple-sum counterparts, which have no competent foundations in microeconomic aggregation or index number theory. However, most central banks in the world, including that of Singapore, the Monetary Authority of Singapore (MAS), still report their monetary aggregates as simple summations. Recent DSGE macroeconomic models often ignore aggregate quantities of money as possible instruments or targets of monetary policy. In the case of a small open economy like Singapore’s, exchange rates are often targeted to achieve goals for inflation and output gap. See, e.g., McCallum (2006). Is that because quantities of money are irrelevant to economic activity? To examine the relevance of Divisia monetary aggregates in predicting real economy activity in Singapore, we construct monetary services indices for Singapore using the recent credit-card- augmented Divisia monetary aggregates formula. We produce those state-of-the-art monetary services indexes for Jan 1991 to Mar 2021. In future work, we plan to use our data to explore central bank policy in Singapore and to propose improvements in that policy. By making our data available to the public, we encourage others to do the same.
    Keywords: Divisia index, Divisia monetary aggregates, credit card augmented Divisia, open- economy macroeconomics, monetary policy analysis, Singapore.
    JEL: E32 E40 E41 E47 E50 E51 E52 E58
    Date: 2021–06
  10. By: Rohan Kekre; Moritz Lenel
    Abstract: We study the transmission of monetary policy through risk premia in a heterogeneous agent New Keynesian environment. Heterogeneity in households' marginal propensity to take risk (MPR) summarizes differences in portfolio choice on the margin. An unexpected reduction in the nominal interest rate redistributes to households with high MPRs, lowering risk premia and amplifying the stimulus to the real economy. Quantitatively, this mechanism rationalizes the role of news about future excess returns in driving the stock market response to monetary policy shocks and amplifies their real effects by 1.3-1.5 times.
    JEL: E44 E52 G12
    Date: 2021–05
  11. By: Diana Lima; Vasco Gabriel; Ioannis Lazopoulos
    Abstract: The paper investigates whether the institutional arrangements that determine the conduct of monetary policy and prudential regulation and supervision of the banking system influence policymakers’ actions in pursuing their designated mandates. Employing recently developed dynamic heterogeneous panel methods and using data for 25 industrialised countries from 1960 to 2018, we empirically assess whether central banks’ main objective of inflation stability is compromised when assigned with both policy mandates manifested as inflation bias. Our results show that, once we appropriately control for relevant policy and institutional factors, the separation of prudential policy and monetary policy does not have a significant effect on inflation outcomes.
    JEL: E21 E60 F40
    Date: 2021
  12. By: Schularick, Moritz; Ter Steege, Lucas; Ward, Felix
    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 financial 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; local projections; monetary policy
    JEL: E44 E50 G01 G15 N10
    Date: 2020–05
  13. By: Luca Pensieroso; Romain Restout
    Abstract: Was the Gold Standard a major determinant of the onset and protracted character of the Great Depression of the 1930s in the United States and worldwide? In this paper, we model the ‘Gold-Standard hypothesis’ in an open-economy, dynamic general equilibrium framework. We show that encompassing the international and monetary dimensions of the Great Depression is important to understand the turmoil of the 1930s, especially outside the United States. Contrary to what is often maintained in the literature, our results suggest that the vague of successive nominal exchange rate devaluations coupled with the monetary policy implemented in the United States did not act as a relief. On the contrary, they made the Depression worse.
    Keywords: Great Depression, Gold Standard, Open Macroeconomics, Dynamic General Equilibrium.
    JEL: N10 E13 N01
    Date: 2021
  14. By: Francois Gourio; Phuong Ngo
    Abstract: Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing correlation in turn reduces the term premium, and hence contributes to explaining the decline in long-term interest rates. We use the model to evaluate this mechanism quantitatively. Our results shed light on the validity of the New Keynesian ZLB model, a cornerstone of modern macroeconomic theory.
    Keywords: zero lower bound; liquidity trap; stock market; inflation premia; term premia; risk premia
    JEL: C61 E31 E52 E62
    Date: 2020–01–03
  15. By: Andrés, Javier; Arce, Oscar; Fernández-Villaverde, Jesús; Hurtado, Samuel
    Abstract: We study the macroeconomic effects of internal devaluations undertaken by a periphery of countries belonging to a monetary union. We find that internal devaluations have large and positive output effects in the long run. Through an expectations channel, most of these effects carry over to the short run. Internal devaluations focused on goods markets reforms are generally more powerful in stimulating growth than reforms aimed at moderating wages, but the latter are less deflationary. For a monetary union with a periphery the size of the euro area's, the countries at the periphery benefit from internal devaluations even at the zero lower bound (ZLB) of the nominal interest rate. Nevertheless, when the ZLB binds, there is a case for a sequencing of reforms that prioritizes labor policies over goods markets reforms.
