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on Monetary Economics |
| By: | Sumon Kumar Bhaumik; Vinh Dang; Ali M. Kutan |
| Abstract: | Many developing and emerging markets have high degrees of state bank ownership. In addition, the recent global financial crisis has led to significant state ownership of banking assets in developed countries such as the United Kingdom. These observations beg the question of whether the effectiveness of monetary policy through a lending channel differs across banks with different ownerships. In this paper, using bank-level data from India, we examine this issue and also test whether the reaction of different types of banks (i.e., private, state and foreign) to monetary policy changes is different in easy and tight policy regimes. Our results suggest that there are considerable differences in the reactions of different types of banks to monetary policy initiatives of the central bank and the bank lending channel of monetary policy might be much more effective in a tight money period than in an easy money period. We also find differences in impact of monetary policy changes on less risky short term and more risky medium term lending We discuss the policy implications of the findings. Our results from India are preliminary and further studies are needed to see whether our findings can be generalized to emerging economies or developing countries in general. |
| Keywords: | bank ownership; credit channel of monetary policy; lending; monetary policy regimes, India. |
| JEL: | E51 E58 G21 G32 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-988&r=mon |
| By: | Stefan Gerlach; John Lewis |
| Abstract: | This paper estimates a monetary policy reaction function for the ECB over the period 1999-2009. To allow for a potential shift in interest rate setting during the financial crisis, we permit a smooth transition from one set of parameters to another. The estimates show a swift change in the months following the collapse of Lehman brothers. They suggest that the ECB cut rates more aggressively than expected solely on the basis of the worsening of macroeconomic conditions, consistent with the theoretical literature on optimal monetary policy in the vicinity of the zero bound. |
| Keywords: | ECB, reaction functions; zero lower bound; smooth transition |
| JEL: | C2 E52 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:254&r=mon |
| By: | Ansgar Belke |
| Abstract: | After the dramatic rescue package for the euro area, the governing council of the European Central Bank decided to purchase European government bonds - to ensure an "orderly monetary policy transmission mechanism". Many observers argued that, by bond purchases, national fiscal policies could from now on dominate the common monetary policy. This note argues that they are quite right. The ECB has indeed become more dependent in political and financial terms. The ECB has decided to sterilise its bond purchases - compensating those purchases through sales of other bonds or money market instruments to keep the overall money supply unaffected. This is to counter accusations that the ECB is monetizing government debt. This note addresses how effective these sterilisation policies are. One problem inherent in the sterilization approach is that it reshuffles only the liability side of the ECB's balance sheet. It is not well-suited to either diminish the bloated ECB balance sheet or to remove the potentially toxic covered or sovereign bonds from it. In addition, the intake of potentially toxic assets as collateral and by outright purchases in the central bank balance sheet artificially keeps the asset prices up and does not prevent the (quite intransparent) risk transfer from one group of countries to another to occur. Finally, sterilization takes place in a setting of still ultra-lax monetary policies, i.e. of new liquidity-enhancing operations with unlimited allotment, and, hence, does not appear to be overly irrelevant. A credible strategy to deal with the financial crisis should deal primarily with the asset side of the ECB balance sheet. [...]<br /> |
| Keywords: | Accountability, bail-out, bond purchases, central bank independence, insolvency risk, Securities Markets Programme, transparency |
| JEL: | G32 E42 E51 E58 E63 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1040&r=mon |
| By: | Vasco Cúrdia; Michael Woodford |
| Abstract: | While many analyses of monetary policy consider only a target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We first extend a standard New Keynesian model to allow a role for the central bank’s balance sheet in equilibrium determination and then consider the connections between these alternative policy dimensions and traditional interest rate policy. We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, arguing that, according to our model, while the former is likely to be ineffective at all times, the latter can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times. |
| Keywords: | Banks and banking, Central ; Monetary policy ; Interest rates ; Bank reserves |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:463&r=mon |
| By: | Ippei Fujiwara; Nao Sudo; Tomoyuki Nakajima; Yuki Teranishi |
