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on Monetary Economics |
| By: | Bask, Mikael (Department of Economics); Proaño, Christian R (Department of Economics) |
| Abstract: | We show that a so-called expectations-based optimal monetary policy rule has desirable properties in a standard New Keynesian model augmented with a cost channel and inflation rate expectations that are partly backward-looking. In particular, optimal monetary policy under commitment is associated with a determinate rational expectations equilibrium that is stable under least squares learning for all parameter constellations considered, whereas, under discretion in policy-making, the central bank has to be sufficiently inflation rate averse for the rational expectations equilibrium to have the same properties. |
| Keywords: | Commitment; Cost Channel; Determinacy; Discretion; Inflation Inertia; Least Squares Learning; Optimal Monetary Policy |
| JEL: | C62 E52 |
| Date: | 2012–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2012_007&r=mon |
| By: | Marc P. Giannoni |
| Abstract: | This paper compares the properties of interest rate rules such as simple Taylor rules and rules that respond to price-level fluctuations—called Wicksellian rules—in a basic forward-looking model. By introducing appropriate history dependence in policy, Wicksellian rules perform better than optimal Taylor rules in terms of welfare and robustness to alternative shock processes, and they are less prone to equilibrium indeterminacy. A simple Wicksellian rule augmented with a high degree of interest rate inertia resembles a robustly optimal rule—that is, a monetary policy rule that implements the optimal plan and is also completely robust to the specification of exogenous shock processes. |
| Keywords: | Interest rates ; Inflation (Finance) ; Taylor's rule ; Price levels ; Monetary policy |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:546&r=mon |
| By: | Gustavo Adler; Camilo Ernesto Tovar Mora; Pedro Castro |
| Abstract: | Heavy foreign exchange intervention by central banks of emerging markets have lead to sizeable expansions of their balance sheets in recent years—accumulating foreign assets and non-money domestic liabilities (the latter due to sterilization operations). With domestic liabilities being mostly of short-term maturity and denominated in local currency, movements in domestic monetary policy interest rates can have sizable effects on central bank's net worth. In this paper we examine empirically whether balance sheet considerations influence the conduct of monetary policy. Our methodology involves the estimation of interest rate rules for a sample of 41 countries and testing whether deviations from the rule can be explained by a measure of central bank financial strength. Our findings, using linear and nonlinear techniques, suggests that central bank financial strength can be a statistically significant factor explaining large negative interest rate deviations from "optimal" levels. |
| Keywords: | Capital , Central banks , Developed countries , Emerging markets , Monetary policy , |
| Date: | 2012–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/60&r=mon |
| By: | Stefano Eusepi; Marc Giannoni; Bruce Preston |
| Abstract: | Under rational expectations, monetary policy is generally highly effective in stabilizing the economy. Aggregate demand management operates through the expectations hypothesis of the term structure: Anticipated movements in future short-term interest rates control current demand. This paper explores the effects of monetary policy under imperfect knowledge and incomplete markets. In this environment, the expectations hypothesis of the yield curve need not hold, a situation called unanchored financial market expectations. Whether or not financial market expectations are anchored, the private sector’s imperfect knowledge mitigates the efficacy of optimal monetary policy. Under anchored expectations, slow adjustment of interest rate beliefs limits scope to adjust current interest rate policy in response to evolving macroeconomic conditions. Imperfect knowledge represents an additional distortion confronting policy, leading to greater inflation and output volatility relative to rational expectations. Under unanchored expectations, current interest rate policy is divorced from interest rate expectations. This permits aggressive adjustment in current interest rate policy to stabilize inflation and output. However, unanchored expectations are shown to raise significantly the probability of encountering the zero lower bound constraint on nominal interest rates. The longer the average maturity structure of the public debt, the more severe is the constraint. |
| Keywords: | Monetary policy ; Rational expectations (Economic theory) ; Interest rates ; Inflation (Finance) |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:547&r=mon |
| By: | Brahima Coulibaly |
| Abstract: | During the 2008-2009 global financial crisis, emerging market economies (EMEs) loosened monetary policy considerably to cushion the shock. In previous crises episodes, by contrast, EMEs generally had to tighten monetary policy to defend the value of their currencies, to contain capital flight, and to bolster policy credibility. Our study aims to understand the factors that enabled this remarkable shift in monetary policy, and also to assess whether this marks a new era in which EMEs can now conduct countercyclical policy, more in line with advanced economies. The results indicate statistically significant linkages between some characteristics of the economies and their ability to conduct countercyclical monetary policy. We find that macroeconomic fundamentals and lower vulnerabilities, openness to trade, and international capital flows, financial reforms, and the adoption of inflation targeting all facilitated the conduct of countercyclical policy. Of these factors, the most important have been the financial reforms achieved over the past decades and the adoption of inflation targeting. As long as EMEs maintain these strong economic fundamentals, continue to reform their financial sector, and adopt credible and transparent monetary policy frameworks such as inflation targeting, the conduct of countercyclical monetary policy will likely be sustainable. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1042&r=mon |
