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on Monetary Economics |
| By: | Markus K. Brunnermeier; Yuliy Sannikov |
| Abstract: | A theory of money needs a proper place for financial intermediaries. Intermediaries diversify risks and create inside money. In downturns, micro-prudent intermediaries shrink their lending activity, fire-sell assets and supply less inside money, exactly when money demand rises. The resulting Fisher disinflation hurts intermediaries and other borrowers. Shocks are amplified, volatility spikes and risk premia rise. Monetary policy is redistributive. Accommodative monetary policy that boosts assets held by balance sheet-impaired sectors, recapitalizes them and mitigates the adverse liquidity and disinflationary spirals. Since monetary policy cannot provide insurance and control risk-taking separately, adding macroprudential policy that limits leverage attains higher welfare. |
| JEL: | E32 E41 E44 E51 E52 E58 G01 G11 G21 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22533&r=mon |
| By: | Firmin Doko Tchatoka (School of Economics, University of Adelaide); Nicolas Groshenny (School of Economics, University of Adelaide); Qazi Haque (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide) |
| Abstract: | This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. To relate to this debate, we consider alternative inflation series in the estimation. We find that only when measuring inflation with core PCE monetary policy appears to have been reasonable and sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator and re-formulate the artificial economy as a factor model where the theoryÂ’s concept of inflation is the common factor to the empirical inflation series. We find that CPT and PCE provide better indicators of the latent concept while core PCE is less informative. Finally, we allow for positive trend inflation and the emerging results complement our previous findings. Again, even with these extensions, the only instance in which we can confidently rule out indeterminacy is when we measure inflation with core PCE. |
| Keywords: | Indeterminacy, Taylor Rules, Trend Infl?ation, Great Deviation. |
| JEL: | E32 E52 E58 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2016-09&r=mon |
| By: | Masazumi Hattori (Hitotsubashi University); Steven Kong (Bank for International Settlements); Frank Packer (Bank for International Settlements); Toshitaka Sekine (Bank of Japan) |
| Abstract: | How central banks can best communicate to the market is an increasingly important topic in the central banking literature. With ever greater frequency, central banks communicate to the market through the forecasts of prices and output with the purposes of reducing uncertainty; at the same time, central banks generally rely on a publicly stated medium-term inflation target to help anchor expectations. This paper aims to document how much the release of the forecasts of one major central bank, the Bank of Japan (BOJ), has influenced private sector expectations of inflation, and whether the degree of influence depends to any degree on the adoption of an inflation target (IT). Consistent with earlier studies, we find the central bank's forecasts to be quite influential on private sector forecasts. In the case of next year forecasts, their impact continues into the IT regime. Thus, the difficulties of aiming at an inflation target from below do not necessarily diminish the influence of the central bank's inflation forecasts. |
| Keywords: | central bank communication; Bank of Japan; inflation forecast; inflation targeting |
| JEL: | E31 E52 E58 |
| Date: | 2016–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:boj:bojwps:wp16e11&r=mon |
| By: | Jung, Alexander |
| Abstract: | This paper examines whether monetary data releases by the European Central Bank (ECB) have provided markets with additional clues about the future course of its monetary policy. It conducts a novel econometric approach based on a combination of an Ordered Probit model explaining future policy rate changes (sample 2000 to 2014) and the Vuong test for model selection. Overall, our results suggest that information contained in press releases on monetary developments for the euro area has helped markets in forming their expectations on the next monetary policy decision. JEL Classification: C34, D78, E52, E58 |
| Keywords: | communication, monetary analysis, predictability, Probit model, Vuong test |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161926&r=mon |
| By: | Corradin, Stefano; Rodriguez-Moreno, Maria |
| Abstract: | We document that a large yield spread, a basis, developed between USD- and EUR-denominated comparable bonds issued by the same euro area country over the 2008 – 2013 period. We find evidence that the basis varies over time, depending on liquidity withdrawn by strongly-constrained banks from the ECB and haircuts applied in the repo market, on the one hand, and the collateral policy and the liquidity supply conditions determined by the ECB, on the other. Overall, ECB collateral and liquidity factors explain a relevant share of the total variation in the basis and help to explain cross country dispersion in the basis. JEL Classification: G01, G12 |