| Abstract: | In this paper we consider a two-country New Open Economy Macroeconomics model, and analyze the optimal monetary policy when countries cooperate in the face of a "global liquidity trap"--i.e., a situation where the two countries are simultaneously caught in liquidity traps. The notable features of the optimal policy in the face of a global liquidity trap are history dependence and international dependence. The optimality of history dependent policy is confirmed as in local liquidity trap. A new feature of monetary policy in global liquidity trap is whether or not a country's nominal interest rate is hitting the zero bound affects the target inflation rate of the other country. The direction of the effect depends on whether goods produced in the two countries are Edgeworth complements or substitutes. We also compare several classes of simple interest-rate rules. Our finding is that targeting the price level yields higher welfare than targeting the inflation rate, and that it is desirable to let the policy rate of each country respond not only to its own price level and output gap, but also to those in the other country. |
| Keywords: | Monetary policy - Mathematical models ; Liquidity (Economics) ; Inflation targeting ; Interest rates ; Price levels ; International trade |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:56&r=mon |
| By: | Christopher Gust; David Lopez-Salido |
| Abstract: | We use a DSGE model that generates endogenous movements in risk premia to examine the positive and normative implications of alternative monetary policy rules. As emphasized by the microfinance literature, variation in risk arises because households face fixed costs of transferring cash across financial accounts, implying that some households rebalance their portfolios infrequently. We show that the model can account for the mean returns on equity and the risk-free rate, and in line with empirical evidence generates a decline in the equity premium following an unanticipated easing of monetary policy. An important result that emerges from our analysis is that countercyclical monetary policy generates higher average welfare than constant money growth or zero inflation policies. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:999&r=mon |
| By: | Burton A. Abrams (Department of Economics,University of Delaware) |
| Abstract: | The financial crisis and recession of 2008-2010 have witnessed the biggest reduction in money-supply multipliers in U.S. history. In contrast to what occurred during the Great Depression, the Fed has avoided decreases in monetary aggregates by dramatically increasing the monetary base. A variation of the Bernanke-Blinder credit-view model is shown to reveal that holding the money supply constant following an autonomous fall in the money multiplier is insufficient to prevent aggregate demand from falling. This helps to explain the severity of the 2008-2010 recession despite growing monetary aggregates and expansionary fiscal policy |
| Keywords: | credit-view model, monetary policy, money-supply model |
| JEL: | F41 E51 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dlw:wpaper:10-05.&r=mon |
| By: | Martin Bodenstein; James Hebden; Ricardo Nunes |
| Abstract: | When the nominal interest rate reaches its zero lower bound, credibility is crucial for conducting forward guidance. We determine optimal policy in a New Keynesian model when the central bank has imperfect credibility and cannot set the nominal interest rate below zero. In our model, an announcement of a low interest rate for an extended period does not necessarily reflect high credibility. Even if the central bank does not face a temptation to act discretionarily in the current period, policy commitments should not be postponed. In reality, central banks are often reluctant to allow a recovery path with output and inflation temporarily above target. From the perspective of our model such a policy reflects a low degree of credibility. We find increased forecast uncertainty in inflation and the output gap at the zero lower bound while interest rate uncertainty is reduced. Furthermore, misalignments between announced interest rate paths and market expectations are found to be best explained by lack of credibility. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1001&r=mon |
| By: | Alessio Anzuini (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco J. Lombardi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Patrizio Pagano (Banca d’Italia, Via Nazionale 91, I-00184 Rome, Italy.) |
| Abstract: | Global monetary conditions have often been cited as a driving factor of commodity prices. This paper investigates the empirical relationship between US monetary policy and commodity prices by means of a standard VAR system, commonly used in analysing the effects of monetary policy shocks. The results suggest that expansionary US monetary policy shocks drove up the broad commodity price index and all of its components. While these effects are significant, they however do not appear to be overwhelmingly large. This finding is also confirmed under different identification strategies for the monetary policy shock. JEL Classification: E31, E40, C32. |
| Keywords: | Monetary policy Shock, Oil Price, VAR. |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101232&r=mon |
| By: | Steven B. Kamin |
