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on Monetary Economics |
| By: | Ahmet Benlialper (Department of Economics, Middle East Technical University, Ankara, Turkey); Hasan Cömert (Department of Economics, Middle East Technical University, Ankara, Turkey); Nadir Öcal (Department of Economics, Middle East Technical University, Ankara, Turkey) |
| Abstract: | In the last decades, many developing countries abandoned their existing policy regimes and adopted inflation targeting (IT) by which they aimed to control inflation through the use of policy interest rates. During the period before the crisis, most of these countries experienced large appreciations in their currencies. Given that appreciation helps central banks curb inflationary pressures, we ask whether central banks in developing countries have different policy stances with respect to depreciation and appreciation in order to hit their inflation targets. To that end, we analyze central banks’ interest rate decisions by estimating a nonlinear monetary policy reaction function for a set of IT developing countries using a panel threshold model. Our findings suggest that during the period under investigation (2002-2008), central banks in developing countries implementing IT tolerated appreciation by remaining inactive in case of appreciation, but fought against depreciation pressures beyond some threshold. We are unable to detect a similar asymmetric response for IT advanced countries suggesting that asymmetric policy stance is peculiar to IT developing countries. Although there is a vast literature on asymmetric responses of various central banks to changes in inflation and output, asymmetric stance with regards to exchange rate has not been analyzed yet in a rigorous way especially within the context of IT developing countries. In this sense, our study is the first in the literature and thus is expected to fill an important gap. |
| Keywords: | Inflation Targeting, Central Banking, Developing Countries, Exchange Rates |
| JEL: | E52 E58 E31 F31 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:1702&r=mon |
| By: | Ciccarelli, Matteo; Osbat, Chiara |
| Abstract: | After 2012, inflation has been unexpectedly low across much of the developed world and economists speak of a “missing inflation” puzzle, namely inflation was expected to be higher on the back of an ongoing recovery. This paper investigates the causes and consequences of low inflation in the euro area after 2012 and analyses whether monetary policy has been successful in dampening the risks associated to low inflation. The paper finds that the missing inflation was primarily due to cyclical factors – domestic in the earlier part of the period and global in the latter part – and that the Phillips curve remains a useful tool in understanding inflation dynamics over the period of interest. The succession of negative shocks constrained headline inflation for a prolonged period, and there is evidence of an increase in the persistence of inflation and a fall in the trend inflation rate, which had begun to have a greater influence on longer-term inflation expectations. This may have signalled uncertainty over the effectiveness of unconventional monetary policy measures, but public belief in the ECB’s commitment to keep the annual rate of HICP inflation below but close to 2% has remained intact. The paper concludes that unconventional monetary policy measures are effective in mitigating the downside risks to price stability, curtailing risks of de-anchoring, and expanding aggregate demand. JEL Classification: E31, E52, E58 |
| Keywords: | inflation expectations, low inflation, Phillips curve, unconventional monetary policy |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2017181&r=mon |
| By: | Michael T. Belongia; Peter N. Ireland |
| Abstract: | Discussions of monetary policy rules after the 2007-2009 recession highlight the potential ineffectiveness of a central bank’s actions when the short-term interest rate under its control is limited by the zero lower bound. This perspective assumes, in a manner consistent with the canonical New Keynesian model, that the quantity of money has no role to play in transmitting a central bank’s actions to economic activity. This paper examines the validity of this claim and investigates the properties of alternative monetary policy rules based on control of the monetary base or a monetary aggregate in lieu of the capacity to manipulate a short-term interest rate. The results indicate that rules of this type have the potential to guide monetary policy decisions toward the achievement of a long-run nominal goal without being constrained by the zero lower bound on a nominal interest rate. They suggest, in particular, that by exerting its influence over the monetary base or a broader aggregate, the Federal Reserve could more effectively stabilize nominal income around a long-run target path, even in a low or zero interest-rate environment. |
| JEL: | E31 E32 E37 E42 E51 E52 E58 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23157&r=mon |
| By: | Elena Andreou; Snezana Eminidou; Marios Zachariadis |
