the effects of devaluation on the trade balance a critical view and re examination of mile s new results abstract in a often cited article miles 1979 claims to have shown empirically the validity of the global monetarist proposition that devaluations do not affect the balance of trade this paper first uses mile s own framework of analysis to reveal serious deficiencies in his methodology and tests that cast doubt on the validity of his results in a respecified trade balance equation we show that devaluations do affect the trade balance in the traditionally predicted direction the pivotal difference between the two specifications arises from our inclusion of relative price effects and longer lag structure for the exchange rate variable

forecasting and trading monetary policy effects on the riskless yield curve with regime switching nelson siegel models abstract we use 1982 2014 data on the us riskless yield curve to show that regime switching dynamics in nelson siegel factor models extended to encompass variables that summarize the state of monetary policy lead to superior predictive accuracy such spread in forecasting power turns out to be statistically significant even controlling for parameter uncertainty and sample variation exploiting regimes we obtain evidence that the increase in predictive accuracy is stronger during the great financial crisis when monetary policy underwent a significant sudden shift although more caution applies in comparisons to a naive random walk benchmark over a few sub samples and when transaction costs are accounted for we report that the increase in predictive power owed to the combination of regimes and of variables that capture the stance of unconventional monetary policies is tradeable we devise and test butterfly strategies that exploit the forecasts from the models and obtain evidence of risk adjusted profits both per se and in comparisons to simpler models

monetary policy under the labour government the first 13 years of the mpc this paper examines the performance of monetary policy under the new framework established in 1997 up to the end of the labour government in may 2010 performance was relatively good in the years before the crisis but much weaker from 2008 the new framework largely neglected open economy issues while the treasury s emu assessment in 2003 can be interpreted in different ways the new framework may have contributed to some extent to the eruption and depth of the financial crisis from 2008 but mon etary policy eventually responded in a bold and innovative way overall the design and operation of mon etary policy were much better than in earlier periods but there is room for significant further evolution

institutional investors and the qe portfolio balance channel the operation of the portfolio balance channel has been emphasized by monetary policy makers as a key channel through which quantitative easing qe policies work we assess whether the investment behavior of insurance companies and pension funds in the united kingdom during the global financial crisis was consistent with such an effect by analyzing both sectoral and institution level data our results suggest qe led to institutional investors shifting their portfolios away from government bonds towards corporate bonds but did not lead to a shift into equities

macroeconomics and the term structure this paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance the topic is important to investors and also to policymakers who wish to extract macroeconomic expectations from longer term interest rates and take actions to influence those rates the simplest model of the term structure is the expectations hypothesis which posits that long term interest rates are expectations of future aver age short term rates in this paper we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis we review models that explain these anomalies using time varying risk premia although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing inflation uncertainty seems to play a large role finally while modern finance theory prices bonds and other assets in a single unified framework we also consider an earlier approach based on segmented markets market segmentation seems important to understand the term structure of interest rates during the recent financial crisis jel e31 e43 e52 e58

financialisation institutions and financing constraints in developing countries the paper uses a consistent firm level data from the world banks enterprise surveys to explore the impact of financialisation in the economy on firms access to finance in 138 developing countries access to finance reflects survey based firms perceptions of external financing constraints financialisation is proxied by consistent cross country measures of financial depth these proxies capture separately the role of bank based versus market based financing firm sector and country level information is jointly used for the analysis firm specific characteristics and economic and non economic national factors are included as controls the results show that the proxies of financialisation are broadly robust predictors of financing constraints of firms in developing countries however the magnitude of the financialisation effect varies between bank based and market based channels of financing as well as between low and high income countries and it is influenced by social institutional and religious factors

the j curve a literature review due to lag structure currency devaluation is said to worsen the trade balance first and improve it later resulting in a pattern that resemble the letter j hence the j curve phenomenon since its introduction by magee in 1973 brooking papers on economic activity 1 pp 303 25 a large number of studies have attempted to test the phenomenon using different techniques and different model specifications the results are at best ambiguous and deserve to be collected together for the future generation of researchers and graduate students this paper fills such a vacuum in the literature by reviewing the j curve related empirical papers

prospect theory as efficient perceptual distortion the paper proposes a theory of efficient perceptual distortions in which the statistical relation between subjective perceptions and the objective state minimizes the error of the state estimate subject to a constraint on information processing capacity the theory is shown to account for observed limits to the accuracy of visual perception and then postulated to apply to perception of options in economic choice situations as well when applied to choice between lotteries it implies reference dependent valuations and predicts both risk aversion with respect to gains and risk seeking with respect to losses as in the prospect theory of kahneman and tversky 1979

on stock market illiquidity and real time gdp growth this study examines whether stock market illiquidity forecasts real uk gdp growth using data over the period 1989q1 2012q2 apart from standard linear model specifications we also utilize non linear models which allow for regime switching behavior in terms of a liquid versus an illiquid market regime and over the phases of the business cycle our findings support a statistically significant negative relationship between stock market illiquidity and future uk gdp growth over and above the usual control variables this relationship is found to be stronger during periods of highly illiquid market conditions and weak economic growth our out of sample forecasting analysis indicates that a regime switching model of illiquid versus liquid market conditions predicts uk growth better than any other model actually this model is the only one to significantly outperform the gdp growth forecasts published in the bank of england s inflation report

the j curve effect and us agricultural and industrial trade this paper examines the j curve hypothesis for us agricultural and manufactured goods using the shiller lag model the results support the j curve effect for agricultural goods but not for manufactured goods these findings explain why many studies in the literature fail to support the j curve phenomenon there are two explanations for these findings 1 the aggregation bias of data that combine both agricultural and manufactured goods and 2 the country under study is often an industrial nation like the us or japan with a high proportion of manufactured goods in both exports and imports

