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on Monetary Economics |
| By: | Ali Alichi; Jaromir Benes; Joshua Felman; Irene Feng; Charles Freedman; Douglas Laxton; Evan Tanner; David Vavra; Hou Wang |
| Abstract: | The paper first describes how the Czech National Bank (CNB) moved gradually from a fixed exchange rate regime to the frontiers of Inflation-Forecast Targeting. It then focuses on the CNB’s recent experience in adding the exchange rate as a complementary monetary policy tool to stimulate the economy and combat the risks of deflation when the policy interest rate is at the zero lower bound. It assesses the theoretical basis of such a policy, the communications approach used by the CNB when announcing the new framework, and the effects thus far on inflation and output. |
| Keywords: | Monetary policy;Czech Republic;Inflation targeting;Deflation;Exchange rate policy;Exchange markets;Foreign exchange intervention;Inflation-Forecast Targeting, Inflation Targeting, exchange rate tool, zero lower bound, forward guidance, deflation, central bank communications |
| Date: | 2015–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/74&r=mon |
| By: | Jakub Janus (Cracow University of Economics) |
| Abstract: | The implementation of unconventional (nonstandard) monetary policy instruments by the leading central banks at the wake of the financial and economic crisis was the most significant shift in the practice of central banking in the recent years. Evaluation of their effects is not feasible without a thorough recognition of the transmission mechanism of various balance-sheet policies, such as quantitative easing. The transmission channels of a standard interest-rate policy are based on a group of theories that are relatively coherent and well-documented. On the contrary, identification of similar framework for unconventional measures proved to be a complicated task. The aim of this paper is to extract and evaluate the theoretical efficiency of particular channels of unconventional monetary policy. This goal requires references to at least several, to some extent mutually exclusive, theories. It is also inevitable to draw one’s attention to the relative significance of identified channels, depending on the nature of used unconventional tools, as well as on reactions of financial institutions and other economic agents to undertaken actions. This paper discusses three broad channel of the unconventional policies transmission mechanism: the signaling channel, the liquidity channel, and the portfolio-balance channel. |
| Keywords: | unconventional monetary policy; monetary transmission mechanism; central banking; quantitative easing |
| JEL: | E42 E52 E58 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:pes:wpaper:2015:no57&r=mon |
| By: | Luis Ignacio Jácome |
| Abstract: | This paper provides a brief historical journey of central banking in Latin America to shed light on the debate about monetary policy in the post-global financial crisis period. The paper distinguishes three periods in Latin America’s central bank history: the early years, when central banks endorsed the gold standard and coped with the collapse of this monetary system; a second period, in which central banks turned into development banks under the aegis of governments at the expense of increasing inflation; and the “golden years,†when central banks succeeded in preserving price stability in an environment of political independence. The paper concludes by cautioning against overburdening central banks in Latin America with multiple mandates as this could end up undermining their hard-won monetary policy credibility. |
| Keywords: | Central banking;Latin America;Central bank role;Monetary policy;Inflation targeting;Economic recession;Financial crises;Cross country analysis;Latin America, central banks, inflation. |
| Date: | 2015–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/60&r=mon |
| By: | Liu, Taoxiong; Huang, Mengdan |
| Abstract: | China has experienced several episodes of inflation in recent years. Popular arguments attribute these episodes to relatively high growth rates of money, which were then primarily explained by China’s accumulation of foreign exchange reserves and the undervaluation of RMB. We attempt to explain China’s high monetary growth rates through the supply of land. Under China’s land system, the supply of land is controlled by the government and can be viewed as exogenous to the monetary system. An increase in the money supply stimulates bank loans and thereby monetary growth. Both an error correction model and a simultaneous equations model are developed to explore the effect of the land supply on monetary growth. The empirical results show that the effect of the land supply on the money supply is significantly positive and even exceeds that of foreign exchange reserves. The significance for monetary policy is that, under China’s existing political economy, both the central bank and local governments should be responsible for monetary policy and price levels. |
| Keywords: | land supply, money supply, foreign exchange reserves |
| JEL: | E50 R10 R14 |
| Date: | 2015–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62781&r=mon |
| By: | mhamdi, ghrissi |
