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on Monetary Economics |
| By: | Emi Nakamura; Jón Steinsson |
| Abstract: | We provide new evidence on the responsiveness of real interest rates and inflation to monetary shocks. Our identifying assumption is that the increase in the volatility of interest rate news in a 30-minute window surrounding scheduled Federal Reserve announcements arises from news about monetary policy. Real and nominal yields and forward rates at horizons out to 3 years move close to one-for-one at these times implying that changes in expected inflation are small. At longer horizons, the response of expected inflation grows. Accounting for "background noise" in interest rates is crucial in identifying the effects of monetary policy on interest rates, particularly at longer horizons. We use structural macroeconomic models to show that the impact of changes in real interest rates on output is small or the impact of changes in output on prices is small or both. Furthermore, our evidence points towards substantial inflation inertia. |
| JEL: | E30 E40 E50 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19260&r=mon |
| By: | Asongu , Simplice A |
| Abstract: | We analyze the effects of monetary policy on economic activity in the proposed African monetary unions. Findings broadly show that: (1) but for financial efficiency in the EAMZ, monetary policy variables affect output neither in the short-run nor in the long-term and; (2) with the exception of financial size that impacts inflation in the EAMZ in the short-term, monetary policy variables generally have no effect on prices in the short-run. The WAMZ may not use policy instruments to offset adverse shocks to output by pursuing either an expansionary or a contractionary policy, while the EAMZ can do with the ‘financial allocation efficiency’ instrument. Policy implications are discussed. |
| Keywords: | Monetary Policy; Banking; Inflation; Output effects; Africa |
| JEL: | E51 E52 E58 E59 O55 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48496&r=mon |
| By: | Diogo Guillen (Princeton University); Wei Cui (Princeton University) |
| Abstract: | Should monetary policy react to asset prices levels and changes? In answering this question, we provide a tractable monetary Ramsey approach for a heterogeneous agents model with conventional policy (interest rate or money growth target) and unconventional policy (purchase of private illiquid assets) as instruments, in which heterogeneous agents' interaction is summarized in one implementability condition. We show that entrepreneurs hold too much liquid asset in a model with equity issuance and resale (liquidity) constraints. In the steady state, optimal policy involves paying interest on liquid assets or reducing the money supply available, leading to an equivalent increase of .40% in permanent consumption compared to the economy with no policy. In responding to liquidity shocks, the paths of macroeconomic variables under no policy and optimal policy are sharply different and suggest the need for policy on changing the rate of return on liquid assets. Finally, we prove that the unconventional policy dominates the conventional counterpart, but, quantitatively, the welfare difference of them is negligible. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:1106&r=mon |
| By: | Leonardo Gambacorta; Federico M Signoretti |
| Abstract: | The global financial crisis has reaffirmed the importance of financial factors for macroeconomic fluctuations. Recent work has shown how the conventional pre-crisis prescription that monetary policy should pay no attention to financial variables over and above their effects on inflation may no longer be valid in models that consider frictions in financial intermediation (Cúrdia and Woodford, 2009). This paper analyzes whether Taylor rules augmented with asset prices and credit can improve upon a standard rule in terms of macroeconomic stabilization in a DSGE with both a firms' balance-sheet channel and a bank-lending channel and in which the spread between lending and policy rates endogenously depends on banks' leverage. The main result is that, even in a model in which financial stability does not represent a distinctive policy objective, leaning-against-the-wind policies are desirable in the case of supply-side shocks whenever the central bank is concerned with output stabilization, while both strict inflation targeting and a standard rule are less effective. The gains are amplified if the economy is characterized by high private sector indebtedness. |
| Keywords: | DSGE, monetary policy, asset prices, credit channel, Taylor rule, leaning-against-the-wind |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:418&r=mon |
| By: | doğru, bülent |
| Abstract: | In this paper, the dynamic determinants of money demand function and the long-run and short-run relationships between money demand, income and nominal interest rates are examined in Turkey for the time period 1980-2012. In particular we estimate a dynamic specification of a log money demand function based on Keynesian liquidity preference theory to ascertain the relevant elasticity of money demand. The empirical results of the study show that in Turkey inflation, exchange rate and money demand are co-integrated, i.e., they converge to a long run equilibrium point, and money demand function in Turkey. |
| Keywords: | Dynamic Ordinary Least Squares, Vector Error Correction, Money Demand Function |
| JEL: | C51 E52 |
| Date: | 2013–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48402&r=mon |
| By: | Ricardo Reis |
