Quantitative easing in a monetary union

2019 ◽  
Vol 72 (1) ◽  
pp. 124-148 ◽  
Author(s):  
Francesco Saraceno ◽  
Roberto Tamborini
Keyword(s):  
Monetary Policy ◽  
Monetary Union ◽  
New Keynesian ◽  
Quantitative Easing ◽  
Monetary Policies ◽  
Risky Assets ◽  
Country Level ◽  
Asymmetric Shocks ◽  
Advanced Economies ◽  
Different Types

Abstract The long season of unconventional monetary policies in advanced economies seems to be coming to an end. How can quantitative easing (QE) be effective where conventional monetary policy fails? How does it work in the peculiar environment of a monetary union? We study this latter case modelling a monetary union as the aggregate of two countries characterized by New Keynesian output and inflation relationships, with a Tobinian money market equation. QE is operated by the single central bank by expanding money supply in exchange for risky assets throughout the union. We assess the stabilization capacity of QE under different types of symmetric and asymmetric shocks, in which case fiscal accommodation at the country level should also intervene.

Conclusions

2017 ◽  
Author(s):  
Yilmaz Akyüz
Keyword(s):  
Monetary Policy ◽  
Financial Crisis ◽  
Interest Rates ◽  
Global Financial Crisis ◽  
Developing Economies ◽  
Quantitative Easing ◽  
Unconventional Monetary Policy ◽  
Advanced Economies ◽  
The Global Financial Crisis ◽  
Zero Bound

The preceding chapters have examined the deepened integration of emerging and developing economies (EDEs) into the international financial system in the new millennium and their changing vulnerabilities to external financial shocks. They have discussed the role that policies in advanced economies played in this process, including those that culminated in the global financial crisis and the unconventional monetary policy of zero-bound interest rates and quantitative easing adopted in response to the crisis, as well as policies in EDEs themselves....

Asymmetric incentives and the new politics of monetary policy

2020 ◽  
Author(s):  
Gene Park ◽  
Gabrielle Cheung ◽  
Saori N Katada
Keyword(s):  
Monetary Policy ◽  
Inflation Rate ◽  
Policy Implications ◽  
Quantitative Easing ◽  
Monetary Policies ◽  
New Politics ◽  
Important Policy ◽  
Central Bankers

Abstract This article develops and tests a theory of asymmetric incentives to explain why politicians might be less motivated to confront deflation than inflation. Leveraging Japan as a least-likely crucial case, we analyze the conditions that lead legislators to take advantage of their power to summon central bankers for questioning. We find that even moderate inflation makes it more likely that legislators will summon central bankers compared to periods when the inflation rate is near zero. By contrast, deflation has either no effect or reduces the likelihood of summonses. We also find some evidence that unconventional monetary policies to combat deflation, specifically quantitative easing, are likely to invite greater legislative scrutiny. These findings have important policy implications. While deflation is widely viewed as pernicious and more difficult to exit than inflation, there are weaker incentives for politicians to address it.

WHY JOIN A CURRENCY UNION? A NOTE ON THE IMPACT OF BELIEFS ON THE CHOICE OF MONETARY POLICY

2011 ◽  
Vol 16 (2) ◽  
pp. 320-334 ◽  
Author(s):  
Federico Ravenna
Keyword(s):  
Monetary Policy ◽  
Open Economy ◽  
Policy Maker ◽  
Small Open Economy ◽  
Optimal Choice ◽  
New Keynesian ◽  
Monetary Policies ◽  
Keynesian Model ◽  
The Impact ◽  
Better Than

We argue that a fixed exchange rate can be an optimal choice even if a policy maker could commit to the first-best monetary policy whenever the private sector's beliefs reflect incomplete information about the policy maker's dependability. This model implies that joining a currency area may be optimal for its impact not on the behavior of the policy maker, but on the beliefs of the private sector. Monetary policies are evaluated using a new Keynesian model of a small open economy solved under imperfect policy credibility. We quantify the minimum distance between announced policy and the private sector's beliefs that is necessary for a peg to perform better than an independent monetary policy when the policy maker can commit to the first-best policy.

scholarly journals INFLATION RISK AND OPTIMAL MONETARY POLICY

2009 ◽  
Vol 13 (S1) ◽  
pp. 58-75 ◽  
Author(s):  
William T. Gavin ◽  
Benjamin D. Keen ◽  
Michael R. Pakko
Keyword(s):  
Monetary Policy ◽  
Term Structure ◽  
New Keynesian ◽  
Optimal Monetary Policy ◽  
Monetary Policies ◽  
Inflation Risk ◽  
Long Run ◽  
Order Of Magnitude ◽  
New Keynesian Models ◽  
Sticky Wages

This paper shows that the optimal monetary policies recommended by New Keynesian models still imply a large amount of inflation risk. We calculate the term structure of inflation uncertainty in New Keynesian models when the monetary authority adopts the optimal policy. When the monetary policy rules are modified to include some weight on a price path, the economy achieves equilibria with substantially lower long-run inflation risk. With either sticky prices or sticky wages, a price path target reduces the variance of inflation by an order of magnitude more than it increases the variability of the output gap.