| Abstract: | The aim of this paper is to provide a credible measure of inflation. This credibility is of great importance for successful inflation targeting regime. This paper proposes a technique to solve a conceptual disparity between inflation phenomenon and its measurement. For this, we proposed an alternative measure called core inflation, defined as the inflation component that has no real impact on long-term production. Evaluation of core inflation was obtained using a VAR system under the assumption that variations in the extent of inflation are affected by two types of shock. The first type has no impact on real output in the long term, while the second can have this effect. This approach is a reconstruction of the approach of Quah and Vahey (1995) in the case of the Tunisian economy. The study concluded that the administered prices constitute a major obstacle to measure, interpret and forecast inflation. Central Bank of Tunisia has no control over a third of the CPI basket. This feature of the Tunisian economy is simply a sign of weakness of the economic system and the need for monetary authorities to continue its efforts to liberalize prices. |
| Keywords: | monetary policy in Tunisia, Inflation, core inflation, VAR |
| JEL: | E5 E6 |
| Date: | 2014–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63477&r=mon |
| By: | Vashelyuk, Natalya (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Trunin, Pavel (Russian Presidential Academy of National Economy and Public Administration (RANEPA)) |
| Abstract: | This paper examines the impact of nonstandard monetary policy measures on money market and their economy-wide effects. Four groups of nonconventional measures (quantitative easing, direct and indirect credit easing, forward guidance) and the way in which these operations were conducted in developed and emerging economies are explored. The study of nonstandard liquidity providing measures taken by the Bank of Russia revealed that the main challenges for monetary policy implementation are enhancing the transparency of monetary policy, minimizing distortional effects and appropriate risk management. We also found the evidence of the effectiveness of the credit auctions for 3-month loans secured by assets or guarantees. The regression analysis of the nonstandard liquidity easing measures showed that the increase in pace of providing the loans secured by non-marketable assets or guaranties puts a downward pressure on MosPrime rates. |
| Keywords: | monetary policy, money market, nonconventional measures, nonstandard liquidity, credit auctions |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:rnp:ppaper:mak14&r=mon |
| By: | Koepke, Robin |
| Abstract: | The empirical literature has long established that U.S. interest rates are an important driver of international portfolio flows, with lower rates “pushing” capital to emerging markets. On the basis of this literature, it is often argued that the Federal Reserve’s imminent policy tightening cycle is likely to weigh on portfolio flows to emerging markets in coming years. The analysis presented in this paper offers a different interpretation of the literature, suggesting that it is the surprise element of monetary policy that affects EM portfolio inflows. A shift in market expectations towards easier future U.S. monetary policy leads to greater foreign portfolio inflows and vice versa. Given current market expectations of sustained increases in the federal funds rate in coming years, EM portfolio flows could be boosted by a slower pace of Fed tightening than currently expected or could be reduced by a faster pace of Fed tightening. |
| Keywords: | Capital Flows, Portfolio Flows, Emerging Markets, Monetary Policy, Market Expectations, Fed Funds Futures, Push and Pull |
| JEL: | E43 F32 F4 G11 |
| Date: | 2014–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63519&r=mon |
| By: | Daniel Kaufmann (KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | This paper documents nominal stability in Switzerland from 1805 to 2013 using a data set on annual price, wage and nominal GDP changes. The trends of these indicators are estimated by an unobserved-components stochastic-volatility model in order to control for short-term fluctuations and measurement error. Based on a narrative analysis of these trends five main findings emerge. (i) Fiat currency regimes in Switzerland provided a relatively stable monetary background even compared to the metal-currency regimes before WW1. (ii) The flexible inflation targeting regime adopted in December 1999 has performed best over the last two centuries measured by today’s definition of nominal stability. (iii) Fiat currency regimes without clearly communicated nominal price anchor (Bretton Woods System and monetary targeting) were characterised by an inflation bias. (iv) The metal-currency regimes (competing currencies and bimetallism before World War 1, and to some extent flexible inflation targeting, were associated with a deflation bias. (v) Persistent deflations in terms of the CPI only occurred under metallic regimes before WW2. These episodes were accompanied by falling nominal GDP, falling employment but relatively stable hourly wages. |
| Keywords: | monetary history, monetary regimes, Nominal stability, unobserved-components stochastic-volatility model, price stability |
| JEL: | E31 C22 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:15-379&r=mon |
| By: | Sanches, Daniel R. (Federal Reserve Bank of Philadelphia) |