| By: | Christian Bustamante; Luis E. Rojas |
| Abstract: | This paper propose indicator variables for the implementation of monetary policy in an inflation targeting regime. Using constant interest rate projections, the notion of a target-compatible interest rate is presented. This variable allows to extract some characteristics that the expected future path of the interest rate have to fulfill in order to be compatible with the target. The specific formulation of the target-compatible interest rate is presented under alternative assumptions over the forecasting horizon (unconditional or conditional forecasts) and the objective of the monetary authority (inflation target or a loss function). The empirical counterpart of the various formulations is shown using a DSGE model for Colombia; a small open economy with an inflation targeting regime. |
| Date: | 2012–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:009383&r=mon |
| By: | Nagayasu, Jun |
| Abstract: | It is often argued that an optimal currency area requires homogeneous regional inflation. However, previous empirical studies point out heterogeneity in sectoral inflation and geographical concentration of industries within a monetary union. It follows that there must be a difference in regional inflation in such a union. We examine this view using regional data from Japan which has experienced a period of rapid change in industrial structure, and show that economic structure is closely related to heterogeneous regional inflation. This study suggests that heterogeneous inflation can be a prevailing and long-lasting phenomenon in a monetary union. |
| Keywords: | Regional inflation; Monetary union; Optimal currency area; Industrial structure |
| JEL: | F4 R1 E5 |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37310&r=mon |
| By: | Adam, Klaus; Woodford, Michael |
| Abstract: | We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without restricting consideration a priori to a particular parametric family of candidate policy rules. We show that robustly optimal policy can be implemented through commitment to a target criterion involving only the paths of inflation and a suitably defined output gap, but that a concern for robustness requires greater resistance to surprise increases in inflation than would be considered optimal if one could count on the private sector to have “rational expectations.” |
| Keywords: | robust control , near-rational expectations , belief distortions , target criterion |
| JEL: | D81 D84 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:mnh:wpaper:29863&r=mon |
| By: | Gara Afonso; Ricardo Lagos |
| Abstract: | We develop a model of the market for federal funds that explicitly accounts for its two distinctive features: banks have to search for a suitable counterparty, and once they have met, both parties negotiate the size of the loan and the repayment. The theory is used to answer a number of positive and normative questions: What are the determinants of the fed funds rate? How does the market reallocate funds? Is the market able to achieve an efficient reallocation of funds? We also use the model for theoretical and quantitative analyses of policy issues facing modern central banks. |
| Keywords: | Federal funds market (United States) ; Econometric models ; Bank loans ; Federal funds rate ; Banks and banking, Central ; Monetary policy ; Over-the-counter markets |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:549&r=mon |
| By: | Volodymyr Vysochansky (Uzhhorod University) |
| Abstract: | World financial crisis unveiled the shaky state of modern monetary system, based on a centralized fiat money supply and fractional-reserve banking. The scale of the crisis and the threat of major inflation, which has already become a reality on commodities markets, confirm the instability of the monetary system. In order to discover weak spots of the system and consider possible solutions on how to remove them, it is necessary to revise the nature of its elements, first of all, money. The article is devoted to the issues of commodities backed money and approaches of its implementation. Model of unregulated money circulation, which is based on ETF technology and exchange infrastructure, is proposed as an incentive to stimulate discussion about possible improvement of the modern monetary system. |
| Keywords: | money, commodities, exchange traded funds, monetary system regulation |
| JEL: | E4 E5 G1 |
| Date: | 2012–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:nos:wuwpfi:vysochansky_volodymyr.52267-1&r=mon |
| By: | Hwee Kwan Chow (Asian Development Bank Institute (ADBI)) |
| Abstract: | Notwithstanding incumbency advantages and network effects enjoyed by the United States (US) dollar, considerations about the stability of its value have led Asian countries to fear they are holding their foreign exchange reserves in a depreciating currency. At the same time, it pays for the regional countries to adjust their reserve currency composition to match the point of reference of their exchange rate policy. This paper examines empirically which regional currency or currencies seem to matter for exchange rate determination in Asia beyond the very short term. To this end, we employ country-specific Vector Autoregressive (VAR) models to compare the relative impact which fluctuations in the Asian Currency Unit (ACU), yuan, and yen separately have on movements of Asian currencies. Contrary to recent evidence based on daily data, we found monthly exchange rates variations in the region are more heavily influenced by the cumulative effect of key Asian currencies than by the yuan or the yen individually within the sample period we used. To the extent that exchange rates in the region shift over time from benchmarking the US dollar towards a broad range of Asian currencies, Asian central banks will find it more attractive to cross-hold Asian bonds. This calls for the development of deep private markets in such assets, as well as institutional prerequisites for internationalizing key regional currencies. |
