This paper studies the role of sticky prices for the monetary transmission mechanism, using disaggregated industry-level data from 205 US industries. There is substantial heterogeneity in the output responses of industries to monetary policy surprises. I show that an industry's response to monetary policy surprises is systematically related to an industry's degree of price stickiness as measured by the average frequency of price adjustment. The size of the differential reaction is economically large and statistically significant. The results suggest that sticky prices play an important role in the transmission of monetary policy, consistent with New Keynesian macroeconomic models. This result is robust to the inclusion of further industry-level control variables.
{"title":"Sectoral Output Effects of Monetary Policy: Do Sticky Prices Matter?","authors":"L. Henkel","doi":"10.2139/ssrn.3703656","DOIUrl":"https://doi.org/10.2139/ssrn.3703656","url":null,"abstract":"This paper studies the role of sticky prices for the monetary transmission mechanism, using disaggregated industry-level data from 205 US industries. There is substantial heterogeneity in the output responses of industries to monetary policy surprises. I show that an industry's response to monetary policy surprises is systematically related to an industry's degree of price stickiness as measured by the average frequency of price adjustment. The size of the differential reaction is economically large and statistically significant. The results suggest that sticky prices play an important role in the transmission of monetary policy, consistent with New Keynesian macroeconomic models. This result is robust to the inclusion of further industry-level control variables.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"38 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126654175","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study international currency risk in a two-country dynamic stochastic general equilibrium model under incomplete markets. The underlying sources of risk are direct shocks to productivity growth, shocks to a long-run risk component of productivity growth, shocks to a stochastic volatility component of productivity growth, and shocks to monetary policy. The long-run risk and stochastic volatility shocks have the interpretation of aggregate demand shocks. Cross-country heterogeneity in the model arises from three sources: differences in the long-run risk and stochastic volatility process parameters that we estimate using United States and Japanese total factor productivity data, differences in monetary policy parameters, and differences in export pricing. The driving force behind currency risk is heterogeneity in precautionary saving. Differences in monetary policy can generate moderate currency risk, but structural differences in productivity growth are more important. Export pricing conventions are not important sources of currency risk. Stochastic volatility shocks are key to generating volatility in the currency risk premium, but they do not help at all in explaining the forward premium bias/anomaly.
{"title":"Uncertainty, Long-Run, and Monetary Policy Risks in a Two-Country Macro Model","authors":"Kimberly A. Berg, Nelson C. Mark","doi":"10.3386/W27844","DOIUrl":"https://doi.org/10.3386/W27844","url":null,"abstract":"We study international currency risk in a two-country dynamic stochastic general equilibrium model under incomplete markets. The underlying sources of risk are direct shocks to productivity growth, shocks to a long-run risk component of productivity growth, shocks to a stochastic volatility component of productivity growth, and shocks to monetary policy. The long-run risk and stochastic volatility shocks have the interpretation of aggregate demand shocks. Cross-country heterogeneity in the model arises from three sources: differences in the long-run risk and stochastic volatility process parameters that we estimate using United States and Japanese total factor productivity data, differences in monetary policy parameters, and differences in export pricing. The driving force behind currency risk is heterogeneity in precautionary saving. Differences in monetary policy can generate moderate currency risk, but structural differences in productivity growth are more important. Export pricing conventions are not important sources of currency risk. Stochastic volatility shocks are key to generating volatility in the currency risk premium, but they do not help at all in explaining the forward premium bias/anomaly.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117160136","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
An extensive literature studies the international transmission of US monetary policy surprises (shifts in expected path of the policy rate). In this paper we show that changes in uncertainty around the expected path constitute an important additional dimension of spillover effects to global bond yields. In advanced countries, it is the term premium component of yields that responds to uncertainty. We find that this can be explained by an international portfolio balance mechanism. In contrast, for emerging countries it is the expected component of yields that reacts to uncertainty. This can be rationalized from a flight to safety channel. We find heterogeneity in the country-level response to uncertainty only in emerging economies and it is driven by the degree of financial openness. Finally, equity markets in both advanced and emerging countries also respond to US monetary policy uncertainty, but only since the financial crisis.