| Abstract: | A primary concern in monetary economics is whether a purely private monetary regime is consistent with macroeconomic stability. I show that a competitive regime is inherently unstable due to the properties of endogenously determined limits on private money creation. Precisely, there is a continuum of equilibria characterized by a self-fulfilling collapse of the value of private money and a persistent decline in the demand for money. I associate these equilibrium allocations with self-fulfilling banking crises. It is possible to formulate a fiscal intervention that results in the global determinacy of equilibrium, with the property that the value of private money remains stable. Thus, the goal of monetary stability necessarily requires some form of government intervention. |
| Keywords: | Private money; Self-fulfilling crises; Macroeconomic stability |
| JEL: | E42 E44 G21 |
| Date: | 2015–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:15-18&r=mon |
| By: | Ennis, Huberto M. (Federal Reserve Bank of Richmond) |
| Abstract: | This discussion was prepared for the 84th Meeting of the Carnegie-Rochester-NYU Conference Series on Public Policy "Monetary Policy: An Unprecedented Predicament" held on November 14-15, 2014, at Carnegie Mellon University. |
| Date: | 2015–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:15-03&r=mon |
| By: | Michael Brei; Almira Buzaushina |
| Abstract: | The present paper investigates how an emerging market economy is affected when it suddenly faces a higher risk premium on international capital markets. We study this question empirically for five Latin American economies over the period 1994-2007 within a structural panel vector autoregression and analyze theoretically the transmission mechanism using a dynamic stochastic general equilibrium model (DSGE) of a small open economy. The financial shock is modeled by an unexpected increase in the risk premium of firms’ foreign-currency debt. In response, the adverse shock is amplified by a feedback mechanism between currency depreciation, adverse balance sheet and risk premium effects. The theoretical model is used to study different monetary policy responses. We find that an exchange rate targeting rule that strikes a balance between exchange rate and inflation targeting allows the monetary authority to stabilize inflation and output more effectively than under a pure inflation targeting rule. |
| Keywords: | CGEM, EPA, Gender inequalities, Trade opening, SenEmerging Markets, Financial Crises, International Capital Markets. |
| JEL: | F34 F36 G21 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2015-11&r=mon |
| By: | Bursian, Dirk; Faia, Ester |
| Abstract: | Trust in policy makers fluctuates significantly over the cycle and affects the transmission mechanism. Despite this it is absent from the literature. We build a monetary model embedding trust cycles; the latter emerge as an equilibrium phenomenon of a game-theoretic interaction between atomistic agents and the monetary authority. Trust affects agents' ’stochastic discount factors, namely the price of future risk, and through this it interacts with the monetary transmission mechanism. Using data from the Eurobarometer surveys, we analyze the link between trust and the transmission mechanism of macro and monetary shocks. Empirical results are in line with theoretical ones. |
| Keywords: | betrayal aversion; monetary transmission system; trust games |
| JEL: | C7 C8 E0 E5 G12 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10541&r=mon |
| By: | Cyril Pitrou |
| Abstract: | A graph representation of the financial relations in a given monetary structure is proposed. It is argued that the graph of debt-liability relations is naturally organized and simplified into a tree structure, around banks and a central bank. Indeed, this optimal graph allows to perform payments very easily as it amounts to the suppression of loops introduced by pending payments. Using this language of graphs to analyze the monetary system, we first examine the systems based on commodity money and show their incompatibility with credit. After dealing with the role of the state via its ability to spend and raise taxes, we discuss the chartalist systems based on pure fiat money, which are the current systems. We argue that in those cases, the Treasury and the central bank can be meaningfully consolidated. After describing the interactions of various autonomous currencies, we argue that fixed exchanged rates can never be maintained, and we discuss the controversial role of the IMF in international financial relations. We finally use graph representations to give our interpretation on open problems, such as the monetary aggregates, the sectoral financial balances and the endogenous nature of money. Indeed, once appropriately consolidated, graphs of financial relations allow to formulate easily unambiguous statements about the monetary arrangements. |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1504.03895&r=mon |
| By: | Weber, Warren E. (Bank of Canada, Federal Reserve Bank of Atlanta, University of South Carolina) |
| Abstract: | Beginning in 1864, in the United States notes of national banks were the predominant medium of exchange. Each national bank issued its own notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e money from the U.S. experience with national bank notes. It examines historical evidence on how well the bank notes—a privately issued currency system with multiple issuers—functioned with respect to ease of transacting, counterfeiting, safety, overissuance, and par exchange (a uniform currency). It finds that bank notes made transacting easier and were not subject to overissuance. National bank notes were perfectly safe because they were insured by the federal government. Further, national bank notes were a uniform currency. Notes of different banks traded at par with each other and with greenbacks. This paper describes the mechanism that was put in place to achieve uniformity. The U.S. experience with national bank notes suggests that a privately issued e-money system can operate efficiently but will require government intervention, regulation, and supervision to minimize counterfeiting, promote safety, and provide the mechanism necessary for different media of exchange to exchange at par with each other. |