the effectiveness of quantitative easing new evidence on private investment abstractthis paper examines the effect of federal reserve s large scale purchases of securities on private investment we find tentative evidence that quantitative easing qe stimulated the level of aggregate investment through the interest rate channel by narrowing corporate bond spread in particular the fed s purchases of mortgage backed securities were found to have a statistically significant effect on aggregate private investment moreover using a garch model we find that qe has led to a reduction in the volatility of private investment this finding remains robust with a qe dummy variable as an alternative measure of the unconventional monetary policy the study also indicates how different aspects of qe influence private investment and its volatility

the effectiveness of unconventional monetary policy announcements in the euro area an event and econometric study abstract we use daily data on government bond yields and market based inflation expectations to measure the announcement effects of unconventional monetary policy announcements in the euro area focusing on their impact on ex ante real interest rates we find evidence of statistically significant effects of several announcements on real interest rates at maturities of two five and ten years that operate partly through nominal interest rates and partly by raising inflation expectations announcements that exceeded market expectations significantly reduced nominal and real interest rates while announcements that disappointed expectations had the opposite effect

do exchange rate changes have symmetric or asymmetric effects on the trade balances of asian countries abstractrecently the linear ardl approach was modified and a non linear version of the same approach that is used mostly to assess asymmetric effects of some exogenous variables on the dependent variable was introduced the non linear model was recently used by one study to show that indeed exchange rate changes have asymmetric effects on the trade balance of a few advanced countries the same was demonstrated for transition economies by another study in this article we provide additional asymmetric effects from seven asian economies by showing that in most cases we find evidence of short run and long run asymmetric effects of exchange rate changes on the trade balance like other studies our findings are country specific

the impact of monetary policy on corporate bonds under regime shifts abstract we study the effects of a conventional monetary expansion quantitative easing and the maturity extension program on corporate bond yields using impulse response functions obtained from flexible models with regimes using a three state markov switching model with time homogeneous vector autoregressive var coefficients that emerges from a systematic model specification search we find that unconventional policies may have been generally expected to decrease both corporate yields and spreads however even though the sign of the responses is the one desired by policymakers the size of the estimated effects depends on the assumptions regarding the decline in long term treasury yields caused by unconventional policies on which considerable uncertainty remains further tests based on yield spreads and a variable that measures inflation expectations show that in the crisis regime unconventional monetary policies do not produce any perverse effects on expected inflation these results prove robust to adopting a framework that allows var coefficients to break to imposing coefficient restrictions that increase parsimony and to a range of different ordering schemes that identify shocks in alternative ways

exchange rate of the us dollar and the j curve the case of oil exporting countries abstract this study examines the effects of changes in the exchange rate of the us dollar on the trade balances of three oil exporting countries namely iran venezuela and saudi arabia an exchange rate pass through model is applied to allow changes in the exchange rate of the dollar to affect prices of traded goods then the impact of changes in prices on the quantities of imports and exports of these economies is estimated the results suggest a partial exchange rate pass through to these countries import and export prices in terms of the us dollar while the three countries raise the price of their primary export namely crude oil in response to a depreciation of the dollar saudi arabia s long run pricing strategy in securing a larger market share stands in contrast to that of the two other opec members the sum of the estimated long run price elasticities of demand for imports and exports is found to exceed unity for iran and venezuela but less than unity for saudi arabia

imperfect credibility and the zero lower bound as the nominal interest rate cannot fall below zero a central bank with imperfect credibility faces a significant challenge to stabilize the economy in a new keynesian model during a large recession we characterize the optimal monetary policy at the zero lower bound for the nominal interest rate if credibility is imperfect confronting monetary policy communication of the u s federal reserve and the swedish riksbank with such a framework the credibility of both institutions is shown to have been low in the aftermath of the 2008 economic crisis

capital inflows and euro area long term interest rates abstract capital flows into the euro area were particularly large in the mid 2000s and the share of foreign holdings of euro area securities increased substantially between the introduction of the euro and the outbreak of the global financial crisis we show that the increase in foreign holdings of euro area bonds in this period is associated with a reduction of euro area long term interest rates by about 1 55 percentage points which is in line with previous studies that document a similar impact of foreign bond buying on us treasury yields these results are relevant both from a euro area and a global perspective as they show that the phenomenon of lower long term interest rates due to foreign bond buying is not exclusive to the united states and foreign inflows into euro area debt securities may have added to increased risk appetite and hunt for yield at the global level

ben bernanke and bagehot s rules former federal reserve chairman ben bernanke has claimed that the fed s bank bailouts during the 2008 financial crisis were consistent with walter bagehot s rules for a lender of last resort this paper demonstrates bernanke s claims to be mistaken first we outline bagehot s doctrine for a classical lender of last resort next we discuss bernanke s theory of bank bailouts and his statements regarding the fed s role in the 2008 bank bailouts finally we examine the bailouts and demonstrate that contrary to bernanke s claims the fed s actions were not consistent with bagehot s rules for a lender of last resort

the federal reserve s large scale asset purchase programmes rationale and effects we provide empirical estimates of the effect of large scale asset purchases lsaps on longer term us treasury yields within a framework that allows for several transmission channels including the scarcity channel associated with the preferred habitat literature and the duration channel associated with interest rate risk we also clarify lsaps role in the broader context of historical monetary policy strategy results indicate that lsap style operations mainly impact longer term rates via the nominal term premium within that premium the response is predominantly embodied in the real term premium the scarcity and duration channels both seem to be of considerable importance

fiscal policy and asset prices with incomplete markets we study the simultaneous impact of fiscal policy decisions on macroeconomic activity wealth distribution and asset prices we consider a general equilibrium overlapping generations model with incomplete markets and heterogeneous agents where government debt and capital are imperfect substitutes increases in public debt lead to significant increases in the riskless rate and to a reduction in the equity premium while higher capital income tax rates lead to a higher equity premium the crowding out effects on capital and output are much higher than in models where government debt and capital are perfect substitutes which thus ignore households portfolio reallocation decisions the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

