Table of Contents

Inflation and Monetary Policy in Russia in December 2014

Alexandra Viktorovna Bozhechkova, Gaidar Institute for Economic Policy, Russian Presidential Academy of National Economy and Public Administration

A Regional Repo Market Initiative for Global Financial Stability

Gongpil Choi, Korea Institute of Finance

On the EUR/CHF Exchange Rate that Would Have Prevailed Without the SNB's Minimum Exchange Rate Policy

Markus Hertrich, University of Basel - Center for Economic Science (WWZ) - Department of Finance, University of Applied Sciences Northwestern Switzerland (CH)

Inflation Is Always and Everywhere an Interest-Rate Phenomenon

Gilles Bélanger, Ministère des Finances du Québec

Cross-Border Liquidity, Relationships and Monetary Policy: Evidence from the Euro Area Interbank Crisis

Puriya Abbassi, Deutsche Bundesbank
Falk Bräuning, VU University Amsterdam, Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)
Falko Fecht, Frankfurt School of Finance & Management
Jose-Luis Peydro, Universitat Pompeu Fabra - Faculty of Economic and Business Sciences, Barcelona Graduate School of Economics (Barcelona GSE), Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI), Centre for Economic Policy Research (CEPR)

Hawks and Doves at the FOMC

Sylvester C. W. Eijffinger, Tilburg University (CentER) - Department of Economics, CESifo (Center for Economic Studies and Ifo Institute), Centre for Economic Policy Research (CEPR)
Ronald Mahieu, Tilburg University - Center for Economic Research, Econometrics and Finance Group, TiasNimbas Business School
Louis Raes, Tilburg University, Tilburg University - European Banking Center

Optimal Mechanisms for the Control of Fiscal Deficits

Hans Peter Gruener, University of Mannheim


MACROECONOMICS: MONETARY & FISCAL POLICIES eJOURNAL

"Inflation and Monetary Policy in Russia in December 2014" Free Download
Russian Economic Developments, No. 2, pp. 5-8, 2015

ALEXANDRA VIKTOROVNA BOZHECHKOVA, Gaidar Institute for Economic Policy, Russian Presidential Academy of National Economy and Public Administration
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Due to the turmoil in the foreign exchange market, the Bank of Russia lifted on the 16th of December the key interest rate up to 17% p.a. in an effort to stop the ruble’s rapid depreciation. In December 2014, the consumer price index stood at 2.6% (0.5% in December 2013 ), up 1.3 p.p. above the value seen in November. As a result, inflation went up to 11.4% on an annualized basis. The consumer price index reached 1.5% within the first 19 days in January 2015.

"A Regional Repo Market Initiative for Global Financial Stability" Free Download

GONGPIL CHOI, Korea Institute of Finance
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The prevailing international monetary system suffers from a shortage of good collateral for nonbank secured lending. Given that the global financial crisis was mainly triggered by the collapse of the collateral pool for dealer-based credit intermediation, there is a need for reforms to prevent it from happening again. This would be possible with a better use of U.S. Treasuries that are kept in silos and a broader recognition of an emerging market sovereign collateral pool. The inclusion of new collateral into the existing nonbank credit intermediation facilities of core countries would be expected to stabilize global capital flows and improve financial stability. The market-driven, risk-mitigating regional repo market initiative would also bring balance to an increasingly market-driven financial ecosystem and mitigate the global shortage of safe assets. Given the geopolitical constraints, developing a regional repo market in Asia is a viable option to take care of long-term rebalancing needs via market development as well as mitigating financial instabilities caused by increasingly collateral-based integration of the dollar-centric international monetary system.

"On the EUR/CHF Exchange Rate that Would Have Prevailed Without the SNB's Minimum Exchange Rate Policy" Free Download

MARKUS HERTRICH, University of Basel - Center for Economic Science (WWZ) - Department of Finance, University of Applied Sciences Northwestern Switzerland (CH)
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The existence of EUR/CHF put options with strike prices below the EUR/CHF 1.20 floor, trading at non-zero cost, challenged the full credibility of the Swiss National Bank (SNB) in enforcing the lower barrier implemented in September 6, 2011 and abandoned on January 15, 2015. These put option prices, however, can be explained if the market expected an abandonment of the EUR/CHF 1.20 floor during the time to maturity of these option contracts. Using a compound option pricing approach, this paper both eliminates a critical assumption in the modeling approach proposed by Hanke et al. (2015), proposing an alternative modeling approach that does not require their assumption, and estimates the latent EUR/CHF exchange rate that would have prevailed without the SNB's minimum exchange rate policy using the proposed modification. The empirical analysis shows that the results using the modified compound option model differs significantly from the results documented in Hanke et al. (2015), underlining the necessity of using the proposed model, since it does not require any critical assumption that may (potentially) bias the empirical results.

"Inflation Is Always and Everywhere an Interest-Rate Phenomenon" Free Download

GILLES BÉLANGER, Ministère des Finances du Québec
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The Fisher Equation, i = r π, relates nominal interest rates to real interest rates and inflation. Real interest rates are what people use to make decisions about the future, but the other two variables pretty much depend on a theory of inflation. At issue here is the determination of nominal interest rates. Rigidity in nominal interest rates, or incomplete pass-through from real to nominal rates imply interesting results that I present here. This paper consists of a simple reduced-form discussion of the model of inflation found in Bélanger (2015) where you find inflation driven by credit conditions.