| Abstract: | What set of institutions can support the activity of a central bank? Designing a central bank requires specifying its objective function, including the bank's mandate at different horizons and the choice of banker(s), specifying the resource constraint that limits the resources that the central bank generates, the assets it holds, or the payments on its liabilities, and finally specifying how the central bank will communicate with private agents to affect the way they respond to policy choices. This paper summarizes the relevant economic literature that bears on these choices, leading to twelve principles on central bank design. |
| JEL: | E5 E58 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19187&r=mon |
| By: | Gaetano D’Adamo (University of Valencia); Riccardo Rovelli (University of Bologna and IZA) |
| Abstract: | This paper studies the role of the exchange rate regime in the process of price convergence in Europe. During the last decade, a large strand of literature has flourished which studies the importance of the Balassa-Samuelson hypothesis in explaining nominal convergence. However, a general result of this literature is that such hypothesis can only explain a minor part of the excess inflation registered in European catching-up countries, while other factors may be at play. The role of the exchange rate regime in convergence in Europe, however, has so far been overlooked. First, we model the (endogenous) choice of the exchange rate regime and, in a second stage, estimate a Balassa-Samuelson type of regression for each regime. The results show that, for countries which pegged to or adopted the euro, the effect of a 1% increase in dual productivity growth (i.e. the difference between traded and non-traded sector productivity growth) on the dual inflation differential is more than twice as big as that of “flexible” countries. Our results suggest that too early adoption of the euro may per se foster excess inflation in a catching-up country which cannot be accounted for by the process of real convergence. |
| Keywords: | Exchange Rate Regimes, Balassa-Samuelson Effect, Inflation, Euro adoption |
| JEL: | C34 E52 F31 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1314&r=mon |
| By: | Asongu , Simplice A |
| Abstract: | Purpose – While in developed economies, changes in monetary policy affect real economic activity in the short-run but only prices in the long-run, the question of whether these tendencies apply to developing countries remains open to debate. In this paper, we examine the effects of monetary policy on economic activity using a plethora of hitherto unemployed financial dynamics in inflation-chaotic African countries for the period 1987-2010. Design/methodology/approach – VARs within the frameworks of VECMs and simple Granger causality models are used to estimate the long-run and short-run effects respectively. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – But for slight exceptions, the tested hypotheses are valid under monetary policy independence and dependence. Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run. For the first-half (long-run dimension) of the hypothesis, permanent changes in monetary policy variables (depth, efficiency, activity and size) affect permanent variations in prices in the long-term. But in cases of disequilibriums only financial dynamic fundamentals of depth and size significantly adjust inflation to the cointegration relations. With respect to the second-half (short-run view) of the hypothesis, monetary policy does not overwhelmingly affect prices in the short-term. Hence, but for a thin exception Hypothesis 1 is valid. Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-term. With regard to the short-term dimension of the hypothesis, only financial dynamics of depth and size affect real GDP output in the short-run. As concerns the long-run dimension, the neutrality of monetary policy has been confirmed. Hence, the hypothesis is also broadly valid. Practical Implications – A wide range of policy implications are discussed. Inter alia: the long-run neutrality of money and business cycles, credit expansions and inflationary tendencies, inflation targeting and monetary policy independence implications. Country/regional specific implications, the manner in which the findings reconcile the ongoing debate, measures for fighting surplus liquidity, caveats and future research directions are also discussed. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect monetary policy), we provide significant contributions to the empirics of money. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries. |
| Keywords: | Monetary Policy; Banking; Inflation; Output effects; Africa |
| JEL: | E51 E52 E58 E59 O55 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48494&r=mon |
| By: | Georg Dettmann (Department of Economics (University of Verona)) |
| Abstract: | The emergence of international current account imbalances has dominated the economic debate for several years and has been considered one of the main reasons for the turbulences in the world economy since 2007. Economic theory suggests that an economy cannot run persistent current account deficits without depleting its net foreign assets. Nevertheless, for most of the 2000s the US net foreign liabilities grew at a rate below the one of the cumulative current account deficit. To investigate on the mechanisms that allow the US to do so, this paper sets up a two country DGE model with asymmetric liquidity constraints. The model will show that there is a permanent wealth transfer from the world to the US. The unique position of the US not only allows them to run persistent current account deficits, but also imposes a permanent decay on the American current account. As the issuer of the world key currency in an asymmetric world monetary system, the US can make use of Seigniorage and valuation effects to be able to run a continuous current account deficit. These mechanisms work in favour of their net foreign bond holdings, but let their CA further deteriorate. The corresponding one-way capital flows were part of the distortions that laid the ground for the world financial crisis 2007-2009. Future will show if a multi polar world with several (regional) reserve currencies emerges. |