{"title":"The International Spillover Effects of US Monetary Policy Uncertainty","authors":"Aeimit Lakdawala, Timothy Moreland, M. Schaffer","doi":"10.2139/ssrn.3580933","DOIUrl":"https://doi.org/10.2139/ssrn.3580933","url":null,"abstract":"An extensive literature studies the international transmission of US monetary policy surprises (shifts in expected path of the policy rate). In this paper we show that changes in uncertainty around the expected path constitute an important additional dimension of spillover effects to global bond yields. In advanced countries, it is the term premium component of yields that responds to uncertainty. We find that this can be explained by an international portfolio balance mechanism. In contrast, for emerging countries it is the expected component of yields that reacts to uncertainty. This can be rationalized from a flight to safety channel. We find heterogeneity in the country-level response to uncertainty only in emerging economies and it is driven by the degree of financial openness. Finally, equity markets in both advanced and emerging countries also respond to US monetary policy uncertainty, but only since the financial crisis.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124813434","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Modern Monetary Theory has lately received much attention but also a fair amount of criticisms. The intention of this paper is to review the main arguments in contention to assess the validity of the arguments put forward and the limitations of its policies. Modern Monetary Theory questions orthodox self-imposed ideological constraints that might unnecessarily bound the extent of government policies.
{"title":"A Post Keynesian Review of Modern Monetary Theory","authors":"Narciso Túñez Area","doi":"10.2139/ssrn.3573406","DOIUrl":"https://doi.org/10.2139/ssrn.3573406","url":null,"abstract":"Modern Monetary Theory has lately received much attention but also a fair amount of criticisms. The intention of this paper is to review the main arguments in contention to assess the validity of the arguments put forward and the limitations of its policies. Modern Monetary Theory questions orthodox self-imposed ideological constraints that might unnecessarily bound the extent of government policies.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"69 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132993769","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Optimal remedies should be grounded in consumer harm. The caselaw interpreting the FTC's ability to obtain equitable monetary relief, however, has strayed far from this benchmark. Rather than requiring the FTC to show the marginal impact of deception, courts presume that everyone exposed to deception is harmed based on the fiction that the FTC has proven materiality. This approach is likely to overstate consumer harm in most circumstances involving a legitimate product, which will reduce the amount of beneficial marketplace information available to consumers. Several cases that challenge the FTC's legal authority to use 13(b) to obtain equitable monetary relief are awaiting certiorari determinations, which have led some to call for Congressional intervention to fix the statutory problem. Regardless of the outcome of this process, we see this turn of events as an opportunity for the FTC to recalibrate its consumer protection remedies to more closely mirror consumer harm. It should do so by focusing on the marginal impact of deception, a task that could be accomplished through Congressional action or on the FTC's own initiative. Regardless of the path, this marginal improvement would be an important one for consumers.
{"title":"Equitable Monetary Relief Under the FTC Act: An Opportunity for a Marginal Improvement","authors":"James C. Cooper, Bruce H. Kobayashi","doi":"10.2139/ssrn.3549899","DOIUrl":"https://doi.org/10.2139/ssrn.3549899","url":null,"abstract":"Optimal remedies should be grounded in consumer harm. The caselaw interpreting the FTC's ability to obtain equitable monetary relief, however, has strayed far from this benchmark. Rather than requiring the FTC to show the marginal impact of deception, courts presume that everyone exposed to deception is harmed based on the fiction that the FTC has proven materiality. This approach is likely to overstate consumer harm in most circumstances involving a legitimate product, which will reduce the amount of beneficial marketplace information available to consumers. Several cases that challenge the FTC's legal authority to use 13(b) to obtain equitable monetary relief are awaiting certiorari determinations, which have led some to call for Congressional intervention to fix the statutory problem. Regardless of the outcome of this process, we see this turn of events as an opportunity for the FTC to recalibrate its consumer protection remedies to more closely mirror consumer harm. It should do so by focusing on the marginal impact of deception, a task that could be accomplished through Congressional action or on the FTC's own initiative. Regardless of the path, this marginal improvement would be an important one for consumers.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116372248","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the effect of bank competition on the optimal use of monetary and macroprudential policies. To this end, I develop a New Keynesian DSGE model with collateral constraints and an imperfect competitive banking sector. The results from the model demonstrate that the degree of competition in the banking sector has a sizable impact on the optimal mix of monetary and macroprudential policies. Specifically, the gains from a leaning-against-the-wind monetary policy are substantially smaller when the banking sector is less competitive. Results suggest that, from a policy perspective, monitoring the level of bank competition is crucial when the objective is to promote financial and economic stability.