| Abstract: | We use monthly data across fifteen euro-area economies for the period 1985:1-2015:3 to obtain monetary policy changes that can be regarded as surprises for different types of consumers. A novel feature of our empirical approach is the estimation of monetary policy surprises based on changes in monetary policy that were unanticipated according to the consumers stated beliefs about the economy. We go on to investigate how these monetary policy surprises affect consumers’ inflation expectations. We find that such monetary policy surprises can have the opposite impact on inflation expectations to those obtained under the assumption that consumers are well informed about a set of macroeconomic variables describing the state of the economy. More specifically, when we relax the assumption of well informed consumers by focusing instead on their stated beliefs about the economy, unanticipated increases in the interest rate raise inflation expectations. This is consistent with imperfect information theoretical settings where unanticipated increases in interest rates are interpreted as positive news about the state of the economy by consumers that know policymakers have relatively more information. This impact changes sign since the Crisis. |
| Keywords: | Inflation; Expectations; Unanticipated; Monetary policy; Beliefs; Crisis |
| JEL: | E31 E52 F41 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:01-2017&r=mon |
| By: | Link, Thomas; Neyer, Ulrike |
| Abstract: | This paper introduces a theoretical model of an interbank market and a central bank that implements an interest corridor system in order to exert control over the overnight interbank rate. We analyze in how far interbank market frictions in the form of broadly defined transaction costs influence banks' demand for excess reserves and the interbank market outcome under different corridor regimes. The friction costs might stem from asymmetric information about counterparty credit risks, reflect differing borrowing/lending conditions in fragmented money markets, or result from new regulatory capital rules affecting interbank exposures. We show that the transaction cost effect on banks' demand for excess reserves and on the interbank market outcome, as well as the importance of bank transaction cost heterogeneity and of the corridor width in this context, depend crucially on whether the central bank runs a standard or a floor operating system. |
| JEL: | E52 E58 G21 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145853&r=mon |
| By: | Julio A. Carrillo; Enrique G. Mendoza; Victoria Nuguer; Jessica Roldán-Peña |
| Abstract: | Quantitative analysis of a New Keynesian model with the Bernanke-Gertler accelerator and risk shocks shows that violations of Tinbergen’s Rule and strategic interaction between policymaking authorities undermine significantly the effectiveness of monetary and financial policies. Separate monetary and financial policy rules, with the latter subsidizing lenders to encourage lending when credit spreads rise, produce higher welfare and smoother business cycles than a monetary rule augmented with credit spreads. The latter yields a tight money-tight credit regime in which the interest rate responds too much to inflation and not enough to adverse credit conditions. Reaction curves for the choice of policy-rule elasticity that minimizes each authority’s loss function given the other authority’s elasticity are nonlinear, reflecting shifts from strategic substitutes to complements in setting policy-rule parameters. The Nash equilibrium is significantly inferior to the Cooperative equilibrium, both are inferior to a first-best outcome that maximizes welfare, and both produce tight money-tight credit regimes. |
| JEL: | E3 E44 E52 G18 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23151&r=mon |
| By: | Breitenlechner, Maximilian; Scharler, Johann |
| Abstract: | The bank lending channel (BLC) holds that monetary policy is transmitted through the supply of bank loans. While the original formulation of the BLC stresses an imperfect substitution between reservable and non-reservable sources of banks' funding, as the transmission mechanism, recent contributions highlight changes of banks' risk premia as a more relevant link between monetary policy and loan supply. Using U.S. data, we quantify the relative importance of these two complementary channels with a SVAR approach. The differently transmitted monetary policy shocks are identified with sigh restrictions that disentangle different dynamics on the market for banks' wholesale funding. We find that policy shocks associated with dynamics on the wholesale funding market that are consistent with the traditional BLC or changes in banks' risk premia, contribute both to the variation of total loans, with the latter mechanism being nearly twice as strong as the traditional BLC. |
| JEL: | E44 E52 C32 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145679&r=mon |
| By: | Ricardo M. Masolo (Bank of England; Centre for Macroeconomics (CFM)); Francesca Monti (Bank of England; Centre for Macroeconomics (CFM)) |
