Monetary policy and asset prices

The purpose of this paper is study the effect of monetary policy on asset prices. We study the properties of a monetary model in which a real asset is valued for its rate of return and for its liquidity. We show that money is essential if and only if real assets are scarce, in the precise sense that their supply is not sufficient to satisfy the demand for liquidity. Our model generates a clear connection between asset prices and monetary policy. When money grows at a higher rate, inflation is higher and the return on money decreases. In equilibrium, no arbitrage amounts to equating the real return of both objects. Therefore, the price of the asset increases in order to lower its real return. This negative relationship between inflation and asset returns is in the spirit of research in finance initiated in the early 1980s.     

A structural model of price and exchange rate dynamics in a small open economy

Conclusions A major result following from the analysis of ourstructural model of inflation under flexible exchange rates is that there is no such thing asstructural inflation in the long run. Long-run inflation rather becomes a purely monetary phenomenon if exchange rates are flexible and if on an international level functioning capital markets are postulated. While, in the light of the assumptions made in Part III, this finding is not nearly as paradoxical as it may appear at first sight, it can hardly be overemphasized considering the ongoing theoretical discussion and the empirical research on the Scandinavian approach to inflation and recalling that the Scandinavian model is basically intended to picture equilibrium dynamics.The results concerning equilibrium price and exchange rate dynamics also apply to the equilibriumlevels of prices and the exchange rate, i. e., the equilibrium price level depends exclusively on monetary factors while the equilibrium exchange rate is determined by a purchasing power parity element and the structural productivity gap component.Turning to the results of our analysis of disequilibrium dynamics, the overall picture does not change very much. Here the qualitative pattern of adjustment of both prices and the exchange rate is again completely independent of structural variables, but is exclusively determined by four adjustment coefficients. However, the particular quantitative values assumed by prices and the exchange rate during the adjustment process do indeed reflect the impact of the productivity gap.No conclusions can be derived from our model on the amount of time it takes to return to the neighbourhood of equilibrium once the economy has been subjected to some kind of external shock. A casual examination of post-1973 developments and especially the Swiss experience suggest, however, that in the case of a disturbance as, e. g., in the form of a monetary contraction (relative to the rest of the world), the economy may take so long to return to the neighbourhood of long-run equilibrium that the negative real consequences of the overvaluation of the domestic currency during the adjustment process provide a momentous rationale for short-run stabilization interventions in the foreign exchange market.We should like to thank Peter Bernholz and an anonymous referee for helpful comments on a previous version of this paper.     

关税、货币政策与中国实际均衡汇率

加入WTO后 ,降低进口品关税等措施将影响人民币均衡汇率水平 ,同时开放经济下国内货币政策、财政政策等宏观经济政策调整也会改变均衡汇率水平。本文运用动态一般均衡的方法 ,探讨中国在加入世界贸易组织之后 ,关税税率调整、货币供应量增长率改变、财政政策调整等措施对实际均衡汇率的长期效应。把货币引入生产函数和消费者的效用函数 ,我们扩展了由Turnovsky提出的两商品资本积累模型 ,利用参数赋值(calibration)的方法进行了均衡状态下的比较静态分析。研究发现降低进口品关税使人民币面临贬值压力 ,而政府增加税收 ,减少对贸易品的消费则有利于人民币的保值和升值。实证研究结果表明 :国外实际利率水平下降 ,实际货币供应量增长率降低都将引起人民币均衡汇率贬值。     

A re-examination of the impacts of macroeconomic and financial shocks on real exchange rate fluctuation: evidence from G7 and Asian countries

ABSTRACT

This paper aims to investigate the sources of real exchange rate fluctuation by utilizing sign restrictions in structural vector autoregressive (SVAR) method. Under an agnostic identification scheme, the empirical results show that the delayed overshooting puzzle still exists in response to monetary shock even if price puzzle is ruled out by construction. In contrast, all countries experience a significant initial real depreciation, and then gradually appreciate in response to currency risk premium (CRP) shock. This finding is consistent with Dornbusch’s overshooting model. In addition, I examine the importance of investors’ expectations in determining the short-term variations in the real exchange rate. The results indicate that the CRP and expectation shocks obviously outperformed the demand, supply and monetary shocks in terms of explaining the real exchange rate fluctuation.     

