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on Monetary Economics |
| By: | Vincenzo Cuciniello (Bank of Italy) |
| Abstract: | This paper presents novel time-varying estimates of the monetary policy rule as perceived by financial markets, focusing on days of heightened inflation-linked swap rate volatility corresponding to preliminary inflation release dates in the euro area. My findings reveal significant fluctuations in the perceived responsiveness of monetary policy to inflation, reflecting shifts in the ECB's concerns regarding price stability risks. Moreover, the sensitivity of this perceived responsiveness to monetary shocks varies based on prevailing inflation expectations, with tighter policy having a greater impact in high-inflation environments. Lastly, a stronger perceived monetary policy response to inflation enhances policy credibility by dampening the sensitivity of long-term inflation expectations to short-term fluctuations. |
| Keywords: | European Central Bank, monetary policy rule, credibility, financial market expectations, macroeconomic data releases |
| JEL: | E50 G10 C10 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1449_24&r=mon |
| By: | Tetiana Yukhymenko (National Bank of Ukraine); Oleh Sorochan (National Bank of Ukraine) |
| Abstract: | This study explores the impact of central bank communications on a range of macrofinancial indicators. Specifically, we examine whether information posted on the National Bank of Ukraine (NBU) website influences foreign exchange (FX) markets and the inflation expectations of experts. Our main results suggest that the NBU's statements and press releases on monetary policy issues do indeed matter. For instance, we find that exchange rate movements and volatility are negatively correlated with the volumes of publications of the NBU on its official website. However, this effect is noticeably larger for volatility than for exchange rate changes. The impact of communication on FX developments is strongest a week after a news release, and it persists further. Furthermore, the inflation expectations of financial experts, though indifferent to NBU updates overall, turn out to be sensitive to monetary policy announcements. The latter reduces the level of expectations and interest rate movement. |
| Keywords: | central bank communications, monetary policy, FX market, text analysis |
| JEL: | E58 E71 C55 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ukb:wpaper:01/2024&r=mon |
| By: | Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia); Douglas Laxton (NOVA School of Business and Economics, Saddle Point Research, The Better Policy Project); Tamta Sopromadze (Head of Monetary Policy Division, National Bank of Georgia); Mariam Tchanturia (Macroeconomic Research Division, National Bank of Georgia); Ana Nizharadze (Macroeconomic Research Division, National Bank of Georgia); Sergo Gadelia (Macroeconomic Research Division, National Bank of Georgia); Giorgi Gigineishvili (Macroeconomic Research Division, National Bank of Georgia); Jared Laxton (Economist at Advanced Macro Policy Modelling (AMPM)) |
| Abstract: | We advocate for a novel approach to decomposing the Consumer Price Index, critiquing the traditional core inflation distinction (which omits volatile items like food and energy) for lacking a solid economic basis. Our proposed method, inspired by practices in economies like the United States, New Zealand and Armenia, categorizes prices into "flexible, " which adjust quickly and are influenced by external factors, and "sticky" non-tradables, which adjust more slowly, offering a clearer view of medium-term inflation expectations. This approach underscores the importance of economic analysis over simplistic statistical methods that exclude volatile CPI components. It emphasizes the need for economists to understand the dynamics driving both sticky and flexible price inflation, with the latter often signifying initial signs of excess demand pressures. Recognizing the impact of dollarization, where exchange rate depreciations quickly affect nontraded sticky prices, becomes crucial. This understanding is vital for formulating monetary policies that prevent long-term inflation expectations from escalating, highlighting the significance of studying the interplay between exchange rate movements and domestic price dynamics in dollarized economies. |
| Keywords: | Non-tradable sticky prices; Monetary policy credibility; Core inflation |
| JEL: | E10 E31 E52 E58 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:aez:wpaper:2024-01&r=mon |
| By: | Zixuan Huang; Ms. Amina Lahreche; Mika Saito; Ursula Wiriadinata |