| Keywords: | financial frictions, law of one price, margin constraints, non-conventional monetary policy |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161927&r=mon |
| By: | Jung, Alexander |
| Abstract: | The aim of the paper is to reassess the issue of money demand stability by estimating a portfolio demand approach for broad money M3 in the euro area covering the sample 1999 to 2013. The question is relevant, since in view of the massive shocks observed since the start of the financial crisis in 2007 relationships may have changed. Overall, the paper finds that the main components of euro area M3 are largely stable and can be explained by fundamental factors such as a transaction variable and opportunity costs. Nevertheless, the analysis detects some instabilities originating from the demand for currency in circulation linked to the euro cash changeover and for marketable instruments in an environment of very low interest rates. JEL Classification: C22, C52, E41 |
| Keywords: | cointegration analysis, components of M3, financial crisis, money demand stability |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161929&r=mon |
| By: | Barnett, William; Chauvet, Marcelle; Leiva-Leon, Danilo; Su, Liting |
| Abstract: | While credit cards provide transactions services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. However, economic aggregation theory and index number theory measure service flows and are based on microeconomic theory, not accounting. We derive theory needed to measure the joint services of credit cards and money. Carried forward rotating balances are not included in the current period weakly separable block, since they were used for transactions services in prior periods. The theory is developed for the representative consumer, who pays interest for the services of credit cards during the period used for transactions. This interest rate is reported by the Federal Reserve as the average over all credit card accounts, including those not paying interest. Based on our derived theory, we propose an empirical measurement of the joint services of credit cards and money. These new Divisia monetary aggregates are widely relevant to macroeconomic research. We evaluate the ability of our money aggregate measures to nowcast nominal GDP. This is currently topical, given proposals for nominal GDP targeting, which require monthly measures of nominal GDP. The nowcasts are estimated using only real time information, as available for policy makers at the time predictions are made. We use a multivariate state space model that takes into account asynchronous information inflow, as proposed in Barnett, Chauvet, and Leiva-Leon (2016). The model considers real time information that arrives at different frequencies and asynchronously, in addition to mixed frequencies, missing data, and ragged edges. The results indicate that the proposed parsimonious model, containing information on real economic activity, inflation, and the new augmented Divisia monetary aggregates, produces the most accurate real time nowcasts of nominal GDP growth. In particular, we find that inclusion of the new aggregate in our nowcasting model yields substantially smaller mean squared errors than inclusion of the previous Divisia monetary aggregates. |
| Keywords: | Credit Cards, Money, Credit, Aggregation Theory, Index Number Theory, Divisia Index, Risk, Asset Pricing, Nowcasting, Indicators |
| JEL: | C43 C53 C58 E1 E3 E40 E41 E51 E52 E58 G17 |
| Date: | 2016–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73246&r=mon |
| By: | Ajello, Andrea; Laubach, Thomas; Lopez-Salido, J. David; Nakata, Taisuke |
| Abstract: | We study optimal interest-rate policy in a New Keynesian model in which the economy can experience financial crises and the probability of a crisis depends on credit conditions. The optimal adjustment to interest rates in response to credit conditions is (very) small in the model calibrated to match the historical relationship between credit conditions, output, inflation, and likelihood of financial crises. Given the imprecise estimates of key parameters, we also study optimal policy under parameter uncertainty. We find that Bayesian and robust central banks will respond more aggressively to financial instability when the probability and severity of financial crises are uncertain. |
| Keywords: | Financial crises ; Financial stability and risk ; Leverage ; Monetary policy ; Optimal policy |
| JEL: | E43 E52 E58 G01 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-67&r=mon |
| By: | Barnett, William; Chauvet, Marcelle; Leiva-Leon, Danilo; Su, Liting |
| Abstract: | While credit cards provide transactions services, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities to assets. However, index number theory measures service flows and is based on aggregation theory, not accounting. We derive theory needed to measure the joint services of credit cards and money. We provide and evaluate two such aggregate measures having different objectives. We initially apply to NGDP nowcasting. Both aggregates are being implemented by the Center for Financial Stability, which will provide them to the public monthly, along with Bloomberg Terminals. |
| Keywords: | Credit Cards, Money, Credit, Aggregation Theory, Index Number Theory, Divisia Index, Risk, Asset Pricing, Nowcasting, Indicators. |