    Keywords: internal devaluation; monetary union; policy sequencing; Structural reforms; zero lower bound
    JEL: D42 E44 E63
    Date: 2020–05
  16. By: Hideaki Aoyama; Corrado Di Guilmi; Yoshi Fujiwara; Hiroshi Yoshikawa
    Abstract: Low inflation was once a welcome to both policy makers and the public. However, Japan’s experience during the 1990’s changed the consensus view on price of economists and central banks around the world. Facing deflation and zero interest bound at the same time, Bank of Japan had difficulty in conducting effective monetary policy. It made Japan’s stagnation unusually prolonged. Too low inflation which annoys central banks today is translated into the “Phillips curve puzzle”. In the US and Japan, in the course of recovery from the Great Recession after the 2008 global financial crisis, the unemployment rate had steadily declined to the level which was commonly regarded as lower than the natural rate or NAIRU. And yet, inflation stayed low. In this paper, we consider a minimal model of dual labor market to jointly investigate how blue the different factors.
    Keywords: Phillips curve, bargaining power, secondary workers
    JEL: C60 E31
    Date: 2021–06
  17. By: Manuel M. F. Martins (Faculty of Economics, University of Porto and CEF.UP); Fabio Verona (Bank of Finland - Monetary Policy and Research Department and University of Porto - CEF.UP)
    Abstract: Policymakers and researchers see inflation characterized by cyclical fluctuations driven by changes in resource utilization and temporary shocks, around a trend influenced by inflation expectations. We study the in-sample inflation dynamics and forecast inflation out-of-sample by analyzing a New Keynesian Phillips Curve (NKPC) in the frequency domain. In-sample, while inflation expectations dominate medium-to-long-run cycles, energy prices dominate short cycles and business-to-medium cycles once expectations became anchored. While statistically significant, unemployment is not economically relevant for any cycle. Out-of-sample, forecasts from a low-frequency NKPC significantly outperform several benchmark models. The long-run component of unemployment is key for such remarkable forecasting performance.
    Keywords: Inflation dynamics; Inflation forecast; New Keynesian Phillips Curve; Frequency domain; Wavelets
    JEL: C53 E31 E37
    Date: 2021–06
  18. By: Ehrmann, Michael; Tietz, Robin; Visser, Bauke
    Abstract: Whether Federal Reserve Bank presidents have the right to vote on the U.S. monetary policy committee depends on a mechanical, yearly rotation scheme. Rotation is without exclusion: also nonvoting presidents attend and participate in the meetings of the committee. Does voting status change behavior? We find that the data go against the hypothesis that without the voting right, presidents use their public speeches and their meeting interventions to compensate for the loss of formal influence; rather, they support the hypothesis that the voting right makes presidents more involved. We also find that speeches move financial markets less in years that presidents vote. We argue that these discounts are consistent with their communication behavior. JEL Classification: D71, D72, E58
    Keywords: central bank communication, financial market response, FOMC, monetary policy committee, voting right rotation
    Date: 2021–06
  19. By: Galí, Jordi
    Abstract: I analyze an extension of the New Keynesian model that features overlapping generations of finitely-lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I study the conditions under which bubble-driven fluctuations may emerge and the type of monetary policy rules that may prevent them. I conclude by discussing some of the model's welfare implications.
    Keywords: Asset Price Volatility; Economic Fluctuations; monetary policy rules; Stabilization policies
    JEL: E44 E52
    Date: 2020–06
  20. By: Stefania D'Amico; Tim Seida
    Abstract: To analyze the evolution of quantitative easing’s (QE) and tightening’s (QT) effects across consecutive announcements, we focus on their unexpected component. Treasury yield sensitivities to QE and QT supply surprises do not fall monotonically over time, thus later announcements seemed to remain powerful; yield sensitivities to QT surprises are on average larger than sensitivities to QE surprises, implying supply effects did not diminish during periods of market calm amid economic expansion; finally, yield sensitivities are amplified by the amount of interest-rate uncertainty prevailing before the announcement, implying that turning points in the balance sheet policy tended to elicit larger reactions.