| Abstract: | E-money development has important yet theoretically ambiguous consequences for monetary policy transmission, because nonbank deposit-taking e-money issuers (EMIs) (e.g., mobile network operators) can either complement or substitute banks. Case studies of e-money regulations point to complementarity of EMIs with banks, implying that the development of e-money could deepen financial intermediation and strengthen monetary policy transmission. The issue is further explored with panel data, on both monthly (covering 21 countries) and annual (covering 47 countries) frequencies, over 2001 to 2019. We use a two-way fixed effect estimator to estimate the causal effects of e-money development on monetary policy transmission. We find that e-money development has accompanied stronger monetary policy transmission (measured by the responsiveness of interest rates to the policy rate), growth in bank deposits and credit, and efficiency gains in financial intermediation (measured by the lending-to-deposit rate spread). Evidence is more pronounced in countries where e-money development takes off in a context of limited financial inclusion. This paper highlights the potential benefits of e-money development in strengthening monetary policy transmission, especially in countries with limited financial inclusion. |
| Keywords: | Monetary policy transmission; banks; nonbank financial institutions; e-money; panel data |
| Date: | 2024–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/069&r=mon |
| By: | Christopher J. Erceg; Marcin Kolasa; Jesper Lindé; Mr. Haroon Mumtaz; Pawel Zabczyk |
| Abstract: | We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the only effective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates. |
| Keywords: | Monetary Policy; Quantitative Easing; International Spillovers |
| Date: | 2024–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/073&r=mon |
| By: | Pascal Paul; Mauricio Ulate; Jing Cynthia Wu |
| Abstract: | We develop a quantitative New Keynesian DSGE model to study the introduction of a central bank digital currency (CBDC): government-backed digital money available to retail consumers. At the heart of our model are monopolistic banks with market power in deposit and loan markets. When a CBDC is introduced, households benefit from an expansion of liquidity services and higher deposit rates as bank deposit market power is curtailed. However, deposits also flow out of the banking system and bank lending contracts. We assess this welfare trade-off for a wide range of economies that differ in their level of interest rates. We find substantial welfare gains from introducing a CBDC with an optimal interest rate that can be approximated by a simple rule of thumb: the maximum between 0% and the policy rate minus 1%. |
| Keywords: | central banks; digital currencies; banks; DSGE models; monetary policy; central bank |
| JEL: | E3 E4 E5 G21 G51 |
| Date: | 2024–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:98046&r=mon |
| By: | Andriy Tsapin (National Bank of Ukraine; National University of Ostroh Academy); Oleksandr Faryna (National Bank of Ukraine; National University of Kyiv-Mohyla Academy) |
| Abstract: | Using survey data from the USAID Financial Sector Transformation Project, this paper examines whether or not financial literacy influences households' expectations about future prices and whether or not it anchors inflation expectations to the central bank's target. We find that higher financial literacy lowers average uncertainty about one-year inflation, but increases three-year inflation expectations. The results from quantile regressions confirm the asymmetric effects of financial literacy and its components on inflation. Inverse effects of financial literacy on expected inflation are at work for the upper end of the distribution (unanchored expectations), while positive effects are seen in the lower end of the distribution (anchored expectations). Our findings also suggest that financial literacy significantly improves inflation perceptions and the accuracy of individuals' predictions about inflation. The conclusions from this research are beneficial and have strong policy implications for the central bank's monetary policy. |
| Keywords: | c inflation expectations, inflation perceptions, financial literacy, monetary policy |
| JEL: | C81 D80 D82 E31 E52 E58 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ukb:wpaper:02/2024&r=mon |
| By: | Callum Jones; Mariano Kulish; James Morley |