the effects of asset purchases and normalization of u s monetary policy this paper examines changes in the effects of unconventional monetary policies in the united states to this end we estimate a markov switching var model with absorbing regimes to capture possible structural changes our results detect regime changes around the beginning of 2011 and the middle of 2013 before 2011 the u s large scale asset purchases lsaps had relatively large impacts on the real economy and prices but after the middle of 2013 their effects were weaker and less persistent in addition after the middle of 2013 which includes the monetary policy normalization period the asset purchase or balance sheet shocks had slightly weaker effects than during the early stage of the lsaps but stronger effects than during the late stage of the lsaps while interest rate shocks had insignificant effects on the real economy and prices finally our results suggest that the positive responses of durables and capital goods expenditures to interest rate shocks weakened the negative impacts of interest rate hikes after the middle of 2013 including the period of monetary policy normalization jel c32 e21 e52

sovereign debt the assessment this article serves as an introduction to two issues of the oxford review of economic policy one entitled sovereign debt understanding bond markets during the eurozone crisis and the second sovereign debt lessons from the past reforms for the future we begin by documenting recent trends in advanced country sovereign indebtedness and reviewing events that preceded the sovereign debt crisis in the eurozone the mechanisms through which rising sovereign debt may impact bond yields economic growth and inflation are discussed and the evidence for such effects is reviewed our discussion highlights that there is no unique threshold beyond which sovereign debt exerts adverse macroeconomic effects and that in order to understand the consequences of a given debt load one must analyse its structure in terms of internal and external creditors currency denomination the time to maturity of the bonds and the legal code governing debt issuance as well as various economic and political constraints measuring the fiscal space of the sovereign we then turn our attention to episodes in which sovereign debt proves excessive and default occurs we review explanations for the protracted and inefficient nature of defaults and describe some lessons from historical studies examining default outcomes in the final part of the paper we discuss proposals for averting future debt crises including jointly issued bonds such as eurobonds contingent convertible bonds and elements of a sovereign debt restructuring mechanism in the course of our discussion we draw on each of the 11 articles included in the two issues of this journal devoted to sovereign debt copyright 2013 oxford university press

estimation of j curves united states and canada delayed reactions to exchange rate changes in trade on current account balances are known to exist in both the united states and canada a model has been constructed to estimate relative price effects for trade with major partners in order to determine the quantitative magnitudes and relevant time delays for both countries adjustments in trade accounts there is a distinct tendency for balances to worsen when exchange depreciation first occurs and then to improve after several quarters have passed there is also a tendency for the balances to worsen again the u s and canadian time profiles of adjustment are found to be similar

cross border auction cycle effects of sovereign bond issuance in the euro area we provide evidence for the euro area of spillovers from foreign public debt auctions into domestic secondary market auction cycles we also confirm existing evidence of such spillovers from domestic issues into the domestic secondary market consistent with a theory of primary dealers limited risk bearing capacity we find that auction cycles from domestic issues are stronger during the recent crisis period whereas cross border effects are stronger in the precrisis period but this evidence is not strong this finding likely reflects the opposing effects of reduced sovereign bond market integration during the crisis and higher yield covariances caused by more market volatility

the j curve in the emerging economies of eastern europe devaluation or depreciation of a currency worsens the trade balance before improving it resulting in a j curve pattern a new definition of the hypothesis implies a short run deterioration combined with the long run improvement by using monthly data over the january 1990 june 2005 period from 11 east european emerging economies most of which are the new european union eu members or the eu candidate countries this article uses the bounds testing approach to cointegration and error correction modelling and finds empirical support for the j curve hypothesis in three countries of bulgaria croatia and russia the results have important implications for policymakers involved in economics in terms of using exchange rate policy as a policy device to achieve real convergence toward eu standards

determinants of international trade flows this paper models and estimates import demand and demand for export functions for 19 industrial countries although primary emphasis is placed on the period of generalized floating exchange rates 1972 through 1980 estimates are also provided for the fixed exchange rate years 1957 1970 thus making possible a comparison between the two eras aside from the conventional income and price variables the paper assesses the effect of variations in the exchange rate and in the expected exchange rate on real trade flows additionally it estimates an unrestricted lag structure of the effect of price and exchange rate variations on imports

an asymmetric analysis of the j curve effect in the commodity trade between china and the us this paper follows a non linear ardl error correction approach to examine the presence of the j curve in the commodity level trade between the united states and china the analysis disaggregates the us china trade flows by commodities and separately examines the trade balance responses of 97 commodities to the changes in the real yuan us exchange rates the analysis at the commodity level alleviates potential aggregation bias that is present in earlier studies offering little evidence for long run asymmetric effects of exchange rate on the china us trade balance we find strong support for short run asymmetric effects in the case of two third of the commodities whereas significant long run asymmetric effects are present in the case of one third of the commodities including those commodities which command large shares in the china us trade

quantitative easing a sceptical survey evaluation of quantitative easing qe is difficult as it is only used in response to severe and unusual economic difficulties despite this we argue that two main conclusions can be drawn from a sceptical reading of the evidence first large scale asset purchases reduce government bond rates especially at the longer end of the yield curve however this effect may be temporary and is small if bond rates are already low while initial waves of qe are more effective than subsequent programs second qe appears to have been effective in late 2008 and 2009 preventing even larger declines in output and inflation than were experienced we argue that the literature is limited relying on similar methodologies and largely originating in central banks exploration of alternative approaches to qe would be useful in widening an evidence base that is currently too narrow

central banks and financial stability rediscovering the lender of last resort practice in a finance economy the purpose of our paper is to assess whether central banks have adopted new practices of lending in last resort during the 2007 09 financial crisis we compare the current period with the classical period both featured by a finance economy with developed financial markets and unregulated institutions beyond the differences determined by the monetary regime and concerning the central bank rate policy we find similarities such as the enlargements of the set of counterparties and eligible collateral assets since the credit system is based on financial markets and innovations central banks have a wider involvement that goes beyond a narrow conception of the lender of last resort that prevailed under a regulated banking system we conclude that the historical roots of financial stabilisation by central banks in a finance economy have just been rediscovered and that the functions of lender of last resort and market maker of last resort may be analytically integrated copyright oxford university press