| Keywords: | bank notes; e-money; financial services |
| JEL: | E41 E42 E58 |
| Date: | 2015–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedacf:2015_002&r=mon |
| By: | Onour, Ibrahim |
| Abstract: | Research Problem: The primary purpose of the paper is to set up a macroeconomic model that depict domestic inflation dynamics in a conflict economy impeded by parallel market for foreign exchange and internal political conflict. Research methodology: To investigate domestic inflation sensitivity to macro variables time-varying coefficient estimation approach employed on monthly data from Sudan during the period from January 2008 to December2013. Results: While domestic money growth (government spending) is the main driver of domestic inflation,the increasing role of parallel market for foreign exchange and imported inflation on domestic inflation reveal increasing sensitivity of the economy to external shocks. Also indicated that our model based estimates of domestic inflation rate is about 22% above the officially announced inflation rate. Recommendations: To control domestic inflation it is essential to control growth in domestic money creation and adopt more flexible official foreign exchange rate that enables inflation trageting policy. |
| Keywords: | Inflation, parallel market, money growth |
| JEL: | E3 E30 E31 E4 E44 |
| Date: | 2015–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63527&r=mon |
| By: | Funashima, Yoshito |
| Abstract: | Given that Nordhaus' political business cycle theory is relevant at election cycle frequency and that its validity can change over time, we consider wavelet analysis especially suited to test the theory. For the postwar U.S. economy, we exploit wavelet methods to demonstrate whether there actually exists an opportunistic political business cycle in monetary policy by allowing for time-varying behavior and by introducing the frequency-domain perspective. Our results indicate an inclination of the Federal Reserve to cut the Funds rate prior to presidential elections except for the 1990s. Moreover, such political manipulation is shown to significantly affect output in not only the famous Burns-Nixon era but also the Volcker-Reagan era. The outcomes are robust even when the effects of government spending are controlled for. |
| Keywords: | Monetary policy; Political business cycle; Wavelet |
| JEL: | E52 E58 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:63654&r=mon |
| By: | Lena Dräger (Universität Hamburg (University of Hamburg)); Christian R. Proaño (The New School for Social Research) |
| Abstract: | Against the background of the recent housing boom and bust in countries such as Spain and Ireland, we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a banking sector module along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal con- straint on the bank’s leverage ratio. We illustrate in particular how different lending standards within the monetary union can translate into destabilizing spill-over effects between the regions, which can in turn result in a higher macroeconomic volatility. This mechanism is modelled by letting the loan-to-value (LTV) ratio that banks demand of entrepreneurs depend on either re- gional productivity shocks or on the productivity shock from one dominating region. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the euro area. Additionally, we show the effects of a monetary policy rule augmented by the loan rate spread as in Cúrdia and Woodford (2010) in a two-country monetary union context. |
| Keywords: | Cross-border banking, euro area, monetary unions, DSGE |
| JEL: | F41 F34 E52 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:201503&r=mon |
| By: | César Carrera (Central Reserve Bank of Peru); Fernando Pérez Forero (Central Reserve Bank of Peru); Nelson Ramírez-Rondán (Central Reserve Bank of Peru) |
| Abstract: | Emerging economies have been largely affected for Fed's Quantitative Easing (QE) policies. This paper assesses the impact of these measures in terms of key macroeconomic variables for four small open economies (SOE) in Latin America such as Chile, Colombia, Mexico and Peru. We identify a QE policy shock in a Structural VAR with Block Exogeneity (à la Zha, 1999) and we impose a mixture of zero and sign restrictions (à la Arias et al., 2014). Overall, we find that this QE policy shock has significant effects on financial variables such as aggregate credit and the exchange rate. These effects are larger than the ones produced on output and prices. |
| Keywords: | Quantitative Easing, Structural Vector Autoregressions, Sign and Zero Restrictions |
| JEL: | E43 E51 E52 E58 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:2015-035&r=mon |
| By: | Daisuke Ikeda (Bank of Japan); Takushi Kurozumi (Bank of Japan) |