| Abstract: | Allowing for ambiguity, or Knightian uncertainty, about the behavior of the policy-maker helps explain the evolution of trend in ation in the US in a simple new-Keynesian model, without resorting to exogenous changes in the in ation target. Using Blue Chip survey data to gauge the degree of private sector confidence, our model helps reconcile the difference between target in ation and the in ation trend measured in the data. We also show how, in the presence of ambiguity, it is optimal for policymakers to lean against the private sectors pessimistic expectations. |
| Keywords: | Ambiguity Aversion, Monetary Policy, Trend Inflation |
| JEL: | D84 E31 E43 E52 E58 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1709&r=mon |
| By: | Schwanebeck, Benjamin; Palek, Jakob |
| Abstract: | The financial crisis proved strikingly that stabilizing the price level is a necessary but not a sufficient condition to ensure macroeconomic stability. The obvious candidate for addressing systemic risk is macroprudential policy. In this paper we study the optimal (Ramsey) monetary and macroprudential policy mix in a currency union in the case of different kinds of aggregate and idiosyncratic shocks. The monetary and macroprudential instruments are modelled as independent tools. With a union-wide macroprudential tool, full absorption on the aggregate level is possible, but welfare losses due to fluctuations in relative variables prevail. With country-specific macroprudential tools, full absorption of shocks is always possible. But it is only optimal as long as there is no difference in the financing of production factors. Evaluating the performance of different policy regimes shows that the additional welfare gain from having country-specific macroprudential tools vanishes as the ability of the central bank to commit decreases. |
| JEL: | E58 E32 E44 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145520&r=mon |
| By: | Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University) |
| Abstract: | Should an inflation-targeting central bank have an explicit tolerance band around its inflation target? This paper provides an answer derived from the Swedish experience. The Riksbank is exceptional in the sense that it first adopted and later abolished an explicit band and is currently considering bringing it back. We conclude that the band should be explicit for several reasons. Most important, an inflation-targeting central bank should be open and transparent to the public regarding its actual ability to control inflation. We discuss how a numerical measure of the proper width of the band can be constructed to foster communication and credibility. |
| Keywords: | inflation targeting; tolerance band; tolerance interval; monetary policy; the Riksbank; Sweden |
| JEL: | E30 E31 E58 |
| Date: | 2017–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2017_002&r=mon |
| By: | Francis Leni Anguyo (School of Economics, University of Cape Town, South Africa); Rangan Gupta (Department of Economics, University of Pretoria, South Africa and IPAG Business School, Paris, France); Kevin Kotze (School of Economics, University of Cape Town, South Africa) |
| Abstract: | This paper considers the role of financial frictions and the conduct of monetary policy in Uganda. It makes use of a dynamic stochastic general equilibrium model, which incorporates small open-economy features and financial frictions that are introduced though the activities of heterogeneous agents in the household. Most of the parameters in the model are estimated with the aid of Bayesian techniques and quarterly macroeconomic data from 2000q1 to 2015q4. The results suggest that the central bank currently responds to changes in the interest rate spread, despite the fact that capital and financial markets are relatively inefficient in this low income country. In addition, the analysis also suggests that to reduce macroeconomic volatility the central bank should continue to respond to these financial sector frictions and that it may be possible to derive a more favourable sacrifice ratio by making use of a slightly more aggressive response to macroeconomic developments. |
| Keywords: | Monetary policy, inflation-targeting, financial frictions, small open-economy, low income country, dynamic stochastic general equilibrium model, Bayesian estimation |
| JEL: | E32 E52 F41 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201710&r=mon |
| By: | Martin Eichenbaum; Benjamin K. Johannsen; Sergio Rebelo |
| Abstract: | This paper documents two facts about the behavior of floating exchange rates in countries where monetary policy follows a Taylor-type rule. First, the current real exchange rate is highly negatively correlated with future changes in the nominal exchange rate at horizons greater than two years. This negative correlation is stronger the longer is the horizon. Second, for most countries, the real exchange rate is virtually uncorrelated with future inflation rates both in the short and in the long run. We develop a class of models that can account for these and other key observations about real and nominal exchange rates. |
| JEL: | E52 F31 F41 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23158&r=mon |