| Abstract: | This paper reviews the available evidence and previous research on potential effects of financial globalization, that is, the international integration of financial markets. In particular, we address the questions: Has financial globalization materially increased the influence of external developments on domestic monetary conditions? And, has it reduced the influence of central banks over financial and economic conditions in their own country? We find that central banks with floating currencies retain the ability to independently determine short-term interest rates and thus influence broader financial conditions and macroeconomic performance in their economies. However, domestic financial conditions appear to have become more vulnerable to a wide range of external shocks, complicating the task of making appropriate monetary policy decisions. Moreover, the financial crisis has highlighted the importance of cross-border channels for the transmission of liquidity and credit shocks. With financial transactions increasingly being undertaken in vehicle currencies such as dollars and euros, the liquidity provision and the lender-of-last resort functions of many central banks are being challenged. Accordingly, international arrangements for liquidity provision may become increasingly important in the future. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1002&r=mon |
| By: | Rasmus Fatum |
| Abstract: | The Japanese zero-interest rate period provides a "natural experiment" for investigating the effectiveness and transmission channels of sterilized intervention when traditional monetary policy options are constrained. This paper takes advantage of the fact that all interventions in the JPY/USD market during the zero-interest rate period are sterilized sales of JPY and, therefore, none of these interventions can signal a future interest rate decrease. In order to further assess through which transmission channel these interventions work, the analysis integrates official daily Japanese intervention data with a comprehensive set of rumors data that capture interventions of which the market is aware. Market awareness is a necessary condition for intervention to disseminate information and work through channels other than the portfolio balance channel. The results of the time series analysis show that intervention, on average, induces a statistically and economically significant same-day depreciation of the JPY. Market awareness is shown to be unimportant. Consequently, the effects of Japanese interventions during the zero-interest rate period are consistent only with the portfolio balance channel. This is a remarkable finding, demonstrating that sterilized intervention is, in principle, an independent policy instrument. |
| Keywords: | Monetary policy - Japan ; Transmission mechanism (Monetary policy) ; Foreign exchange ; Financial markets ; Interest rates - Japan |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:57&r=mon |
| By: | Mohamed Daly Sfia |
| Abstract: | This paper investigates the possibility of constructing a composite leading indicator (CLI) of Tunisian inflation. For doing so, partial information about future inflation rate provided by a number of basic series is analyzed first. Based on the correlation analysis, a few of these basic series are chosen for construction of composite indicator. Empirical results show that the deviation from long‐term trend of two monetary aggregates (M1 and M3), short‐term interest rate (TMM), real effective exchange rate and crude petroleum production, are important leading indicators for inflation rate in Tunisia. Accordingly, based on monthly data on these basic series, one composite indicator is constructed and its performance is assessed by using turning point analysis, granger causality tests, and impulse response functions. The results indicate that our composite indicator is useful in anticipating changes in inflation rates in Tunisia. |
| Keywords: | Tunisia, Inflation, Leading indicators, Composite index |
| JEL: | E31 E32 E37 |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-980&r=mon |
| By: | John Lewis |
| Abstract: | This paper analyses how the financial crisis has affected task of meeting the Maastricht Criteria for the eight Central and Eastern European Countries which have yet to join the euro. It identifies the channels by which the crisis has fed through to deficits, debt, interest rates and inflation and seeks to provide numerical estimates of these factors. Deficits have worsened, but for most countries the problem is still primarily structural rather than cyclical. Debts have risen, but only in the cases of Latvia and Poland has the crisis changed the outlook for meeting the criterion. Inflation has fallen, particularly in the Baltic states on account of large output gap declines. The depth of the recession is likely to depress inflation rates for several years. Lastly, the interest rate criterion is more challenging because of the rise in spreads since the crisis. |
| Keywords: | New Member States; Convergence Criteria; Euro Adoption; Financial Crisis |
| JEL: | E61 E66 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:253&r=mon |
| By: | Aleksander Aristovnik; Matevz Meze |