{"title":"Macroprudential and Monetary Policies with an Imperfectly Competitive Banking Sector","authors":"Nimrod Segev","doi":"10.2139/ssrn.3545519","DOIUrl":"https://doi.org/10.2139/ssrn.3545519","url":null,"abstract":"This paper studies the effect of bank competition on the optimal use of monetary and macroprudential policies. To this end, I develop a New Keynesian DSGE model with collateral constraints and an imperfect competitive banking sector. The results from the model demonstrate that the degree of competition in the banking sector has a sizable impact on the optimal mix of monetary and macroprudential policies. Specifically, the gains from a leaning-against-the-wind monetary policy are substantially smaller when the banking sector is less competitive. Results suggest that, from a policy perspective, monitoring the level of bank competition is crucial when the objective is to promote financial and economic stability.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"142 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-02-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128812386","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the effect of monetary policy shocks on different demographic groups in the U.S. labor market. I look at the effect of a contractionary monetary policy shock on unemployment rates of high and low-skill workers, finding that the low-skill group is more sensitive to these shocks than the high-skill. Further breaking the skill groups down by gender and race, I find that female workers and non-White workers, regardless of their skill type, are more adversely affected by these shocks. Results suggest monetary policy shocks clearly have heterogeneous effects in the labor market, which should be taken into consideration while implementing monetary policy.
{"title":"Monetary Policy Shocks and Skill Differences in the U.S. Labor Market","authors":"Pritha Chaudhuri","doi":"10.2139/ssrn.3527650","DOIUrl":"https://doi.org/10.2139/ssrn.3527650","url":null,"abstract":"This paper studies the effect of monetary policy shocks on different demographic groups in the U.S. labor market. I look at the effect of a contractionary monetary policy shock on unemployment rates of high and low-skill workers, finding that the low-skill group is more sensitive to these shocks than the high-skill. Further breaking the skill groups down by gender and race, I find that female workers and non-White workers, regardless of their skill type, are more adversely affected by these shocks. Results suggest monetary policy shocks clearly have heterogeneous effects in the labor market, which should be taken into consideration while implementing monetary policy.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-01-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121223966","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-12-27DOI: 10.5709/CE.1897-9254.325
João Braz Pinto, J. Andrade
Keynes emphasized a specific situation in which the liquidity preference becomes absolute, leading to monetary policy ineffectiveness when nominal interest approaches the zero-bound rate. This situation was termed a liquidity trap (LT) by Robertson and was popularized by the Hicks- Hansen framework (IS-LM). Early macroeconomic textbooks characterized the LT as the Keynesian case against the classical one. The “lowflation” environment experienced in the USA and Europe again brought the LT to the forefront. The quantitative easing monetary policy was introduced in Japan and better applied in the USA and EMU as a solution to overcome the LT. The macroeconomic mainstream contends that the LT is essentially a money demand problem, whereas we propose another interpretation; the current situation should be interpreted as a “banking problem” that impedes the transformation of the monetary base into money supply. To prove our thesis, we study the behavior of the USA money multiplier and the income velocity of money by comparing an earlier period with the 2007-2008 crisis period. Using a VAR and a VECM model, we compare the normal situation of monetary policy efficiency with the situation of LT monetary policy inefficiency. We prove that the LT focus should not be placed on the demand for money but rather on the behavior of the money supply – more specifically, on banks’ behavior leading to the transformation of the monetary base into the money supply.