staggered price setting translog preferences and endogenous persistence abstract this paper generates persistent real effects of a monetary disturbance in the context of staggered price setters the model combines two related and reinforcing features a translog demand structure and a particular input output production structure these features offer a rationale why a firm when computing its own optimal contract price is influenced by the prices set in other overlapping contracts practically the two features interact in a positive manner and provide a way to generate significant endogenous persistence

anticipated versus unanticipated terms of trade shocks and the j curve phenomenon abstract using a dynamic stochastic general equilibrium dsge model we examine the impact of anticipated and unanticipated terms of trade tot shocks on aggregate output inflation and the trade balance tb this allows us to offer an alternative explanation of the j curve phenomenon we find that an unanticipated tot shock increases real output as well as inflation but the j curve phenomenon may not exist under a certain condition however under the same condition an anticipated tot shock leads to the j curve effect we find that our main result concerning the j curve phenomenon continues to hold even if the assumption of rational expectations about the tot is relaxed further analysis reveals that the presence of a cost channel of monetary policy increases the intensity of the j curve effect assuming plausible parameter values while using a more general model calibration results support our theoretical predictions

tobin s imperfect asset substitution in optimizing general equilibrium in this paper we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets this is specified in a manner which captures tobin s 1969 view that an expansion of one asset s supply affects both the yield on that asset and the spread or risk premium between returns on that asset and alternative assets our estimates of this model on u s data confirm that some of the observed deviations of long term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets the richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities and so exert an extra effect on long term yields and aggregate demand separate from their effect on the expected path of short term rates

optimal central bank lending abstract we analyze optimal monetary policy in a sticky price model with open market operations the central bank sets the policy rate and can additionally control the amount of money by rationing money supplied against eligible securities optimal policy under money rationing is shown to enhance welfare in the long run and in the short run compared to a conventional optimal policy regime where money supply is not rationed and satiates money demand specifically this property is shown to apply when privately issued debt is eligible in open market operations which allows the central bank to separately alter costs of borrowing and the size of transactions for which money is required

how do individual uk producer prices behave this article presents a number of stylised facts about the behaviour of individual uk producer prices first on average 26 of prices change each month although there is considerable heterogeneity between sectors second the probability of price changes is not constant over time third the distribution of price changes is wide although a significant number of changes are relatively small fourth prices that change more frequently do so by less conventional pricing theories struggle to match these results particularly the marked heterogeneity

central banking in the credit turmoil an assessment of federal reserve practice abstract central banking is understood in terms of the fiscal features of monetary credit and interest on reserves policies monetary policy expanding reserves by buying treasuries transfers all revenue from money creation directly to the fiscal authorities credit policy selling treasuries to fund loans or acquire non treasury securities is debt financed fiscal policy interest on reserves frees monetary policy to fund credit policy independently of interest rate policy an ambiguous boundary of responsibilities between the fed and the fiscal authorities contributed to economic collapse in fall 2008 accord principles are proposed to clarify fed credit policy powers and secure its independence on monetary and interest rate policy the fed needs more surplus capital from the fiscal authorities to be fully flexible against both inflation and deflation at the zero interest bound

conducting monetary policy at very low short term interest rates can monetary policy committees accustomed to describing their plans and actions in terms of the level of a short term nominal interest rate find effective means of conducting and communicating their policies when that rate is zero or close to zero the very low levels of interest rates in japan switzerland and the united states in recent years have stimulated much interesting research on this question and have led some central banks to make changes in their operating procedures and communications strategies in this paper we will give a brief overview of current thinking on the conduct of monetary policy when short term interest rates are very low or even zero monetary policy works for the most part by influencing the prices and yields of financial assets which in turn affect economic decisions and thus the evolution of the economy when the short term policy rate is at or near zero the conventional means of effecting monetary ease lowering the target for the policy rate is no longer feasible however it would be a mistake to think that monetary policy was impotent we discuss three strategies for stimulating the economy at an unchanged level of the policy rate these involve i providing assurance to investors that short rates will be kept lower in the future than they currently expect ii changing the relative supplies of securities in the marketplace by altering the composition of the central bank s balance sheet and iii increasing the size of the central bank s balance sheet beyond the level needed to set the short term policy rate at zero quantitative easing we also discuss the costs and benefits of very low interest rates an issue that bears on the question of whether the central bank should take the policy rate all the way to zero before undertaking alternative policies

distinguished lecture on economics in government exchange rate regimes is the bipolar view correct the choice of appropriate exchange rate regime which for economies with access to international capital markets increasingly means a move away from the middle ground of pegged but adjustable fixed exchange rates towards the two corner regimes of either flexible exchange rates or a fixed exchange rate supported if necessary by a commitment to give up altogether an independent monetary policy lawrence h summers 2000 p 8

quantitative easing in the united kingdom evidence from financial markets on qe1 and qe2 during the recent financial crisis the bank of england like many other central banks loosened monetary policy using both conventional and unconventional measures the main unconventional measure used by the bank was the policy of asset purchases mainly of government bonds financed by the creation of central bank money so called quantitative easing qe during march 2009 to january 2010 and october 2011 to may 2012 the bank completed asset purchases of 200 billion qe1 and 125 billion qe2 respectively the decision to resume purchases in july 2012 will mean that by november 2012 the bank will have bought a total of 375 billion of assets equivalent to around 25 per cent of annual gdp this article reviews the transmission channels through which asset purchases operate and assesses the impact of qe1 and qe2 on financial markets copyright 2012 oxford university press

macroprudential policy central banks and financial stability evidence from china abstract we study the chinese experience and provide evidence that central banks can play an active role in safeguarding financial stability the narrative approach is used to disentangle macropudential policy actions from monetary actions we show that reserve requirements window guidance supervisory pressure and housing market policies can be used for macroprudential purposes our var estimates suggest that well targeted macroprudential policy has immediate and persistent impact on credit but no statistically significant impact on output macroprudential policy can be used to retain financial stability without triggering an economic slowdown or as a complement to monetary policy to offset the buildup of financial vulnerabilities arising from monetary easing a well designed mix of these two policies helps to achieve both macroeconomic and financial stability objectives which however requires central banks to maintain a multi instrument framework