    Keywords: Balance sheet policy surprises; quantitative easing and tightening; asset supply effects
    JEL: E43 E44 E52 E58
    Date: 2020–07–31
  21. By: Bahaj, Saleem; Reis, Ricardo
    Abstract: Monetary and financial policies that lower the cost of credit for working capital in a currency outside of its country can provide the impetus for that currency to be used in international trade. This paper shows this in theory, by exploring the complementarity in the currency used for financing working capital and the currency used for invoicing sales. Financial policies by a central bank can jump-start the use of its currency outside a country's borders. In the data, the creation of 38 swap lines by the People's Bank of China between 2009 and 2018 provides a test of the theory. Signing a swap line with a country is significantly associated with increases in the use of the RMB in payments to and from that country in the following months.
    JEL: E44 E58 F33 F41 G15
    Date: 2020–05
  22. By: Saroj Bhattarai; Jae Won Lee; Choongryul Yang
    Abstract: We show that the effectiveness of redistribution policy in stimulating the economy and improving welfare is directly tied to how much inflation it generates, which in turn hinges on monetary-fiscal adjustments that ultimately finance the transfers. We compare two distinct types of monetary-fiscal adjustments: In the monetary regime, the government eventually raises taxes to finance transfers, while in the fiscal regime, inflation rises, effectively imposing inflation taxes on public debt holders. We show analytically in a simple model how the fiscal regime generates larger and more persistent inflation than the monetary regime. In a quantitative application, we use a two-sector, two-agent New Keynesian model, situate the model economy in a COVID-19 recession, and quantify the effects of the transfer components of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We find that the transfer multipliers are significantly larger under the fiscal regime—which results in a milder contraction—than under the monetary regime, primarily because inflationary pressures of this regime counteract the deflationary forces during the recession. Moreover, redistribution produces a Pareto improvement under the fiscal regime.
    Keywords: Household heterogeneity; Redistribution; Monetary-fiscal policy mix; Transfer multiplier; Welfare evaluation; COVID-19; CARES Act
    JEL: E53 E62 E63
    Date: 2021–03–01
  23. By: Barnett, William A.; Park, Hyun; Park, Sohee
    Abstract: The Barnett critique states that there is an internal inconsistency between the theory that is implied by simple sum monetary aggregation (perfect substitutability among components) and the economic theory that produces the models within which those aggregates are used. That inconsistency causes the appearance of unstable demand and supply for money. The incorrect inference of unstable money demand has caused serious harm to the field of monetary economics. The appearance of instability of the demand for money function disappears, if the relevant neoclassical microeconomic aggregation and index number theories are used to produce the monetary aggregates, which then would nest properly within the money demand functions. In fact, studies of the demand for money function using competently produced monetary aggregates and state-of-the-art demand system modeling methodology have found the demand for money function to be more stable and more easily modeled than the demand for most other consumer goods. See, e.g., Barnett and Serletis (2000, chapters 2, 7, 9, 16, 17, 18, 24), Barnett and Chauvet (2011, chapters 1, 4, 7), and Barnett (2012, pp. 92-110).
    Keywords: Divisia monetary aggregates; demand for money; Barnett critique; index number theory; aggregation theory.
    JEL: E4 E41 E5 E51
    Date: 2021–06–22
  24. By: Balcilar, Mehmet (Eastern Mediterranean University); Ozdemir, Zeynel Abidin (Ankara HBV University); Ozdemir, Huseyin (Gazi University); Aygun, Gurcan (Gazi University); Wohar, Mark E. (University of Nebraska Omaha)
    Abstract: This study examines the monetary policy effectiveness of five major Asian countries (China, Hong Kong, India, Japan, and South Korea) using a quantile vector autoregression (QVAR) model-based spillover estimation approach of Balcilar et al. (2020b) at different quantile paths. To do this, we first obtain the spillover index from interest rate to industrial production and consumer price index under the high and low levels of uncertainty. The full sample results from our analysis provide partial supporting evidence for the economic theory, which asserts that monetary policy efficiency must fall during periods of high economic uncertainty. Furthermore, this approach also allows us to uncover asymmetric effects of economic policy uncertainty and lending rate on macroeconomic indicators. The impacts of interest rate and domestic and foreign (US, EU) uncertainty shocks on major Asian markets present significant asymmetric characteristics. Moreover, our time-varying results suggest that monetary policy shocks are more effective and potent on Asian economies during very low and very high uncertain times than normal economic periods.
