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on Monetary Economics |
| By: | Isabelle SALLE (GREThA, CNRS, UMR 5113); Murat YILDIZOGLU (GREThA, CNRS, UMR 5113); Marc-Alexandre SENEGAS (GREThA, CNRS, UMR 5113) |
| Abstract: | This paper investigates the performances of an inflation targeting regime in a learning economy, whose functioning is tackled through an Agent-Based Model (ABM). While the structure of our ABM has common features with that of the New Keynesian canonical modelling framework, we model individual agents\' forms of behaviour under procedural rationality in the sense of Simon (1971). Instead of assuming that they fully optimize on an intertemporal basis beforehand, and make use of rational expectations in that respect, agents are supposed to adopt economic forms of behaviour that are guided by simple rules of thumb -- or heuristics -- while a continuous learning process governs the evolution of those simple rules. Departures from the rational expectations equilibrium endogenously arise from those learning rules. Subsequently, the central bank implements an inflation targeting regime via a monetary policy rule. Our aim is to analyse the interplay between the learning mechanisms operating at the individual level, and the features and performances of the inflation targeting regime. In such a setting, we show the primary importance of the credibility of central bank announcements regarding macroeconomic stabilization outcomes, as well as the beneficial role played by the inflation target as an anchoring device for private inflation expectations. We also demonstrate the potential welfare cost of imperfect public information, and contribute to the debate on optimal monetary policy rule under uncertainty |
| Keywords: | inflation targeting; agent-based model; central bank communication; expectations; learning |
| JEL: | E52 E58 C63 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:grt:wpegrt:2012-15&r=mon |
| By: | Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College) |
| Abstract: | Over the last twenty-five years, a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies. In light of this work, the Federal Reserve’s recent policy of "quantitative easing," with its goal of affecting the supply of liquid assets, appears as a radical break from standard practice. Superlative (Divisia) measures of money, however, often help in forecasting movements in key macroeconomic variables, and the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary policy shocks. These results cast doubt on the adequacy of conventional models that focus on interest rates alone. They also highlight that all monetary disturbances have an important "quantitative" component, which is captured by movements in a properly measured monetary aggregate. |
| Keywords: | quantitative easing, interest rates, Divisia index, monetary policy |
| JEL: | E51 E52 E58 |
| Date: | 2012–06–18 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:801&r=mon |
| By: | Virginie Coudert; Cécile Couharde; Valérie Mignon |
| Abstract: | Although nominal parities have been completely fixed within the euro area since the launch of the single currency, real effective exchange rates have continued to vary under the effect of inflation disparities, exhibiting a strong appreciation in the peripheral countries. In this paper, we assess real exchange rate misalignments for euro area countries by using a Behavioral Equilibrium Exchange Rate (BEER) approach on the period 1980-2010. The results show that the peripheral member countries have been suffering from increasingly overvalued exchange rates since the mid-2000s, as their real appreciation has not stemmed from improving fundamentals in terms of productivity or external position. In addition, currency misalignments have been increased on average for all euro area countries since monetary union, while becoming more persistent. More worryingly, our findings highlight different patterns across members, as misalignments have been larger and more persistent in peripheral countries than in core countries. |
| Keywords: | euro area, real equilibrium exchange rates, misalignments, panel cointegration |
| JEL: | F31 C23 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-30&r=mon |
| By: | Hanif, M. Nadim; Khan, Mahmood ul Hassan |