| Abstract: | We propose a shadow interest rate for structural macroeconomic models that measures the interest-rate-equivalent stance of monetary policy at the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance that extends the expected duration of zero-interest-rate policy beyond the lower bound constraint is expansionary and decreases the shadow rate. Quantitative easing that shortens the expected duration of the binding constraint also decreases the shadow rate. We find that the estimated shadow federal funds rate from a workhorse structural model of the US economy better captures the stance of monetary policy than a shadow rate based only on the term structure of interest rates. Furthermore, both forward guidance and quantitative easing appear to be important drivers of our shadow federal funds rate. |
| Keywords: | zero lower bound; forward guidance; quantitative easing; shadow rate; monetary policy |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2024-05&r=mon |
| By: | Billi, Roberto (Monetary Policy Department, Central Bank of Sweden); Galí, Jordi (CREI, UPF and BSE); Nakov, Anton (European Central Bank) |
| Abstract: | We study the optimal monetary policy problem in a New Keynesian economy with a zero lower bound (ZLB) on the nominal interest rate, when the steady state natural rate (r*) becomes permanently negative. We show that the optimal policy aims to approach gradually a new steady state with positive average inflation. Around that steady state, the optimal policy implies well defined (second-best) paths for inflation and output in response to shocks to the natural rate. Under plausible calibrations, the optimal policy implies that the nominal rate remains at its ZLB most of the time. Despite the latter feature, the central bank can implement the optimal outcome as a unique equilibrium by means of an appropriate nonlinear interest rate rule. In order to establish that result, we derive sufficient conditions for local determinacy in a general model with endogenous regime switches. |
| Keywords: | zero lower bound; New Keynesian model; decline in r*; equilibrium determinacy; regime switching models; secular stagnat |
| JEL: | E32 E52 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0433&r=mon |
| By: | Patozi, A. |
| Abstract: | In this paper, I investigate how the Net-Zero transition affects the transmission of monetary policy. I first document an upward trend in environmental performance among US publicly listed companies over the last decade. Second, I evaluate the implications of firms becoming ‘greener’ for the transmission of monetary policy on asset prices, credit risk and firm-level investment. In response to a shock to monetary policy, ‘green’ firms (with high environmental scores) are significantly less impacted than their ‘brown’ counterparts (with lower environmental scores). The dependence of monetary policy responses on firm-level greenness is not explained by intrinsic differences in firms’ characteristics. Instead, I show that the heterogeneous response is the result of investors’ preferences for sustainable investing. Using a stylized theoretical framework, I illustrate how incorporating such preferences attenuates the semi-elasticity of ‘green’ asset prices with respect to monetary policy shocks. |
| Keywords: | Climate Change, ESG, Heterogeneity, Monetary Policy, Sustainable Investing |
| JEL: | E52 G12 G14 G30 |
| Date: | 2023–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camjip:2302&r=mon |
| By: | Nicolò Gnocato (Bank of Italy) |
| Abstract: | This paper studies the optimal conduct of monetary policy in the presence of heterogeneous exposure to energy price shocks between the employed and the unemployed, as it is documented by data from the euro-area Consumer Expectations Survey: higher energy prices weigh more on the unemployed, who consume less and devote a higher proportion of their consumption to energy. I account for this evidence into a tractable Heterogeneous-Agent New Keynesian (HANK) model with Search and Matching (S&M) frictions in the labour market, and energy as a complementary input in production and as a non-homothetic consumption good: energy price shocks weigh more on the jobless, who consume less due to imperfect unemployment insurance and, since preferences are non-homothetic, devote a higher share of this lower consumption to energy. Households' heterogeneous exposure to rising energy prices induces an endogenous trade-off for monetary policy, whose optimal response involves partly accommodating core inflation so as to indirectly sustain employment and, therefore, prevent workers from becoming more exposed to the shock through unemployment. |
| Keywords: | heterogeneous agents, New Keynesian, unemployment risk, energy shocks, optimal monetary policy, endogenous trade-off |
| JEL: | E21 E24 E31 E32 E52 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1450_24&r=mon |
| By: | Arina Wischnewsky |