A stable demand for money despite financial crisis: the case of Venezuela

The demand for broad money in Venezuela is investigated over a period of financial crisis and substantial exchange rate fluctuations. The analysis shows that there exist a long-run relationship between real money, real income, inflation, the exchange rate and an interest rate differential, that remains stable over major policy changes and large shocks. The long-run properties emphasize that both inflation and exchange rate depreciations have negative effects on real money demand, whereas a higher interest rate differential has positive effects. The long-run relationship is finally embedded in a dynamic equilibrium correction model with constant parameters. These results have implications for a policy-maker. In particular, they emphasize that with a high degree of currency substitution in Venezuela, monetary aggregates will be very sensitive to changes in the economic environment.     

Does and Should a Commodity Medium of Exchange Have Relatively Low Storage Costs?

I provide new existence and welfare results for a version of the Kiyotaki-Wright model. I construct an equilibrium where all agents use mixed strategies. Consequently, an object with a higher storage cost must have a higher acceptability. Therefore, the endogenous transaction pattern corresponds to the observation that money is dominated in rate of return by other assets (e.g., bonds), something that is a central issue in monetary economics. Furthermore, at least in a neighborhood of equal storage costs, the equilibrium that I construct Pareto dominates alternative equilibria in which better objects are widely accepted.     

UNEMPLOYMENT PERSISTENCE AND THE SUSTAINABILITY OF EXCHANGE RATE PEGS

It is commonly thought that an open economy can accommodate output shocks through either exchange rate or real sector adjustments. We formalize this notion by incorporating unemployment persistence into a two‐sided escape clause model of currency crises. We show that unemployment persistence makes a currency peg more fragile and undermines the credibility of the monetary authority in a dynamic setting. The fragility is captured by a devaluation premium in expectations that increases the average inflation rate when the currency peg is more vulnerable to ‘busts’ than ‘booms’. This interaction between macroeconomic and microeconomic rigidities suggests that a policy reform can only be consistent if it renders either exchange rates or the economy more flexible.     

A corporate balance-sheet approach to currency crises

This paper presents a general equilibrium currency crisis model of the ‘third generation’, in which the possibility of currency crises is driven by the interplay between private firms’ credit-constraints and nominal price rigidities. Despite our emphasis on microfoundations, the model remains sufficiently simple that the policy analysis can be conducted graphically. The analysis hinges on four main features (i) ex post deviations from purchasing power parity; (ii) credit constraints a la Bernanke-Gertler; (iii) foreign currency borrowing by domestic firms; (iv) a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short-term lending facilities. We derive sufficient conditions for the existence of a sunspot equilibrium with currency crises. We show that an interest rate increase intended to support the currency in a crisis may not be effective, but that a relaxation of short-term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms.     

Deflationary policy under digital and fiat currency competition

I examine the implications of digital and fiat currency competition on optimal monetary policy according to the Friedman rule (a standard deflationary policy) in a Fernández-Villaverde and Sanches (2016) framework, with no search friction. Consistent with the existing literature, first, I find that monetary equilibrium under a purely private arrangement of digital currencies will not deliver a socially efficient allocation. Second, I place restrictions on the available supply of digital currencies and find that a socially efficient allocation is possible only if the upper bound on digital currency circulation is equal to the rate of time-preference, albeit some degree of government intervention is required to curb the profit-maximizing incentive of the miners. Third, I find that optimal monetary policy at the Friedman rule will be socially inefficient when digital currencies compete with government-issued fiat money. Finally, I show that the Friedman rule is a socially desirable policy only in a purely fiat monetary regime.     