| Abstract: | Market based implementation of monetary policy embeds a swift and complete pass-through of changes in policy rate to market interest rates. This impacts the lending and deposit rates (retail rates) of the banking system. Incomplete and slow pass-through impairs the effectiveness of monetary policy transmission mechanism. This study estimates the degree and the speed of interest rate pass-through in case of Pakistan. Monthly data on State Bank of Pakistan (SBP) policy rate, money market rates and banks’ retail lending/deposit rates from July 2001 to August 2011 is used to estimate an unrestricted autoregressive distributed lag (ARDL) model. The standard ARDL model allows for the estimation of an error correction model, which helps in differentiating short run impact of changes in policy rate from its long run impact on the banks’ lending rates. The results indicate that while there is a swift pass-through from the policy rate (T-bill rates and overnight rate) to money market rate, the impact of changes in money market rates on the bank deposit rates is not only sluggish, but also incomplete. However, banks’ lending rates on fresh loans are more responsive to changes in money market rates as the banks have the luxury to take into account the changes in opportunity cost of funding. |
| Keywords: | Policy Interest Rate; Market Interest Rate; Monetary Policy |
| JEL: | E52 |
| Date: | 2012–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39587&r=mon |
| By: | Mimir, Yasin; Sunel, Enes; Taskin, Temel |
| Abstract: | This paper conducts a quantitative investigation of the role of reserve requirements as a macroprudential policy tool. We build a monetary DSGE model with a banking sector in which (i) an agency problem between households and banks leads to endogenous capital constraints for banks in obtaining funds from households, (ii) banks are subject to time-varying reserve requirements that countercyclically respond to expected credit growth, (iii) households face cash-in-advance constraints, requiring them to hold real balances, and (iv) standard productivity and money growth shocks are two sources of aggregate uncertainty. We calibrate the model to the Turkish economy which is representative of using reserve requirements as a macroprudential policy tool recently. We also consider the impact of financial shocks that affect the net worth of financial intermediaries. We find that (i) the time-varying required reserve ratio rule countervails the negative effects of the financial accelerator mechanism triggered by adverse macroeconomic and financial shocks, (ii) in response to TFP and money growth shocks, countercyclical reserves policy reduces the volatilities of key real macroeconomic and financial variables compared to fixed reserves policy over the business cycle, and (iii) a time-varying reserve requirement policy is welfare superior to a fixed reserve requirement policy. The credit policy is most effective when the economy is hit by a financial shock. Time-varying required reserves policy reduces the intertemporal distortions created by the credit spreads at expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability. |
| Keywords: | Banking sector; time-varying reserve requirements; macroeconomic and financial shocks |
| JEL: | E51 E44 G28 G21 |
| Date: | 2012–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39613&r=mon |
| By: | Yunus Aksoy (University of London); Henrique S. Basso (University of Warwick) |
| Abstract: | We propose a model that delivers endogenous variations in term spreads driven primarily by banks’ portfolio decision and their appetite to bear the risk of maturity transformation. We first show that fluctuations of the future profitability of banks’ portfolios affect their ability to cover for any liquidity shortage and hence influence the premium they require to carry maturity risk. During a boom, profitability is increasing and thus spreads are low, while during a recession profitability is decreasing and spreads are high, in accordance with the cyclical properties of term spreads in the data. Second, we use the model to look at monetary policy and show that allowing banks to sell long-term assets to the central bank after a liquidity shock leads to a sharp decrease in long-term rates and term spreads. Such interventions have significant impact on long-term investment, decreasing the amplitude of output responses after a liquidity shock. The short-term rate does not need to be decreased as much and inflation turns out to be much higher than if no QE interventions were implemented. Finally, we provide macro and micro-econometric evidence for the U.S. confirming the importance of expected financial business profitability in the determination of term spread fluctuations |
| Keywords: | Yield Curve, Quantitative Easing, Maturity Risk, Bank Portfolio |
| JEL: | E43 E44 E52 G20 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1223&r=mon |
| By: | Olivier Coibion; Yuriy Gorodnichenko; Lorenz Kueng; John Silvia |
| Abstract: | We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy. |
| JEL: | E2 E3 E4 E5 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18170&r=mon |
| By: | Carlos A. Vegh; Guillermo Vuletin |