{"title":"A Monetary Analysis of the Liquidity Trap with an Application to the USA","authors":"João Braz Pinto, J. Andrade","doi":"10.5709/CE.1897-9254.325","DOIUrl":"https://doi.org/10.5709/CE.1897-9254.325","url":null,"abstract":"Keynes emphasized a specific situation in which the liquidity preference becomes absolute, leading to monetary policy ineffectiveness when nominal interest approaches the zero-bound rate. This situation was termed a liquidity trap (LT) by Robertson and was popularized by the Hicks- Hansen framework (IS-LM). Early macroeconomic textbooks characterized the LT as the Keynesian case against the classical one. The “lowflation” environment experienced in the USA and Europe again brought the LT to the forefront. The quantitative easing monetary policy was introduced in Japan and better applied in the USA and EMU as a solution to overcome the LT. The macroeconomic mainstream contends that the LT is essentially a money demand problem, whereas we propose another interpretation; the current situation should be interpreted as a “banking problem” that impedes the transformation of the monetary base into money supply. To prove our thesis, we study the behavior of the USA money multiplier and the income velocity of money by comparing an earlier period with the 2007-2008 crisis period. Using a VAR and a VECM model, we compare the normal situation of monetary policy efficiency with the situation of LT monetary policy inefficiency. We prove that the LT focus should not be placed on the demand for money but rather on the behavior of the money supply – more specifically, on banks’ behavior leading to the transformation of the monetary base into the money supply.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130905466","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract In this paper I develop a multi-sector model with price frictions, production networks, trend inflation and different types of shocks to study how these conditions affect the properties of inflation and their implications for monetary policy. Calibrating the model to the U.S. economy my results show that in this setting inflation becomes 30% less sensitive to the output-gap compared to a standard one-sector model. Furthermore, in the multi-sector model inflation is affected by sectoral variables linked to between-sector and within-sector price distortions. This fact adds inertia to the inflationary process and makes monetary policy less effective. Additionally, the welfare costs of trend inflation increase by one order of magnitude in the multi-sector model compared to the standard one-sector model. The amplification is quantitatively explained by between-sector rather than within-sector price distortions. This suggests that one-sector models and models without heterogeneity underestimate the costs of long-run inflation and the efficacy of monetary policy to fight inflation.
{"title":"The Importance of Production Networks and Sectoral Heterogeneity for Monetary Policy","authors":"Nicolas Castro","doi":"10.2139/ssrn.3499902","DOIUrl":"https://doi.org/10.2139/ssrn.3499902","url":null,"abstract":"Abstract In this paper I develop a multi-sector model with price frictions, production networks, trend inflation and different types of shocks to study how these conditions affect the properties of inflation and their implications for monetary policy. Calibrating the model to the U.S. economy my results show that in this setting inflation becomes 30% less sensitive to the output-gap compared to a standard one-sector model. Furthermore, in the multi-sector model inflation is affected by sectoral variables linked to between-sector and within-sector price distortions. This fact adds inertia to the inflationary process and makes monetary policy less effective. Additionally, the welfare costs of trend inflation increase by one order of magnitude in the multi-sector model compared to the standard one-sector model. The amplification is quantitatively explained by between-sector rather than within-sector price distortions. This suggests that one-sector models and models without heterogeneity underestimate the costs of long-run inflation and the efficacy of monetary policy to fight inflation.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129398454","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use spatial panel data model analysis to study the international transmission of U.S. monetary policy shocks in the global equity and bond markets. Through this analysis, we decompose the overall effect of such a shock into 1) direct effects, 2) higher-order network effects transmitted through global economic networks, and 3) simultaneous effects transmitted between local equity and bond markets. Theoretically, our analysis of the transmission mechanism for the shocks relies on a network model with monetary policy spillovers. Empirically, we study asset price responses around the scheduled Federal Reserve announcements to demonstrate the significant roles of all three effects in the transmission of shocks.
{"title":"The Global Effects of U.S. Monetary Policy on Equity and Bond Markets: A Spatial Panel Data Model Approach","authors":"Lina Lu, Shaowen Luo","doi":"10.2139/ssrn.3508958","DOIUrl":"https://doi.org/10.2139/ssrn.3508958","url":null,"abstract":"We use spatial panel data model analysis to study the international transmission of U.S. monetary policy shocks in the global equity and bond markets. Through this analysis, we decompose the overall effect of such a shock into 1) direct effects, 2) higher-order network effects transmitted through global economic networks, and 3) simultaneous effects transmitted between local equity and bond markets. Theoretically, our analysis of the transmission mechanism for the shocks relies on a network model with monetary policy spillovers. Empirically, we study asset price responses around the scheduled Federal Reserve announcements to demonstrate the significant roles of all three effects in the transmission of shocks.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116220590","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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