    Keywords: economic policy uncertainty, monetary policy efficiency, quantile spillover, QVAR
    JEL: C32 E44 F42 G01
    Date: 2021–05
  25. By: Francesco Bianchi; Renato Faccini; Leonardo Melosi
    Abstract: The COVID pandemic hit the US economy at a time in which the ability of policymakers to react to adverse shocks is greatly limited. The current low interest rate environment limits the Federal Reserve's ability to stabilize the economy, while the large public debt curtails the efficacy of fiscal interventions by inducing expectations of costly fiscal adjustments. A solution to this impasse is a coordinated fiscal and monetary strategy aiming at creating a controlled rise of inflation to wear away a targeted fraction of debt. Under our coordinated strategy, the fiscal authority introduces an emergency budget with no provisions on how it will be balanced, while the monetary authority allows a temporary increase in inflation. The coordinated strategy enhances the efficacy of the fiscal stimulus planned in response to the COVID pandemic and allows the Federal Reserve to correct a prolonged period of below-target inflation. The strategy results in only moderate levels of inflation by separating long-run fiscal sustainability from a short-run policy intervention.
    Keywords: Monetary policy; fiscal policy; emergency budget; shock specific rule; COVID
    JEL: E30 E52 E62
    Date: 2020–05–12
  26. By: Adrien Auclert; Matthew Rognlie; Martin Souchier; Ludwig Straub
    Abstract: Introducing heterogeneous households to a New Keynesian small open economy model amplifies the real income channel of exchange rates: the rise in import prices from a depreciation lowers households’ real incomes, and leads them to cut back on spending. When the sum of import and export elasticities is one, this channel is offset by a larger Keynesian multiplier, heterogeneity is irrelevant, and expenditure switching drives the output response. With plausibly lower short-term elasticities, however, the real income channel dominates, and depreciation can be contractionary for output. This weakens monetary transmission and creates a dilemma for policymakers facing capital outflows. Delayed import price pass-through weakens the real income channel, while heterogeneous consumption baskets can strengthen it.
    JEL: E52 F32 F41
    Date: 2021–05
  27. By: Friedman, Milton (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: In this lecture, Milton Friedman reviews the role of fiscal and monetary policies on the course of the U.S. business cycle, during several episodes from 1961 to 1969. He relates these developments to shifts in contemporary popular and scientific opinion about the determinants of the business cycle. In each episode of expansion or contraction, he shows that monetary policy – in the sense of changes in the rate of growth of the quantity of money – decisively dominated over fiscal policy in determining the pace of economic activity and the rate of inflation. During the lecture, Friedman makes several digressions to explain the variability of the lag in effect of monetary policy, the reason why interest rates are a poor guide to the stance of monetary policy, and why the downward-sloping liquidity preference function is a poor model that fails to comport with the real world. He also explains why tax increases are not necessarily contractionary, and why tax decreases are not necessarily expansionary.
    Date: 2021–06–23
  28. By: Lijun Bo; Tongqing Li; Xiang Yu
    Abstract: This paper studies a systemic risk control problem by the central bank, which dynamically plans monetary supply for the interbank system with borrowing and lending activities. Facing both heterogeneity among banks and the common noise, the central bank aims to find an optimal strategy to minimize the average distance between log-monetary reserves and some prescribed capital levels for all banks. A relaxed control approach is adopted, and an optimal randomized control can be obtained in the system with finite banks by applying Ekeland's variational principle. As the number of banks grows large, we further prove the convergence of optimal strategies using the Gamma-convergence arguments, which yields an optimal relaxed control in the mean field model. It is shown that the limiting optimal relaxed control is linked to a solution of a stochastic Fokker-Planck-Kolmogorov (FPK) equation. The uniqueness of the solution to the stochastic FPK equation is also established under some mild conditions.