Financial Conditions Indexes and Monetary Policy in Asia

2017 ◽  
Vol 16 (2) ◽  
pp. 83-117 ◽  
Author(s):  
Margarita Debuque-Gonzales ◽  
Maria Socorro Gochoco-Bautista
Keyword(s):  
Monetary Policy ◽  
Common Factor ◽  
The United States ◽  
The Philippines ◽  
Output Growth ◽  
Monetary Transmission ◽  
Financial History ◽  
Monetary Policies ◽  
Financial Conditions ◽  
Advanced Economies

This paper constructs quarterly financial conditions indexes (FCIs) for eight Asian economies—namely, Hong Kong, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, and Thailand—using a common factor methodology based on Hatzius et al. ( 2010 ). A wide array of financial data is included in the indexes based on identified monetary transmission channels in the literature. Bank-related indicators, various measures of financial stress and risk, and credit surveys, where available, are incorporated to fully reflect the state of the financing environment. The FCIs for Asia successfully capture important episodes in each economy's financial history, but only the indexes of financially advanced economies Japan and Singapore have sufficient forecasting power to predict output growth and inflation. High co-movement of Asian FCIs suggests highly similar monetary policies in the region that are strongly linked with monetary policy in the United States.

scholarly journals Credit Traps

2012 ◽  
Vol 102 (6) ◽  
pp. 3004-3032 ◽  
Author(s):  
Efraim Benmelech ◽  
Nittai K Bergman
Keyword(s):  
Monetary Policy ◽  
Banking Sector ◽  
Bank Lending ◽  
Quantitative Easing ◽  
Monetary Policies ◽  
Aggregate Investment ◽  
Financing Frictions

This paper studies the limitations of monetary policy in stimulating credit and investment. We show that, under certain circumstances, unconventional monetary policies fail in that liquidity injections into the banking sector are hoarded and not lent out. We use the term “credit traps” to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. We show that small contractions in monetary policy can lead to a collapse in lending. Our analysis demonstrates how quantitative easing may be useful in increasing collateral prices, bank lending, and aggregate investment. (JEL E44, E52, E58, G01)

scholarly journals Risk-taking Channel of Monetary Policy: Evidence from Indian Banking

2018 ◽  
Vol 13 (1) ◽  
pp. 1-20
Author(s):  
Sanjukta Sarkar ◽  
Rudra Sensarma
Keyword(s):  
Monetary Policy ◽  
Risk Taking ◽  
Default Risk ◽  
Market Risk ◽  
Jel Classification ◽  
Foreign Banks ◽  
Short Term ◽  
Risky Assets ◽  
Advanced Economies ◽  
Policy Transmission

Some recent articles have studied the link between the central bank’s monetary policy stance and the risk-taking behaviour of banks in the context of advanced economies. Loose monetary policy can encourage banks to reach for yield, which will increase their share of risky assets, and also induce them to use more short-term funding. We empirically examine the existence of this risk-taking channel of monetary policy transmission in India. We find that expansionary monetary policy may increase default risk particularly for foreign banks and new private sector banks. We also find that tightening of monetary policy leads to lower liquidity risk and market risk and the effects are stronger for foreign banks than for other bank groups. In terms of market risk, the effect on foreign banks is weaker in cases of monetary tightening compared to expansion. JEL Classification: G21, G28, G32

scholarly journals Central Bank Balance Sheet Policies and Spillovers to Emerging Markets

2017 ◽  
Vol 17 (172) ◽  
Author(s):  
Manmohan Singh ◽  
Haobin Wang
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Financial Stability ◽  
Emerging Market ◽  
Balance Sheet ◽  
Two Dimensions ◽  
Short Term ◽  
Monetary Policies ◽  
Policy Tool ◽  
Advanced Economies

We develop a theoretical model that shows that in the near future, the monetary policies of some key central banks in advanced economies (AEs) will have two dimensions—changes in short-term policy rates and balance sheet adjustments. This will affect emerging market economies (EMs), especially those with a pegged exchange rate, as these EMs primarily use a single monetary policy tool, i.e., the short-term policy rate. We show that changes in policy rates and balance sheet adjustments in AEs may differ in their respective financial spillovers to pegged EMs. Thus, it will be difficult for EMs to mitigate different types of spillovers with a single monetary policy tool. In that context, we use the model to show how EMs might use additional tools—capital controls and/or macro-prudential policy—to complement their monetary policy and financial stability toolkit. We also discuss how balance sheet adjustments that affect long-term interest rates may percolate to influence short-term interest rates via financial plumbing.

scholarly journals EMERGING FOREIGN EXCHANGE MARKETS AND MONETARY POLICY IN EURO AREA: EVIDENCE FROM THE CRISIS

2020 ◽  
Author(s):  
Milan Nedeljkovic ◽  
◽  
Nikola Vasiljevic ◽  
Keyword(s):  
Monetary Policy ◽  
Foreign Exchange ◽  
Emerging Market ◽  
Foreign Exchange Markets ◽  
Monetary Policy Shocks ◽  
Advanced Economies ◽  
Different Types ◽  
Policy Shocks ◽  
Exchange Markets ◽  
The Business Cycle

We examine how emerging market (EM) foreign exchange (FX) markets respond to innovations in the monetary policy in advanced economies over the crisis period. We focus on the case of the European Central Bank (ECB) which pursued a combination of different policies during the Eurozone sovereign crisis. In a new econometric framework, we identify responses of foreign exchange markets in three EM economies (Hungary, Poland and Turkey) to different types of ECB policies. We find weak effect of the ECB’s Euro liquidity provisions on the EM foreign exchange markets. In contrast, while the ECB’s foreign exchange liquidity provisions as well as government bond interventions and policy rate changes did not impact the FX levels, they led to higher uncertainty in the FX markets. The results are indicative of the additional, uncertainty channels through which monetary policy shocks in advanced economies may affect the business cycle fluctuations in the EM economies.

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