| Keywords: | Seigniorage, NFA Positions, Current Account, DGE, Two Country Model, Borrowing Constraints, International Monetary Theory |
| JEL: | E41 E42 E47 E51 F31 F32 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:11/2013&r=mon |
| By: | Alex Nikolsko-Rzhevskyy (Lehigh University); David Papell; Ruxandra Prodan |
| Abstract: | The Taylor rule has been the dominant metric for monetary policy evaluation over the past 20 years, and it has become common practice to identify periods where policy either adheres closely to or deviates from the Taylor rule benchmark. The purpose of this paper is to identify (Taylor) rules-based and discretionary eras solely from the data so that knowledge of subsequent economic outcomes cannot influence the choice of the dates. We define Taylor rules-based and discretionary eras by smaller and larger Taylor rule deviations, the absolute value of the difference between the actual federal funds rate and the federal funds rate prescribed by the original Taylor rule, and use tests for multiple structural changes and Markov switching models to identify the eras. Monetary policy in the U.S. is characterized by a Taylor rules-based (low deviations) era until 1974, a discretionary (high deviations) era from 1974 to about 1985, a rules-based era from about 1985 to 2000, and a discretionary era from 2001 to 2008. The Taylor rule deviations are about three times as large in the discretionary eras than in the rules-based eras and are almost four times larger in the most discretionary era (1974 to 1984) than in the least discretionary era (1985 to 2000). With the Markov switching models, which allow for regime changes at the beginning and end of the sample, we also identify a discretionary era from 1965 to 1968 and a rules-based era in 2006 and 2007. The discretionary and rules-based eras closely correspond to periods where the Taylor rule deviations are above and below two percent. |
| Keywords: | Taylor rules, rules versus discretion, monetary policy |
| JEL: | E52 |
| Date: | 2013–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:hou:wpaper:2013-198-44&r=mon |
| By: | Karl Farmer (Karl-Franzens University of Graz) |
| Abstract: | The pronounced increase in external imbalances in the European Economic and Monetary Union (EMU) during the years running up to 2008 is traditionally explained by financial integration through the common currency. This paper examines in a one-good, two-country overlapping generations' model, with production, capital accumulation and public debt, the effects of financial integration on the net foreign asset positions of initially low-interest and high-interest rate EMU countries. We find that a lower savings rate and government expenditure quota, together with a higher capital production share in the latter can in fact be transformed into the observed external imbalances when interest rates converge. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2013-07&r=mon |
| By: | Asongu , Simplice A |
| Abstract: | Purpose – A major lesson of the EMU crisis is that serious disequilibria in a monetary union result from arrangements not designed to be robust to a variety of shocks. With the specter of this crisis looming substantially and scarring existing monetary zones, the present study has complemented existing literature by analyzing the effects of monetary policy on economic activity (output and prices) in the CEMAC and UEMOA CFA franc zones. Design/methodology/approach – VARs within the frameworks of VECMs and Granger causality models are used to estimate the long-run and short-run effects respectively. Impulse response functions are further used to assess the tendencies of significant Granger causality findings. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run in the CFA zones (Broadly untrue). This invalidity is more pronounced in CEMAC (relative to all monetary policy variables) than in UEMOA (with regard to financial dynamics of activity and size). Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-run in the CFA zones. Firstly, the absence of co-integration among real output and the monetary policy variables in both zones confirm the long-term dimension of the hypothesis on the neutrality of money. The validity of its short-run dimension is more relevant in the UEMOA zone (with the exception of overall money supply) than in the CEMAC zone (in which only financial dynamics of ‘financial system efficiency’ and financial activity support the hypothesis). Practical Implications – (1) Compared to the CEMAC region, the UEMOA zone’s monetary authority has more policy instruments for offsetting output shocks but fewer instruments for the management of short-run inflation. (2) The CEMAC region is more inclined to non-traditional policy regimes while the UEMOA zone dances more to the tune of traditional discretionary monetary policy arrangements. A wide range of policy implications are discussed. Inter alia: implications for the long-run neutrality of money and business cycles; implications for credit expansions and inflationary tendencies; implications of the findings to the ongoing debate; country-specific implications and measures of fighting surplus liquidity. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect money supply), we have provided a significant contribution to the empirics of monetary policy. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries and monetary unions. |