price pressure in the government bond market what determines the term structure of interest rates standard economic theory links the interest rate for maturity t to the willingness of a representative agent to substitute consumption between times 0 and t the standard model contrasts sharply with a more informal view based on investors preferred habitat proposed by john culbertson 1957 and franco modigliani and richard sutch 1966 according to the preferred habitat view there are investor clienteles with preferences for specific maturities and the interest rate for a given maturity is influenced by the demand of the corresponding clientele and the supply of bonds with that maturity for example the typical clientele for long term bonds are pension funds an increase in their demand would be expected to raise prices of long term bonds and thus lower long term interest rates in short preferred habitat implies that there is price pressure in the bond market while the preferred habitat view has intuitive appeal it has not entered into the academic mainstream typically being relegated to a paragraph in mba level textbooks one reason for this is the mixed findings in early empirical studies of the term structure specifically between 1962 and 1964 the us treasury and federal reserve raised the supply of short term government debt while simultaneously lowering the supply of long term debt this program known as operation twist aimed to raise shortterm interest rates and so improve the balance of payments while also lowering long term rates to stimulate private investment a number of papers evaluated operation twist and while they reached different conclusions none found strong evidence that the operation was effective in flattening the term structure e g modigliani price pressure in the government bond market

government monetary and fiscal operations generalising the endogenous money approach the traditional endogenous money approach can be generalised substantially by including the insights of modern money theory regarding the necessary coordination of fiscal and monetary policies a monetarily sovereign government is composed of two entities involved in the issuance and redemption of government monetary instruments as such one should include the role of the treasury in monetary policy and the role of the central bank in fiscal policy the paper suggests a simple way to model that interaction shows some of the theoretical insights that can be drawn from that interaction and illustrates the relevance of that interaction with the monetary and fiscal practices of the us treasury and the federal reserve over the past century times of stress in the monetary system such as the recent great recession usually bring to light more forcefully this necessary interaction

what does monetary policy do to long term interest rates at the zero lower bound this article uses a structural var with daily data to identify the effects of monetary policy shocks on various longer term interest rates since the federal funds rate has been stuck at the zero lower bound the var is identified using the assumption that monetary policy shocks are heteroskedastic monetary policy shocks have especially high variance on days of fomc meetings and certain speeches while there is otherwise nothing unusual about these days a complementary high frequency event study approach is also used i find that stimulative monetary policy shocks lower treasury and corporate bond yields but the effects die off fairly fast

the effect of conventional and unconventional monetary policy rules on inflation expectations theory and evidence this paper has three parts part 1 constructs a classical economic model of inflation augmented by a complete set of financial markets i call this the core monetary model part 2 develops a series of calibrated examples to illustrate how the core monetary model explains the history of inflation after wwii and part 3 provides evidence to show that the unconventional monetary policy followed in the wake of the 2008 financial crisis was effective in stabilizing inflation expectations the core monetary model provides a unified framework to explain how an interest rule can be used to control inflation in normal times and to explain the purpose of unconventional monetary policy when policy attains the zero lower bound i argue that management of the variation in the composition of the fed s balance sheet is an important tool in a central bank s arsenal that can be used to help prevent deflation in the wake of a financial crisis

central bank design abstract starting with a blank slate how could one design the institutions of a central bank for the united states this paper explores the question of how to design a central bank drawing on the relevant economic literature and historical experiences while staying free from concerns about how the fed got to be what it is today or the short term political constraints it has faced at various times the goal is to provide an opinionated overview that puts forward the trade offs associated with different choices and identifies areas where there are clear messages about optimal central bank design

monetary shocks the exchange rate and the trade balance abstract this paper investigates the response of the exchange rate and the trade balance to monetary policy innovations for the us economy during the period 1973 01 1993 12 the empirical findings indicate that contractionary monetary policy shocks lead to transitory appreciations of the real and the nominal exchange rate exchange rate appreciations that are caused by a temporary contractionary shock to monetary policy are correlated with a short lived improvement in the trade balance which is then followed by a deterioration giving support to the j curve hypothesis

devaluation and the j curve some evidence from ldcs within the international trade literature it is not uncommon to find arguments about whether devaluation will improve the trade balance it is argued that the flows of goods respond only with time lags to changes in the exchange rate the j curve terrn is used to describe the movement over time of the trade balance it may deteriorate at first and improvement may come later this paper presents a method by which one could detect the existence of the j curve the method is applied to four developing countries the empirical evidence supports the pattern of movemnent described by the j curve a major policy option for a country facing a persistent balance of payments deficit is said to be devaluation of its currency within the international trade literature it is not uncommon to find arguments about whether devaluation will improve the trade balance or the balance of payments for example proponents of the elasticities approach describe the necessary and sufficient conditions for an improvement in the trade balance in terms of elasticities of demand and supply referred to as the marshall lerner condition while there is abundant empirical evidence to suggest that these conditions are indeed met at least for industrial countries there have been circumstances under which 2 devaluation has not been successful for example one might wonder why the u s trade balance deteriorated so much in 1972 despite the devaluation of the dollar in 1971 this unfavorable effect of devaluation on the trade balance is termed the j curve phenomenon received for publication august 23 1984 revision accepted for publication november 26 1984 the university of wisconsin milwaukee i would like to thank two anonymous referees for their valuable comments on the initial draft of this paper 1 proponents of the absorption approach e g alexander 1952 describe how devaluation may change the terms of trade increase production and switch expenditures from foreign to domestic goods thus improving the trade balance international monetarists argue that devaluation reduces the real value of cash balances and or changes the relative price of traded and nontraded goods thus improving both the trade balance and the balance of payments 2 for an cstimate of the elasticities see houthakker and magee 1969 and warner and kreinin 1983 the former study provides the elasticities estimates under fixed exchange rates and the latter under floating rates this content downloaded from 157 55 39 17 on wed 31 aug 2016 04 39 37 utc all use subject to http about jstor org terms

