Creator: Kareken, John H., Muench, Thomas J., and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 017 Stichwort: Open market policy, Information lag, and FOMC Fach: E44 - Financial Markets and the Macroeconomy and E58 - Central Banks and Their Policies
Creator: Lacker, Jeffrey Malcolm Series: Foundations of policy toward electronic money Abstract:
Briefly reviews the potential consequences of electronic money for the management of the government's balance sheet through open market operations and for the regulations governing the public and private issue of payment instruments.
Stichwort: Monetary policy, Payment instruments, and Electronic money Fach: E52 - Monetary policy, central banking, and the supply of money and credit - Monetary policy, E58 - Monetary policy, central banking, and the supply of money and credit - Central banks and their policies, and E42 - Money and interest rates - Monetary systems ; Standards ; Regimes ; Government and the monetary system ; Payment systems
Creator: Bengui, Julien and Bianchi, Javier Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 754 Abstract:
The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages undermine the effectiveness of macroprudential taxes but do not necessarily call for weaker interventions. A quantitative analysis of the model suggests that aggregate welfare gains and reductions in the severity and frequency of financial crises remain, on average, largely unaffected by even significant leakages.
Stichwort: Regulatory arbitrage, Macroprudential policy, Financial crises, and Limited regulation enforcement Fach: F32 - Current Account Adjustment; Short-term Capital Movements, E44 - Financial Markets and the Macroeconomy, E32 - Business Fluctuations; Cycles, F41 - Open Economy Macroeconomics, and D62 - Externalities
Creator: Hevia, Constantino and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 726 Abstract:
We study a model of a small open economy that specializes in the production of commodities and that exhibits frictions in the setting of both prices and wages. We study the optimal response of monetary and exchange rate policy following a positive (negative) shock to the price of the exportable that generates an appreciation (depreciation) of the local currency. According to the calibrated version of the model, deviations from full price stability can generate welfare gains that are equivalent to almost 0.5% of lifetime consumption, as long as there is a significant degree of rigidity in nominal wages. On the other hand, if the rigidity is concentrated in prices, the welfare gains can be at most 0.1% of lifetime consumption. We also show that a rule - formally defined in the paper - that resembles a "dirty floating" regime can approximate the optimal policy remarkably well.
Stichwort: Dutch disease, Foreign exchange intervention, and Inflation targeting Fach: F31 - Foreign Exchange and F41 - Open Economy Macroeconomics
Creator: Hevia, Constantino and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 702 Abstract:
We analyze optimal policy in a simple small open economy model with price setting frictions. In particular, we study the optimal response of the nominal exchange rate following a terms of trade shock. We depart from the New Keynesian literature in that we explicitly model interna-tionally traded commodities as intermediate inputs in the production of local final goods and assume that the small open economy takes this price as given. This modification not only is in line with the long-standing tradition of small open economy models, but also changes the optimal movements in the exchange rate. In contrast with the recent small open economy New Keynesian literature, our model is able to reproduce the comovement between the nominal exchange rate and the price of exports, as it has been documented in the commodity currencies literature. Although we show there are preferences for which price stability is optimal even without flexible fiscal instruments, our model suggests that more attention should be given to the coordination between monetary and fiscal policy (taxes) in small open economies that are heavily dependent on exports of commodities. The model we propose is a useful framework in which to study fear of floating.
Stichwort: Optimal monetary policy, Terms of trade shocks, Devaluations, and Small open economy Fach: F41 - Open Economy Macroeconomics and E52 - Monetary Policy
Creator: Amador, Manuel, Bianchi, Javier, Bocola, Luigi, and Perri, Fabrizio Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 740 Abstract:
Recently, several economies with interest rates close to zero have received large capital inflows while their central banks accumulated large foreign reserves. Concurrently, significant deviations from covered interest parity have appeared. We show that, with limited international arbitrage, a central bank's pursuit of an exchange rate policy at the ZLB can explain these facts. We provide a measure of the costs associated with this policy and show they can be sizable. Changes in external conditions that increase capital inflows are detrimental, even when they are beneficial away from the ZLB. Negative nominal rates and capital controls can reduce the costs.
Stichwort: Negative interest rates, Foreign exchange interventions, CIP deviations, Currency pegs, Capital flows, and International reserves Fach: F41 - Open Economy Macroeconomics, F31 - Foreign Exchange, and F32 - Current Account Adjustment; Short-term Capital Movements
Creator: Athey, Susan, Atkeson, Andrew, and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 613 Abstract:
We analyze the optimal design of monetary rules. We suppose there is an agreed upon social welfare function that depends on the randomly fluctuating state of the economy and that the monetary authority has private information about that state. We suppose the government can constrain the policies of the monetary authority by legislating a rule. In general, well-designed rules trade-off the need to constrain policymakers from the standard time consistency problem arising from the temptation for unexpected inflation with the desire to give them flexibility to react to their private information. Surprisingly, we show that for a wide variety of circumstances the optimal rule gives the monetary authority no flexibility. This rule can be interpreted as a strict inflation targeting rule where the target is a prespecified function of publicly observed data. In this sense, optimal monetary policy is transparent.
Fach: E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, F33 - International Monetary Arrangements and Institutions, E52 - Monetary Policy, and F41 - Open Economy Macroeconomics
Creator: Miller, Preston J. and Todd, Richard M. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 154 Abstract:
We present a 2-country model with heterogeneous agents in which changes in a country’s monetary policy affect real interest rates, relative prices of traded and nontraded goods and real exchange rates. Nontransitory real effects of monetary policy stem solely from a friction (country-specific reserve requirements) that generates separate demands for a country’s money and bonds. Without violating the classical assumptions of individual rationality and flexible prices, the model’s implications seem qualitatively in accord with the U.S. experience of the 1980s: a monetary policy tightening leading to a rise in the real interest rate and to an initial rise in the real value of the dollar which is subsequently reversed. In the model a monetary policy change leads to different welfare effects for agents born at different times, living in different countries, or participating on different sides of a market. The welfare of some agents can be affected more by relative price changes than by real interest rate changes.
Stichwort: Open economy, Nontraded goods, General equilibrium, Legal restrictions, and Monetary policy Fach: F41 - Open Economy Macroeconomics and E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General