| Keywords: | foreign exchange reserves, exchange rate determination, Asia, Yuan, Yen, monthly exchange rates variation, benchmarking |
| JEL: | F31 F33 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23251&r=mon |
| By: | Ramon Marimon; Juan Pablo Nicolini; Pedro Teles |
| Abstract: | We study the interplay between competition and trust as efficiency-enhancing mechanims in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on effciency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good. |
| Keywords: | Currency competition; Trust; Inflation |
| JEL: | E40 E50 E58 E60 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2011/24&r=mon |
| By: | Olivier Armantier; Scott Nelson; Giorgio Topa; Wilbert van der Klaauw; Basit Zafar |
| Abstract: | Understanding the formation of consumer inflation expectations is considered crucial for managing monetary policy. This paper investigates how consumers form and update their inflation expectations using a unique “information” experiment embedded in a survey. We first elicit respondents’ expectations for future inflation either in their own consumption basket or for the economy overall. We then randomly provide a subset of respondents with inflation-relevant information: either past-year food price inflation, or a median professional forecast of next-year overall inflation. Finally, inflation expectations are re-elicited from all respondents. This design creates unique panel data that allow us to identify the effects of new information on respondents’ inflation expectations. We find that respondents revise their inflation expectations in response to information, and do so meaningfully: revisions are proportional to the strength of the information signal, and inversely proportional to the precision of prior inflation expectations. We also find systematic differences in updating across demographic groups and by question wording, underscoring how different types of information may be more or less relevant for different groups, and how the observed impact of information may depend on methods used to elicit inflation expectations. |
| Keywords: | Inflation (Finance) ; Consumer behavior ; Information theory ; Consumer surveys |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:543&r=mon |
| By: | Alessio Anzuini (Bank of Italy); Marco J. Lombardi (European Central Bank); Patrizio Pagano (Bank of Italy) |
| Abstract: | Global monetary conditions are often cited as a driver 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 drive up the broad commodity price index and all of its components. While these effects are significant, they do not, however, appear to be overwhelmingly large. This finding is confirmed under different identification strategies for the monetary policy shock. |
| Keywords: | monetary policy shock, oil prices, VAR |
| JEL: | E31 E40 C32 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_851_12&r=mon |
| By: | Carlos Carvalho; Fernanda Nechio |
| Abstract: | We combine questions from the Michigan Survey about the future path of prices, interest rates, and unemployment to investigate whether U.S. households are aware of the so-called Taylor (1993) rule. For comparison, we perform the same analysis using questions from the Survey of Professional Forecasters. Our findings support the view that some households form their expectations about the future path of interest rates, inflation, and unemployment in a way that is consistent with Taylor-type rules. The extent to which this happens, however, does not appear to be uniform across income and education levels. In particular, we find evidence that the relationship between unemployment and interest rates is not properly understood by households in the lowest income quartile, and by those with no high school diploma. We also find evidence that the perceived effect of unemployment on interest rates is asymmetric, being relevant only for interest-rate decreases. Finally, we argue that the relationships we uncover can be given a causal interpretation. |
| Keywords: | Monetary policy |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2012-01&r=mon |
| By: | L. GAMBACORTA; B. HOFMANN; G. PEERSMAN |
| Abstract: | This paper assesses the macroeconomic effects of unconventional monetary policy by estimating a panel VAR with monthly data from eight advanced economies over a sample spanning the period since the onset of the global nancial crisis. The results suggest that an exogenous increase in central bank balance sheets at the zero lower bound leads to a temporary rise in economic activity and consumer prices. The re- sponse pattern of output is thus very similar to that usually found for interest rate shocks, while the reaction of the price level is less persistent. Looking at individual country results reveals that the e¤ects of balance sheet shocks are very similar across countries. |
| Keywords: | unconventional monetary policy, zero lower bound, panel VARs |
| JEL: | C32 E30 E44 E51 E52 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:11/765&r=mon |
| By: | Eiji Ogawa (Asian Development Bank Institute (ADBI)); Junko Shimizu |