| By: | Francis Leni Anguyo (School of Economics, University of Cape Town); Rangan Gupta (Department of Economics, University of Pretoria); Kevin Kotze (School of Economics, University of Cape Town) |
| Abstract: | This paper considers the role of financial frictions and the conduct of monetary policy in Uganda. It makes use of a dynamic stochastic general equilibrium model, which incorporates small open-economy features and financial frictions that are introduced though the activities of heterogeneous agents in the household. Most of the parameters in the model are estimated with the aid of Bayesian techniques and quarterly macroeconomic data from 2000q1 to 2015q4. The results suggest that the central bank currently responds to changes in the interest rate spread, despite the fact that capital and financial markets are relatively inefficient in this low income country. In addition, the analysis also suggests that to reduce macroeconomic volatility the central bank should continue to respond to these financial sector frictions and that it may be possible to derive a more favourable sacrifice ratio by making use of a slightly more aggressive response to macroeconomic developments. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:ctn:dpaper:2017-01&r=mon |
| By: | Chatelain, Jean-Bernard; Ralf, Kirsten |
| Abstract: | A pre-test of Ramsey optimal policy versus time-consistent policy rejects time-consistent policy and (optimal) simple rule for the U.S. Fed during 1960 to 2006, assuming the reference new-Keynesian Phillips curve transmission mechanism with auto-correlated cost-push shock. The number of reduced form parameters is larger with Ramsey optimal policy than with time-consistent policy although the number of structural parameters, including central bank preferences, is the same. The new-Keynesian Phillips curve model is under-identified with Ramsey optimal policy (one identifying equation missing) and hence under-identified for time-consistent policy (three identifying equations missing). Estimating a structural VAR for Ramsey optimal policy during Volcker-Greenspan period, the new-Keynesian Phillips curve slope parameter and the Fed's preferences (weight of the volatility of the output gap) are not statistically different from zero at the 5% level. |
| Keywords: | Ramsey optimal policy, Time-consistent policy, Identification, Central bank preferences, New-Keynesian Phillips curve. |
| JEL: | C61 C62 E31 E52 E58 |
| Date: | 2017–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:76831&r=mon |
| By: | Ben Fung; Scott Hendry; Warren E. Weber |
| Abstract: | This paper studies the period in Canada when both private bank notes and government-issued notes (Dominion notes) were simultaneously in circulation. Because both of these notes shared many of the characteristics of today's digital currencies, the experience with these notes can be used to draw lessons about how digital currencies might perform. The paper begins with a brief historical review of how these notes came into existence and of the regulations regarding their issuance. It examines historical evidence on how desirable bank notes were as media of exchange by examining how well they functioned with respect to ease of transacting, counterfeiting, safety, scarcity, and par exchange (a uniform currency). It then examines whether the introduction of government-issued notes improved how bank notes functioned as media of exchange. It finds that they did not. Improvements in the functioning of bank notes were due to changes in government regulation. Using the Canadian experience and that of the United States, the paper concludes that privately issued digital currencies will not be perfectly safe without government intervention, government-issued digital currency will not drive out existing private digital currencies, and government intervention will be required for privately issued and government-issued digital currencies to be a uniform currency. |
| Keywords: | Bank notes, E-Money, Financial services |
| JEL: | E41 E42 E58 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:17-5&r=mon |
| By: | Junichi Fujimoto (National Graduate Institute for Policy Studies); Ko Munakata (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Keio University) |
| Abstract: | To reveal a policy mandate for financial stability, we introduce a frictional credit market with a search and matching process into a standard New Keynesian model with nominal rigidities in the goods market, and then investigate optimal policy under financial frictions. We show that a second-order approximation of social wel- fare includes terms for credit, in addition to terms for inflation and consumption, so that any optimal policy must hold responsibility for financial and price stabilities. We highlight this issue by considering several tools for monetary and macropru- dential policy. We find that optimal monetary policy requires keeping the credit market countercyclical against the real economy. Also, optimal macroprudential policy, which poses constraints on supply and demand sides of credit, reduces ex- cessive variations in lending and contributes to both financial and price stabilities. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ngi:dpaper:16-30&r=mon |