the mirage of floating exchange rates this note summarizes some of the highlights of my longer paper with guillermo calvo fear of floating many emerging market countries have suffered financial crises one view blames soft pegs for these crises adherents to that view suggest that countries move to corner solutions hard pegs or floating exchange rates we analyze the behavior of exchange rates reserves and interest rates to assess whether there is evidence that country practice is moving toward corner solutions we focus on whether countries that claim they are floating are indeed doing so we find that countries that say they allow their exchange rate to float mostly do not there seems to be an epidemic case of fear of floating

optimal disinflation in new keynesian models abstract central bankers conventional wisdom suggests that nominal interest rates should be raised to attain a lower inflation target in contrast i show that the standard new keynesian monetary model with rational expectations and full credibility predicts that nominal interest rates should be decreased to attain this goal real interest rates however are virtually unchanged these results also hold in recent vintages of new keynesian models with sticky wages price and wage indexation and habit formation in consumption

necessity as the mother of invention monetary policy after the crisis we examine recent changes in monetary policy due to the financial crisis and ask whether they are likely to be temporary or permanent we present evidence from two original surveys one of central bank governors the other of academic specialists we find that central banks in crisis countries are more likely to have resorted to new policies to have had discussions about changing mandates and to have communicated more extensively but thinking has changed more broadly for instance many central banks in non crisis countries also report implementing macro prudential measures looking forward we expect central banks to have broader mandates use macro prudential tools more widely and communicate more actively than before the crisis while there is no consensus yet about the usefulness of unconventional monetary policies we expect most of them will remain in central banks toolkits as governors who gain experience with a particular tool are more likely to assess that tool positively finally the relationship between central banks and their governments might well have changed with central banks crossing the line into the political realm more often than in the past

monetary policy with interest on reserves abstract i analyze monetary policy with interest on reserves and a large balance sheet i show that conventional theories do not determine inflation in this regime so i base the analysis on the fiscal theory of the price level i find that monetary policy can peg the nominal rate and determine expected inflation with sticky prices monetary policy can also affect real interest rates and output though higher interest rates raise output and then inflation the conventional sign requires a coordinated fiscal monetary policy contraction i show how conventional new keynesian models also imply strong monetary fiscal policy coordination to obtain the usual signs i address theoretical controversies a concluding section places our current regime in a broader historical context and opines on how optimal fiscal and monetary policy will evolve in the new regime

the continuing muddles of monetary theory a steadfast refusal to face facts lionel robbins was concerned about the methodology of economic science when he discussed the relationship between theory and reality two of the examples of inappropriate relationships were taken from monetary economics such shortcomings continue among the worst are 1 is lm whereby the monetary authorities set the monetary base and the interest rate is market determined 2 the monetary base multiplier of bank deposits and the role of reserve ratios 3 the current three equation neoclassical consensus assuming perfect creditworthiness and hence no need for banks 4 the analysis of the evolution of money

qe a successful start may be running into diminishing returns existing studies may have underestimated the impact of qe1 on uk gdp because they did not take full account of the beneficial effect on credit risk spreads and on the exchange rate however all such effects were also influenced by the roughly simultaneous introduction of similar easing in the usa which complicates the analysis another area where qe has been positive is in reducing public sector borrowing costs where qe1 and subsequent rounds have disappointed is in their inability to stimulate a recovery in credit and monetary growth amid an increased desire among banks to hold far more of their reserves at the central bank moreover there is growing evidence of significant diminishing returns in qe2 as gilt rates have already fallen to historically low levels and the risk is that if policy makers fail to resuscitate the bank lending channel further rounds of qe could potentially have negative returns

using changes in auction maturity sectors to help identify the impact of qe on gilt yields this article uses a novel way of identifying part of the impact of quantitative easing qe on gilt yields using natural experiments associated with bank of england announcements about changes in the maturity distribution of future gilt purchases we find that changes in expected qe purchases had a significant effect on gilt yields following each announcement in march 2009 august 2009 and february 2012 the local supply effects we identify appear to be important they may account for around half of the total impact on gilt yields in these events and are passed through to yields of related assets

monetary policy in exceptional times this paper describes the way in which the european central bank ecb the federal reserve and the bank of england conducted monetary policy since the beginning of the financial crisis in august 2007 we argue that both quantitative easing and the other non standard measures introduced by central banks that changed the composition of the asset side of their balance sheets so called qualitative easing acted mainly through their effects on interest rates and in particular on money market spreads rather than solely through quantity effects in terms of the money supply we perform a quantitative exercise on the euro area which estimates the effect of the reduction of these spreads to the broader economy michele lenza huw pill and lucrezia reichlin

overcoming the zero bound on interest rate policy the paper proposes three options for overcoming the zero bound on interest rate policy a carry tax on money open market operations in long bonds and monetary transfers a variable carry tax on electronic bank reserves could enable a central bank to target negative nominal interest rates a carry tax could be imposed on currency to create more leeway to make interest rates negative quantitative policy monetary transfers and open market purchases of long bonds could stimulate the economy by creating liquidity broadly defined a central bank needs more fiscal support than usual from the treasury to pursue quantitative policy at the interest rate floor

unconventional monetary policy the assessment the uncon ventional monetary policy measures adopted by the major central banks in the period since 2008 are discussed in this paper we highlight some important differences between quan titative easing and conventional monetary policy and then evaluate the mechanisms through which quantitative easing may propagate to financial markets and the real economy drawing on perspec tives from monetarist and new keynesian theory additional measures intended to supplement or strengthen the effects of pure quantitative easing often termed unconventional unconventional monet ary policy are also assessed in our discussion we relate the various articles in this issue to some of the key research questions posed in relation to unconventional monetary policy