| Abstract: | As economies transition towards digitalization, the shift from cash to noncash alternatives becomes increasingly relevant. While this trend is rapidly advancing in some countries, others continue to rely heavily on cash, underlining the need for central banks to measure and understand cash usage accurately. Numerous studies have attempted to explain the dynamics behind the declining—or, in some instances, paradoxically increasing—utilization of cash in conjunction with the rise of digital payment systems. Yet, the question of what fundamental factors influence cash use and how one might accurately formulate policies for a Central Bank Digital Currency (CBDC), particularly in a diverse European context, remains unanswered. This paper enriches the discourse on digital payment systems and cash usage by exploring the underlying influences on these phenomena. Notably, it provides new cross-country evidence on cultural and behavioral factors being pivotal in shaping these trends. This study is the first to reveal that (social) trust plays a crucial role in the global shift from cash reliance to digital economy integration, outlining a distinctive non-linear relationship between trust and cash usage. |
| Keywords: | cash use, digital transformation, culture, national mobile payment system, cashless societies, trust, monetary systems |
| JEL: | E41 O33 E42 C33 Z1 E7 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:trr:wpaper:202404&r=mon |
| By: | Delgado, Martha Elena (Fedesarrollo); Herreño, Juan (UCSD); Hofstetter, Marc (Universidad de los Andes); Pedemonte, Mathieu (FRB Cleveland) |
| Abstract: | We estimate the causal effects of a shift in the expected future exchange rate of a local currency against the US dollar on a representative sample of firms in an open economy. We survey a nationally representative sample of firms and provide the one-year-ahead nominal exchange rate forecast published by the local central bank to a random sub-sample of firm managers. The treatment is effective in shifting exchange rate and inflation expectations and perceptions. These effects are persistent and larger for non-exporting firms. Linking survey responses with administrative census data, we find that the treatment affects the dynamics of export and import quantities and prices at the firm level, with differential effects for exports to destination countries that use the US dollar as their currency. We instrument exchange rate expectations with the variation induced by the treatment and estimate a positive elasticity of a future expected depreciation in import expenditures. |
| Keywords: | Expectations; exchange rate; firms |
| JEL: | E31 E71 F31 G41 |
| Date: | 2024–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:021114&r=mon |
| By: | Witness Simbanegavi; Andrea Leonard Palazzi |
| Abstract: | A review of the literature on second-round effects from food and energy (non-core) inflation shows that these effects are mainly transmitted via cost-push and demand-pull inflation channels. We deploy a gap model to investigate the presence of second-round effects in South Africa in the period 20032022. We find evidence that shocks to non-core inflation cause core inflation to revert to headline inflation, suggesting that these shocks transmit to core inflation. Core inflation reverts to headline inflation within one year, but the reversion is only partial, which could be interpreted as affirming the credibility of the South African Reserve Bank (SARB). Thus, following shocks to non-core inflation, policymakers should closely monitor conduits such as wage settlements and firms mark-ups for signs of spillovers and pass-through. Keeping inflation expectations well anchored should minimise these risks. |
| Date: | 2023–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:rbz:oboens:11045&r=mon |
| By: | In Kyung Kim (Department of Economics, Sogang University, Seoul, Korea); Jinhyuk Lee (Department of Economics, Korea University); Hyejoon Im (School of Economics & Finance, Yeungnam University) |
| Abstract: | Using retail scanner data from Kazakhstan, an emerging economy with significant and un-expected exchange rate fluctuations, we observe an incomplete yet substantial exchange rate pass-through (ERPT) into prices. Specifically, we note a 50% change occurring a year after the initial shock. The ERPT demonstrates asymmetry in response to exchange rate movements. Notably, the direction of this asymmetry is opposite for imported versus domestic products. Furthermore, our findings indicate that ERPT is non-linear; the price response is more pro-nounced when the exchange shock is small, aligning with the existence of menu costs. Our results also reveal that larger retailers exhibit a greater ERPT compared to smaller or medium-sized retailers, regardless of the exchange rate shock direction. Understanding these asymmetric and non-linear price responses to exchange rate shocks may be crucial for formulating effective inflation targeting policies, especially in emerging economies prone to high inflation. |