| By: | Raphael A. Auer; Andrei A. Levchenko; Philip Sauré |
| Abstract: | We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry-level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of international input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disinflation and high inflation. |
| Keywords: | international inflation synchronization, globalisation, inflation, input linkages, monetary policy, global value chain, production structure, input-output linkages, supply chain |
| JEL: | E31 E52 E58 F02 F14 F33 F41 F42 F62 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2017-03&r=mon |
| By: | Geiger, Martin; Scharler, Johann |
| Abstract: | We study the revision of macroeconomic expectations due to aggregate demand, aggregate supply and monetary policy shocks. Using zero and sign restrictions, the macroeconomic shocks are identified in a vector autoregressive model in which we include survey data that measure macroeconomic expectations. We find that, in general, people tend to revise expectations in a way that is consistent with standard theory. In particular, people appear to differentiate among the three types of shocks and tend to revise expectations according to the characteristics of the shock. Nevertheless, the accuracy of responses varies with respect to which shock we consider. People process demand shocks most accurately meaning that they revise expectations about economic activity, inflation and the interest rate in a way consistent with standard theory. For supply shocks we find that people at least revise expectations about economic activity and inflation in a theory consistent manner. In the event of monetary policy shocks, people tend to be relatively uncertain about how to process these shocks. |
| JEL: | E00 E32 D84 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145747&r=mon |
| By: | Koetter, Michael; Podlich, Natalia; Wedow, Michael |
| Abstract: | We test if unconventional monetary policy instruments influence the competitive conduct of banks. Between q2:2010 and q1:2012, the ECB absorbed €218 billion worth of government securities from five EMU countries under the Securities Markets Programme (SMP). Using detailed security holdings data at the bank level, we show that banks exposed to this unexpected (loose) policy shock mildly gained local loan and deposit market shares. Shifts in market shares are driven by banks that increased SMP security holdings during the lifetime of the program and that hold the largest relative SMP portfolio shares. Holding other securities from periphery countries that were not part of the SMP amplifies the positive market share responses. Monopolistic rents approximated by Lerner indices are lower for SMP banks, suggesting a role of the SMP to re-distribute market power differentially, but not necessarily banking profits. JEL Classification: C30, C78, G21, G28, L51 |
| Keywords: | competition, security markets program, unconventional monetary policy |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172017&r=mon |
| By: | Rüth, Sebastian; Bachmann, Rüdiger |
| Abstract: | What are the macroeconomic consequences of changes in residential mortgage market loan-to-value (LTV) ratios? In a structural VAR, real GDP and business investment increase significantly following an expansionary LTV shock. The impact on residential investment, however, is contingent on the systematic reaction of monetary policy. Historically, the FED responded directly to lower collateral requirements by significantly raising the policy instrument, thereby increasing mortgage rates and reducing residential investment. In a counterfactual policy experiment, where the Federal Funds rate remains constant after the shock, the reaction of non-residential GDP components is magnified and residential investment increases significantly. While firms increase their borrowing after a relaxation of bank lending standards, whether monetary policy reacts endogenously or is held constant, household debt only increases in an environment of a counterfactually constant Federal Funds rate. |
| JEL: | E30 E44 E52 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145826&r=mon |
| By: | Emmanuel Farhi; Ivan Werning |
| Abstract: | This paper extends the benchmark New-Keynesian model with a representative agent and rational expectations by introducing two key frictions: (1) incomplete markets with uninsurable idiosyncratic risk and occasionally-binding borrowing constraints; and (2) bounded rationality in the form of level- k thinking. Compared to the benchmark model, we show that the interaction of these two frictions leads to a powerful mitigation of the effects of monetary policy, which is much more pronounced at long horizons. This offers a potential rationalization of the ?forward guidance puzzle?. Each of these frictions, in isolation, would lead to no or much smaller departures from the benchmark model. We conclude that the interaction of bounded rationality and is important. |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:503421&r=mon |
| By: | Mazelis, Falk |
