Vincent Reinhart

Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment

The success over the years in reducing inflation and, consequently, the average level of nominal interest rates has increased the likelihood that the nominal policy interest rate may become constrained by the zero lower bound. When that happens, a central bank can no longer stimulate aggregate demand by further interest-rate reductions and must rely on non-standard policy alternatives. To assess the potential effectiveness of such policies, we analyze the behavior of selected asset prices over short periods surrounding central bank statements or other types of financial or economic news and estimate no-arbitrage models of the term structure for the United States and Japan. There is some evidence that central bank communications can help to shape public expectations of future policy actions and that asset purchases in large volume by a central bank would be able to affect the price or yield of the targeted asset.

Conducting Monetary Policy at Very Low Short-Term Interest Rates

Can monetary policy committees, accustomed to describing their plans and actions in terms of the level of a short-term nominal interest rate, find effective means of conducting and communicating their policies when that rate is zero or close to zero? The very low levels of interest rates in Japan, Switzerland, and the United States in recent years have stimulated much interesting research on this question and have led some central banks to make changes in their operating procedures and communications strategies. In this paper, we will give a brief overview of current thinking on the conduct of monetary policy when short-term interest rates are very low or even zero. Monetary policy works for the most part by influencing the prices and yields of financial assets, which in turn affect economic decisions and thus the evolution of the economy. When the short-term policy rate is at or near zero, the conventional means of effecting monetary ease (lowering the target for the policy rate) is no longer feasible. However, it would be a mistake to think that monetary policy was impotent. We discuss three strategies for stimulating the economy at an unchanged level of the policy rate: these involve (i) providing assurance to investors that short rates will be kept lower in the future than they currently expect, (ii) changing the relative supplies of securities in the marketplace by altering the composition of the central bank’s balance sheet, and (iii) increasing the size of the central bank’s balance sheet beyond the level needed to set the short-term policy rate at zero (“quantitative easing”). We also discuss the costs and benefits of very low interest rates, an issue that bears on the question of whether the central bank should take the policy rate all the way to zero before undertaking alternative policies.

On the Use of Reserve Requirements in Dealing with Capital Flow Problems

In recent years, many developing countries have intervened in foreign exchange markets to offset to some extent the effect on their economies of large capital flows. Often changes in reserve requirements were used to mitigate the impact of that intervention on domestic money supplies. Because reserve requirements are a tax, however, changes in reserve requirements can have real effects. This paper shows that the exact implications for output, the real exchange rate and the capital and current accounts depend importantly on who--whether depositors or borrowers--pays the tax. In any case, foreign exchange intervention matched by changes in reserve requirements that keep the money supply fixed do influence the exchange rate in the short and, sometimes, the long run. The recent experiences of ten developing countries establish that, while the incidence of the tax varies considerably across countries and time, both deposit and lending rates of interest respond to changes in reserve requirements. Copyright @ 1999 by John Wiley & Sons, Ltd. All rights reserved.

The market reaction to federal reserve policy action from 1989 to 1992

Abstract An examination of the market reaction to Federal Reserve policy easings from 1989 to 1992 suggests that these actions were mostly unexpected and were not viewed to be persistent. Changes in the intended trading range for the federal funds rate had their greatest impact on the near-term outlook, but those effects diminished as the investing horizon lengthened. By this interpretation, any change in longer-term interest rates was mostly owed to the consequences of lower near-term rates, not to any substantial revision to the longer-run outlook. Most significantly, the range of reaction was remarkably wide across all markets.

Death and taxes: their implications for endogenous growth

Abstract Blanchard’s explanation of consumption dynamics, when combined with a technology that does not exhibit diminishing returns, delivers a model consistent with many of the regularities in cross-country growth regressions. Longer life expectancies generate faster economic growth by affecting households’ willingness to smooth intertemporally. Greater government expenditure or taxation lowers growth, but the effect of higher government debt is ambiguous.

Auction Format Matters: Evidence on Bidding Behavior and Seller Revenue

This paper evaluates the importance of auction format on bidding behavior and seller revenue, focusing on differences in performance under uniform-price and discriminatory-price formats. The analysis is based on a standard benchmark model from which empirically testable hypotheses are derived on the optimal amount of bid shading that generates revenue equivalence between the two formats. Applying this model to data from the IMF gold auctions run in 1976-80, we find evidence of statistically significant shading in excess of the theoretically derived optimum under the discriminatory format. This evidence suggests greater seller revenue under the uniform-price format.

Flexible Estimation of Demand Schedules and Revenue Under Different Auction Formats

From 1976 to 1980, the International Monetary Fund sold by sealed-bid auctions one-fifth of its gold stock and systematically experimented with auction format. Based on data from these auctions, this paper uses nonlinear estimation techniques to estimate demand curves under the alternative formats. Demand schedules at the uniform-price auctions were steeper and to the right of those at discriminatory-price auctions, upholding the predictions of bidding theory. Moreover, it is estimated that discriminating-price auctions yielded lower revenue than uniform-price auctions; Monte Carlo simulations suggest that this latter result is both robust and statistically significant.

How the Machinery of International Finance Runs with Sand in its Wheels

The dramatic swings in international capital movements in recent years have renewed interest in restrictions on capital flows. This paper provides a model of international asset flows and domestic equity price formation incorporating three restrictions on capital flows. A transaction tax introduces significant asymmetries in the reaction of asset prices to financial and real shocks but has no long-lived effects. Policies targeted to the level of net foreign debt by imposing a tax or outright controls do influence the steady-state levels of the real exchange rate and relative equity prices.

The 'Tobin tax,' asset accumulation, and the real exchange rate

Abstract We extend a standard model of exchange rate determination in a small open economy to examine the general equilibrium consequences of a tax on foreign assets. The model: (1) incorporates asset market clearing at a point in time, (2) accounts for asset accumulation over time by way of trade imbalances and the governments financing needs, and (3) broadens the governments policy options to include a tariff on the traded good and a tax on foreign assets. A capital tax results in a transitory trade deficit because agents shift to home assets; their decumulation of foreign assets is mirrored in a trade deficit.

The design of an interest rate rule with staggered contracting and costly transacting

Abstract We examine interest rate rules in a model in which agents plan their consumption decisions in the face of two rigidities. First, households need cash balances to aid trade. Second, todays price level is inherited from past contracting decisions so that changes in nominal aggregate demand fall on output in the short run. Given these rigidities, the central bank can set the nominal interest rate in the short run. However, a pure interest rate peg fails to uniquely determine nominal and real magnitudes. A reaction function constraining the nominal interest rate to be continuous and showing some sensitivity to inflation does not exhibit this indeterminacy.