global implications of national unconventional policies abstract financial integration in the markets for banks assets and liabilities makes balance sheet constraints highly correlated across countries resulting in a high degree of financial and macroeconomic interdependence likewise under financial integration unconventional policies aimed at stabilizing domestic financial and credit conditions could entail large international spillovers therefore stabilization by one country will also benefit other countries reducing incentives to implement credit policies in a classic free riding problem especially when these policies entail domestic costs we show that this outcome can emerge in an open economy model featuring financial intermediaries that face endogenously determined balance sheet constraints

the variety of maturities offered by firms and institutional investment in corporate bonds we study how a firm s decision to offer bonds of various maturities affects the portfolio allocations of institutional investors we argue that because of lower information collection costs institutional investors tilt their portfolios towards firms that offer bonds of various maturities we show that this translates into lower bond yields both in the primary and in the secondary bond markets

limits of arbitrage theory and evidence from the mortgage backed securities market limits of arbitrage theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor we examine the mortgage backed securities mbs market in this light we show that the risk of homeowner prepayment which is a wash in the aggregate is priced in the mbs market the covariance of prepayment risk with aggregate wealth implies the wrong sign to match the observed prices of prepayment risk the price of risk is better explained by a kernel based on mbs market wide specific risk consistent with the specialized arbitrageur hypothesis a number of recent limits of arbitrage theories predict that the distressed liquidation of assets by hedge funds results in a large drop in asset prices see for example shleifer and vishny 1997 kyle and xiong 2001 gromb and vayanos 2002 geanakoplos 2003 or he and krishnamurthy 2006 these theories are often referenced in explaining episodes of market illiquidity and falling asset prices such as the events during the fall of 1998 in traditional asset pricing theory the marginal investor in every asset market is the same broadly diversified representative investor thus a hedge fund liquidating 200 billion of mortgage backed securities finds a large pool of ready buyers comparable to the entire capital market and the liquidation does not affect expected returns because the representative investor acts quickly to eliminate excess returns according to the limits of arbitrage theory on the other hand the marginal investor in a particular asset market is an investor who specializes in that market in this case liquidations can have large effects on prices given that the relevant set of buyers is a smaller specialized pool of investors

quantitative easing is not as unconventional as it seems policy interest rates do not have to be short the means by which monetary authorities influence prices and quantities can differ but the obstacles to altering one rather than the other are not insuperable inflation is sluggish and expectations of future interest rates long and short nominal and real are diverse and uncertain these factors determine the limited power that monetary authorities enjoy when they conduct quantitative easing but this policy is not as unconventional as some have claimed and indeed can be viewed as broadly similar to conventional monetary measures the impact of quantitative easing however could be very different depending on the underlying structure of the economy and the fiscal authorities responses finally we note some important caveats that must be borne in mind when trying to evaluate the impact of quantitative easing particularly given the fact that the world s main financial markets are closely linked copyright 2012 oxford university press

the banking panics in the united states in the 1930s some lessons for today in this paper we discuss the lessons learned from the us banking panics in the 1930s for the response by the federal reserve to the crisis of 2008 we revisit the debate over illiquidity versus insolvency in the banking crises of the 1930s and provide empirical evidence that the banking crises largely reflected illiquidity shocks in the recent crisis the fed under bernanke had well learned the lesson from the banking panics of the 1930s of conducting expansionary monetary policy to meet demands for liquidity however unlike in the 1930s the deeper problem of the recent crisis was not illiquidity but insolvency and especially the fear of insolvency of counterparties a number of virtually insolvent us banks deemed too big and too interconnected to fail were rescued by fiscal bail outs

perils of unconventional monetary policy abstract unconventional monetary policy by relaxing restrictions on the composition of the balance sheet of the central bank compromises control over the stochastic path of inflation or in open economies over the stochastic path of exchange rates if the composition of the balance sheet is unrestricted then the path of inflation is indeterminate this is the case under pure quantitative easing where the target is the size of real money balances in contrast credit easing policies restrict the composition of the portfolio by targeting a specific expansion in the maturity profile of bonds bought and thus can implement a determinate path of inflation the composition of the portfolios traded by monetary fiscal authorities also determines premia in asset and currency markets

quantitative easing and the uk stock market does the bank of england information dissemination strategy matter we use intraday aggregate stock market data and an event study framework to assess the uk s equity market reaction to the unexpected element of the bank of england monetary policy committee s mpc asset purchase announcements for the 2009 2017 period we assess the reactions of equity returns and their volatility over various time frames both preceding and following the mpc announcements our results show that the uk unconventional monetary policy shocks have a significant impact on domestic equity returns and volatilities the strength of this impact depends on the bank s information dissemination through inflation reports and the publication of the mpc s voting records jel g14 e44 e52

what is the effect of unconventional monetary policy on bank performance this paper examines the relationship between unconventional monetary policy and the us banking performance unconventional monetary policy is captured through the central bank s assets and excess reserves results show that unconventional monetary policy has a negative relationship with bank performance further analysis shows that the negative association between unconventional monetary policy and performance is mitigated for banks with a high level of asset diversification and low deposit funding we also find that the negative relationship between unconventional monetary policy and performance subdues for deposit insured financial institutions finally we use dynamic panel threshold analysis which reveals that the negative association between unconventional monetary policy and bank performance is particularly pronounced above the reported threshold value

determinacy and identification with taylor rules the new keynesian taylor rule theory of inflation determination relies on explosive dynamics by raising interest rates in response to inflation the fed induces ever larger inflation unless inflation jumps to one particular value on each date however economics does not rule out explosive inflation so inflation remains indeterminate attempts to fix this problem assume that the government will choose to blow up the economy if alternative equilibria emerge by following policies we usually consider impossible the taylor rule is not identified without unrealistic assumptions thus taylor rule regressions do not show that the fed moved from passive to active policy in 1980