| Abstract: | This paper investigates the heterogeneous impact of monetary policy shocks on financial intermediaries. I distinguish between traditional banks and shadow banks based on their ability to raise debt and equity funding. The functional form for both intermediaries imposes no constraints ex ante, but a Bayesian estimation of key parameters results in traditional banks having a comparative advantage at raising debt while shadow banks are better at raising equity. In line with empirical observations, shadow bank lending moves in the opposite direction to bank lending following monetary policy shocks, which mitigates aggregate credit responses. The recognition of a distinct shadow banking sector results in an amplified propagation of real shocks and a muted propagation of financial shocks. This identification can help in assessing effects of financial regulation on the economy. A historical shock decomposition highlights the roles of traditional banks and shadow banks in the run-up to the 2008 financial crisis. |
| JEL: | E32 E44 G20 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145763&r=mon |
| By: | Cheung, Yin-Wong; Chinn, Menzie D.; Garcia Pascual, Antonio; Zhang, Yi |
| Abstract: | Previous assessments of nominal exchange rate determination, following Meese and Rogoff (1983) have focused upon a narrow set of models. Cheung et al. (2005) augmented the usual suspects with productivity based models, and "behavioral equilibrium exchange rate" models, and assessed performance at horizons of up to 5 years. In this paper, we further expand the set of models to include Taylor rule fundamentals, yield curve factors, and incorporate shadow rates and risk and liquidity factors. The performance of these models is compared against the random walk benchmark. The models are estimated in error correction and first-difference specifications. We examine model performance at various forecast horizons (1 quarter, 4 quarters, 20 quarters) using differing metrics (mean squared error, direction of change), as well as the “consistency” test of Cheung and Chinn (1998). No model consistently outperforms a random walk, by a mean squared error measure, although purchasing power parity does fairly well. Moreover, along a direction-of-change dimension, certain structural models do outperform a random walk with statistical significance. While one finds that these forecasts are cointegrated with the actual values of exchange rates, in most cases, the elasticity of the forecasts with respect to the actual values is different from unity. Overall, model/specification/currency combinations that work well in one period will not necessarily work well in another period. JEL Classification: F31, F47 |
| Keywords: | behavioral equilibrium exchange rate model, exchange rates, forecasting performance, interest rate parity, monetary model |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172018&r=mon |
| By: | Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:503446&r=mon |
| By: | Wix, Carlo; Schüwer, Ulrich |
| Abstract: | This paper explores how credit demand affects the pass-through of monetary policy to bank lending. We employ a novel identification strategy based on exploiting exogenous cross-sectional variation in local mortgage credit demand across U.S. counties following the occurrence of large natural disasters. First, we show that large natural disasters cause increased local credit demand in the short-term and reduced local credit demand in the medium-term, which we interpret as intertemporal substitution. We then test whether the effect of monetary policy on bank lending is different for unaffected counties and counties subject to an exogenously reduced credit demand following a natural disaster. We find that credit growth associated with a one percentage point decrease in the federal funds rate is 9 percentage points higher in counties with reduced credit demand relative to unaffected counties. Hence, our results suggest that monetary policy is more effective when credit demand is low. |
| JEL: | E52 G21 Q54 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145943&r=mon |
| By: | Aggarwal, Sakshi |
| Abstract: | This paper empirically analyses India’s money demand function during the period 1996 to 2013 using quarterly data. Cointegration test suggests that money demand represented by M1 and Interest Rate have a unit root, whereas in the presence of structural break both of the variables are found to be stationary which implies that shocks are temporary in nature. It was found that there is no long term equilibrium relationship in the money demand function. Moreover, when the money demand function was estimated using dynamic OLS, it is concluded that GDP and short term interest rate has a positive impact on money demand (M1). |
| Keywords: | Demand for Money, Monetary Policy, Cointegration |
| JEL: | E41 E52 |
| Date: | 2017–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:76967&r=mon |
| By: | Sebastian Edwards |