结构性通货膨胀的一个基本理论分析框架——基于状态空间时变参数模型的实证

以实体经济的部门瓶颈制约模型、货币视角的资产市场均衡模型为基础构建了一个结构性通货膨胀理论分析框架,并利用状态空间时变参数模型计量方法进行了实证检验。结果显示,农业部门瓶颈制约明显,产品供给弹性低,当需求短期内增加,农业劳动力、农产品价格上涨的结构性通货膨胀特征明显;同时,当货币流动性出现过剩,充足的流动性会将结构性通货膨胀推向更高水平,国内货币流动性、外汇储备则起到推波助澜的作用。     

Inflationary Expectations, Variable Output, and Exchange-Rate Dynamics

This paper develops a model of exchange-rate dynamics characterized by inflationary expectations held with perfect foresight, sticky wages, and sluggish output adjustment. In this framework monetary expansion initially lowers interest rates because of sluggish output and price adjustment but quite surprisingly produces exchange-rate overshooting or undershooting. Moreover, after its initial depreciation in the overshooting case, the domestic currency temporarily appreciates beyond its new long-run equilibrium level. In the undershooting case, the home currency temporarily appreciates away from its new long-run equilibrium level. Finally, the dynamic real exchange rate-real interest rate relationship at times becomes inverse.     

房地产价格与通货膨胀预期

文章通过构建房地产均衡市场模型,在风险中性的假设前提下,利用无套利均衡定价原理,发展了从房地产价格波动中分离出市场通货膨胀预期的新方法.在此基础上,通过对中国房地产市场的实证研究发现,房地产预期收益率与通货膨胀预期之间确实存在稳定的函数关系.最后,文章提出将房地产价格纳入到居住类消费价格指数中去以减少货币政策认识时滞的政策建议.     

The demand for money and the real exchange rate misalignments in emerging European countries: A nonlinear approach

This paper investigates the extent to which domestic and foreign money balances in emerging European countries are influenced by foreign exchange considerations. A well-specified and stable relationship between real money demand and the exchange rate can be perceived as an important part of a successful monetary policy. This study examines the long-run determinants of real exchange rates (RERs) associated with the behavioral equilibrium exchange rate (BEER) approach and identifies currency misalignments in these countries. The misalignment is later used to test the nonlinear behavior of the demand for money. The results indicate that the RER misalignments have a significant impact on domestic money demand. When the currencies are overvalued, there is a reduction in domestic money demand, and when they are undervalued, there is an increase in domestic money demand. Furthermore, it can be concluded that overvaluation causes an increase in foreign money demand indicating a shift of preference from domestic to foreign currency.     

Three measures of East Asian currency evaluation

One of the prominent explanations for the East Asian financial crises of 1997 relies upon East Asian currency overvaluation. However, most empirical studies of these crises do not undertake serious examination of whether these currencies were overvalued. In this article, three major approaches to identifying the equilibrium exchange rate are implemented: long-run purchasing power parity (PPP), a productivity-based model, and a monetary model of the nominal exchange rate. The PPP calculations indicate that as of May 1997, the Hong Kong dollar, baht, ringgit, and peso were overvalued, and the won undervalued. In a framework that explicitly accounts for the role of productivity, substantial overvaluation of the peso is detected, but an undervaluation of the won is also uncovered. Misalignments of the ringgit and baht are small. Finally, the estimated equilibrium rates from a monetary model do not imply much deviation from short-run equilibrium at the end of June 1997. A conclusion of substantial overvaluation on the eve of the East Asian currency turmoil is not very plausible, suggesting that some alternate mechanism for generating crises - other than one involving the conventional macroeconomic fundamentals - was at work.     

Collateral fluctuations in a monetary economy

This paper studies economy-wide fluctuations that occur endogenously in the presence of monetary and real assets. Using a standard monetary search model, we consider an economy in which agents can increase consumption, over and above what their liquid monetary asset holdings would allow, pledging real assets as collateral for monetary loans. It is shown that, if the liquidation value of real assets is below full market value, a stable cyclical equilibrium can emerge in consumption and capital around the unstable steady state. We also provide conditions for the existence of cycles of higher order, chaos and sunspot equilibria.     