| Abstract: | The history of financial crises, including the recent global crisis, shows that post-financial-crisis recoveries tend to be slower than usual recoveries. Against this background lie various factors, one of which is a slowdown in productivity induced by a post-crisis deterioration in firms' financing. To avoid a post-crisis slow recovery in which this factor comes into play, how should monetary policy be conducted? Ikeda and Kurozumi (2014) develop a model in which a tightening in firms' financing induces a productivity slowdown and hence a slow recovery, and conduct a monetary policy analysis. The analysis shows that (1) it is crucial for the post-crisis conduct of monetary policy to adopt a policy stance of responding strongly to output growth, while maintaining a response to inflation; and (2) such a policy stance toward output stabilization outperforms that toward inflation stabilization, because it facilitates recoveries in investment and productivity by improving firms' growth expectations. |
| Keywords: | Post-financial-crisis slow recovery; Slowdown in total factor productivity; Welfare-maximizing monetary policy |
| JEL: | E52 O33 |
| Date: | 2015–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojlab:lab15e02&r=mon |
| By: | Jakub Mateju (CERGE-EI, Prague, Czech Republic; Czech National Bank, Prague, Czech Republic) |
| Abstract: | This paper suggests that non-fundamental component in asset prices is one of the drivers of financial and credit cycle. Presented model builds on the financial accelerator literature by including a stock market where limitedly-liable investors trade stocks of productive firms with stochastic productivities. Investors borrow funds from the banking sector and can go bankrupt. Their limited liability induces a moral hazard problem which shifts demand for risk and drives prices of risky assets above fundamental value. Embedding the contracting problem in a New Keynesian general equilibrium framework, the model shows that loose monetary policy induces loose credit conditions and leads to a rise in both fundamental and non-fundamental components of stock prices. Positive shock to non-fundamental component triggers a financial cycle: collateral values rise, lending rate and default rate decreases. These effects reverse after several quarters, inducing a credit crunch. The credit boom lasts only while stock market growth maintains sufficient momentum. However, monetary policy does not reduce volatility of inflation and output gap by reacting to asset prices. |
| Keywords: | credit cycle, limited liability, non-fundamental asset pricing, collateral value, monetary policy |
| JEL: | E32 E44 E52 G10 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2015_05&r=mon |
| By: | Labrinidis, George |
| Abstract: | The purpose of this paper is to contribute to the discussion on the modern monetary arrangements from a Marxist perspectives, following the recent developments of the Marxist theory of world money. The paper treats the US Dollar as a primus inter pares quasi-world money and challenges the argument of the US hegemony by exploring the behavior of major capitalist states and selected developing countries as far as their official international reserves are concerned. The findings reveal a clear pattern in the behavior of major capitalist states in terms of size and forms, although the degree varies implying a hierarchical structure of the corresponding quasi-world moneys. Although part of a vast literature on international reserves, the analysis focuses on developed countries and treats them individually. The merit of this approach is that it reveals the above mentioned pattern which is blurred when Japan is included. The results imply that current international monetary arrangements promote multipolarity and competition in the geopolitical scene, the evolution of which is historical. |
| Keywords: | International reserves, quasi-world money, US Dollar, Gold |
| JEL: | B51 E58 F3 F31 |
| Date: | 2014–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59963&r=mon |
| By: | Weber, Warren E. (Bank of Canada, Federal Reserve Bank of Atlanta & University of South Carolina) |
| Abstract: | In the United States prior to 1863, each bank issued its own distinct notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e-money from the U.S. experience with state bank notes. It examines historical evidence on how well the bank notes—a privately issued currency system with multiple issuers—functioned with respect to ease of transacting, counterfeiting, safety, overissuance, and par exchange. It finds that bank notes made transacting easier and were not subject to overissuance. However, counterfeiting of bank notes was widespread, bank notes were not perfectly safe, and notes of different banks did not exchange at par and rates of exchange were volatile. The paper also examines how bank notes were regulated and supervised and how that regulation and supervision affected the functioning of the system. The U.S. experience with state bank notes suggests that a privately issued e-money system can operate efficiently but only with appropriate government intervention, regulation, and supervision to minimize counterfeiting and to promote safety and par exchange. |
| Keywords: | bank notes; e-money; financial services |
| JEL: | E41 E42 E58 |
| Date: | 2015–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedacf:2015_001&r=mon |
| By: | Labrinidis, George |