| Abstract: | Developing countries have typically pursued procyclical macroeconomic policies, which tend to amplify the underlying business cycle (the “when-it-rains-it-pours” phenomenon). There is, however, evidence to suggest that about a third of developing countries have shifted from procyclical to countercyclical fiscal policy over the last decade. We show that the same is true of monetary policy: around 35 percent of developing countries have become countercyclical over the last decade. We provide evidence that links procyclical monetary policy in developing countries to what we refer as the “fear of free falling;” that is, the need to raise interest rates in bad times to defend the domestic currency. |
| JEL: | E52 F41 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18175&r=mon |
| By: | Jaromir Baxa; Miroslav Plasil; Borek Vasicek |
| Abstract: | The purpose of this paper is to provide a novel look at the evolution of inflation dynamics in selected Central European (CE) countries. We use the lens of the New Keynesian Phillips Curve (NKPC) nested within a time-varying framework. Exploiting a time-varying regression model with stochastic volatility estimated using Bayesian techniques, we analyze both the closed and open-economy version of the NKPC. The results point to significant differences between the inflation processes in three CE countries. While inflation persistence has almost disappeared in the Czech Republic, it remains rather high in Hungary and Poland. In addition, the volatility of inflation shocks decreased quickly a few years after the adoption of inflation targeting in the Czech Republic and Poland, whereas it remains quite stable in Hungary even after ten years' experience of inflation targeting. Our results thus suggest that the degree of anchoring of inflation expectations varies across CE coutries. In addition, we found some evidence that the 'structural' parameters of the NKPC are somewhat related to the macroeconomic environment. |
| Keywords: | Bayesian model averaging, Central European countries, inflation dynamics, New Keynesian Phillips curve, time-varying parameter |
| JEL: | C11 C22 E31 E52 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2012/04&r=mon |
| By: | Pfajfar, D.; Santoro, E. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: This paper examines the nexus between news coverage on inflation and households' inflation expectations. In doing so, we test the epidemiological foundations of the sticky information model (Carroll, 2003, 2006). We use both aggregate and household-level data from the Survey Research Center at the University of Michigan. We highlight a fundamental disconnection between news on inflation, consumers' frequency of expectation updating and the accuracy of their expectations. Our evidence provides at best weak support to the epidemiological framework, as most of the consumers who update their expectations do not revise them towards professional forecasters' mean forecast. |
| Keywords: | Inflation;Survey Expectations;News;Information Stickiness. |
| JEL: | C53 D84 E31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2012048&r=mon |
| By: | Hanif, M. Nadim; Malik, Muhammad Jahanzeb; Iqbal, Javed |
| Abstract: | This study estimates degree of intrinsic inflation persistence in Pakistan using aggregate price index, group level price indices, and individual commodity prices. We find no evidence of a unit root in (MoM) inflation at any level, except for house rent. Using monthly data from 1959 to 2011 we find that the estimate of (overall) inflation persistence is 0.16, which is low but significant. During 2001-2011 (overall) inflation persistence is insignificant. Food inflation does not exhibit any persistence during the last decade. However, the degree of persistence is very high (0.80) and significant for core inflation (NFNE), which weakens slightly (to 0.69) when we account for commodities price shock of 2008. At micro level, the estimated degree of inflation persistence for various groups is found to be relatively higher, in almost 60 percent of the cases, compared to corresponding degree of persistence at aggregate level. This may be because in micro analysis we consider only those commodities for which the estimated degree of inflation persistence is significant. |
| Keywords: | Persistence; Inflation; Food Inflation; Core Inflation |
| JEL: | E31 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39583&r=mon |
| By: | Detzer, Daniel |
| Abstract: | This paper analyzes two instruments - asset-based reserve requirements put forward by Thomas Palley and asset-based capital requirements proposed by Charles Goodhart and Avinash Persaud - regarding their merits in reducing excessive asset price inflation. A theoretical framework of asset pricing based on the ideas of Keynes and Minsky is developed, within which the working of the instruments is demonstrated and analyzed. It is shown that in theory both instruments are able to reduce excessive asset price inflation by reducing the amount of credit money and investment flowing from financial institutions into a booming sector. It is found that asset-based reserve requirements will only work through a predictable price effect, while the effect of asset-based capital requirements is hard to predict and may even become a quantitative supply constraint. Hence, it is concluded that due to the higher predictability of asset-based reserve requirements those are more suitable for the task of tackling asset price bubbles. -- |
