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Unconventional monetary policy in an open economy

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  • Gieck, Jana

Abstract

The impact of unconventional monetary policies on exchange rates and its spillovers to other economies is not yet fully understood. In this paper I develop a two-country DSGE model with interbank markets and endogenous default probabilities to analyze the cross-border impacts of unconventional monetary policy. I examine the impact of two unconventional measures commonly used: central bank liquidity injections and asset swaps. I find that liquidity injections lead to a short run appreciation of domestic currency, but a mild long run depreciation. In contrast, asset swaps cause a short run depreciation of domestic currency, but a long run appreciation. Lastly, when both countries coordinate on the implementation of unconventional policies, the model yields the following results: Non-coordinated liquidity injections lead to higher increases with respect to output and inflation variation, but have negative spillovers on the other economy in terms of lower growth. By contrast, coordinating asset swaps leads to higher increases in output and lower fluctuation in inflation in both countries. The results of this paper suggest that coordination in unconventional monetary policy may not always yield an optimal outcome, and macroeconomic outcomes in both countries depend crucially on the choice of instrument.

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  • Gieck, Jana, 2014. "Unconventional monetary policy in an open economy," Discussion Papers 41/2014, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:412014
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    Cited by:

    1. Shifu Jiang, 2017. "The Ramsey Cooperative and Non-Cooperative Unconventional Monetary Policy," FIW Working Paper series 180, FIW.
    2. Martin Pietrzak, 2016. "Evaluation of unconventional monetary policy in a small open economy," FIW Working Paper series 167, FIW.
    3. Arteta,Carlos & Kose,Ayhan & Stocker,Marc & Taskin,Temel, 2016. "Negative interest rate policies : sources and implications," Policy Research Working Paper Series 7791, The World Bank.
    4. Marek Lubiński, 2015. "Efekty ponadgraniczne niekonwencjonalnej polityki monetarnej," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 6, pages 5-28.

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    More about this item

    Keywords

    Unconventional Monetary Policy; Quantitative Easing; Asset Swaps; Open Economy DSGE; Currency Wars; Policy Coordination;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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