| Abstract: | Regional monetary and financial cooperation in Asia has been discussed for years. To move towards a coordinated exchange rate policy, Ogawa and Shimizu (2005) proposed both an Asian Monetary Unit (AMU), which is a common currency basket computed as a weighted average of the thirteen ASEAN+3 currencies, and AMU Deviation Indicators (AMU DIs), which indicates the deviation of each Asian currency in terms of the AMU compared with the benchmark rate. The AMU and the AMU DIs are considered both as surveillance measures under the Chiang Mai Initiative and as benchmarks for coordinated exchange rate policies among Asian countries. In this paper, the authors show that monitoring the AMU and the AMU DIs plays an important role in the regional surveillance process under the Chiang Mai Initiative. By using daily and monthly data of AMU and AMU DIs for the period from January 2000 to June 2010, which are available from the website of the Research Institute of Economy, Trade, and Industry (RIETI), they examine their usefulness as a surveillance indicator. Our studies of AMU and AMU DIs confirm the following : first, an AMU peg system stabilizes the nominal effective exchange rate (NEER) of each Asian country. Second, the AMU and the AMU DIs could signal overvaluation or undervaluation for each of the Asian currencies. Third, trade imbalances within the region have been growing as the AMU DIs have been widening. Fourth, the AMU DIs could predict huge capital inflows and outflows for each Asian country. The above findings support the usefulness of using the AMU and the AMU DIs as surveillance indicators for monetary cooperation in Asia. |
| Keywords: | Asian Monetary Unit, Monetary cooperation, Asia, regional financial cooperation, Asian currencies |
| JEL: | F31 F33 F36 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23261&r=mon |
| By: | Cheick Kader M'Baye (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon) |
| Abstract: | Under what conditions should a central bank adopt an inflation targeting regime ? This is the main question we address in this paper. A large part of the literature puts forward that these regimes should have to be adopted, as they yield higher macroeconomic performances. We analyze the issue of optimal inflation targeting in a new theoretical framework, which conciliates the interaction between the degree of price stickiness, and the degree of strategic complementarities in fi-rms' price setting. We show that adopting a target for inflation, crucially depends on the sequential but complementary importance of the model's parameters. In particular, we show that strategic complementarities appear to be the fi-rst driving force. When they are low, the central bank must adopt an inflation targeting regime whatever the importance of other parameters in the model. By contrast, when the degree of strategic complementarities is high, adopting a target for in ation depends on both the degree of price stickiness and the precision of central bank's information about the fundamentals of the economy. When prices are exible enough, adopting an inflation target is never optimal. However, when prices are strongly sticky, and the central bank holds precise information about the fundamentals, the central bank should adopt an explicit target for inflation. |
| Keywords: | Inflation targeting ; price stickiness ; heterogeneous information ; strategic complementarities |
| Date: | 2012–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00677671&r=mon |
| By: | Eiji Ogawa (Asian Development Bank Institute (ADBI)); Junko Shimizu |
| Abstract: | Regional monetary and financial cooperation in Asia has been discussed for years. To move towards a coordinated exchange rate policy, Ogawa and Shimizu (2005) proposed both an Asian Monetary Unit (AMU), which is a common currency basket computed as a weighted average of the thirteen ASEAN+3 currencies, and AMU Deviation Indicators (AMU DIs), which indicates the deviation of each Asian currency in terms of the AMU compared with the benchmark rate. The AMU and the AMU DIs are considered both as surveillance measures under the Chiang Mai Initiative and as benchmarks for coordinated exchange rate policies among Asian countries. In this paper, the authors show that monitoring the AMU and the AMU DIs plays an important role in the regional surveillance process under the Chiang Mai Initiative. By using daily and monthly data of AMU and AMU DIs for the period from January 2000 to June 2010, which are available from the website of the Research Institute of Economy, Trade, and Industry (RIETI), they examine their usefulness as a surveillance indicator. Our studies of AMU and AMU DIs confirm the following : first, an AMU peg system stabilizes the nominal effective exchange rate (NEER) of each Asian country. Second, the AMU and the AMU DIs could signal overvaluation or undervaluation for each of the Asian currencies. Third, trade imbalances within the region have been growing as the AMU DIs have been widening. Fourth, the AMU DIs could predict huge capital inflows and outflows for each Asian country. The above findings support the usefulness of using the AMU and the AMU DIs as surveillance indicators for monetary cooperation in Asia. |
| Keywords: | Asian Monetary Unit, Monetary cooperation, Asia, regional financial cooperation, Asian currencies |
| JEL: | F31 F33 F36 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23261&r=mon |
| By: | Hafedh Bouakez; Aurélien Eyquem |
| Abstract: | A robust prediction across a wide range of open-economy macroeconomic models is that an unanticipated increase in public spending in a given country appreciates it currency in real terms. This result, however, contradicts the findings of a number of recent empirical studies, which instead document a significant and persistent depreciation of the real exchange rate following an expansionary government spending shock. In this paper, we rationalize the findings of the empirical literature by proposing a small-open-economy model that features three key ingredients: incomplete and imperfect international financial markets, sticky prices, and a not-too-aggressive monetary policy. The model predicts that in response to an unexpected increase in public expenditures, the effective long-term real interest rate falls, causing the real exchange rate to depreciate. We establish this result both analytically, within a special version of the model, and numerically for the more general case. |
