What does money and credit tell us about real activity in the United States?

We analyse the forecasting power of different monetary aggregates and credit variables for US GDP. Special attention is paid to the influence of the recent financial market crisis. For that purpose, in the first step we use a three-variable single-equation framework with real GDP, an interest rate spread and a monetary or credit variable, in forecasting horizons of one to eight quarters. This first stage thus serves to pre-select the variables with the highest forecasting content. In a second step, we use the selected monetary and credit variables within different VAR models, and compare their forecasting properties against a benchmark VAR model with GDP and the term spread (and univariate AR models). Our findings suggest that narrow monetary aggregates, as well as different credit variables, comprise useful predictive information for economic dynamics beyond that contained in the term spread. However, this finding only holds true in a sample that includes the most recent financial crisis. Looking forward, an open question is whether this change in the relationship between money, credit, the term spread and economic activity has been the result of a permanent structural break or whether we might return to the previous relationships.     

On credit and output: Is the supply of credit relevant?

The consensus that changes in the supply of credit were irrelevant to making monetary policy decisions existed among macroeconomists during the second half of the twentieth century. Transmission of shocks to the real economy through changes in the supply of credit, however, played an important role in the recent U.S. financial crisis. This paper explores the extent to which policymakers should consider changes in the supply of credit when making forecasts and monetary policy decisions. More specifically, it considers whether a measure of real credit balances offers consistent and stable information, beyond that of a real interest rate and real money balances, about future output gaps during the U.S. post-war era. Results yield evidence that changes in real credit balances are the only variable, among those considered, to provide consistent and stable information about future output gaps over the entire sample period. Each information variable, however, provides relatively little value added for forecasting future output gaps, beyond a simple autoregressive model. To improve upon forecasts and monetary policy decisions, policymakers therefore should consider a broader range of information variables and occasionally reassess the relative weightings assigned to each.     

Monetary Ratios in a Modern Regime: Why the Monetary Base still Matters

A recent paper Bank of England paper cast doubt on the ‘textbook’ model of the money multiplier. However, this criticism is inconsistent and misleading. It understates the importance of the central bank's control over the monetary base, and how this influences the money supply. The confusion suggests that it would be more fruitful to conduct analysis using the currency‐deposit ratio and reserve‐deposit ratio rather than the money multiplier, and evidence from 1998–2013 is provided. This article explains how these ratios depend on the monetary regime, and the distinction between inside and outside money. Although a modern regime alters the way that money creation occurs, the monetary base still matters.     

Interbank credit and the money manufacturing process: a systemic perspective on financial stability

Interbank lending and borrowing occur when financial institutions seek to settle and refinance their mutual positions over time and circumstances. This interactive process involves money creation at the aggregate level. Coordination mismatch on interbank credit may trigger systemic crises. This happened when, since summer 2007, interbank credit coordination did not longer work smoothly across financial institutions, eventually requiring exceptional monetary policies by central banks, and guarantee and bailout interventions by governments. Our article develops an interacting heterogeneous agent-based model of interbank credit coordination under minimal institutions. First, we explore the link between interbank credit coordination and the money generation process. Contrary to received wisdom, interbank credit has the capacity to remove the inner limits of monetary system capacitance. Second, we develop simulation analysis on imperfect interbank credit coordination, studying impact of interbank dynamics on financial stability and resilience at individual and aggregate levels. Systemically destabilizing forces prove to be related to the working of the banking system over time, especially interbank coordination conditions and circumstances.

     

货币性外汇储备资产的多层次优化配置

在中国拥有巨额外汇储备并急需寻求储备资产管理模式创新的背景下,本文以货币性外汇储备和资本性外汇储备的划分为前提,将多层次、系统的管理思想引入到外汇储备资产优化配置中。通过构建基于多层次需求的货币性外汇储备币种结构优化的AHP模型,测算出外汇储备货币性资产的最优币种权重。在币种结构确定的基础上再建立修正的资产结构优化AHP模型,并最终计算出货币性资产权重,从而实现了币种结构和资产结构优化的真正结合。研究结果表明：美元在币种权重中的领导地位还难以撼动,货币性存款在资产组合权重中也具有明显优势。因此,在货币性资产优化配置中,不宜将币种盲目多样化,同时应充分考虑货币性储备资产的功能和特性,选择流动性强、安全性高的金融资产。     

Are financial spreads useful indicators of future inflation and output growth in EU countries?

This paper seeks to address the policy issue of the usefulness of financial spreads as indicators of future inflation and output growth in the countries of the European Union, placing a particular focus on out-of-sample forecasting performance. Such analysis is of considerable relevance to monetary authorities, given the breakdown of the money/income relation in a number of countries and following increased emphasis of domestic monetary policy on control of inflation following the broadening of the ERM bands. The results confirm that for some countries, financial spread variables do contain some information about future output growth and inflation, with the yield curve and the reverse yield gap performing best. However, the relatively poor out-of-sample forecasting performance and/or parameter instability suggests that the need for caution in using spread variables for forecasting in EU countries. Only a small number of spreads contain information, and improve forecasting in a manner which is stable over time. © 1997 John Wiley & Sons, Ltd.     