"Cross-Border Liquidity, Relationships and Monetary Policy: Evidence from the Euro Area Interbank Crisis" Free Download

PURIYA ABBASSI, Deutsche Bundesbank
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FALK BRÄUNING, VU University Amsterdam, Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)
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FALKO FECHT, Frankfurt School of Finance & Management
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JOSE-LUIS PEYDRO, Universitat Pompeu Fabra - Faculty of Economic and Business Sciences, Barcelona Graduate School of Economics (Barcelona GSE), Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI), Centre for Economic Policy Research (CEPR)
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We analyze the impact of financial crises and monetary policy on the supply of wholesale funding liquidity, and also on the compositional supply effects through cross-border and relationship lending. For empirical identification, we draw on the proprietary bank-to-bank European interbank dataset extracted from Target2 and also exploit the Lehman and sovereign crisis shocks as well as the main Eurosystem non-standard monetary policy measures. The robust results imply that the crisis shocks lead to worse access, volumes and spreads (in both the overnight and longer-term maturities). The quantitative impact on interbank access and volume is stronger than on spreads. Liquidity supply restrictions are exacerbated for cross-border lending after the Lehman failure; for banks headquartered in periphery countries, the impact is quantitatively stronger in the sovereign debt crisis. Moreover, the interbank market – unlike other credit markets – allows to exploit the price dispersion from different lenders on identical credit contracts, i.e. overnight uncollateralized loans in the same morning for the same borrower. This price dispersion increases massively with the crisis, and even more for riskier borrowers. Cross-border and previous relationship lenders charge higher prices for identical contracts in the crisis. Importantly, this price dispersion substantially decreases when the Eurosystem promises unlimited access to liquidity at a fixed price in October 2008 and announces the 3-year LTRO in December 2011, with economically stronger effects for borrowers in weaker countries.

"Hawks and Doves at the FOMC" Free Download
CentER Discussion Paper Series No. 2015-013
European Banking Center Discussion Paper Series No. 2015-003

SYLVESTER C. W. EIJFFINGER, Tilburg University (CentER) - Department of Economics, CESifo (Center for Economic Studies and Ifo Institute), Centre for Economic Policy Research (CEPR)
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RONALD MAHIEU, Tilburg University - Center for Economic Research, Econometrics and Finance Group, TiasNimbas Business School
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LOUIS RAES, Tilburg University, Tilburg University - European Banking Center
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In this paper we estimate ideal points of Bank Presidents and Board Governors at the FOMC. We use stated preferences from FOMC transcripts and estimate a hierarchical spatial voting model. We find a clear difference between the average Board Governor and Bank President. We find little evidence for difference in ideal points according to the appointing president in case of Bank Governors. Similarly career background has no clear effect on the ideal points. We find that the median ideal point at the FOMC has been fairly stable over our sample period (1989-2007) emphasizing the lack of a political appointment channel. We also show that there was considerable variation in the median ideal point of Bank Presidents and Board Governors, but that these seem to cancel each other out. Also the dispersion of opinions (the spread between the lowest and highest ideal point) varies over time, suggestion variation in agreement at the FOMC.

"Optimal Mechanisms for the Control of Fiscal Deficits" Fee Download
CEPR Discussion Paper No. DP10440

HANS PETER GRUENER, University of Mannheim
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This paper shows that a simple two-stage voting mechanism may implement a constrained optimal state dependent decision about the size of the fiscal deficit. I consider a setup with strategic fiscal deficits à la Tabellini and Alesina (1990). Three groups of voters are informed about the productivity of current public spending. Voters differ in their preferences for public goods and swing voters' preferences may change over time. The current government decides on the current spending mix and it has an incentive to strategically overspend. Under certain conditions, a simple two-stage mechanism in which a deficit requires the approval by a supermajority in parliament implements a constrained optimal decision. When the current majority is small, political bargaining may further increase social welfare. However, when the current majority is large, a supermajority mechanism with bargaining leads to a biased spending mix and reduces welfare whereas the laissez faire mechanism may yield the first best. An appropriately adjusted majority threshold can deal with this problem.

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MACROECONOMICS EJOURNALS

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Advisory Board

Macroeconomics: Monetary & Fiscal Policies eJournal

OLIVIER J. BLANCHARD
International Monetary Fund (IMF), National Bureau of Economic Research (NBER)

JOHN Y. CAMPBELL
Morton L. and Carole S. Olshan Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

STEPHEN G. CECCHETTI
Professor of International Economics, Brandeis International Business School, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR)

BENJAMIN M. FRIEDMAN
William Joseph Maier Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

ROBERT E. HALL
Stanford University - The Hoover Institution on War, Revolution and Peace, National Bureau of Economic Research (NBER)

ROBERT E. LUCAS
John Dewey Distinguished Service Professor, University of Chicago - Department of Economics, National Bureau of Economic Research (NBER)

BENNETT T. MCCALLUM
Professor, Carnegie Mellon University - David A. Tepper School of Business, National Bureau of Economic Research (NBER)

ALLAN H. MELTZER
University Professor of Political Economics, Carnegie Mellon University - David A. Tepper School of Business

FREDERIC S. MISHKIN
Alfred Lerner Professor of Banking and Financial Institutions, Columbia Business School - Finance and Economics, National Bureau of Economic Research (NBER)

PAUL M. ROMER
National Bureau of Economic Research (NBER)

JULIO J. ROTEMBERG
Harvard University - Business, Government and the International Economy Unit, National Bureau of Economic Research (NBER)

MATTHEW D. SHAPIRO
Professor, University of Michigan at Ann Arbor - Department of Economics, Professor, National Bureau of Economic Research (NBER)

ROBERT J. SHILLER
Yale University - Cowles Foundation, National Bureau of Economic Research (NBER), Yale University - International Center for Finance

CHRISTOPHER A. SIMS
Princeton University - Department of Economics, National Bureau of Economic Research (NBER)

JOHN B. TAYLOR
Stanford University