Effects of monetary and government spending policy on economic inequality

Using detailed micro-level income and expenditure data, we study the effects of monetary and government spending policy shocks on income and expenditure inequality in the US from 1990 to 2018. We find that expansionary monetary and government spending policy shocks systematically decrease income, disposable income and expenditure inequality. There is evidence of time variation on the effects and monetary policy and transfer payment shocks. Various impulse responses suggest that the impacts of the policy shocks increase during and after the Great Recession. The responses of income and expenditures of households at different percentiles suggest that expansionary monetary and government spending policy have a larger positive impact on households with low income and expenditures relative to those at the top of the distribution. We do not find evidence of the significant impact of Quantitative Easing policies on income inequality, however, expenditure inequality appear to increase due to the policies.     

Money and growth in a cash-in-advance economy with costly credit

This paper develops a stochastic growth model with a cash-in-advance constraint, costly credit, and intermediary services. We study how the behavior of financial intermediaries affects the relationship between economic growth and the monetary system. We show that the payment that intermediaries charge for providing financial services influences the money–growth relationship. When the intermediation cost increases proportionally with credit purchases, we do not observe any influence of growth on the monetary system. When the intermediation cost is not proportional to credit purchases, growth is responsible for a transformation of the monetary system, i.e. money is relatively driven out of the economy as the economy grows.     

Managing Capital Inflows Indirectly? On the Determinants of Monetary Sterilization with Reference to East Asia

This paper derives a time‐varying sterilization coefficient to examine those factors that determine the extent to which central banks might engage in monetary sterilization. There appear to be good reasons to do so: Sterilization neutralizes the monetary impact of reserve accumulation, which is an endogenous consequence of sustained capital inflows under some degree of management of exchange rates. A pooled sample of Asian economies incorporating Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand, for 1994–2012 is employed. We find that this method does help to directly uncover the determinants of sterilization, and while capital inflows do not appear to influence the sterilization directly, there is substantial evidence to suggest it does so indirectly—particularly through domestic interest rates.     

The Impact of Monetary Surprises on Australian Financial Futures Markets: An Insight into Cash Rate Target Announcements

This paper investigates the impact of unanticipated Australian monetary policy changes on AUD/USD exchange rate futures, and 3‐year and 10‐year Australian Treasury bond futures, during the period from January 1997 to April 2010. Our study contributes to the literature by using both the 30‐day and the 90‐day bank accepted bill (BAB) rates to disentangle the unexpected surprise component of monetary policy changes from overall cash rate target changes in the Australian money market, and by concurrently modelling the effects of monetary surprises and other key macroeconomic announcements in Australia. The empirical results suggest that the 30‐day BAB rate is the best proxy for the expected monetary policy actions. We find that the effect of monetary surprises on the volatility of the 3‐ and 10‐year bond future instruments is significant and persistent. We have also documented a strong monetary policy effect on the mean returns of the exchange rate futures, indicating that unexpected monetary policy adjustments have a significant impact on the level of the exchange rate movements rather than on the volatility of the FX futures market.     

THE OPTIMALITY AND CONTROLLABILITY OF MONETARY POLICY THROUGH DELEGATION WITH CONSISTENT TARGETS

This paper uses two game‐theory models, where monetary policy is first ineffective and then effective, to illustrate a delegation scheme that makes consistent policy optimal and controllable. The delegation scheme produces the minimization of both the social and the central bank loss functions. Minimizing the social loss function generates optimality conditions. Minimizing the central bank loss function produces controllability conditions. Optimality conditions depend on specific models, and controllability conditions do not. We propose a concept of consistent targets, which refer to the targets that satisfy both optimality and controllability conditions. Consistent policy proves optimal and controllable in both example models when the government delegates consistent targets to the central bank.     

Surplus liquidity,central bank losses and the use of reserve requirements in emerging markets

Since the turn of the millennium, stocks of foreign reserves held by central banks in many emerging markets and developing countries have exceeded currency in circulation. To steer money market rates, these central banks have been absorbing liquidity from, rather than providing it to, the banking sector in their regular monetary policy operations. When interest rates in countries with major reserve currencies are low, the yield on foreign reserves is low. A higher interest rate on liquidity‐absorbing operations may expose central banks to losses. Although a central bank is not a profit‐maximizing institution, central bank losses can undermine the independence of the central bank. Using data for a large panel of central banks, this paper provides some evidence that central banks tend to apply low‐remunerated reserve requirements when profitability is at stake.     

