15. Answer BRIEFLY all the questions regarding TWO of the following three papers

Question

15. Answer BRIEFLY all the questions regarding TWO of the following three papers: (a) [Ihrig et al. (2015)] rate? Explain rate? Explain. maturities are traded. Can the Fed's overnight reverse repurchase operations affect money market (i) Is the interest rate on excess reserves a lower bound (i.e., a floor) for the federal funds (ii) As of now, can the Fed use small-scale open market operations to raise the federal funds (ii) The money market is where financial instruments with high liquidity and very short (iv) What is the width of the federal funds target range? interest rates? Explain (v) How would excess reserves change if the Fed starts phasing out its securities reinvest- ment? Would this bring a significant change in the federal funds rate? Explain. (b) [Borio and Zabai (2016)] i) Has quantitative easing been successful in rising asset prices? (ii) List two problems that limit the effectiveness of forward guidance in steering expecta- tions about the future path of the policy rate. rates been transmitted to retail deposits? effect to be stronger in the U.S. or in Germany? (iii) List 4 central banks that have used negative policy rates. Has these negative interest (iv) How can expansionary monetary policy affect wealth inequality? Do you expect the (v) What is money illusion? (i) Would a rise in the demand for safe advanced-country assets increase or decrease these (c) [Rogoff (2017)] countries' real interest rates? (ii) List one advantage and one disadvantage of raising central bank inflation targets (iii) How can the lower bound on nominal interest rate be negative rather than zero? (iv) How can a dual currency system help implement negative nominal interest rates? (v) How can phasing out large-denomination paper currency notes help implement negative nominal interest rates?

Explanation / Answer

(b)

I.Yes quantitative easing has been successful in rising asset prices. If we study data after the financial crisis of late 2000, particularly U.S.A it reveals that quantitate easing coupled with low interest rates freed up capital & encouraged risk appetite resulting in rise of bond & share prices.

II.The two factors which can limit the effectiveness of forward guidance are given below

a. It’s difficult to fully understand the guidance because central banks tend to retain sufficient flexibility to respond unforeseen circumstances, resulting in difficulties to reach an agreement & compromises.

This also creates ambiguity in decision making.

b. Central banks may not be able to guarantee the consistency of future decisions beyond short duration as they are not sure of market response. As the market responds in a fast paced manner to uncertainty it limits the effectiveness of forward guidance.

III.Central banks of following countries have used negative policy rates.

Denmark, Sweden, Switzerland and Japan

Yes, negative interest rates have been transmitted to retail deposits.

iv.Expansionary monetary policy increases wages due to low interest rates but results in decreasing employment opportunities. This creates imbalance in income distribution at lower ends leading to wealth inequality.

v.In this people think of currency in nominal value rather than real value which depends on consumer price index. In other words people consider numeric or nominal value of currency for its purchasing power (Real value), which is not correct.

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