| Abstract: | The main objective of the following article is to present the key findings of the existent research in the field of the influence the introduction of the euro had on the trade of the member states of the Economic and Monetary Union (EMU). The intention of this article is also to inspire further research (especially concerning the effect of the euro on the Slovene foreign trade). Recent empirical researches show that the trade among the members of the EMU has grown on average by 10–15 % due to the use of a common currency and there was also an increase in trade with the non-member states. The trade benefits of the entry of new countries into the EMU will thus not be the same as the benefits of the initial formation of the EMU in the nineties. This claim has been tested on the example of Slovenia. A regression analysis of time series shows that there has been a positive effect on Slovenia’s exports into and a negative effect on its imports from the eurozone precisely at the time of the creation of the EMU in 1999. |
| Keywords: | euro, foreign trade, Economic and monetary union (EMU), Slovenia, time series |
| JEL: | F13 F17 F30 |
| Date: | 2010–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-982&r=mon |
| By: | Libero Monteforte (Bank of Italy); Gianluca Moretti (Bank of Italy) |
| Abstract: | We present a mixed-frequency model for daily forecasts of euro area inflation. The model combines a monthly index of core inflation with daily data from financial markets; estimates are carried out with the MIDAS regression approach. The forecasting ability of the model in real-time is compared with that of standard VARs and of daily quotes of economic derivatives on euro area inflation. We find that the inclusion of daily variables helps to reduce forecast errors with respect to models that consider only monthly variables. The mixed-frequency model also displays superior predictive performance with respect to forecasts solely based on economic derivatives. |
| Keywords: | forecasting inflation, real time forecasts, dynamic factor models, MIDAS regression, economic derivatives |
| JEL: | C13 C51 C53 E37 G19 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_767_10&r=mon |
| By: | Pels (Institute for International Integration Studies, Trinity College Dublin); |
| Abstract: | The establishment of a monetary union in Europe in 1999 has eliminated exchange rate risk within the euro area and has led to a more unified financial framework. It has been established in the literature that the euro has led to a disproportional increase in bilateral asset holdings within the euro area. This paper builds on this evidence and answers the question whether this has been a one-off effect, or whether the euro effect in intra-euro area bilateral asset holdings has changed over time. We show, using a gravity framework, that the proportional increase in bilateral asset holdings took place in the early years of the European monetary union and was a unique event. The data used are bilateral data on equity and bond holdings, provided by the Coordinated Portfolio Investment Survey of the IMF for the years 1997, and 2001 until 2006. |
| Keywords: | international asset trade; gravity equation; euro |
| JEL: | F30 F36 F41 G11 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp331&r=mon |
| By: | Balazs Egert |
| Abstract: | This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel’s Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-makret service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistant and that commodity prices have a stronger effect on inflation in a higher inflation environment. |
| Keywords: | European Union, inflation, Balassa-Samuelson, real convergence,catching up, Bayesian model average, non-linearity. |
| JEL: | E43 E50 E52 C22 G21 O52 |
| Date: | 2010–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-991&r=mon |
| By: | Ellis W. Tallman; Jon R. Moen |
| Abstract: | We employ a new data set comprised of disaggregate figures on clearing house loan certificate issues in New York City to document how the dominant national banks were crucial providers of temporary liquidity during the Panic of 1907. Clearing house loan certificates were essentially “bridge loans” arranged between clearing house members. They enabled and were issued in anticipation of gold imports, which took a few weeks to arrive. The large, New York City national banks acted as private liquidity providers by requesting (and the New York Clearing House issuing) a volume of clearing house loan certificates beyond their own immediate liquidity needs, in accord with their role as central reserve city banks in the national banking system. |
| Keywords: | Financial crises - United States ; Lenders of last resort |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1010&r=mon |
| By: | Korap, Levent |
| Abstract: | In this paper, the determinants of the portfolio based capital flows are examined for the Turkish economy. Following the structural vector autoregression methodology, the estimation results reveal that the ‘push’ factors based on the external developments for the Turkish economy have a dominant role in explaining the behavior of the portfolio flows. Further, the domestic real interest rate as one of the main ‘pull’ factors has been found in a negative dynamic relationship with the portfolio flows. This result is attributed to that the dynamic course of the portfolio flows should not be related to the excess return possibilities of the real interest structure of the Turkish economy. |
| Keywords: | Portfolio Flows; SVAR Analysis; Turkish Economy; |
| JEL: | C32 G11 F32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24275&r=mon |