| JEL: | C43 C53 C58 E1 E3 E40 E41 E51 E52 E58 G17 |
| Date: | 2016–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73245&r=mon |
| By: | Tobal Martín; Yslas Renato |
| Abstract: | This paper empirically compares the implications of two distinct models of FX intervention, within the context of Inflation Targeting Regimes. For this purpose, it applies the VAR methodology developed by Kim (2003) to the cases of Mexico and Brazil. Our results can be summarized in three points. First, FX interventions have had a short-lived effect on the exchange rate in both economies. Second, the Brazilian model of FX intervention entails higher inflationary costs and this result cannot be entirely explained by differences in the level of pass-through. Third, each model is associated with a different interaction between exchange rate and interest rate setting (conventional monetary policies). |
| Keywords: | Foreign exchange intervention; Exchange rate pass-through; Exchange rate regime; Monetary policy coordination |
| JEL: | F31 E31 E52 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2016-14&r=mon |
| By: | Kahn, Robert B.; Meade, Ellen E. |
| Abstract: | In this paper, we discuss the evolution of central bank interactions since the early 1970s following the breakdown of the managed exchange-rate system that was negotiated at Bretton Woods. We review the most important forums or organizations through which central banks have engaged in diplomacy. We then discuss the mobilization of coordination through diplomacy using three examples over the past 30 years: the Plaza Accord in 1985 negotiated by the G-5; the response to the Asian financial crisis in 1997-98, led by the International Monetary Fund (IMF) with heavy participation from G-7 finance ministries and central banks; and the response to the global financial crisis that began in 2007. For each of these examples, we provide the economic circumstances at the time, discuss how the response was mobilized, and evaluate its success. Our main conclusion is that the relationship-building that is inherent in multilateral interaction has provided a springboard for coordination in times of stress or crisis. Moreover, crises matter in that they can be turning points in terms of the actions taken and the countries included in the dialogue; thus, the groupings themselves are to some extent endogenous to events. Finally, we use the lens of diplomacy and coordination to trace out the path for central bank diplomacy going forward. |
| Keywords: | Central bank coordination ; Global financial institutions ; International monetary system |
| JEL: | F33 E58 F55 |
| Date: | 2016–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-62&r=mon |
| By: | Luis Alberiko Gil-Alaña (Navarra Center for International Development); Borja Balprad; Guglielmo Maria Caporale; Hector Carcel |
| Abstract: | This paper uses fractional integration and cointegration techniques to analyze nominal exchange rate dynamics in three groups of African countries aiming to form currency unions in the near future. The proposed unions are the WAMZ (West African Monetary Zone), the EAC (East African Community), and the SADC (South African Development Community). The univariate results indicate that in all but three countries (Democratic Republic of Congo, Mauritius and Madagascar) the nominal exchange rate series exhibit a unit root. Concerning the multivariate results, for the WAMZ cointegration is only found in the case of Ghana with both Gambia and Guinea; for the EAC for Rwanda with Burundi, and Tanzania with both Rwanda and Uganda. Finally, for the SADC, cointegration is found in only 15 out of 66 cases, including Swaziland with South Africa, Zambia with Malawi, and Mozambique with both Lesotho and Tanzania. The policy implications of these findings are also discussed. |
| Keywords: | Monetary unions; Africa; Exchange rates |
| JEL: | C22 C32 E31 F15 |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:nva:unnvaa:wp11-2015&r=mon |
| By: | Horioka, Charles Yuji; Ford, Nicholas |
| Abstract: | Meese and Rogoff (1983) and subsequent studies find that economic fundamentals are apparently not able to explain exchange rate movements, but we argue that this so†called “Exchange Rate Disconnect Puzzle†arose because researchers such as Meese and Rogoff (1983) did not use the right fundamentals and because they did not allow for the forward†looking nature of exchange rate determination. Further, because they apparently were not aware that financial markets by themselves could not equalise interest rates across countries, they did not properly appreciate that the exchange rate is strongly influenced by agents’ expectations of aggregated differences in local returns. Thus, we believe that the same underlying explanation provided by Ford (2015) and Ford and Horioka (2016a and 2016b) for the Feldstein†Horioka (1980) Puzzle and the PPP Puzzle††namely that financial markets alone cannot achieve net transfers of financial capital and cannot equalise real interest rates across countries††also helps explain why previous attempts to connect changes in the exchange rate to economic fundamentals have not been successful, and so can also be said to contribute to solving the Exchange Rate Disconnect Puzzle. |
