definition consistent measurement of exchange market pressure currencies can be under severe pressure but in a managed exchange rate regime that is not fully visible via the change in the exchange rate the literature has proposed a way to measure such exchange market pressure emp indirectly by adding interest rate changes and forex interventions to the exchange rate change we demonstrate that this measure is not consistent with the definition of emp and develop a new measure that is consistent this is first derived within the commonly used monetary exchange rate model then we generalize the analysis by avoiding the use of an exchange rate model we find that the interest rate should not be taken in the first difference form used so far but rather in level form and relative to the interest rate chosen if the country had no exchange rate objective applications on the european monetary system and east asian crises confirm that this improvement is highly relevant in practice

a theory of voting equilibria a voting equilibrium arises when the voters in an electorate acting in accordance with both their preferences for the candidates and their perceptions of the relative chances of various pairs of candidates being in contention for victory generate an election result that justifies their perceptions voting equilibria always exist and the set of equilibria can vary substantially with the choice of voting system we compare equilibria under the plurality rule approval voting and the borda system we consider a candidate positioning game and find that the plurality rule imposes little restriction on the position of the winning candidate in three candidate races while approval voting leads to a winner positioned at the median of the voter distribution we contrast campaign activities intended to influence voter preferences with activities meant to influence only perceptions of candidate viability

dynamic forecasts of qualitative variables a qual var model of u s recessions this article presents a new qual var model for incorporating information from qualitative and or discrete variables in vector autoregressions with a qual var it is possible to create dynamic forecasts of the qualitative variable using standard var projections previous forecasting methods for qualitative variables in contrast produce only static forecasts i apply the qual var to forecasting the 2001 business recession out of sample and to analyzing the romer and romer narrative measure of monetary policy contractions as an endogenous variable in a var out of sample the model predicts the timing of the 2001 recession quite well relative to the recession probabilities put forth at the time by professional forecasters qual vars which include information about the qualitative variable can also enhance the quality of density forecasts of the other variables in the system

forecasting macro variables with a qual var business cycle turning point index one criticism of vector autoregression var forecasting is that macroeconomic variables tend not to behave as linear functions of their own past around business cycle turning points a large amount of literature therefore focuses on nonlinear forecasting models such as markov switching models which only indirectly capture the relation with turning points this article investigates a direct approach to using information on turning points from the national bureau of economic research nber chronology to model and forecast macroeconomic data our qual var model includes a truncated normal latent business cycle index that is negative during nber recessions and positive during expansions we motivate our forecasting exercise by demonstrating that if starting from a linear specification a truncated normal variable is an omitted variable then forecasts of the remaining variables will become nonlinear functions of their own past we apply the qual var model to recursive out of sample forecasting and find th

strategic voting when participation is costly abstract we study a general multiparty model of plurality rule elections with costly participation and prove that strategic voting that is situations in which some voters abandon their most preferred alternative and vote strategically for the serious contender they dislike less may emerge in equilibrium just like when participation is costless compulsory palfrey 1989 this qualifies opposite claims made in more confined setups e g arzumanyan and polborn 2017 and establishes that duverger s psychological effect is present in a much larger set of cases than currently believed

international spillovers of large scale asset purchases this paper evaluates the international spillover eects of large scale asset purchases lsaps using a two country dynamic stochastic general equilibrium model with nominal and real rigidities and portfolio balance eects portfolio balance eects arise from imperfect substitution between short and long term bond portfolios in each country as well as between domestic and foreign bonds within these portfolios we show that lsaps lower both domestic and foreign long term yields and stimulate economic activity in both countries international spillover eects

estimating the effects of macroprudential policy shocks a qual var approach this paper proposes a qual var i e a var augmented by qualitative variables to estimate the effects of lowering maximum loan to value ltv ratios a key macroprudential policy tool we use korea as a case study where ltv ratios have been used frequently as a policy instrument the qual var has several advantages over competing methods we conclude that a macroprudential tightening is effective in dampening credit growth and reducing the appreciation of house prices

a search based model of the interbank money market and monetary policy implementation we present a search based model of the interbank money market and monetary policy implementation banks are subject to reserve requirements and the central bank tenders reserves interbank payments redistribute holdings and banks trade with each other in a decentralized over the counter market the central bank provides standing facilities where banks can either deposit surpluses or borrow to cover shortfalls of reserves overnight the model provides insights on liquidity trading volume and rate dispersion in the interbank market features largely absent from the canonical models in the tradition of poole 1968 and fits a number of stylized facts for the eurosystem observed during the recent period of unconventional monetary policies moreover it provides insights on the implications of different market structures