| Keywords: | Monetary Policy; Banking; Inflation; Output effects; Africa |
| JEL: | E51 E52 E58 E59 O55 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48495&r=mon |
| By: | Michael Mazur; Miguel Ramirez (Department of Economics, Trinity College) |
| Abstract: | In an age of globalized finance, Forex market efficiency is particularly relevant as agents engage in arbitrage opportunities across international markets. This study tests the forward exchange rate unbiasedness hypothesis using more powerful tests such as the Zivot-Andrews single-break unit root and the KPSS stationarity (no unit root) tests to confirm that the USD/EUR spot and three-month forward rates are I(1) in nature. The study successfully employs Engle-Granger cointegration analysis which identifies a stable long-run relationship between the spot and forward rates and generates an ECM model that is used to forecast the in-sample (historical) data.The study’s findings refute past conclusions that fail to identify the data’s I(1) nature and suggests that market efficiency is present in the long run but not necessarily in the short run. |
| Keywords: | Cointegration analysis, Error-correction model (ECM), Forward exchange rate unbiasedness hypothesis (FRUH), KPSS no unit root test, unexploited profits, and Zivot-Andrews single break unit root test |
| JEL: | F3 F31 C20 C22 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:tri:wpaper:1310&r=mon |
| By: | Karl Whelan (University College Dublin) |
| Abstract: | The introduction of the euro meant that countries with sovereign debt problems could not use monetisation and devaluation as a way to prevent default. The institutional structures of the euro were also widely thought to prevent a country in difficulties being bailed out by other euro members or having its sovereign debt purchased by the ECB. Despite these restrictions, there was relatively little discussion about sovereign default in pre-EMU debates among economists and financial markets priced in almost no default risk in the pre-crisis years. The crisis has seen bailouts and bond purchases by the ECB but there has also been a sovereign default inside the euro and further defaults seem likely. The introduction of the euro was intended to bring greater stability by ending devaluations triggered by self-fulfilling runs on a currency. While this particular scenario can no longer happen, this paper discusses mechanisms whereby expectations that a country may leave the euro can lead to this outcome occurring. |
| Keywords: | Euro Crisis, Sovereign Default |
| Date: | 2013–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201309&r=mon |
| By: | Jerry Tsai |
| Abstract: | This paper offers an explanation for the properties of the nominal term structure of interest rates and time-varying bond risk premia based on a model with rare consumption disaster risk. In the model, expected inflation follows a mean reverting process but is also subject to possible large (positive) shocks when consumption disasters occur. The possibility of jumps in inflation increases nominal yields and the yield spread, while time-variation in the inflation jump probability drives time-varying bond risk premia. Predictability regressions offer independent evidence for the model's ability to generate realistic implications for both the stock and bond markets. |
| Keywords: | Term structure of interest rates, rare disasters |
| JEL: | G12 |
| Date: | 2013–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:665&r=mon |
| By: | Hyeongwoo Kim; Deockhyun Ryu |
| Abstract: | This paper estimates the degree of persistence of 16 long-horizon real exchange rates relative to the US dollar. We use nonparametric operational algorithms by El-Gamal and Ryu (2006) for general nonlinear models based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). We found substantially shorter maximum half-life (MHL) estimates than the counterpart from linear models, which is robust to the choice of bandwidth with exceptions of Canada and Japan. |
| Keywords: | Real Exchange Rate; Purchasing Power Parity; Short Memory in Mean; Short-Memory in Distribution; mixing; Max Half-Life; Max Quarter-Life |
| JEL: | C14 C15 C22 F31 F41 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2013-08&r=mon |
| By: | Hall, Stephen G. (University of Leicester); Tavlas, George (Bank of Greece) |
| Abstract: | This paper surveys the literature dealing with the thesis put forward by Dooley, Folkerts-Landau and Garber (DFG) that the present constellation of global exchange-rate arrangements constitutes a revived Bretton-Woods regime. DFG also argue that the revived regime will be sustainable, despite its large global imbalances. While much of the literature generated by DFG’s thesis points to specific differences between the earlier regime and revived regime that render the latter unstable, we argue that an underlying similarity between the two regimes renders the revived regime unstable. Specifically, to the extent that the present system constitutes a revived Bretton-Woods system, it is vulnerable to the same set of destabilizing forces -- including asset price bubbles and global financial crises -- that marked the latter years of the earlier regime, leading to its breakdown. We extend the Markov switching model to examine the relation between global liquidity and commodity prices. We find evidence of commodity-price bubbles in both the latter stages of the earlier Bretton-Woods regime and the revived regime. |
