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"Monetary models"
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A monetary model of exchange rate beats the random walk forecast even at a short horizon: Evidence from the Serbian hyperinflation at daily frequency
This paper finds that an out-of-sample forecast of a monetary model of exchange rate (MMER) in hyperinflation decisively beats a random walk one particularly at the most challenging one step ahead forecast, thus outperforming standard results previously obtained for low inflation episodes. The findings refer to the Serbian hyperinflation at daily frequency, and are robust with respect to various tests. Fast adjustment of the exchange rate to its fundamental value and the low, well below one discount factor found in the Serbian episode, as opposed to low-inflation ones, can account for divergent results in the respective inflation environments. The low discount factor appears in other hyperinflation episodes, while fast adjustment is due to the absence of nominal rigidities in hyperinflation thus both suggesting that reported findings for one episode might generalize.
Journal Article
The Power of Forward Guidance Revisited
In recent years, central banks have increasingly turned to forward guidance as a central tool of monetary policy. Standard monetary models imply that far future forward guidance has huge effects on current outcomes, and these effects grow with the horizon of the forward guidance. We present a model in which the power of forward guidance is highly sensitive to the assumption of complete markets. When agents face uninsurable income risk and borrowing constraints, a precautionary savings effect tempers their responses to changes in future interest rates. As a consequence, forward guidance has substantially less power to stimulate the economy.
Journal Article
Clearing Up the Fiscal Multiplier Morass
We quantify government spending multipliers in US data using Bayesian prior and posterior analysis of a monetary model with fiscal details and two distinct monetary-fiscal policy regimes. The combination of model specification, observable data, and relatively diffuse priors for some parameters lands posterior estimates in regions of the parameter space that yield fresh perspectives on the transmission mechanisms that underlie government spending multipliers. Short-run output multipliers are comparable across regimes—posterior means around 1.3 on impact—but much larger after 10 years under passive money/active fiscal than under active money/passive fiscal—90 percent credible sets of [1.5, 1.9] versus [0.1, 0.4] in present value, when estimated from 1955 to 2016.
Journal Article
An Artificial Neural Network-Based Approach to the Monetary Model of Exchange Rate
This paper aims to investigate the predictive accuracy of the flexible price monetary model of the exchange rate, estimated by an approach based on combining the vector autoregressive model and multilayer feedforward neural networks. The forecasting performance of this nonlinear, nonparametric model is analyzed comparatively with a monetary model estimated in a linear static framework; the monetary model estimated in a linear dynamic vector autoregressive framework; the monetary model estimated in a parametric nonlinear dynamic threshold vector autoregressive framework; and the naïve random walk model applied to six different exchange rates over three forecasting periods. The models are compared in terms of both the magnitude of their forecast errors and the economic value of their forecasts. The proposed model yielded promising outcomes by performing better than the random walk model in 16 out of 18 instances in terms of the root mean square error and 15 out of 18 instances in terms of mean return and Sharpe ratio. The model also performed better than linear models in 17 out of 18 instances for root mean square error and 14 out of 18 instances for mean returns and Sharpe ratio. The distinguishing feature of the proposed model versus the present models in the literature is its robustness to outperform the random walk model, regardless of whether the magnitude of forecast errors or the economic value of the forecasts is chosen as a performance measure.
Journal Article
Monetary Policy, Asset Prices, and Liquidity in Over-the-Counter Markets
We develop a model where agents can allocate their wealth between a liquid asset, which can be used to purchase consumption goods, and an illiquid asset, which represents a better store of value. Should a consumption opportunity arise, agents may visit a frictional \"over-the-counter\" secondary asset market where they can exchange illiquid for liquid assets. We characterize how monetary policy affects both the issue price and the secondary market price of the asset. We also show that, in contrast to conventional wisdom, search and bargaining frictions in the secondary asset market can improve welfare if inflation is low.
Journal Article
Order Flow and the Monetary Model of Exchange Rates: Evidence from a Novel Data Set
We propose an exchange rate model that is a hybrid of the conventional specification with monetary fundamentals and the Evans-Lyons microstructure approach. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on interdealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or \"hybrid,\" model exhibits greater in-sample stability and out of sample forecasting improvement vis-á-vis the basic macroeconomic and random walk specifications.
Journal Article
A Tractable Monetary Model under General Preferences
This article studies an economy with both centralized and decentralized monetary exchanges under search frictions. A degenerate asset distribution is featured under a broad class of preferences including, for example, constant return to scale, constant elasticity of substitution, CARA and others from a range of macroeconomic literatures. Some novel applications impossible under quasi-linear preferences, for example endogenous growth, are illustrated under this class of preferences. This article finds that the welfare cost and growth loss of inflation can be much higher in these applications than previous estimates.
Journal Article