external shocks u s monetary policy and macroeconomic fluctuations in emerging markets estimated structural vars show that external shocks are an important source of macroeconomic fluctuations in emerging markets furthermore u s monetary policy shocks affect interest rates and the exchange rate in a typical emerging market quickly and strongly the price level and real output in a typical emerging market respond to u s monetary policy shocks by more than the price level and real output in the u s itself these findings are consistent with the idea that when the u s sneezes emerging markets catch a cold at the same time u s monetary policy shocks are not important for emerging markets relative to other kinds of external shocks

the macroeconomic effects of large scale asset purchase programmes the effects of asset purchase programs on macroeconomic variables are likely to be moderate we reach this conclusion after simulating the impact of the federal reserve s second large scale asset purchase program lsap ii in a dsge model enriched with a preferred habitat framework and estimated on u s data our simulations suggest that such a program increases gdp growth by less than half a percentage point although the effect on the level of gdp is very persistent the program s marginal contribution to infl ation is very small one key reason for our fi ndings is that we estimate a small degree of fi nancial market segmentation if we enrich the set of observables with a measure of long term debt the semi elasticity of the risk premium to the amount of debt in privatesector hands is substantially smaller than that reported in the recent empirical literature in this case our baseline estimates of the effects of lsap ii on the macroeconomy decrease by at least a factor of two throughout the analysis a commitment to an extended period at the zero lower bound for nominal interest rates increases the effects of asset purchase programs on gdp growth and infl ation

a micro model of the federal funds market this paper demonstrates that valuable insights into the determination of federal funds rates can be gained through modeling the micro decisions of market participants fed fund demand functions are derived for different bank valuation functions and several implications are discussed specifically it is i possible to rationalize the observation that large banks are net purchasers and small banks net sellers of fed funds ii to explain the positive spread of fed funds rates over other short term money market rates and iii to link the size of this spread to the federal reserve s underlying monetary policy strategy

the paradox of voter participation a laboratory study it is widely believed that rational choice theory is grossly inconsistent with empirical observations about voter turnout we report the results of an experiment designed to test the voter turnout predictions of the rational choice palfrey rosenthal model of participation with asymmetric information we find that the three main comparative statics predictions are observed in the data the size effect whereby turnout goes down in larger electorates the competition effect whereby turnout is higher in elections that are expected to be close and the underdog effect whereby voters supporting the less popular alternative have higher turnout rates we also compare the quantitative magnitudes of turnout to the predictions of nash equilibrium we find that there is undervoting for small electorates and overvoting for large electorates relative to nash equilibrium these deviations from nash equilibrium are consistent with the logit version of quantal response equilibrium which provides a good fit to the data and can also account for significant voter turnout in very large elections

monetary policy transmission with interbank market fragmentation this paper shows how interbank market fragmentation disrupts the transmission of monetary policy fragmentation is the fact that banks depending on their country of location have different probabilities of default on their interbank borrowings once fragmentation is introduced into standard theoretical models of monetary policy implementation excess liquidity arises endogenously this leads short term interest rates to depart from the central bank policy rates using data on monetary policy operations i show that this mechanism has been at work in the euro area since 2008 the model is used to analyze conventional and unconventional monetary policy measures

money announcements the demand for bank reserves and the behavior of the federal funds rate within the statement week the effect of money stock announcements on the federal funds rate hasbeen attributed informally to the information conveyed by the announcements about aggregate reserved emand this aggregate information hypothesis explains the effect without ref erence to federal reserve intervention in the funds market in this paper the a uthor provides a formal model of the aggregate information hypothesis under lagged reserve accounting the model relies on imperfect information in the funds ma rket and on imperfect bank arbitrage of reserve demand between days of the week some stylized facts are presented about funds rate behavior in the period 1980 83 copyright 1987 by ohio state university press

assessing the economy wide effects of quantitative easing this article examines the macroeconomic impact of the first round of quantitative easing qe by the bank of england we attempt to quantify the effects of these purchases by focusing on the impact of lower long term interest rates on the wider economy we use three different models to estimate the impact of qe on output and inflation a large bayesian vector autoregression var a change point structural var and a time varying parameter var our estimates suggest that qe may have had a peak effect on the level of real gdp of around and a peak effect on annual cpi inflation of about points