    Date: 2021–06
  29. By: Ferry Syarifuddin
    Abstract: This paper provides two empirical investigations concerning the macroeconomics of foreign exchange (FX) futures market. We first examine the macroeconomic consequences of FX futures market activities for selected emerging market economies that adopt inflation targeting framework (ITF). This paper then conducts comparative study investigating the effect of futures-based FX intervention on the exchange rate dynamics and exchange rate pass-through effect for the case ofBrazil and India. By utilizing the Bayesian Panel VAR, we find initial intention of market squeezing. However, it occurs only in small magnitudes and for short periods and, therefore, the FX futures rate, spot exchange rate, inflation rate, and economic growth would not fluctuate abnormally. For the second investigation, we utilize Autoregressive Distributed Lag model and show that the futures-based FX interventions in Brazil are effective, while it is not the case for India. These findings suggest that specific economic institutional aspects, which leads to the FX futures market deepening and robust financial-economic regulatory structures, are important inmitigating market manipulation and promoting an effective futures-based FX intervention.
    Keywords: foreign exchange futures market; futures-based FX intervention; exchange rate; pass-through.
    JEL: E44 E52 E58 G23 G28
    Date: 2020
  30. By: Wickens, Michael R.
    Abstract: A feature of the financial crisis rarely mentioned in the academic literature is that forward interest rates remained persistently higher than future spot rates. Yet according to the expectations hypothesis forward interest rates are unbiased predictors of future spot rates. More general theories attribute the forecast errors to term premia. This paper examines whether these theories can explain data for the US and UK that spans the financial crisis and whether alternative approaches provide better forecasts. The main findings are that these theories break down after the financial crisis and, not unexpectedly, that the forecast errors are due mainly to monetary policy.
    Date: 2020–05
  31. By: Haelim Anderson; Kinda Cheryl Hachem; Simpson Zhang
    Abstract: We study financial stability with constraints on central bank intervention. We show that a forced reallocation of liquidity across banks can achieve fewer bank failures than a decentralized market for interbank loans, reflecting a pecuniary externality in the decentralized equilibrium. Importantly, this reallocation can be implemented through the issuance of clearinghouse loan certificates, such as those issued in New York City during the Panic of 1873. With a new dataset constructed from archival records, we demonstrate that the New York Clearinghouse issued loan certificates to member banks in the way our model suggests would have helped resolve the panic.
    JEL: D53 D62 E42 E50 G01 N21
    Date: 2021–05
  32. By: Karadi, Peter; Schoenle, Raphael; Wursten, Jesse
    Abstract: We use microdata to estimate the strength of price selection { a key metric for the effect of monetary policy on the real economy. We propose a product-level proxy for mispricing and assess whether products with larger mispricing respond with a higher probability to identified monetary and credit shocks. We find that they do not, suggesting selection is absent. Instead, we detect state-dependent adjustment on the gross extensive margin. Our results are broadly consistent with second-generation state-dependent pricing models and sizable effects of monetary policy on the real economy. JEL Classification: E31, E32, E52
    Keywords: identified credit and monetary policy shocks, monetary non-neutrality, PPI microdata, price-gap proxy, scanner data, state-dependent pricing
    Date: 2021–06
  33. By: Richard H. Clarida; Burcu Duygan-Bump; Chiara Scotti
    Abstract: The COVID-19 pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. economy since the Great Depression. In this paper, we argue that the Federal Reserve acted decisively and with dispatch to deploy all the tools in its conventional kit and to design, develop, and launch within weeks a series of innovative facilities to support the flow of credit to households and businesses. These measures, taken together, provided crucial support to the economy in 2020 and are continuing to contribute to what is expected to be a robust economic recovery in 2021.
    Keywords: Monetary policy; Forward guidance; Asset purchases; Section 13(3) facilities
    JEL: E40 E50
    Date: 2021–06–03
  34. By: Nuno Coimbra; Daisoon Kim; Hélène Rey
    Abstract: Before the 2008 crisis, the cross-sectional skewness of banks’ leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks’ risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability.
    JEL: E0 E5 F3 G01
    Date: 2021–06
  35. By: Chad Fulton; Kirstin Hubrich
    Abstract: We perform a real-time forecasting exercise for US inflation, investigating whether and how additional information--additional macroeconomic variables, expert judgment, or forecast combination--can improve forecast accuracy and robustness. In our analysis we consider the pre-pandemic period including the Global Financial Crisis and the following expansion--the longest on record--featuring unemployment that fell to a rate not seen for nearly sixty years. Distinguishing features of our study include the use of published Federal Reserve Board staff forecasts contained in Tealbooks and a focus on forecasting performance before, during, and after the Global Financial Crisis, with relevance also for the current crisis and beyond. We find that while simple models remain hard to beat, the additional information that we consider can improve forecasts, especially in the post-crisis period. Our results show that (1) forecast combination approaches improve forecast accuracy over simpler models and robustify against bad forecasts, a particularly relevant feature in the current environment; (2) aggregating forecasts of inflation components can improve performance compared to forecasting the aggregate directly; (3) judgmental forecasts, which likely incorporate larger and more timely datasets, provide improved forecasts at short horizons.