| Abstract: | Distinguishing between the money that functions in the world market and the money that functions internally in an economy has troubled many theorists. This paper is informed by the Marxist approach to money in general and world money in particular and argues that the theoretical difficulty derives from a fundamental misconception with regard to the forms of money. Consequently, the paper offers an analysis of the forms of money and shows that a new form emerged as early as 1914 associated with the world market, which might be called quasi-world-money, such as the US dollar. The analysis provides a framework within which to comprehend the residual but essential role of gold in parallel to quasi-world-money. The framework also allows for money convertibility to be redefined appropriately. |
| Keywords: | forms of money, quasi-world money, gold, convertibility, USD |
| JEL: | B51 E42 F33 |
| Date: | 2014–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59962&r=mon |
| By: | Elcyon C. R. Lima; Alexis Maka; Mário Mendonça |
| Abstract: | This article estimates the monetary policy rule followed by the Brazilian Central Bank for setting its main policy instrument, the SELIC rate, for the period after the Real Plan. In order to overcome the uncertainty over the dates at which changes in parameters occurred, this paper uses regime-dependent-switching probabilities according to a hidden Markov chain to model possible deviations from a simple linear reaction function. From July 1996 to January 2006 the Brazilian monetary policy can be fully characterized by four policy regimes. The changes in monetary policy in this period are best described by recurring regime changes, instead of once-and-for-all shifts. We have identified substantial differences in the way monetary policy was conducted in the subperiods before and after 1999, when the Brazilian exchange rate policy regime changed from crawling peg to free-floating. At each of these subperiods there are two recurring regimes and the two regimes of one subperiod differ from the two regimes of the other. Neste artigo estimamos a regra da política monetária adotada no período pós-Plano Real pelo Banco Central do Brasil (Bacen) ao fixar o seu principal instrumento de política, a taxa Sistema Especial de Liquidação e Custódia (Selic). Para lidar com a incerteza referente às datas nas quais ocorreram mudanças nos parâmetros, adotamos as hipóteses segundo as quais essas mudanças são regimedependentes e as probabilidades de ocorrência dos regimes seguem uma cadeia de Markov. O modelo assim especificado possui uma estrutura flexível e permite detectar possíveis desvios em relação a uma função de reação linear simples. Concluímos que, de julho de 1996 a janeiro de 2006, a política monetária brasileira pode ser caracterizada por quatro regimes. As mudanças de regime ocoridas nesse período são mais adequadamente descritas por mudanças de regime recorrentes do que por mudanças permanentes. No entanto, identificamos diferenças substanciais na forma como a política monetária foi conduzida nos períodos anterior e posterior a 1999, quando o câmbio passou de administrado para flutuante. Em cada um desses períodos existem dois regimes de política recorrentes, sendo que os dois regimes do período anterior a 1999 diferem dos dois regimes do período posterior. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:0181&r=mon |
| By: | Joseph Crowley |
| Abstract: | This paper presents an overview of exposures in the balance sheets of central banks, banks, and other depository institutions during the past decade, with emphasis on asset growth and currency composition. It exploits the IMF’s SRF-based monetary data to show: (i) there was a widely observed buildup of assets prior to the global financial crisis, but there has been no significant reduction in its wake; (ii) the foreign currency composition of the balance sheets of banks and other depository institutions remained remarkably constant in spite of the crisis, significant changes in the composition of balance sheets, and globalization, and does not seem to have been significantly influenced by the behavior of exchange rates; and (iii) exposure to households increased prior to the crisis, but this increased risk was offset by increased capitalization. |
| Keywords: | Central banks;Commercial banks;Financial assets;Financial risk;Balance sheets;Global Financial Crisis 2008-2009;Asset growth, currency composition, balance sheet composition, dollarization |
| Date: | 2015–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/47&r=mon |
| By: | Radim Gottwald (Department of Finance, Faculty of Business and Economics, Mendel University in Brno) |
| Abstract: | The forecasting power of forward exchange rates for future spot exchange rates has been investigated by many researchers. In this paper, the author focuses on this topical economic theme too, and investigates the extent, to which the future spot exchange rates could be forecasted based on the current forward exchange rates. The paper aims at an assessment of the forecasting of spot USD/EUR exchange rates based on the forward exchange rates in the period from 2005 to 2013. Graphical and regression analyses are used to investigate the relationship between daily closing spot and forward rates, namely between 3 month rates and 6 month rates. The ordinary least squares method is used in order to forecast the chosen parameters. Hypotheses related to these parameters are tested at a significance level of 5%. By means of the augmented Dickey-Fuller test for a unit root in a time series sample, the author investigates whether the time series of the parameters is stationary. Afterwards, the time series is detrended in order to guarantee stationarity. Transformation into a non-linear econometric model with integrated autoregressive