fixed costs and the behavior of the federal funds rate abstract this paper presents an equilibrium model of the federal funds market that ties movements in the funds rate to changes in the supply of reserves and to a fixed cost facing banks that borrow at the discount window it is found that the existence of the fixed cost is capable of explaining a number of features of the funds market in particular it is critical for explaining occasional instances of extremely high funds rates it also provides an explanation for heterogeneous behavior across banks towards the discount window and for higher average funds rates at the end of maintenance periods

unconventional monetary policy and the spillovers to emerging markets abstract unconventional monetary policy such as quantitative easing qe is often considered to have considerable spillover effects on emerging market economies eme aims at quantifying these effects so far mostly use high frequency data around announcement dates panels or var models this paper proposes an alternative way to estimate the effects of qe on emerging markets that allows us to include macroeconomic i e low frequency data together with announcement dates a qual var is estimated that integrates binary information of qe announcements with an otherwise standard var including us and emerging market variables a key advantage is that the model accounts for the endogeneity and forecastability of qe announcements the model uncovers the fed s latent unobservable propensity for qe and generates impulse responses for eme variables to qe shocks the results suggest that qe has significant effects on eme s financial conditions and plays a sizable role in explaining capital inflows equity prices and exchange rates

liquidity regulation and the implementation of monetary policy in addition to revamping existing rules for bank capital basel iii introduces a new global framework for liquidity regulation one part of this framework is the liquidity coverage ratio lcr which requires banks to hold sufficient high quality liquid assets to survive a 30 day period of market stress as monetary policy typically involves targeting the interest rate on loans of one of these assets central bank reserves it is important to understand how this regulation may impact the efficacy of central banks current operational frameworks we introduce term funding and an lcr requirement into an otherwise standard model of monetary policy implementation our model shows that if banks face the possibility of an lcr shortfall then the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper our results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented

winter is possibly not coming mitigating financial instability in an agent based model with interbank market abstract we develop a macroeconomic agent based model to study how financial instability can emerge from the co evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy the model is populated by heterogenous firms consumers and banks that locally interact in different markets in particular banks provide credit to firms according to a basel ii or iii macro prudential frameworks and manage their liquidity in the interbank market the central bank performs monetary policy according to different types of taylor rules we find that the model endogenously generates market freezes in the interbank market which interact with the financial accelerator possibly leading to firm bankruptcies banking crises and the emergence of deep downturns this requires the timely intervention of the central bank as a liquidity lender of last resort moreover we find that the joint adoption of a three mandate taylor rule tackling credit growth and the basel iii macro prudential framework is the best policy mix to stabilize financial and real economic dynamics however as the liquidity coverage ratio spurs financial instability by increasing the pro cyclicality of banks liquid reserves a new counter cyclical liquidity buffer should be added to basel iii to improve its performance further finally we find that the central bank can also dampen financial instability by employing a new unconventional monetary policy tool involving active management of the interest rate corridor in the interbank market

payment obligations reserve requirements and the demand for central bank balances we develop a model in which a bank s demand for reserves depends on the joint distribution of transactions reserve requirements and the interest rate by devoting resources to its liquidity management a bank can save on costly reserves required to settle its payments on time we test the model with data from the largest banks in the swiss interbank clearing system we find that the turnover ratio the speed with which a bank turns over its reserves in the payment system depends largely on the aggregate value of its payments we also find that reserve requirements impose a highly uneven burden on the banks

voluntary reserve targets we study monetary policy implementation through an operating regime involving voluntary reserve targets vrts operating regimes based on reserve requirements may lead to a collapse in interbank trade as they have since the financial crisis we show that no matter the abundance of reserves vrts encourage market activity and support the central bank s control over interest rates we consider i the impact of anticipated and unanticipated liquidity injections by the central bank on market outcomes and ii a comparison with the implementation framework currently adopted by the federal reserve overall a vrt framework may provide several advantages over other frameworks

voter participation and strategic uncertainty the paradox of not voting is examined in a model where voters have uncertainty about the preferences and costs of other voters in game theoretic models of voter participation under complete information equilibrium outcomes can have substantial turnout even when voting costs are relatively high in contrast when uncertainty about preferences and costs is present only voters with negligible or negative net voting costs participate when the electorate is large

interest rate corridors and reserves abstract this paper evaluates reserves regimes versus interest rate corridors which have become competing frameworks for monetary policy implementation rate corridors relying on lending and deposit facilities to create ceilings and floors for overnight interest rates evince mixed results on controlling volatility reserve requirements allow period average smoothing of interest rates but even if remunerated are subject to reserve avoidance activities a system of voluntary period average reserve commitments could offer equivalent rate smoothing advantages if central banks created symmetric opportunity costs of meeting or falling short of period average reserve requirements or commitments they could achieve flat reserve demand on settlement day