| Abstract: | On December 1933, John Maynard Keyes published an open letter to President Roosevelt, where he wrote: “The recent gyrations of the dollar have looked to me more like a gold standard on the booze than the ideal managed currency of my dreams.” In this paper I use high frequency data to investigate whether the gyrations of the dollar were unusually high throughout this period. My results show that although volatility was pronounced, it was not higher than during October 1931- July 1933. I analyze Keynes writings on the international monetary system in an effort to understand what he meant in his letter. I compare Keynes’s “The means to prosperity” with James P. Warburg’s plan for a “modified international standard.” |
| JEL: | B22 B26 B3 E31 E5 F31 N22 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23141&r=mon |
| By: | Gopalakrishnan, Balagopal; Mohapatra, Sanket |
| Abstract: | This paper examines the influence of global risk on the holding of gold by central banks based on annual data for 100 countries during 1990-2015. We use a dynamic panel generalized method of moments (GMM) model to estimate this effect, controlling for a variety of domestic factors. Consistent with portfolio diversification and perception of gold as a safe asset, we find that the gold holdings of central banks increase in response to higher global risk. This effect is larger for high-income countries than for developing countries. Moreover, greater capital account openness is associated with a stronger response of central banks’ gold holding to global risk, while a higher ratio of overall reserves to imports is associated with a weaker response. We also find evidence that the sensitivity depends on whether the currency regime followed is fixed or floating, with higher responsiveness in the case of fixed rate regimes. The baseline results are robust to alternate estimation methods, exclusion of crisis years, active and passive management of gold reserves and additional controls. These findings suggest that central banks adjust their gold holdings in response to changes in global risk conditions, with the magnitude of response depending on reserve management capacity and country-specific vulnerabilities. |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:14557&r=mon |
| By: | David Fielding; Christopher Hajzler; James MacGee |
| Abstract: | Inflation can affect both the dispersion of commodity-specific price levels across locations (relative price variability, RPV) and the dispersion of inflation rates (relative inflation variability, RIV). Some menu-cost models and models of consumer search suggest that the RIV-inflation relationship could differ from the RPV-inflation relationship. However, most empirical studies examine only RIV, finding that RIV is high when inflation is high. We examine city-level retail price data from Japan, Canada and Nigeria, and find that the impact of inflation on RIV differs from its effect on RPV. In particular, positive inflation shocks reduce RPV but raise RIV. |
| Keywords: | Inflation and prices |
| JEL: | E31 E50 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:17-3&r=mon |
| By: | Toni Beutler; Robert Bichsel; Adrian Bruhin; Jayson Danton |
| Abstract: | In this paper, we empirically analyze the transmission of realized interest rate risk - the gain or loss in a bank's economic capital caused by movements in interest rates - to bank lending. We exploit a unique panel data set that contains supervisory information on the repricing maturity profiles of Swiss banks and provides us with an individual measure of interest rate risk exposure net of hedging. Our analysis yields two main results. First, the impact of an interest rate shock on bank lending significantly depends on the individual exposure to interest rate risk. The higher a bank's exposure to interest rate risk, the higher the impact of an interest rate shock on its lending. Our estimates indicate that a year after a permanent 1 percentage point upward shock in nominal interest rates, the average bank in 2013Q3 would, ceteris paribus, reduce its cumulative loan growth by approximately 300 basis points. An estimated 12.5% of the impact would result from realized interest rate risk weakening the bank's economic capital. Second, bank lending appears to be mainly driven by capital rather than liquidity, suggesting that a higher capitalized banking system can better shield its creditors from shocks in interest rates. |
| Keywords: | Interest Rate Risk, Bank Lending, Monetary Policy Transmission |
| JEL: | E44 E51 E52 G21 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2017-04&r=mon |
| By: | Bholat, David |
| Abstract: | This article discusses a small scale pilot to harmonise three Bank of England statistical and regulatory data forms. The primary purpose of the pilot was to assess opportunities for improved operational efficiency in regulatory reporting. The broader purpose was to demonstrate how common data standards can be created from heterogeneous data sets. In the course of discussing the pilot, the article explains the history of how data has been collected at the Bank of England; how that process is changing in light of the Bank’s Strategic Plan; and why a common data standard is a critical financial market infrastructure fundamental to the success of global regulatory reform. JEL Classification: E58, C81, G18 |
| Keywords: | Bank of England, central banks, data standards, metadata, regulatory reporting |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbsps:201613&r=mon |