On the Stability of Euro Area Money Demand and Its Implications for Monetary Policy

We employ a recent time‐varying cointegration test to revisit the usefulness of long‐run money demand equations for the ECB, addressing the issue of their instability by means of a model evaluation exercise. Building on the results, we make a twofold contribution. First, we propose a novel stable money demand equation relying on two crucial factors: a speculative motive, represented by domestic and foreign price‐earnings ratios, and a precautionary motive, measured by changes in unemployment. Second, we use the model to derive relevant policy implications for the ECB, since excess liquidity looks more useful for forecasting stock market busts than future inflation. Overall, this evidence points to (i) a possible evolution of the monetary pillar in the direction of pursuing financial stability and (ii) the exclusion of a sudden liquidity–driven inflationary burst after the exit from the prolonged period of unconventional monetary measures.     

Forecasting inflation using commodity price aggregates

This paper shows that for five small commodity-exporting countries that have adopted inflation targeting monetary policies, world commodity price aggregates have predictive power for their CPI and PPI inflation, particularly once possible structural breaks are taken into account. This conclusion is robust to using either disaggregated or aggregated commodity price indexes (although the former perform better), the currency denomination of the commodity prices, and to using mixed-frequency data. In pseudo out-of-sample forecasting, commodity indexes outperform the random walk and AR(1) processes, although the improvements over the latter are sometimes modest.     

The evolution of monetary policy rules

This article examines the evolutionary forces involved in the development of monetary policy rules over time, considering in particular how these relate to proposals made by Milton Friedman and Walter Bagehot. The lines between money and credit and between monetary and fiscal policy are given special focus.     

The global monetary boom - no cause for panic

• ▀ Global monetary growth has been its fastest for decades over recent months, but we continue to believe inflation risks are lower than many think. A modest inflation overshoot in the coming years is possible but would not be very damaging.
• ▀ While headline money growth figures still look strong, heavy precautionary borrowing by firms in March-April is already starting to unwind in the US and UK. About 80% of the rise in borrowing by large UK firms has been repaid.
• ▀ In addition, tightened lending standards at banks are likely to weigh on future corporate borrowing and money growth. A net 70% of US banks tightened corporate credit standards in the latest Fed survey. Rising loan defaults risk exacerbating this.
• ▀ Heavy government borrowing and accompanying central bank QE have been key drivers of monetary growth and are likely to remain so, notwithstanding a slowdown in the pace of central bank bond purchases. This is the main risk factor those who fear inflation cite.
• ▀ But if credit to the private sector starts to shrink, deficit financing of this sort may be essential to prevent long-term weakness in money, credit, and economic growth. Japan's experience in the 1990s and 2000s is relevant here.
• ▀ Inflation also has room to overshoot current targets, if necessary, given the substantial undershoots of the last decade. This consideration in part explains the recent shift in Federal Reserve thinking towards targeting an average inflation rate over time

     

Limited monitoring and the essentiality of money

Monetary theory emphasizes that imperfect monitoring is necessary for money to be essential, that is, for money to achieve socially desirable allocations. Little is known about how limited monitoring must be if money is to be essential, though. Understanding sufficient conditions for the essentiality of money is important since monitoring is a natural way in which credit is introduced in monetary models. In this paper, we show that money can fail to be essential even if monitoring is quite limited. This indicates that one must be careful when introducing monitoring in monetary models to allow for the coexistence of money and credit.     

Asset price targeting in an open economy with cognitive limitations: The best for macroeconomic and financial stability?

The choices of policy targets and the formation of agent expectations have been critical issues addressed by monetary policy management since the financial crisis of 2008. This paper evaluates macroeconomic stability in a new Keynesian open economy in which agents experience both cognitive limitations and asset market volatility. The (im)perfect credibility of various monetary policies (e.g., a Taylor-type rule with- or without asset price targeting, strict domestic inflation targeting, strict CPI inflation targeting, and exchange rate peg) may lead agents to react according to their expectation rules, and thus create various degrees of booms and busts in output and inflation. Simulations confirm that a Taylor-type CPI inflation targeting including an asset price target is the best choice. In contrast, the business cycles induced by Keynesian “animal spirits” are enhanced by strict inflation targeting. Furthermore, a credible exchange rate pegging system with an international reserve pooling arrangement can improve social welfare and stability in an open economy, even though its absolute value of the loss function is slightly lower than a Taylor-type CPI inflation targeting including an asset price target.     

House prices,collateral constraint,and the asymmetric effect on consumption

This paper investigates the asymmetric effect of house prices on various categories of consumption under constrained and unconstrained regimes. We first present a simple theoretical model based on Iacoviello (2004) and Luengo-Prado (2006), explicitly considering the dual role of housing and linking credit constraints to the behavior of consumption in a pair of aggregate Euler equations. We then estimate a threshold regression model and find that LC-PIH holds only under the unconstrained regime. More importantly, durable consumption exhibit a very strong asymmetric effect in response to changes in house prices, while other categories of consumption do not exhibit this asymmetry.     