    Keywords: Inflation; Survey forecasts; Forecast combination
    JEL: C53 E37 E30
    Date: 2021–03–04
  36. By: Michal Kobielarz
    Abstract: This paper analyzes country bailouts in a monetary union within a framework where sovereign default and exit from the union are two separate decisions. The lack of exit precedent creates uncertainty about the exit cost, which might prevent countries from exiting. The first exit can resolve the uncertainty, which is why the union might bail out a troubled country. As the bailout is meant to prevent an exit from the union, it does not exclude subsequent defaults. The model motivates the occurrence of large fiscal transfers within the Eurozone, and explains why they were insufficient to resolve the debt crisis.
    Keywords: monetary union, bailouts, fiscal transfers, exit, sovereign debt
    Date: 2021
  37. By: Shiratsuka, Shigenori
    Abstract: This paper explores measurement errors in the Japanese Consumer Price Index (CPI) stemming from lower-level substitution within items. The CPI is widely used as a measure for inflation or the cost of living. The Japanese CPI employs the one-specification for one-item policy in surveying individual prices. The policy specifies a few most popular specifications for each item and continuously surveys their prices at specific outlets. As a result, the price homogeneity is generally maintained, limiting the impact of the differences in the elementary aggregation formulas, which corresponds to the narrow definition of the lower-level substitution bias. In contrast, the price representativeness becomes difficult to be maintained for highly heterogeneous and differentiated products. That is another aspect of the lower-level substitution bias particular to the Japanese CPI, encompassed by the broad definition of the lower-level substitution bias. However, quantitative assessments on the lower-level substitution bias in the Japanese CPI are very limited since the detailed CPI data at individual price observations was not readily available for a long time. This paper is the first trial on a quantitative assessment of the lower-level substitution bias using the micro data for the Retail Price Survey (RPS), which is the primary source data for the Japanese CPI. Empirical evidence confirms that the lower-level substitution bias in the Japanese CPI differs from that for the U.S. CPI. On the one hand, the one-specification for one-item policy in the price survey succeeds in keeping price observations homogeneous, limiting the elementary aggregation bias. On the other hand, the policy also weakens price representativeness, which requires additional quantitative assessments using alternative data sources, such as scanner data and web-scraping data.
    Keywords: Consumer Price Index, Measurement Errors, Substitution Effects, Elementary Aggregation Formula, Price Representativeness, Price Survey Method
    JEL: C43 E31
    Date: 2021–06
  38. By: Berlin, Howard (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: When the British defeated the Ottoman Turks and the armistice was signed on October 31, 1918, Palestine, part of the defeated Ottoman Empire, was administratively divided into the Mutasarrifate (a sub province) of Jerusalem and the Vilayets (a major administrative district or province) of Beirut and Damascus. Palestine was then governed by the British, first as a military occupation, and then as a Mandate granted to them as a Trust by the League of Nations. Prior to 1927, Palestine had no currency that was solely its own, but rather coins and banknotes of many other countries that were used in Palestine. These were mostly those of Turkey, Egypt, France, Great Britain, India, Germany, Russia, Austria, and the United States. The author of this working paper traces the need for a Palestine currency and the formation of the Palestine Currency Board, which remained in effect until March 31, 1952, nearly four years after the State of Israel was established on May 14, 1948. Parts of this working paper was adapted from the author’s book: The Coins and Banknotes of Palestine Under the British Mandate, 1927-1947, McFarland & Company, Inc. (2001) and is built on the writings of numismatic researchers Jack H. Fisher, Esq. (deceased) and Raphael Dabbah, both of whom the author has had the pleasure of knowing for many years. Where verbatim passages are taken from British sources, the British spellings have been retained. Unless credited otherwise, all images of coins and currency notes were from the author’s collection.
    Keywords: Palestine Mandate; currency board; coins; currency notes
    JEL: E58 N15
    Date: 2021–06–18

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