process AR(1) is used in order to reduce high positive autocorrelation in the residuals of the model. Thereafter, forecasts of the detrended model are made. Results revealed the following findings. According to the graphical analysis, the current forward exchange rates probably cannot be considered sufficiently reliable forecasters of the future spot exchange rates. According to the regression analysis, the forward forecasts even systematically undervalue the future spot exchange rates. Summarized, the current forward exchange rates cannot be considered sufficiently reliable forecasters of the future spot exchange rates. The above-mentioned findings are important for financial analysts working in financial companies or enterprises, which import or export some products, thus trading with foreign business partners using foreign currencies. Speculators on foreign exchange markets could make use of the presented findings as well. |
| Keywords: | Forward exchange rate, spot exchange rate, rational expectations theory, currency pair, FOREX |
| JEL: | C53 F31 O24 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:men:wpaper:52_2015&r=mon |
| By: | Beck, T.H.L. (Tilburg University, Center For Economic Research); Pamuk, H. (Tilburg University, Center For Economic Research); Uras, R.B. (Tilburg University, Center For Economic Research); Ramrattan, R. |
| Abstract: | Using a novel enterprise survey from Kenya (FinAccess Business), we document a strong positive association between the use of mobile money as a method to pay suppliers and access to trade credit. We develop a dynamic general equilibrium model with heterogeneous entrepreneurs, imperfect credit markets and the risk of theft to account for this empirical pattern. Mobile money<br/>dominates at money as a medium of exchange in its capacity to avoid theft, but it comes with higher transaction costs. The interaction between risk of theft and limited access to trade credit generates demand for mobile money as a payment method with suppliers and the use of mobile money in turn raises the value of a credit relationship and hence the willingness to apply for trade credit. Calibrating the stationary equilibrium to match a set of moments that we observe in FinAccess Business and quantifying the importance of the endogenous interactions between mobile money and trade credit on entrepreneurial performance and macroeconomic development, wefind that the availability of the mobile money technology increases the macroeconomic output<br/>of the entrepreneurial sector by 0.33-0.47%. |
| Keywords: | money; trade-credit; m-pesa; allocations |
| JEL: | D14 G21 O12 O16 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:3d35ab30-05ef-4a31-8710-f845325b8ce4&r=mon |
| By: | Marcel Schroder |
| Abstract: | This paper is motivated by the popular view that the surge in China’s foreign exchange reserves is due to a distortionary exchange rate policy aimed at keeping the real exchange rate undervalued to support export-led growth. It undertakes an in-depth empirical investigation to quantify how much "mercantilist" and "precautionary" motives have contributed to the reserve build-up in China during 1998Q4-2011Q4. A substantial problem is that theory is consistent with employing two vastly differing approaches to defining and estimating the role of mercantilist reserve accumulation. A priori, either method could generate misleading results. The study shows, however, that the distinction between the two approaches is immaterial in China’s case. The results suggest that mercantilism accounts for less than 10 percent of reserve accumulation. Precautionary motives and other factors seem to be the dominant determinants of the surge in China’s international reserves. |
| Keywords: | international reserves, precautionary demand, mercantilism, China |
| JEL: | E58 F31 F36 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pas:papers:2015-04&r=mon |
| By: | Carlos A. Arango; Oscar M. Valencia |
| Abstract: | This paper presents a DSGE model with banks that face moral hazard in management. Banks receive demand deposits and fund investment projects. Banks are subject to potential withdrawals by depositors which may force them into early liquidation of their investments. The likelihood of this happening depends on the bank management efforts to keep the bank financially sound and the degree of bank leverage. We study the properties of this model under different monetary and macro-prudential policy arrangements. Our model is able to replicate the pro-cyclicality of leverage, and provides insights on the interplay between bank leverage and bank management incentives as a result of monetary, productivity and financial shocks. We find that a combination of pro-cyclical capital requirements and a standard monetary policy are well suited to contain the effects on output and prices of a downturn, keeping the financial system in check. Yet, in an expansionary phase (i.e. a productivity shock) this policy combination may produce desirable results for some macro-variables but at the expense of a deterioration in other macro-financial indicators. |
| Keywords: | DSGE modeling, Financial frictions, Moral hazard, Macro-prudential policies. |
| JEL: | G11 D86 |
| Date: | 2015–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:012695&r=mon |
| By: | Ambrogio Cesa-Bianchi; Luis Felipe Céspedes; Alessandro Rebucci |