political uncertainty and public financing costs evidence from u s gubernatorial elections and municipal bond markets this research investigates how political uncertainty around u s gubernatorial elections in uences the borrowing costs of public debt measured by yields of municipal bonds our evidence from both the new issuance market and the secondary market shows that yields of municipal bonds increase sharply by 6 to 8 basis points before elections and then reverse afterward elections have more pronounced impact during economic downturns when outcomes are less predictable and when states have more outstanding debt several state institutions such as gaap budgeting spending limits and tax increase limits help to mitigate the adverse impact of political uncertainty

quantitative monetary policy and government debt management in britain since 1919 the enormous increase in the united kingdom s national debt during the two world wars of the twentieth century meant that government debt management which had hitherto been regarded as a matter of budgetary convenience acquired great macroeconomic significance the paper examines and compares four episodes in the management of the national debt since 1919 and in each case explores the relationship between debt management and monetary policy the current policy of quantitative easing is a form of government debt management and the paper discusses it in the context of the earlier episodes copyright 2012 oxford university press

the foreign exchange market a random walk with a dragging anchor this paper explores some anomalies in the foreign exchange market it is hard to find evidence of either short term overshooting or of longer term reversion to an equilibrium the forward exchange rate contains virtually no information on future spot rates discussions with practitioners indicate that longer term speculation based on fundamentals is strictly limited and survey data and other evidence suggest that expectations and speculation are based on a variety of models the interplay between speculation based on fundamentals and on a random walk or chartist approach influences the outcome this endorses the prior model of j a frankel and k a froot copyright 1988 by the london school of economics and political science

monetary policy elasticity dynamics and real exchange rate reversal models of hysteresis in trade invoke permanent shifts in competitiveness to explain the real exchange rate reversal of the 1980s these models predict an immediate and permanent response of competitiveness to exchange rate overshooting in contrast an extensive empirically based j curve literature suggests a lagged response of competitiveness to real exchange rate movements this paper shows that such trade balance elasticity dynamics offer an attractive alternative explanation of real exchange rate reversal copyright 1995 by ohio state university press

international transmission channels of u s quantitative easing evidence from canada en reaction a la grande recession la reserve federale americaine a reduit son taux directeur a sa valeur plancher afin d accentuer la detente monetaire la banque centrale americaine a par la suite mis en oeuvre des achats massifs d actifs ce qui a eu pour effet de quadrupler la taille de son bilan

flow effects of central bank asset purchases on sovereign bond prices evidence from a natural experiment we estimate the response of sovereign bond prices to net supply shocks caused by purchase operations under the ecb s public sector purchase programme pspp to avoid simultaneity bias in the estimated relationship between prices and purchases we exploit a pspp feature that renders securities temporarily ineligible for reasons unrelated to their prices using these purchase restrictions as an instrument to identify exogenous variation in purchase volumes we find that pspp causes statistically significant and economically relevant upward price impacts the impacts are short lived and concentrated in securities issued by higher yield jurisdictions and characterized by higher maturity and lower liquidity

the j curve revisited an empirical examination for the united states abstract this paper examines empirical evidence for trade prices and quantities for the united states to determine whether j curve effects have occurred in recent history empirical estimates of exchnage rate pass through and trade volume responses to exchange rate changes for the 1967 to 1987 period indicate that the often told tale of trade balance deterioration and then improvement the j shaped adjustment path has not typically been experienced by the united states expenditures on imports have typically increased following dollar depreciations primarily as a result of relatively inelastic import volume responses export earnings have been seen to rise only marginally during these same dollar depreciations due to increases in export prices and the subsequent reductions induced in export volume the long run merchandise trade balance adjustment path is seen to resemble a sine wave rather the a j

examining the behaviour of individual uk consumer prices this article examines how uk consumer prices behave using two databases with millions of price observations the microdata that underpin official consumer prices index data and a database of supermarket prices prices do not change continuously but our key finding is the marked heterogeneity in the data that is not consistent with standard microeconomic foundations that typically form the basis of macroeconomic policy models declining hazard functions and the distribution of price changes also argue against representative agent models our results suggest further work is needed to find a model of price setting that genuinely corresponds to how individual uk consumer prices behave

bond market clienteles the yield curve and the optimal maturity structure of government debt we propose a clientele based model of the yield curve and optimal maturity structure of government debt clienteles are generations of agents at different life cycle stages in an overlappinggenerations economy an optimal maturity structure exists in the absence of distortionary taxes and induces efficient intergenerational risksharing if agents are more risk averse than log then an increase in the long horizon clientele raises the price and optimal supply of long term bonds but while a welfare maximizing government caters to clienteles it does not accommodate fully their demand and limits issuance of long term bonds to a level where these earn negative expected excess returns

exchange rates and traded goods prices abstract this paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm the model stresses the role of exchange rate uncertainty and expectations the most important result of the analysis is that the stochastic properties of deviations from the law of one price are crucially affected by the currency of denomination of export prices using data on domestic and dollar export prices of japanese goods i find that deviations from the law of one price are due to exchange rate surprises but also to price staggering and ex ante price discrimination

the financial market impact of uk quantitative easing after outlining some of the monetary developments associated with quantitative easing qe we measure the impact of the uk s initial 2009 10 qe programme on bonds and other assets first we use a macro nance yield curve both to create a counterfactual path for bond yields and to estimate the impact of qe directly second we analyse the impact of individual qe operations on a range of asset prices we nd that qe signi cantly lowered government bond yields through the portfolio balance

the effectiveness of alternative monetary policy tools in a zero lower bound environment this paper reviews alternative options for monetary policy when the shortterm interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates we use a model of risk averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level slope and curvature term structure risk we find that these treasury factors historically were quite helpful for predicting both yields and excess returns over 1990 2007 the historical correlations are consistent with the claim that if in december 2006 the fed were to have sold off all its treasury holdings of less than 1 year maturity about 400 billion and use the proceeds to retire treasury debt from the long end this might have resulted in a 14 basis point drop in the 10 year rate and an 11 basis point increase in the 6 month rate we also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009 our estimates imply that at the zero lower bound such a maturity swap would have the same effects as buying 400 billion in long term maturities outright with newly created reserves and could reduce the 10 year rate by 13 basis points without raising short term yields