信贷渠道在我国货币政策传导中的现状

根据货币政策传导理论,银行信贷渠道和资产负债表渠道是货币政策信贷传导的主要方式。从2003年开始,我国中央银行连续采取紧缩性的货币政策。文中介绍了此轮货币政策的信贷传导现状,指出现阶段我国货币政策的信贷传导仍然存在梗阻,应加以疏通。     

Does money help predict inflation? An empirical assessment for Central Europe

This paper investigates the predictive ability of money for future inflation in the Czech Republic, Hungary, Poland and Slovakia. We construct monetary indicators similar to those the European Central Bank regularly uses for monetary analysis. We find in-sample evidence that money matters for future inflation at the policy horizons that central banks typically focus on, but our pseudo out-of-sample forecasting exercise shows that money does not in general improve the inflation forecasts vis-à-vis some benchmark models such as the autoregressive process. Since at least some models containing money improve the inflation forecasts in certain periods, we argue that money still serves as a useful cross-check for monetary policy analysis.     

Bagged neural networks for forecasting Polish (low) inflation

Accurate inflation forecasts lie at the heart of effective monetary policy. This paper utilizes a thick modelling approach in order to investigate the quality of the out-of-sample short-term headline inflation forecasts generated by a combination of bagged single hidden-layer feed-forward artificial neural networks. The model’s accuracy rises during the period of consistently falling and persistently low inflation in the emerging economy of Poland, and it statistically outperforms some of the popular benchmarks more frequently, especially at longer horizons. However, dispensing with data preprocessing and bootstrap aggregation compromises its forecasting ability severely. Combining linear and non-linear univariate and multivariate approaches with diverse underlying model assumptions delivers further gains in predictive accuracy and statistically outperforms a panel of benchmarks in a number of cases. While the vague interpretability of the model poses a considerable hurdle for policy makers, its inclusion in the forecasting toolbox should increase the accuracy of the ensemble of models, especially in periods of structural change.     

Emergence of a core-periphery structure in a simple dynamic model of the interbank market

This paper studies a simple dynamic model of interbank credit relationships. Starting from a given balance sheet structure of a banking system with a realistic distribution of bank sizes, the necessity of establishing interbank credit connections emerges from idiosyncratic liquidity shocks. Banks initially choose potential trading partners randomly, but over time form preferential relationships via an elementary reinforcement learning algorithm. As it turns out, the dynamic evolution of this system displays a formation of a core-periphery structure with mainly the largest banks assuming the roles of money center banks mediating between the liquidity needs of many smaller banks. Statistical analysis shows that this evolving interbank market shares the majority of the salient characteristics of interbank credit relationship that have been put forth in recent literature. Preferential interest rates for borrowers with strong attachment to a lender may prevent the system from becoming extortionary and guarantee the survival of the small peripherical banks.     

Fed Credit Policy: What is a Lender of Last Resort?

Discussions of the Fed׳s financial crisis lending – and its role as “Lender of Last Resort” more generally – often overlook the distinction between monetary policy and credit policy. Central bank actions constitute monetary policy if they alter the quantity of the bank׳s monetary liabilities, but constitute credit policy if they alter the composition of the bank׳s portfolio without affecting the outstanding amount of monetary liabilities. In the 19th century, Henry Thornton and Walter Bagehot advocated Lender of Last Resort policies as a means of expanding the money supply when the demand for money surged in a crisis. In contrast, the Fed׳s recent crisis lending for the most part left its outstanding monetary liabilities unaffected, and thus represented credit policy, not Lender of Last Resort activity. Credit allocation in a crisis is potentially costly because it affects market participants׳ beliefs about the likelihood of future central bank rescues, which in turn reduces their incentive to protect themselves against financial distress and thus exacerbates financial instability. Credible limits on credit policy thus are critical to central banks׳ core policy mission. One path to establishing such limits is to create “living wills” that detail how to resolve large, complex financial firms without government support.     

Monetary policy analysis and inflation targeting in a small open economy: a VAR approach*

Empirical monetary policy research has increased in the last decade, possibly because deregulation and explicit monetary targets have made monetary policy issues more interesting. In particular, within the inflation targeting framework it has been argued that inflation forecasts can be used as optimal intermediate targets for monetary policy, and the development of empirical models that have good forecasting properties is therefore important. This paper shows that a VAR model with long‐run restrictions, justified by economic theory, is useful for both forecasting inflation and for analysing other issues that are central to the conduct of monetary policy. Copyright © 2001 John Wiley & Sons, Ltd.     

Money Information in Lonergan–von Neumann Systems

Important technological changes have posed serious difficulties in the practical use of von Neumann's model of economic growth, which explicitly ‘eliminated all monetary complications’. The present paper draws on Lonergan's development of some Schumpeterian ideas to extend the von Neumann model to incorporate technological change with money. It gives an analysis of the notion of credit money as ‘information on the move”. General comparisons with the data of economic history indicate that the model shows a new realism in representing important dynamic aspects of cyclic economic growth.