| Abstract: | This paper first compares house price cycles in advanced and emerging economies using a new quarterly house price dataset covering the period 1990- 2012. It is found that that house prices in emerging economies grow faster, are more volatile, less persistent and less synchronized across countries than in advanced economies. They also correlate more closely with capital flows than in advanced economies. The analysis is then conditioned on an exogenous change to global liquidity, broadly understood as a proxy for the international supply of credit. It is found that in emerging markets a global liquidity shock has a much stronger impact on house prices and consumption than in advanced economies. Finally, holding house prices constant in response to this shock tends to dampen its effects on consumption in both advanced and emerging economies, but possibly through different channels: in advanced economies by boosting the value of housing collateral and hence supporting domestic borrowing, and in emerging markets by appreciating the exchange rate and hence supporting the international borrowing capacity of the economy. |
| Keywords: | Capital flows, Housing finance, Exchange rates, Monetary Policy, Capital flows, Emerging markets, Global liquidity, House prices, External instrumental variables |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:88736&r=mon |
| By: | Barbara Annicchiarico (Department of Economics, University of Rome Tor Vergata.); Lorenza Rossi (Department of Economics and Management, University of Pavia) |
| Abstract: | We study the effects of real uncertainty on long-run growth under different Taylor-type rules. We fi nd a non-negligible relationship between real uncertainty and growth, which depends on the source of real uncertainty as well as the type of the Taylor rule considered. Importantly, when uncertainty is due to investment speci fic shocks, it is highly detrimental for growth, unless the Central Bank follows a strong inflation targeting rule. Furthermore, we fi nd that in the presence of real uncertainty, there is a positive correlation between average growth and average inflation under pure inflation targeting regimes and negative otherwise. |
| Keywords: | Taylor rules, Endogenous Growth, Real Uncertainty. |
| JEL: | E32 E52 O42 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:pav:demwpp:demwp0100&r=mon |
| By: | Fulvio CORSI (University of St. Gallen and Swiss Finance Institute); Didier SORNETTE (ETH Zurich and Swiss Finance Institute) |
| Abstract: | We propose a reduced form model for the Minskian dynamics of liquidity and of asset prices in terms of the so-called financial accelerator mechanism. In a nutshell, credit creation is driven by the market value of the financial assets employed as collateral in the bank loans. This leads to a self-reinforcing feedback between financial prices and liquidity that we model by coupled non–linear stochastic processes. We show that the resulting dynamics are characterized by a transient super- exponential growth qualifying a bubble regime. Unchecked, this would lead to a finite time singularity (FTS). The underlying singularity expresses the unsustainable dynamics of the corresponding econ- omy and announces a regime change, such as a crash. We propose to describe the dynamics of the crisis by the same coupled non–linear stochastic process with inverted signs, i.e., nonlinear negative feedbacks of value and money on their growth rates. Casting the financial accelerator dynamics into a simple macroeconomic model, we show that the cycle of booms and bursts of financial assets and liquidity determines economic recessions in the form of increasing aggregate default rates and decreas- ing GDP. Finally, by exploiting the implications of the proposed model on the dynamics of financial asset returns, we introduce a generalized GARCH process, called FTS-GARCH, that can provide an early warning identification of bubbles. Estimating the FTS-GARCH on well-known historical bubble episodes suggest the possibility to diagnose in real-time the presence of bubbles in financial time series. |
| Keywords: | Minskian dynamics, financial bubbles, positive feedback, financial accelerator, general- ized FTS-GARCH |
| JEL: | G01 G17 C53 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1160&r=mon |
| By: | Strunz, Sebastian; Bartkowski, Bartosz; Schindler, Harry |
| Abstract: | We do not know; but simplistic answers to the title's question should be mistrusted. In this paper, we first provide a literature overview, laying out the vast diversity of theories on the role of monetary aspects for economic growth both within mainstream growth theory and within heterodox perspectives. In fact, completely contradicting results have been derived from a variety of reasonable theories. Based on this literature survey, we explore the narrative background of the most prominent theories as each of them is related to and justified by a distinct narrative. For instance, mainstream growth textbooks are based on the assumption that "money is a neutral medium of exchange" while other approaches hold that "zero interest rates are a precondition for a stationary economy". We show how these narratives - though they may well contain some truth - lend themselves to serve as myths, which rather inhibit than facilitate our understanding of the complex relationship between monetary variables and economic growth. Finally, we discuss consequences for the degrowth debate in terms of practical proposals for overcoming assumed growth imperatives as well as theoretical consequences. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ufzdps:52015&r=mon |