| Keywords: | Incomplete markets, monetary policy, public spending shocks, real exchange rate, small open economy, sticky prices |
| JEL: | F31 F41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1212&r=mon |
| By: | Shahin Vallée |
| Abstract: | As Chinaâ??s economic might grows, its standing and that of its currency in the international monetary system become increasingly pressing issues. The crisis seems to have reminded the Chinese authorities of the dangers of a unipolar monetary system, and they have therefore accelerated their plans to internationalise the renminbi (RMB). The goal of this internationalisation strategy is not clear and China has not defined publicly the monetary system it aims to achieve. Nevertheless, there are more and more signs that the internationalisation of the RMB is progressing, notwithstanding major challenges. Conventional wisdom and the majority of the literature posits that the RMB will not succeed in its internationalisation process until China fully opens its capital and financial accounts, makes its exchange rate flexible and liberalises its financial sector. These three obstacles are real but circumventable. However, if China's internationalisation strategy follows a path that concentrates on overcoming immediate challenges in order to raise the status of the RMB to that of a second-tier world currency, the Chinese authorities will still have to undertake substantial reforms if they intend to place the RMB on a footing comparable to the dollar or the euro. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:715&r=mon |
| By: | Dietrich Domanski (Asian Development Bank Institute (ADBI)); Philip Turner |
| Abstract: | In mid-September 2008, following the bankruptcy of Lehman Brothers, international interbank markets froze and interbank lending beyond very short maturities virtually evaporated. Despite massive central bank support operations and purchases of key assets, many financial markets remained impaired for a long time. Why was this funding crisis so much worse than other past major bank failures and why has it proved so hard to cure? This paper suggests that much of that answer lies in the balance sheets of international banks and their customers. It outlines the basic building blocks of liquidity management for a bank that operates in many currencies and then discusses how the massive development of foreign exchange (forex) and interest rate derivatives markets transformed banks’ strategies in this area. It explains how the pervasive interconnectedness between major banks and markets magnified contagion effects. Finally, the paper provides some recommendations for how strategic borrowing choices by international banks could make them more stable and how regulators could assist in this process. |
| Keywords: | liquidity freeze, international banking, liquidity management, derivatives markets |
| JEL: | E44 G01 G15 G18 G24 G28 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23245&r=mon |
| By: | Joshua Chan (College of Business and Economics, Australian National University); Gary Koop (Department of Economics, University of Strathclyde); Simon Potter (Federal Reserve Bank of New York) |
| Abstract: | This paper introduces a new model of trend (or underlying) inflation. In contrast to many earlier approaches, which allow for trend inflation to evolve according to a random walk, ours is a bounded model which ensures that trend inflation is constrained to lie in an interval. The bounds of this interval can either be fixed or estimated from the data. Our model also allows for a time-varying degree of persistence in the transitory component of inflation. The bounds placed on trend inflation mean that standard econometric methods for estimating linear Gaussian state space models cannot be used and we develop a posterior simulation algorithm for estimating the bounded trend inflation model. In an empirical exercise with CPI inflation we find the model to work well, yielding more sensible measures of trend inflation and forecasting better than popular alternatives such as the unobserved components stochastic volatility model. |
| Keywords: | Constrained inflation, non-linear state space model, underlying inflation, inflation targeting, inflation forecasting, Bayesian |
| JEL: | E31 E37 C11 C53 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:str:wpaper:1202&r=mon |
| By: | Eric T. Swanson; John C. Williams |
| Abstract: | The zero lower bound on nominal interest rates has constrained the Federal Reserve’s setting of the overnight federal funds rate for over three years running. According to many macroeconomic models, such an extended period of being stuck at the zero bound has important implications for the effectiveness of monetary and fiscal policies. However, economic theory also implies that households’ and firms’ decisions depend on the entire path of expected future short-term interest rates, not just the current level of the overnight rate. Thus, interest rates with a year or more to maturity are arguably the most relevant for the private sector, and it is unclear to what extent the zero lower bound has affected those rates. In this paper, we propose a novel approach to measure when and to what extent the zero lower bound affects interest rates of any maturity. We compare the sensitivity of interest rates of various maturities to macroeconomic news during periods when short-term interest rates are very low to that during normal times. We find that yields on Treasury securities with six months or less to maturity have been strongly affected by the zero bound during most or all of the period when the federal funds rate was near zero. In stark contrast to this finding, yields with more than two years to maturity have responded to economic news during the past three years in their usual way. One- and two-year Treasury yields represent an intermediate case, being partially constrained by the zero bound over part of the period when the funds rate was near zero. We provide two explanations for these results. First, market participants have consistently expected the zero bound to constrain policy for only about a year into the future, minimizing its effect on longer-term yields. Second, the Federal Reserve’s unconventional policy actions may be offsetting the effects of the zero bound on longer-term yields. |