CREDIT,HOUSING COLLATERAL,AND CONSUMPTION: EVIDENCE FROM JAPAN,THE U.K., AND THE U.S.

The consumption behavior of U.K., U.S., and Japanese households is examined and compared using a modern Ando‐Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral, and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for U.K. and U.S., but not Japanese, households has undergone large shifts since 1980. The average consumption‐to‐income ratio rose in the U.K. and U.S. as mortgage down‐payment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is similar in the U.S. and U.K. In Japan, land prices (which proxy house prices) continue to negatively impact consumer spending. There are negative real interest rate effects on consumption in the U.K. and U.S. and positive effects in Japan. Overall, this implies important differences in the transmission of monetary and credit shocks in Japan versus the U.S., U.K., and other credit‐liberalized economies.     

On corruption,bribes and the exchange of favors

This paper investigates how the availability of alternative forms of bribe payments, on top of money, may facilitate corruption. There are two bribe payment technologies and a Corruptor and a Receiver must agree on the value and on the technology of the bribe. The paper infers which form of payment can be used by analyzing probabilities of punishment, bargaining powers of agents, and relative efficiency of the two different technologies. By assumption, monetary payments have distinct efficiency than do non-monetary favors. If the Receiver has a sufficiently high utility for payments using a particular technology, then only bribes paid via this technology are feasible. There is also a range of intermediate cases where monetary bribery is used if and only if the relative bargaining power of the Receiver is sufficiently large compared to that of the Corruptor.     

Distributional role of monetary policy under limited credit access

The paper explores the redistributive effects of a monetary policy shock in a limited participation framework with limited credit access. Expansionary monetary policy redistributes consumption from traders to non-traders. This redistribution is the largest when only financial market participants have a choice between multiple means of payments while non-participants do not. Welfare analysis reveals that the effectiveness of monetary policy on the economy is the greatest when all agents (financial market participants and nonparticipants) can choose from alternative means of payment in a financially segmented model. The model is calibrated to the US economy for quantitative analysis.     

Individual Stock Returns and Monetary Policy: Evidence from Japanese Data

The present paper uses Japanese firm‐level data to investigate the effects of monetary policy on stock. The main purpose of this paper is to examine whether monetary policy has heterogeneous effects on stock returns and whether such heterogeneity can be explained by existing theories of monetary transmission mechanisms. We find little evidence that the demand sides of the interest rate and balance sheet channels explain the heterogeneous effects of monetary policy. However, there is evidence that the supply sides of the interest rate and balance sheet channels, when measured by capital intensity, financial leverage and interest payment burden, can explain its heterogeneous effects.     

Endogenous business cycles and systematic stabilization policy*

We study the effects of fiscal policy rules on the determinacy of rational expectations equilibrium in a perfectly competitive monetary model with constant returns. Government spending implies a distortion of the monetary steady state due to the implied taxation. We show that policy rules that let the GNP share of government spending depend sufficiently negatively on increases in GNP stabilize the economy with respect to endogenous fluctuations for arbitrarily little distortion of the steady state at which stabilization occurs. The rules do not involve lump‐sum taxation, negative income taxation, or exact knowledge of the economy's laissez‐faire steady state.     

Interest on Reserves and the Flexibility of Monetary Policy in the Euro Area

This paper shows that remunerating required reserves can increase the flexibility of monetary policy. The remuneration at the current policy rate implies constant net marginal interest costs of holding required reserves. This allows the central bank to change the policy rate also within a reserve maintenance period without inducing a problematic reserve shifting on behalf of the banks. In the euro area, required reserves are remunerated at an average rate. Therefore, the way in which reserves are remunerated has to be changed in order to make use of the advantage of a higher flexibility of monetary policy.     