is mandatory voting better than voluntary voting we investigate the welfare effects of policies that increase voter turnout in costly voting models in a generalized costly voting model we show that if the electorate is sufficiently large then increasing voter turnout is generically efficient increasing turnout in small elections is only inefficient if the electorate is evenly divided or if there is already almost complete voter participation finally we argue that the effects underlying our results are robust in a large class of endogenous participation models

international spillovers of quantitative easing abstract this paper develops a two country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy the model is able to replicate the key empirical facts on emerging countries response to large scale asset purchases conducted abroad including inflow of capital to local sovereign bond markets an increase in international comovement of term premia and change in the responsiveness of the exchange rate to interest rate differentials according to our simulations quantitative easing abroad boosts domestic demand in the small economy but undermines its international competitiveness and depresses aggregate output at least in the short run this is in contrast to conventional monetary easing in the large economy which has positive spillovers to output in other countries we also find that limiting quantitative easing spillovers might require policies that affect directly international capital flows like purchasing assets by the small economy s central bank

a daily view of yield spreads and short term interest rate movements daily data on short term interest rates are used to show how changes in federal reserve operating procedures have affected the term structure yield spreads were helpful in predicting short term interest rate movements during the nonborrowed reserves targeting period 1979 82 but not during the earlier federal funds targeting period since the adoption of contemporaneous reserves accounting in 1984 yield spreads have been informative about short term interest rate movements principally because of the interplay between the market determination of the overnight funds rate on reserve settlement wednesdays and the fed s apparent commitment to stabilizing the funds rate on other days copyright 1996 by ohio state university press

the micromechanics of the federal funds market implications for day of the week effects in funds rate variability the federal funds rate arguably is the most important interest rate in the u s capital market because it plays a central role in monetary policy and the term structure this paper examines the micromechanics of the funds market we show that in a continuous market with asynchronous trading regulatory constraints and accounting conventions that focus agents attention on discrete time instants have important implications for the dynamics of trading activity and realized market prices we also exhibit a model of the market that explains observed regularities in the intertemporal behavior of the funds rate

monetary policy implementation in a negative rate environment monetary policy implementation could in theory be constrained by deeply negative rates since overnight market participants may have an incentive to invest in cash rather than lend to other participants

corridor system and interest rates volatility and asymmetry the corridor system in its current form is believed to reduce the volatility of overnight interest rates and to eliminate any chance of persistent upward or downward bias the model presented here serves to highlight two main findings one is that a central bank can further reduce the volatility of overnight interest rates by allowing banks some flexibility to meet their reserve targets within a small range as observed in the uk data the second is that a seemingly symmetric corridor may be asymmetric in practice due to several distortions as the uk and euro area data suggest

monetary policy in a channel system abstract channel systems for conducting monetary policy are becoming increasingly popular despite its popularity the consequences of implementing policy with a channel system are not well understood we develop a general equilibrium framework of a channel system and study the optimal policy a novel aspect of the channel system is that a central bank can tighten or loosen its policy without changing its policy rate this policy instrument has so far been overlooked by a large body of the literature on the optimal design of interest rate rules

efficiency and bargaining power in the interbank loan market using detailed transactions level data on interbank loans we examine the efficiency of an overnight interbank lending market and the bargaining power of its participants our analysis relies on the equilibrium concept of the core which imposes a set of no arbitrage conditions on trades in the market for canada s large value transfer system we show that although the market is fairly efficient systemic inefficiency persists throughout our sample the level of inefficiency matches distinct phases of both the bank of canada s operations as well as phases of the 2007 8 financial crisis we find that bargaining power tilted sharply toward borrowers as the financial crisis progressed and surprisingly toward riskier borrowers

reaching for yield and the diabolic loop in a monetary union abstract we use the theoretical framework of acharya and naqvi 2019 to introduce a macro financial model where the reaching for yield incentivized by a loosening monetary policy in the united states mitigates the diabolic loop in a monetary union we provide empirical evidence that the introduction of an accommodative monetary policy by the fed lowers the yields in us assets and increases liquidity and by extension the threshold above which a liquidity shock can damage a bank this in turn incentivizes bank managers to optimize their portfolios by investing in risky assets we use a monetary var to provide novel empirical evidence that there is an increase in the flow of funds to european assets a result which can be attributed to the reaching for yield incentive this portfolio balance channel attenuates the effects of financial fragility and improves government funding costs as well as credit conditions by providing liquidity to domestic banks and assets as a result the reaching for yield incentive mitigates the diabolic loop effect