| Keywords: | Exchange Rate Disconnect Puzzle, exchange rate determination, exchange rate volatility, Feldstein†Horioka puzzle or paradox, financial market integration, goods market integration, international capital flows, international capital mobility, net transfers of capital, PPP puzzle, purchasing power parity puzzle, real interest rate equalisation, real interest rate parity, Exchange Rate Disconnect Puzzle, exchange rate determination, exchange rate volatility, Feldstein†Horioka puzzle or paradox, financial market integration, goods market integration, international capital flows, international capital mobility, net transfers of capital, PPP puzzle, purchasing power parity puzzle, real interest rate equalisation, real interest rate parity, F21, F31, F32, F36, G15 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:agi:wpaper:00000112&r=mon |
| By: | Nikolaos Antonakakis (Webster University, Wien, Austria and University of Portsmouth, Portsmouth, United Kingdom); Juncal Cunado (University of Navarra, Pamplona, Spain); Luis A. Gil-Alana (University of Navarra, Pamplona, Spain); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria) |
| Abstract: | This study examines the inflation persistence using both online and official price indexes in Argentina, Brazil, China, Japan, Germany, South Africa, the UK and the US, using fractional integration technique. The main results suggest that the degree of persistence, estimated by the long-memory parameter, is smaller when using online price indexes (believed to be a more realistic measure of inflation), mainly in the cases of Argentina, Brazil, China and the UK. Monetary policy implications are discussed. |
| Keywords: | Official and online inflation indexes, fractional integration, persistence |
| JEL: | C22 E43 G12 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201663&r=mon |
| By: | Guillermo A. Calvo |
| Abstract: | The paper discusses policy relevant models, going from (1) chronic inflation in the 20th century after WWII, to (2) credit sudden stop episodes that got exacerbated in Developed Market economies after the 2008 Lehman crisis, and appear to be associated with chronic deflation. The discussion highlights the importance of expectations and liquidity, and warns about the risks of relegating liquidity to a secondary role, as has been the practice in mainstream macro models prior to the Great Recession. |
| JEL: | E31 E41 E42 E44 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22535&r=mon |
| By: | Tirthankar Roy |
| Abstract: | Banking experienced large growth in colonial India along with a process of commercialization of agriculture. Yet, the rate of aggregate saving or investment remained low. This article is an attempt to resolve this paradox. It suggests that traditional forms of banking were helped by the formalization of indigenous negotiable instruments, but that transactions between bankers, merchants, and peasants were characterized by a limited use of legal instruments. The limited circulation of bills in this sphere is attributed, among other factors, to high seasonality in the demand for money. Seasonality-induced distortions in the organization of the money market made indigenous banking an unsuitable agent to promote saving and finance industrialization. |
| JEL: | N0 F3 G3 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:67418&r=mon |
| By: | Reifschneider, David L. |
| Abstract: | Current forecasts suggest that the federal funds rate in the future is likely to level out at a rather low level by historical standards. If so, then the FOMC will have less ability than in the past to cut short-term interest rates in response to a future recession, suggesting a risk that economic downturns could turn out to be more severe as a result. However, simulations of the FRB/US model of a severe recession suggest that large-scale asset purchases and forward guidance about the future path of the federal funds rate should be able to provide enough additional accommodation to fully compensate for a more limited to cut short-term interest rates in most, but probably not all, circumstances. |
| Keywords: | Monetary policy ; Asset purchases ; Forward guidance ; Zero lower bound |
| JEL: | E5 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2016-68&r=mon |
| By: | Barnett, William; Su, Liting |
| Abstract: | While credit cards provide transactions services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. However, economic aggregation theory and index number theory measure service flows and are based on microeconomic theory, not accounting. Barnett, Chauvet, Leiva-Leon, and Su (2016) derived the aggregation and index number theory needed to measure the joint services of credit cards and money. They derived and applied the theory under the assumption of risk neutrality. But since credit card interest rates are high and volatile, risk aversion may not be negligible. We extend the theory by removing the assumption of risk neutrality to permit risk aversion in the decision of the representative consumer. |
| Keywords: | Credit Cards, Money, Credit, Aggregation, Monetary Aggregation, Index Number Theory, Divisia Index, Risk, Euler Equations, Asset Pricing. |
| JEL: | C43 C53 C58 E1 E3 E40 E41 E51 E52 E58 G17 |