The payment mechanisms and liquidity effects

A general equilibrium model with multiple means of payment in segmented markets is constructed to study the liquidity effects. It is shown that, under certain conditions, stored value – money issued by private entrepreneurs weakens, but does not completely eliminate the liquidity effects that exist when stored value is prohibited. The Friedman rule can be optimal in the regime with floating stored value. The impact of monetary policy now depends not only on the monetary intervention of the central bank, but also on the quantity of the outstanding private money and its velocity.     

Euro‐Area Yield Curve Reaction to Monetary News

Abstract. Using intraday data, we assess the impact of monetary news on the full length of the euro‐area yield curve. We find that the publication of monetary data has a significant impact on interest rates with maturities ranging from one to ten years, with the largest effect on the one‐ to five‐year segment. These results suggest that when gauging the policy‐relevant signals, market participants look through short‐term movements of annual M3 growth and focus instead on the trend rate of monetary expansion over the medium term.     

Can Bitcoin become money? The monetary rule problem

The growing literature on Bitcoin can be divided into two groups. One performs an economic analysis of Bitcoin focusing on its monetary characteristics. The other one takes a financial look at the price of Bitcoin. Interestingly, both of these groups have not given much more than passing comments to the problem of whether or not Bitcoin has the right monetary rule in order to become a well‐established currency. This paper argues that Bitcoin in particular, and cryptocurrencies in general, do not have a good monetary rule and that this shortcoming seriously limits its prospect of becoming widely used money.     

Truth,Trust, and Sanctions: On Institutional Selection in Sender–Receiver Games*

We have conducted a laboratory experiment to investigate the impact of institutions and institutional choice on truth‐telling and trust in sender–receiver games. We find that in an institution with sanctioning opportunities, receivers sanction predominantly after having trusted lies. Individuals who sanction are responsible for truth‐telling beyond standard equilibrium predictions, and they are more likely to choose the sanctioning institution. Sanctioning and non‐sanctioning institutions coexist if their choice is endogenous, and the former shows a higher level of truth‐telling but lower material payoffs. Our experimental findings are consistent with logit agent quantal response equilibrium with two distinct groups of individuals: one consisting of subjects who experience non‐monetary lying costs as senders and non‐monetary costs when being lied to as receivers, and the other consisting of payoff maximizers.     

Do central banks respond to exchange rate movements? Some new evidence from structural estimation

This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand, and the United Kingdom. We develop and estimate a structural general equilibrium model, in which monetary policy is represented as a simple rule and exchange rate pass‐through is incomplete due to the presence of local currency pricing and distribution services. We find that the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of England have not adjusted interest rates in response to exchange rate movements since the adoption of inflation targeting, while our model selection results for Australia are less clear.     

Virtual Currencies,the Money Market,and Monetary Policy

Virtual currencies are in vogue mainly due to two factors. First, as a protest against authority-driven monetary policy decisions and second, as alternatives to deficits in some monetary systems arising out of political instability or other causes. Assuming that virtual currencies indeed (partially) replace national currencies as payment vehicles, we attempt, in this article, to integrate the virtual currency supply and demand into the Keynesian money market framework. This article presents a few results for the central banks and outlines problems that may result for monetary policy formulation. Since this is the first such attempt to model a national money market as a combination of nationally-issued currency and globally-issued virtual currency, certain simplistic assumptions have been made. Nevertheless, the model offers directions on the impact of virtual currencies on the monetary system and the national money market. Additionally, the paper integrates the official standpoints of the European Central Bank and the Bank of England on this topic.     

Mortgage lending,monetary policy,and prudential measures in small euro‐area economies: Evidence from Ireland and the Netherlands

This paper examines whether the increased use of macroprudential policies since the global financial crisis has affected the impact of (euro‐area and foreign) monetary policy on mortgage lending in Ireland and the Netherlands, which are both small open economies in the euro area. Using quarterly bank‐level data on domestic lending in both countries for 2003–2018, we find that restrictive euro‐area monetary policy shocks reduce the growth of mortgage lending. We find evidence that stricter domestic prudential regulation mitigates this effect in Ireland, but not so in the Netherlands. There is some weak evidence for an international bank lending channel that can be mitigated by stricter lender‐based domestic prudential regulation.