| Keywords: | Monetary Policy,Banking Regulation,Asset Prices,Bubbles,Minsky,Financial Instability Hypothesis,Asset Based Reserve Requirements,Capital Requirements,Macroprudential Regulation |
| JEL: | E12 E52 G12 G18 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ipewps:132012&r=mon |
| By: | Sergio Cesaratto |
| Abstract: | The European crisis appears as the n-th “this time is different” episode of the financial liberalisation sequence cum fixed exchange rates, capital flows from the centre to the periphery, housing bubble, current account (CA) deficit and indebtedness, default. In the author’s view, although Reinhart and Rogoff (2009) is not a satisfactory account of the history and nature of defaults, their title conveys the sense of a recurring pattern of unfortunate events. In this contribution the author examines some conventional and heterodox explanations that have been given for the nature of the balance of payments (BoP) disequilibrium of the Eurozone (EZ) members in relation also to the presumed German mercantilism. The paper discusses next two different interpretations of the causes of the rise in the sovereign spread of periphery countries: both do not clearly identify the nature of the EZ crisis as a BoP crisis. Finally, it focuses on the novel and controversial features of the EZ BoP crisis compared to previous experiences. These original tracts regard the role of the European Central Bank in refinancing banks in peripheral countries. |
| Keywords: | European Monetary Union, financial crisis, Germany, neo-mercantilism, Balance of payment, capital flows, sudden stops, TARGET 2, Monetary sovereignty, MMT, Sinn |
| JEL: | B11 N14 F1 F33 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:640&r=mon |
| By: | Gros, Daniel |
| Abstract: | Lax financial conditions can foster credit booms. The global credit boom of the last decade led to large capital flows across the world, including large movements of resources from the Northern countries of the euro area towards the Southern part. Since the start of the crisis and more markedly after 2009, these flows have suddenly stopped, creating severe adjustment pressures. This paper argues that, at this point, the common monetary policy can only try to mitigate the unavoidable adjustment by maintaining overall financial stability. The challenge is to strike a delicate balance between providing liquidity for solvent institutions while keeping the overall pressure on for a rapid correction of the imbalances. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:6865&r=mon |
| By: | Ray C. Fair (Cowles Foundation, Yale University) |
| Abstract: | In January 2012 the Fed began reporting ranges of its economic forecasts. The ranges, however, measure differences of opinion, not variances of economic forecasts. This paper discusses what the Fed could report in a world in which it used a single macroeconometric model to make its forecasts and guide its policies. Suggestions are then made as to what might be feasible for the Fed to report given that it is unlikely to be willing to commit to a single model. |
| Keywords: | Forecasting uncertainty, Fed policy |
| JEL: | E58 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1864&r=mon |
| By: | Kuikeu, Oscar |
| Abstract: | In cfa franc zone, the exchange rate was devalued, in 1994, in order to deal with the major macroeconomic imbalances that have affected the members during the 1980 decade. Thus, the aim of this paper is to know if this devaluation was relevant, and, in the sense that the devaluation is relevant only if the real exchange rate is overvalued, we will assess the degree of the real exchange rate misalignment in the cfa franc zone. |
| Keywords: | equilibrium real exchange rate, cfa franc zone |
| JEL: | C33 F31 |
| Date: | 2012–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39614&r=mon |
| By: | Gros, Daniel; Mayer, Thomas |
| Abstract: | Europe’s policy-makers are engaged in protracted discussion on whether and how to increase the size of the euro rescue funds (the EFSF and the ESM). In this Policy Brief, Daniel Gros and Thomas Mayer argue that this attention on the headline size of the EMS and EFSF is misplaced. They propose that a simpler solution would be to register the ESM as a bank, with access to the ECB under the same conditions as apply to any normal bank. This would provide a liquidity backstop for the EMS which could refinance any secondary market interventions at the ECB. The size of the guarantees given to the ESM would then become secondary. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:6787&r=mon |