MACROECONOMICS: MONETARY & FISCAL POLICIES eJOURNAL

"Interest Rates 6: Role of Interest Rates" Free Download

ALEXANDER PIERRE FAURE, Rhodes University
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This is the sixth in a series of seven papers on interest rates and it covers the various roles of interest rates: primary tool of monetary policy, bridge between present and future consumption, advancing consumption / investment with debt, interest rates’ inverse relationship with asset prices and the wealth effect, the role of interest rates in derivative instrument pricing, and interest rates’ role in foreign sector issues. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.

"On the Microfoundations of Money Supply Adjustments: An Essay in Loanable Fundamentalism" Free Download

CAMERON HARWICK, George Mason University - Department of Economics
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Discussions of adjustments to the quantity of money tend to take for granted the method by which new money enters the economy. Friedman's helicopter thought experiment notwithstanding, nearly all adjustment flows through financial markets. But the helicopter example has again become relevant with the advent of crypto-currencies, which are able to adjust the money supply automatically without the use of financial markets at all. This paper compares the economic consequences of adjustments to the money supply when the central bank uses open market operations, versus when it uses helicopters to distribute the cash. It concludes that monetary neutrality is better served by the traditional expansion through financial markets, as new funds can be bid upon – and that automaticity of quantity adjustments can only be bought at the price of the automaticity of the direction of new money to its most-valued uses.

"Why Price Stability? An Answer from the Perspective of New Institutional Economics" Free Download

RUDOLF RICHTER, Saarland University
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The European System of Central Banks (ESCB) is contractually obliged to ensure price stability. That is a vital prerequisite for the applicability of the nominalistic principle in a monetary economy according to which money debt consists merely of a certain quantity of accounting units like a number of dollars or euros. The conceptual pair of the nominalistic principle and price stability is seen as plausible focal principle (Schelling) of transaction cost minimizing actors of a paper money economy. On the other hand, an inflationary target of x% as suggested by Bernanke et al. contradicts not only the nominalistic principle that actually underlies the German legal system but, on its own, is also implausible as focal principle.

"Does Social Trust Speed Up Reforms? The Case of Central-Bank Independence" Free Download
IFN Working Paper No. 1053

NICLAS BERGGREN, Research Institute of Industrial Economics (IFN)
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SVEN-OLOV DAUNFELDT, University of Umea - Department of Economics
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JÖRGEN HELLSTRÖM, Umeå University - Department of Economics
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Many countries have undertaken central-bank independence reforms, but the years of implementation differ. What explains such differences in timing? This is of interest more broadly, as it sheds light on factors that matter for the speed at which economic reforms come about. We study a rich set of potential determinants, both economic and political, but put special focus on a cultural factor, social trust. We find empirical support for an inverse u-shape: Countries with low and high social trust implemented their reforms earlier than countries with intermediate levels. We make use of two factors to explain this pattern: the need to undertake reform (which is more urgent in countries with low social trust) and the ability to undertake reform (which is greater in countries with high social trust).

"Can Inflation Be Estimated from Central Bank Balance Sheets?" Free Download

DOUGLAS CARR, Carr Capital Co.
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A new monetary measure is derived from analysis of banking system and central bank assets. Increases in the ratio of banking and central banking assets relative to currency are found to have been very significantly related to past levels of inflation. Up to 98% of the long-term inflation rate can be explained using these measures. Similar relationships were found for the Canadian economy.

In a comparison of long-term inflation forecasts, out of sample forecasts using these measures produced less biased, more accurate forecasts than consensus forecasts. Current forecasts indicate for the next five to ten years, inflation will average near the Federal Reserve’s 2.0% target with a greater chance of undershoot for the next five years and a greater chance of overshoot for six to ten years.

The results of this analysis raise provocative questions about valuation of fiat money, policy lags for inflation, why major economies such as Japan are having difficulty reflating, and what central bank targets and policies should be.

"Monetary Policy Surprises, Investment Opportunities, and Asset Prices" Free Download

ANDREW L. DETZEL, University of Washington Foster School of Business
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I use changes in Federal funds futures rates on days of FOMC announcements to isolate Federal funds policy surprises. A mimicking portfolio for these surprises commands a positive risk premium, and along with the market excess return prices portfolios formed on size, book-to-market, and momentum with an R2 of 86%. The Federal funds surprise portfolio also eliminates the alphas earned by value and momentum factors. This evidence is consistent with expansionary monetary policy adversely affecting the investment opportunity set by decreasing aggregate expected returns.

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About this eJournal

This eJournal distributes working and accepted paper abstracts of empirical and theoretical papers on different aspects of monetary and fiscal policies. The topics in this eJournal include E1 and E6 from Section E of the classification system of the JEL.

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Directors

MACROECONOMICS EJOURNALS

MICHAEL C. JENSEN
Social Science Electronic Publishing (SSEP), Inc., Harvard Business School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
Email: michael_jensen@ssrn.com

Please contact us at the above addresses with your comments, questions or suggestions for ERN-Sub.

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