| Keywords: | Interest rates ; Monetary policy ; Fiscal policy |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2012-02&r=mon |
| By: | Yung Chul Park (Asian Development Bank Institute (ADBI)) |
| Abstract: | This paper analyzes the role and scope of macroprudential policy in preventing financial instability in the context of East Asian economies. It analyzes the behavior of the housing market in a dynamic setting to identify some of the factors responsible for the volatility of housing markets and their susceptibility to boom-bust cycles, which it identifies as a key source of financial imbalances in these economies. It then discusses the causal nexus between price and financial stability and the roles and complementary nature of macroprudential and monetary policies in addressing aggregate risk in the financial system. The paper identifies currency and maturity mismatches, which contributed to the 1997–1998 Asian financial crisis, as ongoing concerns in these economies although the high levels of reserves in the region now act as a buffer. |
| Keywords: | Macroprudential Policy, Financial Stability, East Asia, Emerging Markets, monetary policy |
| JEL: | E52 E58 G01 G15 G28 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23252&r=mon |
| By: | Joshua Aizenman (Asian Development Bank Institute (ADBI)); Yothin Jinjarak; Donghyun Park |
| Abstract: | Motivated by the unprecedented rise of swap agreements between the central banks of developed economies and their developing economy counterparts, this paper evaluates Asian swap arrangements and their association with the build-up of foreign reserves prior to the 2008–2009 global financial crisis. The evidence suggests that there is a limited scope for swaps to substitute for reserves. Furthermore, the selectivity of the swap lines indicates that only countries with significant trade and financial linkages can expect access to such ad hoc arrangements, on a case by case basis. Moral hazard concerns suggest that the applicability of these arrangements will remain limited. However, deepening swap agreements and regional reserve pooling arrangements may weaken the precautionary motive for reserve accumulation. |
| Keywords: | Swaps, swap agreements, central banks, Asia, foreign reserves, global financial crisis, dollar standards |
| JEL: | F15 F31 F32 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23239&r=mon |
| By: | Carlos Madeira; Basit Zafar |
| Abstract: | Using the panel component of the Michigan Survey of Consumers, we show that individuals, in particular women and ethnic minorities, are highly heterogeneous in their expectations of inflation. We estimate a model of inflation expectations based on learning from experience that also allows for heterogeneity in both private information and updating. Our model vastly outperforms existing models of inflation expectations in explaining the heterogeneity in the data. We find that women, ethnic minorities, and less educated agents have a higher degree of heterogeneity in their private information, and are also slower to update their expectations. In addition, we show that personal income forecasts are positively related to subjective inflation expectations. During the 2000s, consumers believe inflation to be more persistent in the short term, but temporary fluctuations in inflation have less effect on income and long-term inflation expectations. Finally, we find evidence that sticky expectations and the heterogeneity of new information received by consumers generate higher mark-ups and inflation. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:536&r=mon |
| By: | Domenico Giannone; Michèle Lenza; Lucrezia Reichlin |
| Abstract: | This paper uses a data-set including time series data on macroeconomic variables, loans, deposits and interest rates for the euro area in order to study the features of financial intermediation over the business cycle. We find that stylized facts for aggregate monetary and real variables are re- markably similar to what has been found for the US by many studies while we uncover new facts on disaggregated loans and deposits. During the crisis the cyclical behavior of short term interest rates, loans and deposits remain stable but we identify unusual dynamics of longer term loans, deposits and longer term interest rates. |
| Keywords: | Money; Loans; Non-financial corporations; Monetary policy; euro area |
| JEL: | E32 E51 E52 C32 C51 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/112202&r=mon |
| By: | Olesya V. Grishchenko; Jing-zhi Huang |
| Abstract: | ``Inflation-indexed securities would appear to be the most direct source of information about inflation expectations and real interest rates" (Bernanke, 2004). In this paper we study the term structure of real interest rates, expected inflation and inflation risk premia using data on prices of Treasury Inflation Protected Securities (TIPS) over the period 2000-2008. The approach we use to estimate inflation risk premium is arbitrage free, largely model free, and easy to implement. We also make distinction between TIPS yields and real yields and take into account explicitly the three-month indexation lag of TIPS in the analysis. In addition, we propose a new liquidity measure based on TIPS prices. Accounting for it, we find that the inflation risk premium is time-varying: it is negative (positive) in the first (second) half of the sample period. The average 10-year inflation risk premium ranges from -16 to 10 basis points over the full sample depending on the proxy used for expected inflation. More specifically, the estimates of the 10-year inflation risk premium range between 14 and 19 basis points for 2004-2008 period. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-06&r=mon |