| Date: | 2016–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:73248&r=mon |
| By: | Gregory Bauer; Gurnain Pasricha; Rodrigo Sekkel; Yaz Terajima |
| Abstract: | This paper analyzes the implications of the global financial cycle for conventional and unconventional monetary policies and macroprudential policy in small, open economies such as Canada. The paper starts by summarizing recent work on financial cycles and their growing correlation across borders. The resulting global financial cycle may be followed by a financial crisis that is quite costly. The cycle causes time variation in global risk premia in fixed income, equity and foreign exchange markets. In turn, time-varying global risk premia affect the transmission mechanisms of both conventional and unconventional monetary policies in small, open economies. While there are large costs associated with financial crises, the paper summarizes new work showing that the central banks’ leaning against the effects of the global financial cycle would typically be too costly. The paper concludes with some suggestions for the formation of macroprudential policies that are designed to offset the financial imbalances that grow during the boom phase of the cycle. |
| Keywords: | International financial markets; Financial stability; Housing; Monetary policy framework |
| JEL: | E42 E43 E44 E52 F41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:16-38&r=mon |
| By: | Juselius, Mikael; Borio, Claudio; Disyatat, Piti; Drehmann, Mathias |
| Abstract: | Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing medium-term economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. As a result, policy rates have been persistently and systematically below this measure. Moreover, we find that monetary policy, through the financial cycle, has a long-lasting impact on output and, by implication, on real interest rates. Therefore, a narrative that attributes the decline in real rates primarily to an exogenous fall in the natural rate is incomplete. The influence of monetary and financial factors should not be ignored. Exploiting these results, an illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to higher output even in the long run. |
| Keywords: | natural interest rate, financial cycle, monetary policy, credit, business cycle |
| JEL: | E32 E40 E44 E50 E52 |
| Date: | 2016–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_024&r=mon |
| By: | Behn, Markus; Gross, Marco; Peltonen, Tuomas |
| Abstract: | We develop an integrated Early Warning Global Vector Autoregressive (EW-GVAR) model to quantify the costs and benefits of capital-based macroprudential policy measures. Our findings illustrate that capital-based measures are transmitted both via their impact on the banking system's resilience and via indirect macro-financial feedback effects. The feedback effects relate to dampened credit and asset price growth and, depending on how banks move to higher capital ratios, can account for up to a half of the overall effectiveness of capital- based measures. Moreover, we document significant cross-country spillover effects, especially for measures implemented in larger countries. Overall, our model helps to understand how and through which channels changes in capitalization affect bank lending and the wider economy and can inform policy makers on the optimal calibration and timing of capital-based macroprudential instruments. JEL Classification: G01, G21, G28 |
| Keywords: | cost-benefit analysis, early-warning system, GVAR, macroprudential policy |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161935&r=mon |
| By: | Brauning, Falk (Federal Reserve Bank of Boston); Fecht, Falko (Frankfurt School of Finance & Management) |
| Abstract: | We empirically investigate the effect that relationship lending has on the availability and pricing of interbank liquidity. Our analysis is based on a daily panel of unsecured overnight loans between 1,079 distinct German bank pairs from March 2006 to November 2007, a period that includes the 2007 liquidity crisis that marked the beginning of the 2007/08 global financial crisis. We find that (i) relationship lenders are more likely to provide liquidity to their closest borrowers, (ii) particularly opaque borrowers obtain liquidity at lower rates when borrowing from their relationship lenders, and (iii) during the crisis, relationship lenders provided cheaper loans to their closest borrowers. Our results hold after controlling for search frictions as well as a large set of (time-varying) bank and bank-pair control variables and fixed effects. While we find some indication that lending relationships help banks reduce search frictions in the over-the-counter interbank market, our results establish that bank-pair relationships have a significant impact on interbank credit availability and pricing due to mitigating uncertainty about counterparty credit quality. |
| Keywords: | interbank market; relationship lending; financial crisis; central counterparty; financial contagion |
| JEL: | D61 E44 G10 G21 |
| Date: | 2016–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:16-7&r=mon |
| By: | Günes Kamber; Benjamin Wong (Reserve Bank of New Zealand) |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2016/06&r=mon |