Openness and the case for flexible exchange rates

Models of stabilization in open economy traditionally emphasize the role of exchange rates as a substitute for nominal price flexibility in fostering relative price adjustment. This view has been recently criticized on the ground that, to the extent that prices are sticky in local currency, the exchange rate does not play the stabilizing role envisioned by the received wisdom. An important question is whether, for this very reason, stabilization policies should limit exchange rate movements, or even eliminate them altogether. In this paper, I re-assess this issue by extending the [Corsetti Giancarlo, and Paolo Pesenti. 2001. Welfare and Macroeconomic Interdependence. Quarterly Journal of Economics 116 (2), 421–446.] model to allow for home bias in consumption—so that I can exploit the advantages of closed-form solutions. While this extension leaves most properties of the model unaffected, home bias implies that the real exchange rate in an efficient equilibrium is not constant, but fluctuates with the terms of trade. The weight that monetary authorities optimally place on stabilizing domestic marginal costs is increasing in home bias: with asymmetric shocks, fixed exchange rates are incompatible with efficient monetary rules. Yet, the adverse welfare consequences of exchange rate movements constrain the optimal intensity of monetary responses to domestic shocks. Openness matters: in our specification each country produces an equal share of the world value added; the lower the import content of consumption, the higher the exchange rate volatility implied by optimal stabilization rules. In relatively closed economy, optimal monetary rules tend to converge, regardless of the nature of nominal rigidities in the exports market.     

CURRENCY SUBSTITUTION, U.S. MONEY DEMAND, AND INTERNATIONAL INTERDEPENDENCE

A number of writers have argued in recent years that massive international currency substitution has been a major cause of exchange rate volatility and monetary instability in the United States and other major countries. Such analysis is frequently coupled with recommendations for a return to pegged exchange rates. This paper critically examines the evidence presented for this currency substitution view. It argues that the weight of latest research suggests that direct international currency substitution has not been of major quantitative importance for the U.S. However, empirical evidence supports traditional views that international capital mobility can generate substantial short-run monetary interdependence even under flexible exchange rates. Thus, even though international currency substitution is of little importance to U.S. monetary conditions, a broader range of international considerations may be of considerable importance for the U.S. economy.     

Government Policy in a Stochastic Growth Model with Elastic Labor Supply

Endogenous labor supply is introduced into a stochastic growth model. Money is superneutral, and the real part of the equilibrium can be characterized by two nonlinear trade-off loci between the time devoted to leisure and the mean growth rate that ensure the following: (i) equality among the risk-adjusted rates of return and (ii) equilibrium in the output market. The balanced growth equilibrium is characterized analytically and policy implications derived. Extensive numerical simulations are also conducted. These assess the effects of risk on growth and the impact of fiscal policy on both the mean growth rate and its volatility. Implications for optimal monetary policy are also addressed.     

Transmission of monetary policy and exchange rate shocks under foreign currency lending

This paper analyses the differences in reaction of domestic and foreign currency lending to monetary and exchange rate shocks, using a panel VAR model estimated for the three biggest Central and Eastern European countries (Poland, the Czech Republic and Hungary). Our results point toward a drop in domestic currency loans and an increase of foreign currency credit in reaction to monetary policy tightening in Poland and Hungary, suggesting that the presence of foreign currency debt weakens the transmission of monetary policy. A currency depreciation shock leads to an initial decline in foreign currency lending, but also in loans denominated in domestic currency as central banks react to a weaker exchange rate by increasing the interest rates. However, after several quarters, credit in foreign currency accelerates, indicating that borrowers start using it to substitute for depressed domestic currency lending.     

Welfare effects of monetary policy in an economy with vertical production and trade: An analysis based on the perspective of local currency pricing

By incorporating the factor of firms' asymmetric price setting behavior into the two-country model with vertical production and trade, we analyze how one country's monetary policy affects the welfare of both countries. We show that an expansionary monetary policy has (i) a beggar-thyself effect if the ratio of the non-expanding country's intermediate goods firms that set their export prices in the local currency is significantly low and (ii) a prosper-thy-neighbor effect in our model regardless of the ratio of either country's intermediate goods firms that set their export prices in the local currency.