| By: | G. PEERSMAN |
| Abstract: | I estimate the impact of different types of bank lending shocks on the euro area economy. I first show that the dynamic effects depend on the type of shock. Whereas surges in lending caused by shocks at the supply side of the banking market have a significant positive impact on economic activity and inflation, exactly the opposite is the case for exogenous lending demand shocks. Second, the macroeconomic relevance of bank lending shocks is considerable. Overall, they account for more than half of output variation since the launch of the euro and up to 75 percent of long-run consumer prices variability. The majority of the fluctuations are caused by innovations to lending supply which are orthogonal to monetary policy. A more detailed inspection suggests that these innovations are mainly the result of shocks in the risk-taking appetite of banks triggered by shifts in long-term interest rates or the term spread. Specifically, when long-term government bond yields decline, banks reduce the volume of government loans and securities on their balance sheets whilst increasing the supply of loans to the private sector, which in turn boosts economic activity, inflation and short-run interest rates. Hence, in contrast to conventional wisdom, a falling term spread could predict rising economic activity, which has been the case for some periods within the sample. |
| Keywords: | Bank lending shocks, risk-taking, SVARs |
| JEL: | C32 E30 E44 E51 E52 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:11/766&r=mon |
| By: | Teodora Paligorova; João A. C. Santos |
| Abstract: | In an investigation of banks’ loan pricing policies in the United States over the past two decades, this study finds supporting evidence for the bank risk-taking channel of monetary policy. We show that banks charge lower spreads when they lend to riskier borrowers relative to the spreads they charge on loans to safer borrowers in periods of low short-term rates compared to periods of high short-term rates. The interest discount that banks offer riskier borrowers when short-term rates are low is robust to borrower-, loan-, and bank-specific factors as well as to macroeconomic factors known to affect loan rates. The discount is also robust to bank-firm fixed effects. Finally, our tests that build on the micro information banks provide on their lending standards in the Senior Loan Officers Opinion Survey suggest the interest rate discount that riskier borrowers receive when short-term rates are low is bank driven. |
| Keywords: | Financial institutions; Monetary policy framework |
| JEL: | G21 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-10&r=mon |
| By: | Rene TAPSOBA (Centre d'Etudes et de Recherches sur le Développement International); Jean-Louis COMBES (Centre d'Etudes et de Recherches sur le Développement International); Nasser ARY TANIMOUNE (Université Ottawa) |
| Abstract: | This article examines the influence of Policy Mix coherence in Economic Community of West African States (ECOWAS). The paper innovates in two ways. First, through an interaction between the monetary conditions index and the primary structural fiscal balance, we highlight coherence-type complementarities between monetary policy and fiscal policy with regard to their effects on economic activity. Second, we show that the influence of the coherence of policy mix on the effect of monetary policy is different according to the stance of the economy within the four possible regimes of policy mix, mostly in the WAEMU subsample, where integration is deeper than in the non-WAEMU countries, thanks to the common currency (the Franc CFA) they share. The analysis is based upon a panel dataset from 1990 to 2006 and remains robust to alternative specifications used to calculate the monetary conditions index. Our results contribute to the debate regarding the prospect of an ECOWAS-wide common currency. Indeed, given the heterogeneity in the economic structure of its members States, more policy mix coherence seems necessary to avoid unexpected impacts of monetary policy on economic activity. |
| Keywords: | Policy Mix, Structural Fiscal Balance, Monetary Conditions Index, Economic Community of West African States. |
| JEL: | O55 E63 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cdi:wpaper:1340&r=mon |
| By: | Alex Segura-Ubiergo |
| Abstract: | This paper highlights that real interest rates in Brazil have declined substantially over time, but are still well above the average of emerging market inflation targeting regimes. The adoption of an inflation-targeting regime and better economic fundamentals (reduction in inflation volatility and improvements in the fiscal and external positions) has helped Brazil sustain significantly lower real interest rates than in the past. Going forward, the paper shows that Brazil can converge towards lower equilibrium real interest rates if domestic savings increase to the level of other emerging market countries. The effect is particularly pronounced if the increase in domestic savings is achieved through higher levels of public savings. Still, econometric results suggest that, controlling for everything else in the model, real interest rates in Brazil are about two full percentage points higher than in other countries in the sample, suggesting that there are still Brazil-specific factors that have not been captured by the empirical analysis. Some of these factors may include credit market segmentation and inflation inertia generated by still pervasive indexation practices. |