day to day monetary policy and the volatility of the federal funds rate we propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements and study the interaction of profit maximizing banks with a central bank targeting interest rates at high frequency the model yields predictions on biweekly patterns of the federal funds rate s volatility and on its response to changes in target rates and in intervention procedures such as those implemented by the fed in 1994 theoretical results are consistent with empirical patterns of interest rate volatility in the u s market for federal funds

governments as bankers how european bonds have substituted bank deposits the purpose of this article is to empirically analyse the relationship between marketable securities government bonds and treasury bills and bank deposits in european markets using a proper data

day to day monetary policy and the volatility of the federal funds interest rate we propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements and study the interaction of profit maximizing banks with a central bank targeting interest rates at high frequency the model yields predictions on biweekly patterns of the federal funds rate s volatility and on its response to changes in target rates and in intervention procedures such as those implemented by the fed in 1994 theoretical results are consistent with empirical patterns of interest rate volatility in the u s market for federal funds

ecb spillovers and domestic monetary policy effectiveness in small open economies abstract in this paper we examine whether financial spillovers from the european central bank s monetary policy have consequences for the effectiveness of domestic monetary policy in three small open economies soes that are highly integrated with the european monetary union denmark norway and sweden we find significant spillovers that are particularly strong for longer maturity yields at the same time domestic monetary policy in norway and sweden is effective for the shorter end of the yield curve but much less so for the longer end of the curve recent work suggests that the trilemma in international economics as we used to know it may be a dilemma soes can only have effective monetary policies when the capital account is managed our results imply something in between although spillovers impose challenges on domestic monetary policy effectiveness small open economies still have some control over their yield curve

stability and coordination in duverger s law a formal model of preelection polls and strategic voting this paper investigates the dynamics of the wasted vote phenomenon and duverger s law i construct a theoretical model in order to consider how preelection polls serve to inform the electorate about the relative chances of the candidates and how that information acts over time to decrease the support of the trailing candidate the results shed light on how public opinion polls can aggregate information in the electorate and coordinate voters on the viable candidates in the election specifically i show that in a bayesian game model of strategic voting there exist non duvergerian equilibria in which all three candidates receive votes in the limit these equilibria require extreme coordination however and any variation in beliefs leads voters away from them to one of the duvergerian equilibria thus non duvergerian equilibria are unstable while two party equilibria are not in addition i describe how preelection polls provide information to voters about the viability of candidates and can thus be used by voters to coordinate on a duvergerian outcome

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

the impact of return on collateral in a channel system we empirically investigate the relationship between the return on collateral and monetary policy implementation in the channel system recent developments in monetary theory suggest that the return on government assets which measures the opportunity cost of holding collateral should have negative impacts on the interest rate spread and the interbank market rate the central bank should set a higher spread when the return on collateral is below a cutoff but implements a lower spread when the return on collateral is higher than the cutoff the interbank market rate tends to lie above the policy target rate when the return on collateral is low and vice versa we use data from eurozone area and six industrialized countries to test these theoretical implications we propose two econometric models one is more structural and closely related to the monetary model to test the negative relationships and the other is based on the threshold autoregression model to detect the potential cutoffs our findings provide conditional support for the negative impact of return on collateral jel e40 e52 e58

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

open mouth operations abstract this paper explains how central bank statements rather than open market operations can be used to implement monetary policy in the extreme policy instruments can be held constant and yet interest rates will evolve along the path desired by the central bank we show how the recent implementation of monetary policy in new zealand works in this way using announcement data from new zealand we find that open mouth operations lead to large changes in interest rates across all maturities and these changes cannot be explained by open market operations implications are drawn for monetary policy in other jurisdictions

bank liquidity interbank markets and monetary policy a major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs this paper studies the efficiency of the interbank lending market in allocating funds we consider two different types of liquidity shocks leading to di erent implications for optimal policy by the central bank we show that when confronted with a distribu tional liquidity shock crisis that causes a large disparity in the liquidity held among banks the central bank should lower the interbank rate this view implies that the traditional tenet prescribing the separation between prudential regulation and mon etary policy should be abandoned in addition we show that during an aggregate liquidity crisis central banks should manage the aggregate volume of liquidity two di erent instruments interest rates and liquidity injection are therefore required to cope with the two di erent types of liquidity shocks finally we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs