Most recent papers:

• Financial Development, Credit, and Business Cycles.
  Tiago Pinheiro, Francisco Rivadeneyra, Marc Teignier.
  Journal of money credit and banking. September 11, 2017
  How does financial development affect the magnitude of the business cycles fluctuations? We examine this question in a general equilibrium model with heterogeneous agents and endogenous credit constraints based on Kiyotaki (1998). We show that there is a hump‐shaped relationship between the degree of financial frictions and the amplification of unexpected productivity shocks. This nonmonotonic relation is due to the fall in financial frictions having two opposite effects on the response of output. One effect is the reallocation of productive inputs between agent types, which, while active, increases with the fall in financial frictions. The other effect is the change in the demand of inputs, which decreases with the fall in financial frictions. At low levels of financial development, the reallocation effect dominates and a fall in financial frictions increases the amplification of productivity shocks. In contrast, at higher levels of financial development, a fall in financial frictions decreases the shock amplification because the reallocation effect disappears while the effect on the demand of inputs is still present.

  September 11, 2017   doi: 10.1111/jmcb.12427   open full text
• Profitability, Value, and Stock Returns in Production‐Based Asset Pricing without Frictions.
  Ronald J. Balvers, Li Gu, Dayong Huang.
  Journal of money credit and banking. September 11, 2017
  In a production‐based asset pricing model without adjustment costs and with decreasing returns to scale following Brock (1982), stock returns at the firm level are determined by profitability, the book‐to‐market ratio, and the change in future profitability prospects. Although firms with low book‐to‐market ratios are normally more profitable and profitable firms are predicted to have higher returns, the stylized fact that book‐to‐market ratios positively forecast returns still holds theoretically, but with specific predicted exceptions. These implications are confirmed empirically.

  September 11, 2017   doi: 10.1111/jmcb.12426   open full text
• Inflation Targeting, Recursive Inattentiveness, and Heterogeneous Beliefs.
  Anna Agliari, Domenico Massaro, Nicolò Pecora, Alessandro Spelta.
  Journal of money credit and banking. September 11, 2017
  We consider a monetary authority that provides an explicit inflation target in order to align expectations with the policy objective. However, biased perceptions of the target may arise due to imperfect information flows. We allow agents to revise expectations over time and we model their recursive choice among prediction strategies as an optimization problem under rational inattention. We then investigate whether a simple policy rule can steer the economy toward the targeted equilibrium. Our findings suggest that determinacy under rational expectations may not be sufficient to reach the target. Instead, monetary policy should be fine‐tuned to correct agents' biased beliefs.

  September 11, 2017   doi: 10.1111/jmcb.12425   open full text
• Austerity and Private Debt.
  Mathias Klein.
  Journal of money credit and banking. September 11, 2017
  This study provides empirical evidence that the costs of austerity crucially depend on the level of private indebtedness. In particular, fiscal consolidations lead to severe contractions when implemented in high private‐debt states. Contrary, fiscal consolidations have no significant effect on economic activity when private debt is low. These results are robust to alternative definitions of private‐debt overhang, the composition of fiscal consolidations, and controlling for the state of the business cycle and government debt overhang. I show that deterioration in household balance sheets is important to understand private debt‐dependent effects of austerity.

  September 11, 2017   doi: 10.1111/jmcb.12424   open full text
• Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins.
  Juliana D. Araujo, Povilas Lastauskas, Chris Papageorgiou.
  Journal of money credit and banking. September 11, 2017
  Motivated by the rise in capital flows to low‐income countries (LICs), we examine the nature of these flows and the factors affecting foreign investors' decision. Recognizing the presence of fixed investment costs, we analyze capital flows at both intensive and extensive margins. To fix ideas, we resort to the gravity literature for the estimating relationships which we embed into a two‐tier econometric framework with cross‐sectional dependence. Our main finding is that market entry costs are statistically and economically very detrimental to LICs. We also obtain the gravity‐type relationship for the destination income unconditionally but not after conditioning on relevant variables, as well as establish labor productivity as a robust attractor of capital inflows.

  September 11, 2017   doi: 10.1111/jmcb.12423   open full text
• Shadow Banks and Macroeconomic Instability.
  Roland Meeks, Benjamin Nelson, Piergiorgio Alessandri.
  Journal of money credit and banking. September 11, 2017
  We develop a macroeconomic model in which commercial banks can offload risky loans to a “shadow” banking sector, and financial intermediaries trade in securitized assets. The model can account both for the business cycle comovement between output, traditional bank, and shadow bank credit, and for the behavior of macroeconomic variables in a liquidity crisis centered on shadow banks. We find that following a liquidity shock, stabilization policy aimed solely at the market in securitized assets is relatively ineffective.

  September 11, 2017   doi: 10.1111/jmcb.12422   open full text
• Assessing the Macroeconomic Effects of LTROs during the Great Recession.
  Christophe Cahn, Julien Matheron, Jean‐Guillaume Sahuc.
  Journal of money credit and banking. September 11, 2017
  In response to the 2008–2009 crisis, faced with distressed financial intermediaries, the European Central Bank (ECB) embarked in longer term refinancing operations (LTROs) with full allotment. Using an estimated DSGE model with a frictional banking sector, we find that such liquidity injections have played a key role in averting a major credit crunch. A counterfactual analysis suggests that, absent these nonconventional measures, output, consumption, investment, and the GDP deflator would have been 2.5%, 0.5%, 9.7%, and 0.5% lower on average over 2009, respectively.

  September 11, 2017   doi: 10.1111/jmcb.12421   open full text
• Okun's Law: Fit at 50?
  Laurence Ball, Daniel Leigh, Prakash Loungani.
  Journal of money credit and banking. September 11, 2017
  This paper asks how well Okun's Law fits short‐run unemployment movements in the United States since 1948 and in 20 advanced economies since 1980. We find that Okun's Law is a strong relationship in most countries, and one that is fairly stable over time. Accounts of breakdowns in the Law, such as the emergence of “jobless recoveries,” are flawed or exaggerated. We also find that the coefficient in the relationship—the effect of a 1% change in output on the unemployment rate—varies substantially across countries. This variation is partly explained by idiosyncratic features of national labor markets, but it is not related to differences in employment protection legislation.

  September 11, 2017   doi: 10.1111/jmcb.12420   open full text
• Costly Information, Planning Complementarities, and the Phillips Curve.
  Sushant Acharya.
  Journal of money credit and banking. May 17, 2017
  Sticky information models capture the sluggish response of aggregate prices to monetary shocks but fail to match the magnitude and frequency of price changes at the microlevel. This paper shows that accounting for the endogenous decision of when to acquire new information about different shocks can help overcome this shortcoming. In the calibrated model, prices change frequently and by large amounts in response to idiosyncratic shocks but sluggishly to monetary shocks. The paper also highlights that many predictions of the sticky information and rational inattention models are the same and thus robust to different specifications of information processing costs.

  May 17, 2017   doi: 10.1111/jmcb.12399   open full text
• The Pitch Rather Than the Pit: Investor Inattention, Trading Activity, and FIFA World Cup Matches.
  Michael Ehrmann, David‐Jan Jansen.
  Journal of money credit and banking. May 17, 2017
  This paper analyzes stock market trading in 15 countries during the 2010 and 2014 soccer FIFA World Cups. We find evidence for substantial investor inattention during these major sporting events. The lack of attention for the trading pit is particularly large when the national soccer team is competing, with traded volumes declining by as much as 48%. During national team matches, prices on local stock markets can temporarily decouple from global financial market developments. These findings suggest that major sporting events can act as a laboratory in which to investigate investor inattention.

  May 17, 2017   doi: 10.1111/jmcb.12398   open full text
• Unstable Inflation Targets.
  William A. Branch, George W. Evans.
  Journal of money credit and banking. May 17, 2017
  This paper studies long‐run inflation targets and stability in an imperfect information environment. When central banks set an inflation target that is not fully communicated, agents draw inferences about inflation from recent data and remain alert to structural change by forming expectations from a forecasting model that is estimated via discounted least squares. Inflation targets can lead agents' beliefs to depart from rational expectations through two channels. First, implementing a higher inflation target can lead to overshooting. Second, there can be nearly self‐fulfilling inflation, disinflation, or deflation that arises as an endogenous response to shocks. Policy implications for implementing a higher target without deanchoring expectations are discussed.

  May 17, 2017   doi: 10.1111/jmcb.12397   open full text
• Variations in Market Liquidity and the Intraday Interest Rate.
  Puriya Abbassi, Falko Fecht, Johannes Tischer.
  Journal of money credit and banking. May 17, 2017
  Most central banks offer banks participating in large‐value real‐time gross settlement (RTGS) systems a free intraday overdraft facility to discourage banks from actively managing their daylight liquidity. In this paper, we ask whether this facility has kept the intraday interest rate at zero. Using a unique transaction‐level data set on collateralized interbank loans for 2006–12, we find that during periods of financial distress, rates for morning transactions are higher than those in the afternoon. Moreover, this intraday rate correlates with market liquidity, suggesting that rates contain a liquidity premium. This intraday pattern is reduced, but not eliminated by the Eurosystem's accommodative liquidity provision.

  May 17, 2017   doi: 10.1111/jmcb.12396   open full text
• Fiscal Activism and the Zero Nominal Interest Rate Bound.
  Sebastian Schmidt.
  Journal of money credit and banking. May 17, 2017
  In an economy where the zero lower bound on nominal interest rates is an occasionally binding constraint and the government lacks a commitment technology, it may be desirable for society to appoint a policymaker who cares less about government spending stabilization relative to inflation and output gap stabilization than the private sector does. A policymaker of this type uses government spending more elastically to stabilize the economy. At the zero lower bound, the anticipation of aggressive fiscal expansions in future liquidity trap situations increases inflation expectations and lowers real interest rates, thereby mitigating the decline in output and inflation.

  May 17, 2017   doi: 10.1111/jmcb.12395   open full text
• Should the Federal Reserve Pay Competitive Interest on Reserves?
  Matthew Canzoneri, Robert Cumby, Behzad Diba.
  Journal of money credit and banking. May 17, 2017
  In 2008, the Federal Reserve began paying interest on reserves. How should the Fed use this new policy instrument? As the Fed reduces its balance sheet, should it continue to satiate reserve demand and pay competitive interest on reserves? Here, we argue that this may be an inefficient use of the new policy instrument. Using a standard Dynamic Stochastic General Equilibrium model (DSGE), augmented to include a banking sector and an interbank market, our benchmark calibration implies an optimal tax on reserves of about 20 to 40 basis points in the steady state, and a fluctuating tax rate in response to shocks.

  May 17, 2017   doi: 10.1111/jmcb.12394   open full text
• Precautionary Saving of Chinese and U.S. Households.
  Horag Choi, Steven Lugauer, Nelson C. Mark.
  Journal of money credit and banking. May 17, 2017
  We employ a model of precautionary saving to study why household saving rates are high in China and low in the United States. The use of recursive preferences gives a convenient decomposition of saving into precautionary and nonprecautionary components. Over 80% of China's saving rate and nearly all U.S. saving arises from the precautionary motive. The difference between U.S. and Chinese household income growth rates is vastly more important than income risk for explaining the saving rates. The key mechanism is that precautionary savers have target wealth‐to‐income ratios, and rapid income growth necessitates high saving rates to maintain the ratio.

  May 17, 2017   doi: 10.1111/jmcb.12393   open full text
• Bank Capital Regulation of Trading Portfolios: An Assessment of the Basel Framework.
  Gordon J. Alexander, Alexandre M. Baptista.
  Journal of money credit and banking. May 17, 2017
  In setting minimum capital requirements for trading portfolios, the Basel Committee on Banking Supervision (1996, 2011a, 2013) initially used Value‐at‐Risk (VaR), then both VaR and stressed VaR (SVaR), and most recently, stressed Conditional VaR (SCVaR). Accordingly, we examine the use of SCVaR to measure risk and set these requirements. Assuming elliptically distributed asset returns, we show that portfolios on the mean‐SCVaR frontier generally lie away from the mean‐variance (M‐V) frontier. In a plausible numerical example, we find that such portfolios tend to have considerably higher ratios of risk (measured by, e.g., standard deviation) to minimum capital requirement than those of portfolios on the M‐V frontier. Also, we find that requirements based on SCVaR are smaller than those based on both VaR and SVaR but exceed those based on just VaR. Finally, we find that requirements based on SCVaR are less procyclical than those based on either VaR or both VaR and SVaR. Overall, our paper suggests that the use of SCVaR to measure risk and set requirements is not a panacea.

  May 17, 2017   doi: 10.1111/jmcb.12392   open full text
• Estimating Monetary Policy Rules When Nominal Interest Rates Are Stuck at Zero.
  Jinill Kim, Seth Pruitt.
  Journal of money credit and banking. May 17, 2017
  Did the Federal Reserve's response to economic fundamentals change with the onset of the Global Financial Crisis? Estimation of a monetary policy rule to answer this question faces a censoring problem since the interest rate target has been set at the zero lower bound since late 2008. Surveys by forecasters allow us to sidestep the problem and to use conventional regressions and break tests. We find that, in the opinion of forecasters, the Fed's inflation response has decreased and the unemployment response has increased, which suggests that the Federal Reserve's commitment to stable inflation has become weaker in the eyes of the professional forecasters.

  May 17, 2017   doi: 10.1111/jmcb.12391   open full text
• On the Credibility of the Euro/Swiss Franc Floor: A Financial Market Perspective.
  Markus Hertrich, Heinz Zimmermann.
  Journal of money credit and banking. March 14, 2017
  We estimate the risk‐neutral break probabilities of a realignment of the EUR/CHF 1.20 floor, maintained by the SNB from September 6, 2011, to January 15, 2015, using put options and an option pricing model, which assumes a lower barrier for the exchange rate. We estimate probabilities considerably different from zero, even when the exchange rate traded far above the floor. We observe a drastic increase in the break probabilities up to approximately 50% shortly before the floor was abandoned. From an option market perspective, the credibility of the SNB in maintaining the floor was, thus, substantially lower than publicly claimed.

  March 14, 2017   doi: 10.1111/jmcb.12390   open full text
• Financial Markets' Views about the Euro–Swiss Franc Floor.
  Urban J. Jermann.
  Journal of money credit and banking. March 14, 2017
  Exchange rates and option prices incorporate market participants' views about the credibility and the effects of exchange rate targets. I present a model to determine exchange rates under policy targets that can be used to price options. The model is estimated with Euro–Swiss Franc exchange rate and options price data. In the first few months of the minimum exchange rate policy, the implied survival probability of the policy for a 3‐month horizon was typically less than 75%. Over time, the credibility increased and this probability reached 95% in August 2014.

  March 14, 2017   doi: 10.1111/jmcb.12389   open full text
• A Bayesian Model Comparison for Trend‐Cycle Decompositions of Output.
  Angelia L. Grant, Joshua C.C. Chan.
  Journal of money credit and banking. March 14, 2017
  We compare a number of widely used trend‐cycle decompositions of output in a formal Bayesian model comparison exercise. This is motivated by the often markedly different results from these decompositions—different decompositions have broad implications for the relative importance of real versus nominal shocks in explaining variations in output. Using U.S. quarterly real GDP, we find that the overall best model is an unobserved components model with two features: (i) a nonzero correlation between trend and cycle innovations and (ii) a break in trend output growth in 2007. The annualized trend output growth decreases from about 3.4% to 1.2%–1.5% after the break. The results also indicate that real shocks are more important than nominal shocks. The slowdown in trend output growth is robust when we expand the set of models to include bivariate unobserved components models.

  March 14, 2017   doi: 10.1111/jmcb.12388   open full text
• Household Wealth and Macroeconomic Activity: 2008–2013.
  Ray C. Fair.
  Journal of money credit and banking. March 14, 2017
  This paper provides estimates of the effects of the fall in financial and housing wealth in 2008–09 on overall macroeconomic activity. When the wealth losses are run through a structural macroeconometric model, it is estimated that the fall in wealth contributed about 2.1 percentage points to the rise in the unemployment rate in 2009 and about 3.3 points in 2010. The contribution to the fall in real GDP was 4.5% and 5.4% in the 2 years. These estimates account for most—but not all—of the recessionary increase in unemployment. The remaining increase in unemployment may have resulted more directly from financial stresses, but little evidence is found for this in this study.

  March 14, 2017   doi: 10.1111/jmcb.12387   open full text
• Mortgage Choice in the Euro Area: Macroeconomic Determinants and the Effect of Monetary Policy on Debt Burdens.
  Michael Ehrmann, Michael Ziegelmeyer.
  Journal of money credit and banking. March 14, 2017
  This paper provides novel evidence on the role of the macroeconomic environment for households’ choice between fixed‐interest‐rate and adjustable‐interest‐rate mortgages (ARMs) in the euro area. We find that relatively more ARMs are taken out when economic growth is strong, the interest rate spread is high, or unemployment shows low volatility. A simulation exercise shows that a reduction in mortgage rates as witnessed during the monetary easing in the course of the global financial crisis produces a substantial decline in debt burdens among mortgage‐holding households, especially in countries where households have higher debt burdens and a larger share of ARMs.

  March 14, 2017   doi: 10.1111/jmcb.12386   open full text
• What Drives the Owner‐Occupied and Rental Housing Markets? Evidence from an Estimated DSGE Model.
  Xiaojin Sun, Kwok Ping Tsang.
  Journal of money credit and banking. March 14, 2017
  Most dynamic stochastic general equilibrium (DSGE) models with a housing market do not explicitly include a rental market and assume a tight mapping between house prices and rents over the business cycle. However, rents are much smoother than house prices in the data. We match this feature of the data by adding both an owner‐occupied housing market and a rental market in a standard DSGE model. The intertemporal preference shock accounts for more than half of the variation in house prices and contributes to residential investment fluctuations through the liquidity constraint, and nominal rigidity in rental contracts captures the variation in the price‐rent ratio.

  March 14, 2017   doi: 10.1111/jmcb.12385   open full text
• Regime Shifts in Price‐Dividend Ratios and Expected Stock Returns: A Present‐Value Approach.
  Kwang Hun Choi, Chang‐Jin Kim, Cheolbeom Park.
  Journal of money credit and banking. March 14, 2017
  We incorporate regime shifts in the mean of price‐dividend ratios into the present value model of van Binsbergen and Koijen (2010) who propose a latent variable approach to modeling expected returns and dividend growth rates. We find that accounting for regime shifts results in much lower persistence of expected returns and higher volatility of expected returns, and thus higher in‐sample predictability, when compared to the results from the van Binsbergen and Koijen (2010) model. We also show that the main source of the increase in the mean of price‐dividend ratios in the mid‐1990s is a decrease in the mean of expected returns.

  March 14, 2017   doi: 10.1111/jmcb.12384   open full text
• When Preferences for a Stable Interest Rate Become Self‐Defeating.
  Ragna Alstadheim, øistein Røisland.
  Journal of money credit and banking. March 14, 2017
  Monetary policymakers often seem to have preferences for a stable interest rate, in addition to stable inflation and output. In this paper, we investigate the implications of having an interest rate level term in the loss function when the policymaker lacks commitment technology. We show that such preferences may become self‐defeating, in the sense that they generate a less stable interest rate than in the case without preferences for interest rate stability.

  March 14, 2017   doi: 10.1111/jmcb.12383   open full text
• Foreign Bank Behavior during Financial Crises.
  Jonathon Adams‐Kane, Julián A. Caballero, Jamus Jerome Lim.
  Journal of money credit and banking. March 14, 2017
  This paper studies whether lending by foreign banks is affected by financial crises. We pair a bank‐level data set of foreign ownership with information on banking crises and examine whether the credit supply of majority foreign‐owned banks that underwent home‐country crises differ systematically from those of other foreign banks. In contrast to the literature, our broad global coverage allows us to exploit variations between foreign banks; this enables us to identify an average treatment effect directly attributable to crises. Our baseline results show that banks exposed to home‐country crises between 2007–08 exhibit changes in lending patterns that are lower by between 13% and 42% than their noncrisis counterparts. This finding is robust to potential alternative explanations, and also holds, though less strongly, for the 1997/98 Asian crisis.

  March 14, 2017   doi: 10.1111/jmcb.12382   open full text
• Coordinating Monetary and Macroprudential Policies.
  Bianca De Paoli, Matthias Paustian.
  Journal of money credit and banking. March 14, 2017
  This paper studies noncooperative games between a monetary authority and a macroprudential regulator whose objectives are a subset of those in the social loss function. The analysis is based on a New Keynesian model with a financial sector and a financial friction à la Gertler and Karadi (2011). When the friction affects the financing of all factors of production equally, macroprudential policy is shown to be a powerful additional tool, fully eliminating inefficiencies, regardless of the source of the shock and no matter whether the central bank and the regulator cooperate. But when trade‐offs are present and policy is discretionary, the institutional arrangements become crucial. While coordination leads to higher welfare than a setting in which each authority takes the decision rule of the other as given (namely, the Nash equilibrium), our analysis shows that a noncooperative setting in which the macroprudential authority acts as a leader within the period can be superior to cooperation. Finally, our conclusions are unaffected by whether the macroprudential instrument affects funding costs or acts as a liquidity requirement.

  March 14, 2017   doi: 10.1111/jmcb.12381   open full text
• Supply‐Side Policies in the Depression: Evidence from France.
  Jérémie Cohen‐Setton, Joshua K. Hausman, Johannes F. Wieland.
  Journal of money credit and banking. March 14, 2017
  The effects of supply‐side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented mandatory wage increases and hours restrictions. Deflation ended but output stagnated. We present time‐series and cross‐sectional evidence that these supply‐side policies, in particular the 40‐hour law, contributed to French stagflation. These results are inconsistent both with the standard one‐sector New Keynesian model and with a medium scale, multisector model calibrated to match our cross‐sectional estimates. We conclude that the New Keynesian model is a poor guide to the effects of supply‐side shocks in depressed economies.

  March 14, 2017   doi: 10.1111/jmcb.12380   open full text
• On the Persistence of Cross‐Country Inequality Measures.
  Dimitris Christopoulos, Peter Mcadam.
  Journal of money credit and banking. January 27, 2017
  We examine inequality persistence in a multicountry unbalanced panel using a battery of stationarity and long‐run memory tests. Inequality is measured by the Gini indices of income inequality. Results suggest that we cannot reject a unit root in inequality measures. This applies to both gross and net indices: thus while redistributive measures have reduced the level of inequality, they have not sufficiently modified its apparent unit root. A more likely conclusion is that inequality measures are exceptionally persistent if not strictly a unit root. We also introduce a new panel stationarity test useful for series subject to unknown structural breaks.

  January 27, 2017   doi: 10.1111/jmcb.12374   open full text
• Rational Inattention in Uncertain Business Cycles.
  Fang Zhang.
  Journal of money credit and banking. January 27, 2017
  The paper proposes endogenous information choice as a channel through which uncertainty affects price dynamics. I consider a rational inattention model with volatility uncertainty and endogenous information processing capability. According to the model, firms' learning and optimal attention exhibits inertia and asymmetry in response to volatility changes. Firms choose to process more information when uncertainty rises, especially about aggregate conditions, and their pricing behavior changes accordingly. Using a Markov‐switching factor‐augmented vector autoregression (MS‐FAVAR), the paper also documents a significant positive correlation between volatility and firms' responsiveness to macro‐ and microlevel shocks, consistent with model predictions.

  January 27, 2017   doi: 10.1111/jmcb.12373   open full text
• The Risk‐Taking Channel of Monetary Policy in the U.S.: Evidence from Corporate Loan Data.
  Manthos D. Delis, Iftekhar Hasan, Nikolaos Mylonidis.
  Journal of money credit and banking. January 27, 2017
  To study the presence of a risk‐taking channel in the U.S., we build a comprehensive data set from the syndicated corporate loan market and measure monetary policy using different measures, most notably Taylor (1993) and Romer and Romer (2004) residuals. We identify a negative relation between monetary policy rates and bank risk‐taking, especially in the run up to the 2007 financial crisis. However, this effect is purely supply‐side driven only when using Taylor residuals and an ex ante measure of bank risk‐taking. Our results highlight the sensitivity of the potency of the risk‐taking channel to the measures of monetary policy innovations.

  January 27, 2017   doi: 10.1111/jmcb.12372   open full text
• Changes in the Federal Reserve Communication Strategy: A Structural Investigation.
  Yasuo Hirose, Takushi Kurozumi.
  Journal of money credit and banking. January 27, 2017
  This paper structurally investigates the changes in the Fed's communication strategy since the mid‐1990s through the lens of anticipated and unanticipated disturbances to a Taylor rule. The anticipated disturbances are identified using Treasury bond yield data in estimating a dynamic stochastic general equilibrium (DSGE) model with a term structure of interest rates. Our estimation results show that the Fed's decisions were unanticipated for market participants until 1999, but thereafter a larger portion of its future policy actions tended to be communicated in advance. We also find that the relative contribution of the anticipated monetary policy disturbances to macroeconomic fluctuations became larger after 1999. The bond yield data is indispensable to these results, since it contains crucial information on an expected future path of the federal funds rate.

  January 27, 2017   doi: 10.1111/jmcb.12378   open full text
• Why Do Shoppers Use Cash? Evidence from Shopping Diary Data.
  Naoki Wakamori, Angelika Welte.
  Journal of money credit and banking. January 27, 2017
  Recent studies find that cash remains the dominant payment choice for small‐value transactions despite the prevalence of alternative payment methods such as debit and credit cards. An important policy question is whether consumers truly prefer using cash or merchants restrict card usage. Using unique shopping diary data, we estimate a payment choice model with individual heterogeneity, controlling for merchants' acceptance of cards. Based on a policy simulation imposing universal card acceptance among merchants, we find that overall cash usage would decrease by only 8.0 percentage points, implying that cash usage in small‐value transactions is driven mainly by consumer preferences.

  January 27, 2017   doi: 10.1111/jmcb.12379   open full text
• Interest Rates in Trade Credit Markets.
  Klenio Barbosa, Humberto Moreira, Walter Novaes.
  Journal of money credit and banking. January 27, 2017
  All things equal, interest rates should increase with the borrower's risk. And yet, Klapper, Laeven, and Rajan (2012) cannot find such a positive relation in a broad sample of trade credit contracts. We shed some light on this puzzle by arguing that competition between informed and uninformed suppliers weakens the link between the trade credit cost and the borrower's creditworthiness. Our model implies that trade credit rates are more likely to increase with the borrower's risk if suppliers are less profitable, have high cost of funds, or sell inputs to firms plagued by moral hazard and financial distress.

  January 27, 2017   doi: 10.1111/jmcb.12369   open full text
• The Effects of Regulating Hidden Add‐On Costs.
  K. Jeremy Ko, Jared Williams.
  Journal of money credit and banking. January 27, 2017
  We examine the welfare effects of price and disclosure regulation in a model where firms can shroud add‐on costs, such as penalty fees for consumer financial products. Such regulation can increase or decrease welfare even when there are no direct costs. There are, however, strong complementarities between price controls and disclosure mandates: conditional on disclosure being mandated, price controls always (weakly) increase welfare, and conditional on prices being sufficiently constrained, disclosure mandates always (weakly) increase welfare.

  January 27, 2017   doi: 10.1111/jmcb.12368   open full text
• Liquidity Provision, Bank Capital, and the Macroeconomy.
  Gary Gorton, Andrew Winton.
  Journal of money credit and banking. January 27, 2017
  New bank equity must come from somewhere. In general equilibrium, raising bank capital requirements means either that banks produce less short‐term debt (as debt holders must become shareholders), or short‐term debt is not reduced and the banking system acquires nonbank equity (as the shareholders in nonbanks become shareholders in banks). The welfare effects involve a trade‐off because bank debt is special as it is used for transactions purposes, but more bank capital can reduce the chance of bank failure (producing welfare losses).

  January 27, 2017   doi: 10.1111/jmcb.12367   open full text
• Heterogeneous Consumers and Fiscal Policy Shocks.
  Emily Anderson, Atsushi Inoue, Barbara Rossi.
  Journal of money credit and banking. December 16, 2016
  This paper studies empirical facts regarding the effects of unexpected changes in aggregate macroeconomic fiscal policies on consumers that differ depending on individual characteristics. We use data from the Consumption Expenditure Survey to estimate individual‐level responses and multipliers for government spending. We find that unexpected fiscal shocks have substantially different effects on consumers depending on their income and age levels: the wealthiest individuals tend to behave according to predictions of standard Real Business Cycle (RBC) models, whereas the poorest ones behave according to standard IS–LM (non‐Ricardian) models, most likely due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality.

  December 16, 2016   doi: 10.1111/jmcb.12366   open full text
• Fiscal Adjustment and Inflation Targeting in Less Developed Countries.
  Edward F. Buffie, Manoj Atolia.
  Journal of money credit and banking. December 16, 2016
  Inflation targeting may not be viable in less developed countries (LDCs) where policymakers rely too heavily on cuts in infrastructure investment to balance the budget. Using a mix of analytical and numerical methods, we demonstrate that the equilibrium ceases to be saddle point stable under active policy when infrastructure cuts account for 30–70% of fiscal adjustment and the return on infrastructure exceeds a comparatively low threshold value. The result is robust to the form of the Taylor rule, the degree of real wage flexibility, the initial level of debt, the choice of a balanced‐budget or debt‐targeting rule, and the q‐elasticity of private investment spending.

  December 16, 2016   doi: 10.1111/jmcb.12365   open full text
• Corridor System and Interest Rates: Volatility and Asymmetry.
  Jiho Lee.
  Journal of money credit and banking. December 16, 2016
  The corridor system in its current form is believed to reduce the volatility of overnight interest rates and to eliminate any chance of persistent upward or downward bias. The model presented here serves to highlight two main findings: one is that a central bank can further reduce the volatility of overnight interest rates by allowing banks some flexibility to meet their reserve targets within a small range, as observed in the UK data. The second is that a seemingly symmetric corridor may be asymmetric in practice due to several distortions, as the UK and euro area data suggest.

  December 16, 2016   doi: 10.1111/jmcb.12364   open full text
• Capital Regulation and Competition as a Moderator for Banking Stability.
  Eva Schliephake.
  Journal of money credit and banking. December 16, 2016
  Capital regulation forces banks to fund a substantial amount of their investments with equity. This creates a buffer against losses but also increases the cost of funding. If higher funding costs translate into higher loan interest rates, the bank's assets are also likely to become more risky, which may destabilize the lending bank. This paper argues that the level of competition in the banking sector can determine whether the buffer or cost effect prevails. The endogenous level of competition may be crucial in determining the efficiency of capital regulation in undercapitalized banking sectors, with excess capacities and correlated risks.

  December 16, 2016   doi: 10.1111/jmcb.12371   open full text
• Rollover Risk, Liquidity and Macroprudential Regulation.
  Toni Ahnert.
  Journal of money credit and banking. December 16, 2016
  I study rollover risk in wholesale funding markets when intermediaries hold liquidity ex ante and fire sales may occur ex post. Multiple equilibria exist in a global rollover game: intermediate liquidity holdings support equilibria with both positive and zero expected liquidation. A simple uniqueness refinement pins down the private liquidity choice, which balances the forgone expected return on investment with reduced fragility and costly liquidation. Due to fire sales, liquidity holdings are strategic substitutes. Intermediaries free ride on the holdings of other intermediaries, causing excessive liquidation. To internalize the systemic nature of liquidity, a macroprudential authority imposes liquidity buffers.

  December 16, 2016   doi: 10.1111/jmcb.12363   open full text
• Macro Credit Policy and the Financial Accelerator.
  Charles T. Carlstrom, Timothy S. Fuerst.
  Journal of money credit and banking. December 16, 2016
  This paper studies macro credit policies within the financial accelerator model of Bernanke, Gertler, and Gilchrist (1999). The focus is on borrower‐based restrictions on lending such as loan‐to‐value (LTV) ratios. We find that the efficacy of cyclical taxes on LTV ratios depends upon the nature of the underlying loan contract. If the loan contract contains equity‐like features such as indexation to aggregate conditions, then there is little role for cyclical taxation. But if the loan contract is not indexed to aggregate conditions, then there are substantial gains to procyclical taxes on LTV ratios.

  December 16, 2016   doi: 10.1111/jmcb.12362   open full text
• Gender Bias and Credit Access.
  Steven Ongena, Alexander Popov.
  Journal of money credit and banking. December 16, 2016
  We extract an exogenous measure of gender bias from survey responses by descendants of U.S. immigrants on questions about the role of women in society. We then use data on around 6,000 small business firms from 17 countries and find that in high‐gender‐bias countries, female entrepreneurs are more likely to opt out of the loan application process and to resort to informal finance, even though banks do not appear to actively discriminate against them. These results are not driven by credit risk differences between female‐ and male‐owned firms or by any idiosyncrasies in the set of countries in our sample.

  December 16, 2016   doi: 10.1111/jmcb.12361   open full text
• Local Trends in Price‐to‐Dividend Ratios—Assessment, Predictive Value, and Determinants.
  Helmut Herwartz, Malte Rengel, Fang Xu.
  Journal of money credit and banking. December 16, 2016
  Persistent variations of the log price‐to‐dividend ratio (PD) and their economic determinants have attracted a lively discussion in the literature. We suggest a gradually time‐varying state process to govern the persistence of the PD. The adopted state‐space approach offers favorable model diagnostics and finds particular support in out‐of‐sample stock return prediction. We show that this slowly evolving mean process is jointly shaped by the consumption risk, the demographic structure, and the proportion of firms with traditional dividend payout policy during the past 60 years. In particular, the volatility of consumption growth plays the dominant role.

  December 16, 2016   doi: 10.1111/jmcb.12370   open full text
• What Moves Investment Growth?
  Long Chen, Zhi Da, Borja Larrain.
  Journal of money credit and banking. December 16, 2016
  We use accounting identities to decompose unexpected changes in investment growth into surprises to current cash‐flow growth and stock returns, and revisions of expectations about future cash‐flow growth and future discount rates. Using a vector autoregressive model we find that current cash‐flow surprises account for the largest element of the variance decomposition. Investment growth and current cash‐flow surprises are negatively correlated with news about future cash‐flow growth, which can be expected from persistent productivity shocks and decreasing returns to scale. We find little evidence of a discount rate channel for investment since return terms are small and have unintuitive signs.

  December 16, 2016   doi: 10.1111/jmcb.12360   open full text
• Bank Leverage Cycles and the External Finance Premium.
  Ansgar Rannenberg.
  Journal of money credit and banking. December 16, 2016
  By combining the approaches of Gertler and Karadi (2011) (GK) and Bernanke, Gertler, and Gilchrist (1999) (BGG), I develop a Dynamic Stochastic General Equilibrium (DSGE) model with leverage constraints both in the banking and in the nonfinancial firm sector. I calibrate this “full model” to US data. The full model matches the relative volatility of the external finance premium and the procyclicality of bank leverage and thus outperforms both a BGG and a GK‐type model. For a reasonably calibrated combination of balance sheet shocks, the model reproduces a substantial share of the contraction (increase) of investment (the external finance premium) observed during the “Great Recession.”

  December 16, 2016   doi: 10.1111/jmcb.12359   open full text
• Mixed Integer Programming Revealed Preference Tests of Utility Maximization and Weak Separability of Consumption, Leisure, and Money.
  Per Hjertstrand, James L. Swofford, Gerald A. Whitney.
  Journal of money credit and banking. September 15, 2016
  Swofford and Whitney (1987, 1988, 1994) investigated the validity of two key assumptions underlying representative agent models of macroeconomics. These assumptions are utility maximization and weak separability. Using mixed integer programming, we check revealed preference conditions for these assumptions. We find that M1, money defined by Friedman and Schwartz (1963), and a broad aggregate are weakly separable. We find that consumption goods and leisure and nondurables and services are weakly separable. We find that M2, M3, and MZM are not weakly separable. Finally, we find three categories of consumption, durables, nondurables and services, do not form an aggregate.

  September 15, 2016   doi: 10.1111/jmcb.12342   open full text
• Like Father Like Sons? The Cost of Sovereign Defaults in Reduced Credit to the Private Sector.
  Rui Esteves, João Tovar Jalles.
  Journal of money credit and banking. September 15, 2016
  We investigate the impact of sovereign defaults on the ability of the corporate sector in emerging nations to finance itself abroad. We test the hypothesis that sovereign defaults have a negative spillover onto the private sector through credit rationing. We explore a novel data set covering the majority of corporates in emerging nations that received foreign capital between 1880 and 1913. Results confirm that credit rationing existed, was very large, and persisted long beyond the default settlement. The private sector paid a severe cost for their governments’ debt intolerance, with negative implications for their growth.

  September 15, 2016   doi: 10.1111/jmcb.12341   open full text
• The CARD Act and Young Borrowers: The Effects and the Affected.
  Peter Debbaut, Andra Ghent, Marianna Kudlyak.
  Journal of money credit and banking. September 15, 2016
  We study a new law that restricts credit to individuals under age 21. We first use a difference‐in‐difference approach to estimate the effect of the law on credit card availability. Following the passage of the law, individuals under age 21 are 8 percentage points (15%) less likely to have a credit card, have fewer cards, and, conditional on having a card at all, are 35% more likely to have a cosigned card. We then use data from before the passage of the law to identify the characteristics of those individuals most likely to be affected by the Act.

  September 15, 2016   doi: 10.1111/jmcb.12340   open full text
• Bank Recapitalization, Regulatory Intervention, and Repayment.
  Thomas Kick, Michael Koetter, Tigran Poghosyan.
  Journal of money credit and banking. September 15, 2016
  We use prudential supervisory data for all German banks during 1994–2010 to test if regulatory interventions affect the likelihood that bailed‐out banks repay capital support. Accounting for the selection bias inherent in nonrandom bank bailouts by insurance schemes and the endogenous administration of regulatory interventions, we show that regulators can increase the likelihood of repayment substantially. An increase in intervention frequencies by one standard deviation increases the annual probability of capital support repayment by 7%. Sturdy interventions, like restructuring orders, are effective, whereas weak measures reduce repayment probabilities. Intervention effects last up to 5 years.

  September 15, 2016   doi: 10.1111/jmcb.12339   open full text
• Monetary Policy Expectations at the Zero Lower Bound.
  Michael D. Bauer, Glenn D. Rudebusch.
  Journal of money credit and banking. September 15, 2016
  We show that conventional dynamic term structure models (DTSMs) estimated on recent U.S. data severely violate the zero lower bound (ZLB) on nominal interest rates and deliver poor forecasts of future short rates. In contrast, shadow‐rate DTSMs account for the ZLB by construction, capture the resulting distributional asymmetry of future short rates, and achieve good forecast performance. These models provide more accurate estimates of the most likely path for future monetary policy—including the timing of policy liftoff from the ZLB and the pace of subsequent policy tightening. We also demonstrate the benefits of including macroeconomic factors in a shadow‐rate DTSM when yields are constrained near the ZLB.

  September 15, 2016   doi: 10.1111/jmcb.12338   open full text
• Two Extensive Margins of Credit and Loan‐to‐Value Policies.
  Pedro Gete, Michael Reher.
  Journal of money credit and banking. September 15, 2016
  We analyze a model of mortgage markets, housing tenure choice, heterogeneous agents, and default with closed form solutions. We uncover new insights which may inspire empirical work, and we ground already established insights in a series of tractable expressions. Then we study optimal loan‐to‐value (LTV) regulation and show that the choice of an LTV cap should balance the opposing forces of access to homeownership and the negative externalities associated with default. Homeownership affordability concerns induce procyclical elements into optimal regulation which attenuate the countercyclical regulation justified by the negative default externalities.

  September 15, 2016   doi: 10.1111/jmcb.12337   open full text
• A Model of the Confidence Channel of Fiscal Policy.
  Bernardo Guimaraes, Caio Machado, Marcel Ribeiro.
  Journal of money credit and banking. September 15, 2016
  This article presents a simple macroeconomic model where government spending affects aggregate demand directly and indirectly, through an expectational channel. Prices are fully flexible and the model is static, so intertemporal issues play no role. There are three important elements in the model: (i) fixed adjustment costs for investment, which create an inaction zone; (ii) noisy idiosyncratic information about the aggregate economy; and (iii) imperfect substitution among private goods and goods provided by the government. An increase in government spending raises demand for private goods and may prevent a coordination failure. The optimal level of government expenditure is high when the desired level of investment is low, which we interpret as a time of low economic activity.

  September 15, 2016   doi: 10.1111/jmcb.12336   open full text
• Credit Availability and Asset Pricing Dynamics in Illiquid Markets: Evidence from Commercial Real Estate Markets.
  David C. Ling, Andy Naranjo, Benjamin Scheick.
  Journal of money credit and banking. September 15, 2016
  This article examines credit frictions and asset pricing in public and private markets with varying liquidity. We find that a tightening in credit availability is negatively related to subsequent price movements in private and public commercial real estate markets. Assets trading in illiquid segments of these markets are also susceptible to a feedback effect whereby changes in asset prices predict subsequent changes in credit availability. Controlling for investor demand, our findings suggest credit constraints play an economically significant asset pricing role in markets that are both highly levered and relatively illiquid.

  September 15, 2016   doi: 10.1111/jmcb.12335   open full text
• Optimal Monetary Policy and Transparency under Informational Frictions.
  Wataru Tamura.
  Journal of money credit and banking. August 08, 2016
  This paper examines the optimal monetary policy and central bank transparency in an economy where firms set prices under informational frictions. The economy is subject to two types of shocks determining the efficient output level and firms' desired markups. To minimize the welfare‐reducing output gap and price dispersion between firms, the central bank controls firms' incentives and expectations by using a monetary instrument and disclosing information on the realized shocks. This paper shows that an optimal policy comprises the disclosure of a linear combination of the two shocks and the adjustment of monetary instruments contingent on the disclosed information.

  August 08, 2016   doi: 10.1111/jmcb.12334   open full text
• Endogenous Price Stickiness, Trend Inflation, and Macroeconomic Stability.
  Takushi Kurozumi.
  Journal of money credit and banking. August 08, 2016
  Previous studies show that higher trend inflation is more likely to induce indeterminacy of equilibrium in sticky‐price models based on micro evidence that each period a fraction of prices is kept unchanged. This paper demonstrates that when the degree of price stickiness is endogenously determined in a Calvo model, indeterminacy caused by higher trend inflation is less likely. A key factor for determinacy is the long‐run inflation elasticity of output implied by the New Keynesian Phillips curve. This elasticity declines substantially with higher trend inflation in the case of exogenously given price stickiness, whereas in the case of endogenous price stickiness the decline in the elasticity is mitigated because higher trend inflation leads to a higher probability of price adjustment.

  August 08, 2016   doi: 10.1111/jmcb.12333   open full text
• Money and Output: Friedman and Schwartz Revisited.
  Michael T. Belongia, Peter N. Ireland.
  Journal of money credit and banking. August 08, 2016
  More than 50 years ago, Friedman and Schwartz examined historical data for the United States and found evidence of procyclical movements in the money stock, which led corresponding movements in output. We find similar correlations in more recent data; these appear most clearly when Divisia monetary aggregates are used in place of the Federal Reserve's official, simple‐sum measures. When we use information in Divisia money to estimate a structural vector autoregression, identified monetary policy shocks appear to have large and persistent effects on output and prices, with a lag that has lengthened considerably since the early 1980s.

  August 08, 2016   doi: 10.1111/jmcb.12332   open full text
• Preferential Regulatory Treatment and Banks' Demand for Government Bonds.
  Clemens Bonner.
  Journal of money credit and banking. August 08, 2016
  The purpose of this paper is to analyze the impact of preferential regulatory treatment on banks' demand for government bonds. Using unique transaction‐level data, our analysis suggests that preferential treatment in microprudential liquidity and capital regulation significantly increases banks' demand for government bonds. Liquidity and capital regulation also seem to incentivize banks to substitute other bonds with government bonds. We also find evidence that this “regulatory effect” leads banks to reduce lending to the real economy.

  August 08, 2016   doi: 10.1111/jmcb.12331   open full text
• Re‐Use of Collateral in the Repo Market.
  Lucas Marc Fuhrer, Basil Guggenheim, Silvio Schumacher.
  Journal of money credit and banking. August 08, 2016
  This paper introduces a methodology to estimate the re‐use of collateral based on actual transaction data. With a comprehensive data set from the Swiss franc repo market we are able to provide the first systematic study on the re‐use of collateral. We find that re‐using collateral was most popular prior to the financial crisis when roughly 10% of the outstanding interbank volume was secured with re‐used collateral. Furthermore, we show that the re‐use of collateral increases with the scarcity of collateral. By giving an estimate of the collateral re‐use and explaining its drivers, the paper contributes to the on‐going debate on collateral availability.

  August 08, 2016   doi: 10.1111/jmcb.12330   open full text
• Uncertainty in an Interconnected Financial System, Contagion, and Market Freezes.
  Mei Li, Frank Milne, Junfeng Qiu.
  Journal of money credit and banking. August 08, 2016
  This paper studies contagion and market freezes caused by uncertainty in financial network structures. Our model demonstrates that in a financial system where financial institutions are interconnected, a negative shock to an individual financial institution could spread to other institutions, causing market freezes because of creditors' uncertainty about the financial network structure. Our model also reveals that when both a large creditor and a continuum of small creditors are present, the size of the large creditor will affect the severity of market freezes substantially. Moreover, our model is used to examine central bank policies to alleviate market freezes.

  August 08, 2016   doi: 10.1111/jmcb.12329   open full text
• Carry Trades, Order Flow, and the Forward Bias Puzzle.
  Francis Breedon, Dagfinn Rime, Paolo Vitale.
  Journal of money credit and banking. August 08, 2016
  We investigate the relation between foreign exchange (FX) order flow and the forward bias. We outline a decomposition of the forward bias according to which a negative correlation between interest rate differentials and order flow creates a time‐varying risk premium consistent with that bias. Using 10 years of data on FX order flow, we find that more than half of the forward bias is accounted for by order flow—with the rest being explained by expectational errors. We also find that carry trading increases currency‐crash risk in that order flow generates negative skewness in FX returns.

  August 08, 2016   doi: 10.1111/jmcb.12328   open full text
• Understanding Post‐Euro Law‐of‐One‐Price Deviations.
  Marina Glushenkova, Marios Zachariadis.
  Journal of money credit and banking. August 08, 2016
  We put together a unique panel of thousands of good‐level prices before and after the euro to compare the determinants and understand the evolution of goods price dispersion across Europe over time. We find that tradeability and nontraded inputs play a significantly smaller role for cross‐country price dispersion after the adoption of the euro, and for Eurozone economies as compared to European Union ones. We then compare the distributions of law‐of‐one‐price (LOP) deviations over time to understand how the degree of integration across European economies changed after the euro. Our tests reveal that the distributions after the euro are typically significantly different from those before, consistent with a greater degree of integration. Utilizing our unique panel data set to trace the location of individual goods in the distribution of LOP deviations, we ask how the price advantage or disadvantage evident in these price distributions evolves over time, and whether goods characteristics play a role for the persistence of these LOP deviations. LOP deviations for these goods are highly correlated over 5‐ or 10‐ year horizons, and correlations remain significantly high over longer horizons. These correlations are greater for homogeneous as compared to differentiated goods and vary across countries. Finally, for most of these European economies and goods, price advantage is typically revealed to be more persistent than price disadvantage.

  August 08, 2016   doi: 10.1111/jmcb.12327   open full text
• Two Monetary Models with Alternating Markets.
  Gabriele Camera, Yili Chien.
  Journal of money credit and banking. July 22, 2016
  We present a thought‐provoking study of two monetary models: the cash‐in‐advance and the Lagos and Wright () models. The different approaches to modeling money—reduced form versus explicit role—induce neither fundamental theoretical nor quantitative differences in results. Given conformity of preferences, technologies, and shocks, both models reduce to equilibrium difference equations that coincide unless price distortions are differentially imposed on cash prices, across models. Equal distortions support equally large welfare costs of inflation. Performance differences stem from unequal assumptions about the pricing mechanism that governs cash transactions, not the differential modeling of the monetary exchange process.

  July 22, 2016   doi: 10.1111/jmcb.12326   open full text
• Evaluating the Efficiency of the FOMC's New Economic Projections.
  Natsuki Arai.
  Journal of money credit and banking. July 22, 2016
  Since 2007, Federal Open Market Committee (FOMC) policymakers have been publishing detailed numerical projections of macroeconomic series over the next 3 years. By testing whether the revisions to these projections are unpredictable, I find that FOMC's efficiency is generally accepted for inflation but often rejected for real economic variables, notably for the unemployment rate. The rejection is due to the strong autocorrelation of revisions, which may reflect information rigidity of FOMC's unemployment projections. The joint efficiency of the entire projection is accepted in most cases.

  July 22, 2016   doi: 10.1111/jmcb.12325   open full text
• On Freezing Depositor Funds at Financially Distressed Banks: An Experimental Analysis.
  Douglas D. Davis, Robert J. Reilly.
  Journal of money credit and banking. July 22, 2016
  This article reports an experiment conducted to evaluate the effects of alterations in the terms of repayments to depositors following a liquidity suspension, as well as the effect of alterations in the publicity of information about withdrawal behavior on the fragility of distressed banks. Results indicate that a “tough” renegotiation stance of protecting depositors who maintain their money in the bank, can quite effectively promote stability. Information provided to depositors regarding past withdrawal behavior weakens the effectiveness of a tough renegotiation policy but reduces fragility somewhat for a more lenient rescheduling condition.

  July 22, 2016   doi: 10.1111/jmcb.12324   open full text
• The Cross‐Market Spillover of Economic Shocks through Multimarket Banks.
  Jose M. Berrospide, Lamont K. Black, William R. Keeton.
  Journal of money credit and banking. July 22, 2016
  This study investigates the mortgage lending of banks operating in multiple U.S. metropolitan areas during the housing market collapse of 2007–09. We show that multimarket banks reduced local portfolio lending in response to high overall mortgage delinquencies in their other markets, consistent with the view that local economic shocks can be transmitted to other regions through banks’ internal capital markets. This spillover was greatest when the bank lacked a branch presence and when the market was highly peripheral to the bank in terms of its total mortgage lending. These effects were not fully offset by securitization or other portfolio lenders.

  July 22, 2016   doi: 10.1111/jmcb.12323   open full text
• The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets.
  Han Chen, Jim Clouse, Jane Ihrig, Elizabeth Klee.
  Journal of money credit and banking. July 22, 2016
  We develop a model to analyze monetary policy implementation with multiple Federal Reserve liabilities and superabundant reserves. The analysis demonstrates the Federal Reserve's tools including interest on excess reserves (IOER), overnight reverse repurchase agreements (ON RRP), and term deposits should allow the Federal Reserve to raise the short‐term interest rates to any desired level. We find the contribution of each the increase in the IOER and ON RRP offering rates in firming money market rates suggested by the data during the December 2015 policy tightening event is remarkably similar to the effect of each tool implied by the calibrated model.

  July 22, 2016   doi: 10.1111/jmcb.12322   open full text
• Announcements of Interest Rate Forecasts: Do Policymakers Stick to Them?
  Nikola Mirkov, Gisle James Natvik.
  Journal of money credit and banking. July 22, 2016
  If central banks value the ex post accuracy of their published forecasts, previously announced interest rate paths might influence the current policy rate. We explore if “forecast adherence” has affected monetary policy in New Zealand and Norway, where central banks have published their interest rate forecasts the longest. We derive and estimate policy rules with separate weights on past interest rate forecasts and find that they have explanatory power for current policy decisions, over and above their correlation with other conventional interest rate rule arguments.

  July 22, 2016   doi: 10.1111/jmcb.12321   open full text
• A New Measure of Equity and Cash Flow Duration: The Duration‐Based Explanation of the Value Premium Revisited.
  David Schröder, Florian Esterer.
  Journal of money credit and banking. July 22, 2016
  This article reexamines the duration‐based explanation of the value premium using novel estimates of the firms' equity and cash flow durations based on analyst forecasts. We show that the value premium can be explained by cross‐sectional differences in the shares' equity durations, but not by their cash flow durations. Different from the duration‐based explanation of the value premium that explains the value premium with cross‐sectional differences in the firm's cash flow timing, we find that short‐horizon stocks have lower (expected) returns than long‐horizon stocks. This result is consistent with an upward‐sloping equity yield curve.

  July 22, 2016   doi: 10.1111/jmcb.12320   open full text
• Lumpy Investment, Lumpy Inventories.
  Rüdiger Bachmann, Lin Ma.
  Journal of money credit and banking. July 22, 2016
  The link between the microenvironment (frictions and heterogeneity) and the macroeconomic dynamics of general equilibrium macromodels is influenced by exactly how general equilibrium closes the model. We make this observation concrete using the recent literature on how nonconvex capital adjustment costs influence aggregate investment dynamics. We introduce inventories into a two‐sector lumpy investment model and find that nonconvex capital adjustment costs dampen and propagate investment impulse responses, more so than without inventories. With two means of transferring consumption into the future, fixed capital and inventories, the tight link between aggregate saving and fixed capital investment is broken.

  July 22, 2016   doi: 10.1111/jmcb.12319   open full text
• Can We Prove a Bank Guilty of Creating Systemic Risk? A Minority Report.
  Jon Danielsson, Kevin R. James, Marcela Valenzuela, Ilknur Zer.
  Journal of money credit and banking. May 17, 2016
  Because increasing a bank's capital requirement to improve the stability of the financial system imposes costs upon the bank, a regulator should ideally be able to prove beyond a reasonable doubt that banks classified as systemically risky really do create systemic risk before subjecting them to this capital punishment. Evaluating the performance of two leading systemic risk models, we show that estimation error alone prevents the reliable identification of the most systemically risky banks. We conclude that it will be a considerable challenge to develop a riskometer that is sound and reliable enough to provide an adequate foundation for macroprudential policy.

  May 17, 2016   doi: 10.1111/jmcb.12318   open full text
• Second Chances: Subprime Mortgage Modification and Redefault.
  Andrew Haughwout, Ebiere Okah, Joseph Tracy.
  Journal of money credit and banking. May 17, 2016
  We examine how the structure of mortgage modification affects the likelihood that the mortgage redefaults over the next year. We focus on pre‐HAMP (Home Affordable Modification Program) subprime modifications where the borrower was seriously delinquent and the monthly payment was reduced. The average redefault rate over the year following the modification is 56%. Redefault rates decline with the magnitude of reduction in monthly payments, and redefault rates decline more when the payment reduction is achieved through principal forgiveness as compared to lower interest rates.

  May 17, 2016   doi: 10.1111/jmcb.12317   open full text
• The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis.
  Allen N. Berger, Björn Imbierowicz, Christian Rauch.
  Journal of money credit and banking. May 17, 2016
  We analyze the roles of bank ownership, management, and compensation structures in bank failures during the recent financial crisis. Our results suggest that failures are strongly influenced by ownership structure: high shareholdings of lower‐level management and non‐chief executive officer (non‐CEO) higher‐level management increase failure risk significantly. In contrast, shareholdings of banks’ CEOs do not have a direct impact on bank failure. These findings suggest that high stakes in the bank induce non‐CEO managers to take high risks due to moral hazard incentives, which may result in bank failure. We identify tail risk in noninterest income as a primary risk‐taking channel of lower‐level managers.

  May 17, 2016   doi: 10.1111/jmcb.12316   open full text
• Inventory Shocks and the Great Moderation.
  James Morley, Aarti Singh.
  Journal of money credit and banking. May 17, 2016
  Why did the volatility of U.S. real GDP decline by more than the volatility of final sales with the Great Moderation in the mid‐1980s? One explanation is that firms shifted their inventory behavior toward a greater emphasis on production smoothing. We investigate the role of inventories in the Great Moderation by estimating an unobserved components model that identifies inventory and sales shocks and their propagation in the aggregate data. Our estimates provide no support for increased production smoothing. Instead, smaller transitory inventory shocks are responsible for the excess volatility reduction in output compared to sales. These shocks behave like informational errors related to production that must be set in advance and their reduction also helps explain the changed forecasting role of inventories since the mid‐1980s. Our findings provide an optimistic prognosis for a continuation of the Great Moderation, despite the dramatic movements in output during the recent economic crisis.

  May 17, 2016   doi: 10.1111/jmcb.12315   open full text
• Managing Beliefs about Monetary Policy under Discretion.
  Elmar Mertens.
  Journal of money credit and banking. May 17, 2016
  In models of monetary policy, discretionary policymaking is typically constrained in its ability to manage public beliefs. However, when a policymaker possesses private information, policy actions serve as signals to the public about unobserved economic conditions and belief management becomes an integral part of optimal discretion policies. This article derives the optimal time‐consistent policy for a general linear‐quadratic setting. The optimal policy is illustrated in a simple New Keynesian model, where analytical solutions can be derived as well. In this model, imperfect information about the policymaker's output target leads to lower policy losses.

  May 17, 2016   doi: 10.1111/jmcb.12314   open full text
• Stock Market Participation: Family Responses to Housing Consumption Commitments.
  Bing Chen, Frank P. Stafford.
  Journal of money credit and banking. May 17, 2016
  As of 2007, many households had taken on very substantial commitments to housing and companion mortgage payments. At the same time they held little in the way of a traditional buffer stock of safer liquid assets but were more likely to have opened stock market accounts. Many of these families when experiencing subsequent mortgage payment difficulties are shown to have been more likely to exit the stock market. Mortgage difficulties also inhibited families from becoming new stock market participants. In this way stocks seem to have likely experienced some direct and indirect “collateral damage” from the housing market, 2007–9.

  May 17, 2016   doi: 10.1111/jmcb.12313   open full text
• Congress and the Federal Reserve.
  Gregory D. Hess, Cameron A. Shelton.
  Journal of money credit and banking. May 17, 2016
  We examine legislative activity to determine when Congress threatens the Fed and whether this pressure affects monetary policy. By the late‐1980s Congress shifted from threatening when unemployment was high to threatening when inflation was high. We use the Romer and Romer monetary shocks to isolate changes in the federal funds rate that cannot be explained by economic conditions and ask whether these shocks respond to pressure. In the 1970s, the Fed responded to bills credibly threatening Fed powers by lowering the federal funds target below that prescribed by current and forecast economic conditions. However, this accommodation ceased in the mid‐1980s.

  May 17, 2016   doi: 10.1111/jmcb.12312   open full text
• The Changing International Transmission of Financial Shocks: Evidence from a Classical Time‐Varying FAVAR.
  Angela Abbate, Sandra Eickmeier, Wolfgang Lemke, Massimiliano Marcellino.
  Journal of money credit and banking. May 17, 2016
  We study the changing international transmission of financial shocks over the period 1971–2012. Global financial shocks are measured as unexpected changes of a U.S. financial conditions index (FCI), developed by Hatzius et al. (2010). We model the FCI jointly with a large international data set through a time‐varying parameter factor‐augmented VAR and find that financial shocks have a considerable impact on growth in the nine countries considered. Moreover, financial shocks during the global financial crisis are found to be large by historical standards. They explain approximately 20% of GDP growth variation on average over 2008–9, compared to an average of 5% prior to the crisis.

  May 17, 2016   doi: 10.1111/jmcb.12311   open full text
• What Asset Prices Should Be Targeted by a Central Bank?
  Kengo Nutahara.
  Journal of money credit and banking. May 08, 2014
  This paper investigates the monetary policy design for restoring equilibrium determinacy. Our interests are whether a central bank should respond to asset price fluctuations, and if so, what asset prices should be targeted. We show that a monetary policy response to the price of a productive tangible asset (capital price) is helpful for equilibrium determinacy, while that to the price of an intangible asset that reflects a firm's profit (share prices) is a source of equilibrium indeterminacy. This result comes from the two assets' prices moving in opposite directions in response to a permanent increase in inflation.

  May 08, 2014   doi: 10.1111/jmcb.12126   open full text
• Dynamics of Banks' Capital Accumulation.
  Emanuel Barnea, Moshe Kim.
  Journal of money credit and banking. May 08, 2014
  We construct a dynamic neoclassical model of banking capital where the dynamics are governed by the process of financial capital accumulation and credit risk realizations in a structure where stylized banking characteristics are maintained. This is aimed at focusing on how the profit‐maximizing capital ratio of banks evolves and how it reacts to exogenous shocks particularly so during periods of prolonged downturn of the economy. We examine impulse responses of our model to credit risk shock, business cycle shock, and monetary policy shock. The convergence of financial capital to its optimal level is also explored.

  May 08, 2014   doi: 10.1111/jmcb.12125   open full text
• Bank Heterogeneity and Interest Rate Setting: What Lessons Have We Learned since Lehman Brothers?
  Leonardo Gambacorta, Paolo Emilio Mistrulli.
  Journal of money credit and banking. May 08, 2014
  A substantial literature has investigated the role of relationship lending in shielding borrowers from idiosyncratic shocks. Much less is known about how lending relationships and bank‐specific characteristics affect the functioning of the credit market in an economy‐wide crisis. We investigate how bank and bank–firm relationship characteristics have influenced interest rate setting since the collapse of Lehman Brothers. We find that interest rate spreads increased by less for those borrowers having closer lending relationships. Furthermore, firms borrowing from banks endowed with large capital and liquidity buffers and from banks engaged mainly in traditional lending were kept more insulated from the financial crisis.

  May 08, 2014   doi: 10.1111/jmcb.12124   open full text
• Macroeconomic Factors and Microlevel Bank Behavior.
  Claudia M. Buch, Sandra Eickmeier, Esteban Prieto.
  Journal of money credit and banking. May 08, 2014
  We analyze the link between banks and the macroeconomy using a model that extends a macroeconomic VAR for the U.S. with a set of factors summarizing conditions in about 1,500 commercial banks. We investigate how macroeconomic shocks are transmitted to individual banks and obtain the following main findings. Backward‐looking risk of a representative bank declines, and bank lending increases following expansionary shocks. Forward‐looking risk increases following an expansionary monetary policy shock. There is, however, substantial heterogeneity in the transmission of macroeconomic shocks, which is due to bank size, capitalization, liquidity, risk, and the exposure to real estate and consumer loans.

  May 08, 2014   doi: 10.1111/jmcb.12123   open full text
• The Riskiness of Corporate Bonds.
  Marco Taboga.
  Journal of money credit and banking. May 08, 2014
  We use an index of riskiness recently proposed by Aumann and Serrano () to analyze how the riskiness of diversified portfolios of corporate bonds changes across rating classes and through time and how it compares to the riskiness of other financial instruments. We find that differences in riskiness among portfolios of bonds belonging to different rating classes are seldom statistically significant. We instead find significant time variation in riskiness, driven mainly by return volatility, inflation, and average bond yields. In particular, we find that increases in average bond yields have historically tended to reduce the riskiness of portfolios of corporate bonds by increasing their expected return and by lowering the probability of portfolio losses.

  May 08, 2014   doi: 10.1111/jmcb.12122   open full text
• Power‐Sharing in Monetary Policy Committees: Evidence from the United Kingdom and Sweden.
  Henry W. Chappell, Rob Roy Mcgregor, Todd A. Vermilyea.
  Journal of money credit and banking. May 08, 2014
  Committees may make better monetary policy decisions than individuals; however, the benefits of group decision making could be lost if committee members cede power to a chairman. We develop an econometric model to describe intracommittee power‐sharing across members. Estimation of the model permits us to classify monetary policy committees into the typology developed by Blinder (, ). We estimate our model for the United Kingdom's Bank of England (BOE) and Sweden's Riksbank. Results for the BOE suggest that the Governor has little influence over other committee members, while those for the Riksbank indicate that the Governor is highly influential.

  May 08, 2014   doi: 10.1111/jmcb.12121   open full text
• Making Weak Instrument Sets Stronger: Factor‐Based Estimation of Inflation Dynamics and a Monetary Policy Rule.
  Harun Mirza, Lidia Storjohann.
  Journal of money credit and banking. May 08, 2014
  The problem of weak identification has recently attracted attention in the analysis of structural macroeconomic models. Using robust methods can result in large confidence sets making precise inference difficult. We overcome this problem in the analysis of the hybrid New Keynesian Phillips Curve and a forward‐looking Taylor rule by employing stronger instruments. We suggest exploiting information from a large macroeconomic data set by generating factors and using them as additional instruments. This approach results in stronger instrument sets and hence smaller weak‐identification robust confidence sets. It allows us to conclude that there has been a shift toward more active monetary policy from the pre‐Volcker regime to the Volcker–Greenspan tenure.

  May 08, 2014   doi: 10.1111/jmcb.12120   open full text
• The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross‐Country Analysis.
  Leonardo Gambacorta, Boris Hofmann, Gert Peersman.
  Journal of money credit and banking. May 08, 2014
  This paper assesses the macroeconomic effects of unconventional monetary policies by estimating a panel vector autoregression (VAR) with monthly data from eight advanced economies over a sample spanning the period since the onset of the global financial crisis. It finds that an exogenous increase in central bank balance sheets at the zero lower bound leads to a temporary rise in economic activity and consumer prices. The estimated output effects turn out to be qualitatively similar to the ones found in the literature on the effects of conventional monetary policy, while the impact on the price level is weaker and less persistent. Individual country results suggest that there are no major differences in the macroeconomic effects of unconventional monetary policies across countries, despite the heterogeneity of the measures that were taken.

  May 08, 2014   doi: 10.1111/jmcb.12119   open full text
• Household Leverage.
  Stefano Corradin.
  Journal of money credit and banking. May 08, 2014
  I propose a life‐cycle model where a finitely lived risk‐averse household finances its housing investment by opting to provide a down payment. Given that the household may default, risk‐neutral lenders efficiently charge a default premium to hedge against expected losses. This has two major consequences. First, the higher the house price volatility, the higher the down payment the household provides to decrease the volatility of the equity share in the house. Second, in the presence of borrowing constraints, higher risk of unemployment persistence and/or a substantial drop in labor income decreases the leveraged position the household takes on.

  May 08, 2014   doi: 10.1111/jmcb.12118   open full text
• Fiscal Data Revisions in Europe.
  Francisco Castro, Javier J. Pérez, Marta Rodríguez‐Vives.
  Journal of money credit and banking. August 15, 2013
  Revisions of budget balances in Europe could be particularly worrisome as adherence to multilateral surveillance rules is judged upon initial data releases. We use a pool of real‐time vintages of data for 15 EU countries over the period 1995–2008. Our main findings are: (i) preliminary releases are biased and nonefficient predictors of subsequent releases, (ii) such systematic bias in revisions is a general feature of the sample, (iii) Eurostat's decisions explain a significant share of the bias and provide some evidence of window dressing practices, and (iv) expected real gross domestic product growth, political cycles, and the strength of fiscal rules also contribute to explain revision patterns.

  August 15, 2013   doi: 10.1111/jmcb.12049   open full text
• Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials.
  Mirko Abbritti, Andreas I. Mueller.
  Journal of money credit and banking. August 15, 2013
  How does the asymmetry of labor market institutions affect the adjustment of a currency union to shocks? To answer this question, this paper sets up a dynamic currency union model with monopolistic competition and sticky prices, hiring frictions, and real wage rigidities. In our analysis, we focus on the differentials in inflation and unemployment between countries, as they directly reflect how the currency union responds to shocks. We highlight the following three results. First, we show that it is important to distinguish between different labor market rigidities as they have opposite effects on inflation and unemployment differentials. Second, we find that asymmetries in labor market structures tend to increase the volatility of both inflation and unemployment differentials. Finally, we show that it is important to take into account the interaction between different types of labor market rigidities. Overall, our results suggest that asymmetries in labor market structures worsen the adjustment of a currency union to shocks.

  August 15, 2013   doi: 10.1111/jmcb.12048   open full text
• Bank Capital: Lessons from the Financial Crisis.
  Asli Demirguc‐Kunt, Enrica Detragiache, Ouarda Merrouche.
  Journal of money credit and banking. August 15, 2013
  Using a multicountry panel of banks, we study whether better capitalized banks experienced higher stock returns during the financial crisis. We differentiate among various types of capital ratios: the Basel risk‐adjusted ratio, the leverage ratio, the Tier 1 and Tier 2 ratios, and the tangible equity ratio. We find several results: (i) before the crisis, differences in capital did not have much impact on stock returns; (ii) during the crisis, a stronger capital position was associated with better stock market performance, most markedly for larger banks; (iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk‐adjusted capital ratio; (iv) higher quality forms of capital, such as Tier 1 capital and tangible common equity, were more relevant.

  August 15, 2013   doi: 10.1111/jmcb.12047   open full text
• Equity Returns and Business Cycles in Small Open Economies.
  Mohammad R. Jahan‐Parvar, Xuan Liu, Philip Rothman.
  Journal of money credit and banking. August 15, 2013
  This is the first paper in the dynamic stochastic general equilibrium literature to match key business cycle moments and long‐run equity returns in a small open economy with production. These results are achieved by introducing four modifications to a standard real business cycle model: (i) borrowing and lending costs are imposed to increase the volatility of the marginal rate of substitution over time, (ii) capital adjustment costs are assumed to make equity returns more volatile, (iii) GHH preferences are employed to smooth consumption, and (iv) a working capital constraint to generate countercyclical trade balances. Our results are based on data from Argentina, Brazil, and Chile.

  August 15, 2013   doi: 10.1111/jmcb.12046   open full text
• The Impact of House Prices on Consumer Credit: Evidence from an Internet Bank.
  Rodney Ramcharan, Christopher Crowe.
  Journal of money credit and banking. August 15, 2013
  This paper shows that house price fluctuations can have a significant impact on credit availability. Data from Prosper.com, a peer‐to‐peer lending site that matches borrowers and lenders to provide unsecured consumer loans, indicate that homeowners in states with declining house prices experience higher interest rates, greater credit rationing, and faster delinquency. We find especially large effects for subprime borrowers whose balance sheets are likely most exposed to asset price declines. This evidence suggests that asset price fluctuations can play an important role in determining credit conditions and are thus a potentially significant mechanism for propagating macroeconomic shocks.

  August 15, 2013   doi: 10.1111/jmcb.12045   open full text
• The Most Beautiful Variations on Fair Wages and the Phillips Curve.
  Andrea Vaona.
  Journal of money credit and banking. August 15, 2013
  This paper explores the connection between inflation and unemployment in two different models with fair wages in both the short and the long runs. Under customary assumptions regarding the sign of the parameters of the effort function, more inflation lowers the unemployment rate, albeit to a declining extent. This is because firms respond to inflation—which spurs effort by decreasing the reference wage—by increasing employment, thus maintaining the effort level constant as implied by the Solow condition. A stronger short‐run effect of inflation on unemployment is produced under varying as opposed to fixed capital, given that in the former case the boom produced by a monetary expansion is reinforced by an increase in investment. Therefore, I provide a new theoretical foundation for recent empirical contributions that find negative long‐ and short‐run effects of inflation on unemployment.

  August 15, 2013   doi: 10.1111/jmcb.12044   open full text
• News on Inflation and the Epidemiology of Inflation Expectations.
  Damjan Pfajfar, Emiliano Santoro.
  Journal of money credit and banking. August 15, 2013
  This paper examines the nexus between news coverage on inflation and households’ inflation expectations. In doing so, we test the epidemiological foundations of the sticky information model (Carroll ). We use both aggregate and household‐level data from the Survey Research Center at the University of Michigan. We highlight a fundamental disconnection among news on inflation, consumers’ frequency of expectation updating, and the accuracy of their expectations. Our evidence provides at best weak support to the epidemiological framework, as most of the consumers who update their expectations do not revise them toward professional forecasters’ mean forecast.

  August 15, 2013   doi: 10.1111/jmcb.12043   open full text
• Nonuniform Staggered Prices and Output Persistence.
  Johan Söderberg.
  Journal of money credit and banking. August 15, 2013
  Staggered prices are a fundamental building block of New Keynesian dynamic stochastic general equilibrium models. In the standard model, prices are uniformly staggered, but recent empirical evidence suggests that deviations from uniform staggering are common. This paper analyzes how synchronization of price changes affects the response to monetary policy shocks. I find that even large deviations from uniform staggering have small effects on the response of output. Aggregate dynamics in a model of uniform staggering may serve well as an approximation to a more complicated model with some degree of synchronization in price setting.

  August 15, 2013   doi: 10.1111/jmcb.12042   open full text
• Declining Effects of Oil Price Shocks.
  Munechika Katayama.
  Journal of money credit and banking. August 15, 2013
  In recent years, output responses to oil price shocks have not only been weaker, but have also reached their trough earlier. This paper builds a model that incorporates a realistic structure of U.S. petroleum consumption and explores three possible explanations for the changes. The possible factors considered are (i) deregulation in the transportation industry, (ii) improved energy efficiency, and (iii) a lower degree of persistence of oil price shocks. Under realistic parameter values, the three factors play an important role quantitatively, accounting for half of the reduction in the largest impact on output of an oil price shock over time.

  August 15, 2013   doi: 10.1111/jmcb.12041   open full text
• U.S. Real Interest Rates and Default Risk in Emerging Economies.
  Nathan Foley‐Fisher, Bernardo Guimaraes.
  Journal of money credit and banking. July 11, 2013
  This paper empirically investigates the impact of changes in U.S. real interest rates on sovereign default risk in emerging economies using the method of identification through heteroskedasticity. Policy‐induced increases in U.S. interest rates starkly raise default risk in emerging market economies. However, the overall correlation between U.S. real interest rates and the risk of default is negative, demonstrating that the effects of other variables dominate the anterior relationship.

  July 11, 2013   doi: 10.1111/jmcb.12033   open full text
• Intraday Patterns in FX Returns and Order Flow.
  Francis Breedon, Angelo Ranaldo.
  Journal of money credit and banking. July 11, 2013
  Using a comprehensive high‐frequency foreign exchange data set, we present evidence of time‐of‐day effects in foreign exchange returns through a significant tendency for currencies to depreciate during local trading hours. We confirm this pattern across a range of currencies and time zones. We also find that this pattern is reflected in order flow and suggest that both patterns relate to the tendency of market participants to be net purchasers of foreign exchange in their own trading hours. Data from a single market maker appears to corroborate that interpretation.

  July 11, 2013   doi: 10.1111/jmcb.12032   open full text
• Disappearing Dividends: Implications for the Dividend–Price Ratio and Return Predictability.
  Chang‐Jin Kim, Cheolbeom Park.
  Journal of money credit and banking. July 11, 2013
  The conventional dividend–price ratio is highly persistent, and the literature reports mixed evidence on its role in predicting stock returns. We argue that the decreasing number of firms with a traditional dividend‐payout policy is responsible for these results, and develop a model in which the long‐run relationship between the dividends and stock price is time varying. An adjusted dividend–price ratio that accounts for the time‐varying long‐run relationship is considerably less persistent. Furthermore, the predictive regression model that employs the adjusted dividend–price ratio as a regressor outperforms the random‐walk model. These results are robust with respect to the firm size.

  July 11, 2013   doi: 10.1111/jmcb.12031   open full text
• International Evidence on the New Keynesian Phillips Curve Using Aggregate and Disaggregate Data.
  Joseph P. Byrne, Alexandros Kontonikas, Alberto Montagnoli.
  Journal of money credit and banking. July 11, 2013
  We present a unique empirical analysis of the properties of the New Keynesian Phillips Curve (NKPC) using an international data set of aggregate and disaggregate sectoral inflation. Our results from panel time‐series estimation clearly indicate that sectoral heterogeneity has important consequences for aggregate inflation behavior. Heterogeneity helps to explain the overestimation of inflation persistence and underestimation of the role of marginal costs in empirical investigations of the NKPC that use aggregate data. We find that combining disaggregate information with heterogeneous‐consistent estimation techniques helps to reconcile, to a large extent, the NKPC with the data.

  July 11, 2013   doi: 10.1111/jmcb.12030   open full text
• Stock Market Comovements and Industrial Structure.
  Pushan Dutt, Ilian Mihov.
  Journal of money credit and banking. July 11, 2013
  We use monthly stock indices for 58 countries to construct pairwise correlations of returns and explain these correlations with risk‐adjusted differences in industrial structure across countries. We find that countries with similar industries exhibit higher stock market comovements. The results are robust to the inclusion of other regressors such as differences in income per capita, stock market capitalizations, measures of institutions, as well as various fixed time, country, and country‐pair effects. Our results are consistent with models where the impact of each industry‐specific shock is proportional to the share of this industry in the overall industrial output of the country.

  July 11, 2013   doi: 10.1111/jmcb.12029   open full text
• Do Sales of Foreign Exchange Reserves Lead to Currency Appreciation?
  Kathryn M.E. Dominguez, Rasmus Fatum, Pavel Vacek.
  Journal of money credit and banking. July 11, 2013
  We employ novel time‐stamped reserve sales data, provided by the Czech National Bank (CNB), to carry out a time‐series analysis of the exchange rate implications of Czech reserve sales aimed at mitigating valuation losses on Euro‐denominated assets. The sales were explicitly not intended to influence the value of the koruna relative to the euro. The period under study includes a well‐defined regime change in the CNB's approach to reserves sales, allowing us to address whether the manner in which the sales are carried out matters for their influence on the relative value of the domestic currency. We find little evidence that reserve sales influence the exchange rate when sales are carried out on a discretionary and relatively infrequent basis. However, when the sales are carried out daily, we find a statistically and economically significant appreciation of the domestic currency follows.

  July 11, 2013   doi: 10.1111/jmcb.12028   open full text
• Real Exchange Rates and Fundamentals: A Cross‐Country Perspective.
  Luca Antonio Ricci, Gian Maria Milesi‐Ferretti, Jaewoo Lee.
  Journal of money credit and banking. July 11, 2013
  This paper employs newly constructed measures for productivity differentials, external imbalances, and commodity terms of trade to estimate a panel cointegrating relationship between real exchange rates and a set of fundamentals for a sample of 48 industrial countries and emerging markets. It finds evidence of a strong positive relation between the consumer price index‐based real exchange rate and commodity terms of trade. The estimated impact of productivity growth differentials between traded and nontraded goods, while statistically significant, is small. Increases in net foreign assets, government consumption, and trade restrictions tend to be associated with appreciating real exchange rates.

  July 11, 2013   doi: 10.1111/jmcb.12027   open full text
• Inflation and Welfare in Retail Markets: Prior Production and Imperfectly Directed Search.
  Adrian Masters.
  Journal of money credit and banking. July 11, 2013
  This paper considers the effect of monetary policy and inflation on retail markets: goods are dated and produced prior to being retailed; buyers direct their search on price and general quality; buyers’ match‐specific tastes are private information. Sellers set the same price for all buyers, some of whom do not value the good highly enough to buy it. The market economy is typically inefficient as a social planner would have the good consumed. Under free entry of sellers, the Friedman rule is optimal policy. When the upper bound on the number of participating sellers binds, moderate levels of inflation can be welfare improving.

  July 11, 2013   doi: 10.1111/jmcb.12026   open full text
• Liquidity and Information Flow around Monetary Policy Announcement.
  Kee H. Chung, John Elder, Jang‐Chul Kim.
  Journal of money credit and banking. July 11, 2013
  We analyze the effects of monetary policy announcements on stock market liquidity using intraday data. We show that the impairment in liquidity associated with policy announcements occurs primarily after, rather than before, the announcements, and is relatively short lived, lasting about 1.5 hours. Liquidity impairment varies proportionately with the information content of the policy announcement, with larger effects associated with unscheduled announcements and scheduled announcements with larger policy surprises. Overall, our results suggest that informed traders have an information processing advantage over uninformed participants rather than access to private information.

  July 11, 2013   doi: 10.1111/jmcb.12025   open full text
• Religion, Corruption, and the Rule of Law.
  Charles M. North, Wafa Hakim Orman, Carl R. Gwin.
  Journal of money credit and banking. July 11, 2013
  In a 207‐country sample, we find that rule of law and corruption are both associated with a country's religious heritage, thereby partially explaining the correlation between religion and economic growth found in previous research. We also show that our results change when we control for some variables lacking data for all countries in the sample but that these differences are attributable to changes in sample composition rather than the effects of the control variables. Our research suggests that researchers doing cross‐country analysis should distinguish between the effects of adding a control variable and the resulting sample composition effects.

  July 11, 2013   doi: 10.1111/jmcb.12024   open full text