| Keywords: | Emerging markets , Inflation targeting , Interest rates , Monetary policy , |
| Date: | 2012–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/62&r=mon |
| By: | Josef T. Yap (Asian Development Bank Institute (ADBI)) |
| Abstract: | Many have argued that the major source of the existing global macroeconomic imbalances are the twin deficits of the United States (US). However, there is still a debate about whether the global imbalances indeed pose a significant threat to the world economy. This matter is settled by arguing that the global imbalances acted as a “handmaiden†to the 2008 financial crisis. One way to reduce global imbalances is to reform the international monetary system and reduce the role of the US dollar as a reserve currency. Robert Triffin was one of those critical of this “exorbitant†privilege granted to the US, which makes it both a system maker and privilege taker. The Triffin Dilemma captures the fundamental instability that underlies the dollar reserve system. However, there are major obstacles to this proposal. Some analysts including Triffin cited the US security umbrella as the primary reason the US and its major allies would want to retain the role of the dollar in global trade and finance despite the underlying inequities in the system. This is related to the imbalance in global governance which is largely US-centric. The imbalance in global governance is also reflected in the dominance of the US financial system brought about by the “first-mover advantageâ€. Because of the inertia brought about by the imbalance in global governance, economic arguments to reform the international monetary system are likely to be trumped by political reality. The paper analyzes whether current efforts in East Asia in terms of financial and monetary cooperation and rebalancing of economic growth could significantly mitigate the adverse impacts of a global system that will still be dominated by the US dollar in the foreseeable future. It also explains why the People’s Republic of China (PRC) is unlikely to make significant unilateral adjustments to reduce global macroeconomic imbalances. |
| Keywords: | The role of the US dollars, global macroeconomic imbalances, the twin deficits, the US |
| JEL: | F31 F33 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23234&r=mon |
| By: | Saroj Bhattara (Penn State University); Gauti Eggertsso; Raphael Schoenle (Department of Economics, Brandeis University) |
| Abstract: | We study the implications of increased price flexibility on aggregate output volatility in a dynamic stochastic general equilibrium (DSGE) model. First, using a simplified version of the model, we show analytically that the results depend on the shocks driving the economy and the systematic response of monetary policy to inflation: More flexible prices amplify the effect of demand shocks on output if interest rates do not respond strongly to inflation, while higher flexibility amplifies the effect of supply shocks on output if interest rates are very responsive to inflation. Next, we estimate a medium-scale DSGE model using post-WWII U.S. data and Bayesian methods and, conditional on the estimates of structural parameters and shocks, ask: Would the U.S. economy have been more or less stable had prices been more flexible than historically? Our main finding is that increased price flexibility would have been destabilizing for output and employment. |
| Keywords: | Increased price exibility, Aggregate volatility, Systematic monetary policy, DSGE model, Bayesian estimation |
| JEL: | D58 E31 E32 E52 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:brd:wpaper:41&r=mon |
| By: | Josef T. Yap (Asian Development Bank Institute (ADBI)) |
| Abstract: | Many have argued that the major source of the existing global macroeconomic imbalances are the twin deficits of the United States (US). However, there is still a debate about whether the global imbalances indeed pose a significant threat to the world economy. This matter is settled by arguing that the global imbalances acted as a “handmaiden†to the 2008 financial crisis. One way to reduce global imbalances is to reform the international monetary system and reduce the role of the US dollar as a reserve currency. Robert Triffin was one of those critical of this “exorbitant†privilege granted to the US, which makes it both a system maker and privilege taker. The Triffin Dilemma captures the fundamental instability that underlies the dollar reserve system. However, there are major obstacles to this proposal. Some analysts including Triffin cited the US security umbrella as the primary reason the US and its major allies would want to retain the role of the dollar in global trade and finance despite the underlying inequities in the system. This is related to the imbalance in global governance which is largely US-centric. The imbalance in global governance is also reflected in the dominance of the US financial system brought about by the “first-mover advantageâ€. Because of the inertia brought about by the imbalance in global governance, economic arguments to reform the international monetary system are likely to be trumped by political reality. The paper analyzes whether current efforts in East Asia in terms of financial and monetary cooperation and rebalancing of economic growth could significantly mitigate the adverse impacts of a global system that will still be dominated by the US dollar in the foreseeable future. It also explains why the People’s Republic of China (PRC) is unlikely to make significant unilateral adjustments to reduce global macroeconomic imbalances. |
| Keywords: | The role of the US dollars, global macroeconomic imbalances, the twin deficits, the US |
| JEL: | F31 F33 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:eab:govern:23234&r=mon |