| Keywords: | Bretton-Woods regime; international liquidity; price bubbles; Markov switching model |
| JEL: | C22 F33 N10 |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2012_001&r=mon |
| By: | Spahn, Peter |
| Abstract: | A hybrid standard macro model is supplemented by an explicit analysis of bank lending, based on a five-position aggregative balance sheet. In the model's two versions credit supply is based on a leverage targeting rule or on simple optimisation, taking into account lending risks and funding costs. Model simulations explore consequences of supply and demand disturbances, discretionary interest rate moves, asset valuation and credit risk shocks. Besides standard Taylor policies, the paper compares the relative efficiency of additional stabilisation tools like external-funding taxes and anti-cyclical leverage regulation. Quantitative restrictions for bank activities seem to be useful. -- |
| Keywords: | Taylor rule,Leverage targeting,Financial market shocks,Funding costs,Endogenous money |
| JEL: | E1 E5 G2 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fziddp:762013&r=mon |
| By: | Oleksiy Kryvtsov |
| Abstract: | Rising consumer prices may reflect shifts by consumers to new higher-priced products, mostly for durable and semi-durable goods. I apply Bils’ (2009) methodology to newly available Canadian consumer price data for non-shelter goods and services to estimate how price increases can be divided between quality growth and price inflation. I find that less than one-third of observed price increases during model changeovers should be attributed to quality growth. This implies overall price inflation close to inflation measured by the official index. I conclude that, according to Bils’ methodology, the quality bias is not an important source of potential mismeasurement of CPI inflation in Canada. |
| Keywords: | Inflation and prices; Potential output |
| JEL: | E31 M11 O47 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-24&r=mon |
| By: | Cockshott, Paul; Zachariah, David |
| Abstract: | The article attempts of apply econophysics concepts to the Eurozone crisis. It starts by examining the idea of conservation laws as applied to market economies. It formulates a measure of financial entropy and gives numerical simulations indicating that this tends to rise. We discuss an analogue for free energy released during this process. The concepts of real and symbolic appropriation are introduced as a means to analyse debt and taxation. We then examine the conflict between the conservation laws that apply to commodity exchange with the exponential growth implied by capital accumulation and how these have necessitated a sequence of evolutionary forms for money, and go on to present a simple stochastic model for the formation of rates of interest and a model for the time evolution of the rate of profit. Finally we apply the conservation law model to examining the Euro Crisis and the European Stability pact, arguing that if the laws we hypothesise actually hold, then the goals of the stability pact are unobtainable. -- |
| Keywords: | entropy,conservation-law,financial crisis |
| JEL: | G01 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201336&r=mon |
| By: | Philip Turner |
| Abstract: | One area where international monetary cooperation has failed is in the role of surplus or creditor countries in limiting or in correcting external imbalances. The stock dimensions of such imbalances - net external positions, leverage in national balance sheets, currency/maturity mismatches, the structure of ownership of assets and liabilities and over-reliance on debt - can threaten financial stability in creditor as in debtor countries. Creditor countries therefore have a responsibility both for avoiding "overlending" and for devising cooperative solutions to excessive or prolonged imbalances. |
| Keywords: | International adjustment, symmetry in adjustment, external financing and risk exposures, financial crisis |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:419&r=mon |
| By: | Jagjit S Chadha; Philip Turner; Fabrizio Zampolli |
| Abstract: | Federal Reserve purchases of bonds in recent years have meant that a smaller proportion of long-dated government debt has had to be held by other investors (private sector and foreign official institutions). But the US Treasury has been lengthening the maturity of its issuance at the same time. This paper reports estimates of the impact of these policies on long-term rates using an empirical model that builds on Laubach (2009). Lowering the average maturity of US Treasury debt held outside the Federal Reserve by one year is estimated to reduce the five-year forward 10-year yield by between 130 and 150 basis points. Such estimates assume that the decisions of debt managers are largely exogenous to cyclical interest rate developments; but they could be biased upwards if the issuance policies of debt managers are not exogenous but instead respond to interest rates. Central banks will face uncertainty not only about the true magnitude of maturity effects, but also about the size and concentration of interest rate risk exposures in the financial system. Nor do they know what the fiscal authorities and their debt managers will do as long-term rates change. |
| Keywords: | quantitative easing, sovereign debt management, long-term interest rate, portfolio balance effect |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:415&r=mon |