| Keywords: | exchange rate pass-through, consumer prices, scanner data, inflation dynamics |
| JEL: | F31 L16 F41 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:sgo:wpaper:2303&r=mon |
| By: | Christiaan van der Kwaak (University of Groningen) |
| Abstract: | High levels of government debt raise the question to what extent the private sector will be willing to absorb the additional government debt that would finance future fiscal stimuli. One alternative is to money-finance such stimuli by letting the central bank buy the additional bonds and permanently retain these on its balance sheet. In this paper, I investigate the effectiveness of such money-financed fiscal stimuli when the central bank pays interest on reserves, and focus on the case where reserves and bonds are not perfect substitutes. I show for several New Keynesian models that money-financed fiscal stimuli have zero macroeconomic impact with respect to debt-financed stimuli, despite reducing funding costs for the consolidated government. Finally, I investigate the quantitative impact of money-financed fiscal stimuli for an extension where this 'irrelevance result' is broken, and find that the impact is substantially smaller than in the literature. |
| Keywords: | Monetary Policy, Fiscal Policy, Monetary-Fiscal Interactions, Monetary financing |
| JEL: | E32 E52 E62 E63 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2417&r=mon |
| By: | Buda, G.; Carvalho, V. M.; Corsetti, G.; Duarte, J. B.; Hansen, S.; Moura, A. S.; Ortiz, A.; Rodrigo, T.; Ortiz, A.; Ortiz, A. |
| Abstract: | We study the transmission of monetary policy shocks using daily consumption, corporate sales and employment series. We find that the economy responds at both short and long lags that are variable in economically significant ways. Consumption reacts in one week, reaches a local trough in one quarter, recovers, and declines again after three quarters. Sales follow a similar pattern, but the initial drop, while delayed (one month), is deeper. In contrast, employment falls monotonically for five quarters albeit with a smaller impact reaction. We show that these short lags are masked by time aggregation at lower —quarterly— frequencies. |
| Keywords: | Economic Activity, Event-study, High-frequency data, Local projections, Monetary Policy |
| JEL: | E31 E43 E44 E52 E58 |
| Date: | 2023–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camjip:2308&r=mon |
| By: | Zan Fairweather (Reserve Bank of Australia); Denzil Fiebig (University of New South Wales); Adam Gorajek (Reserve Bank of Australia); Rochelle Guttmann (Reserve Bank of Australia); June Ma (Harvard University); Jack Mulqueeney (Reserve Bank of Australia) |
| Abstract: | This paper explores the merits of introducing a retail central bank digital currency (CBDC) in Australia, focusing on the extent to which consumers would value having access to a digital form of money that is even safer and potentially more private than commercial bank deposits. To conduct our exploration we run a discrete choice experiment, which is a technique designed specifically for assessing public valuations of goods without markets. The results suggest that the average consumer attaches no value to the added safety of a CBDC. This is consistent with bank deposits in Australia already being perceived as a safe form of money, and physical cash issued by the Reserve Bank of Australia continuing to be available as an alternative option. Privacy settings of a CBDC, which can take various forms, look more consequential for the CBDC value proposition. We find no clear relationship between safety or privacy valuations and the degree of consumers' cash use. |
| Keywords: | central bank digital currency; data privacy; financial safety; willingness to pay |
| JEL: | C90 E42 E50 G21 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2024-02&r=mon |
| By: | Ion Pohoață (UAIC - Alexandru Ioan Cuza University of Iași [Romania]); Delia-Elena Diaconașu (UAIC - Alexandru Ioan Cuza University of Iași [Romania]); Ioana Negru (ULBS - "Lucian Blaga" University) |
| Abstract: | This paper testifies to the fact that the proclaimed independence of central banks, as conceived by its founders, is nothing more than a chimera. We demonstrate that the hypothesis ‘inflation is a purely monetary phenomenon' does not substantiate the case for independence. Further, the portrayal of the conservative central banker, the imaginary principal-agent contract, the alleged financial autonomy, along with the ban on budgetary financing, amount to flawed logic in arguing for the independence of the central bank. We also highlight that the idea of independence is not convincing due to the absence of well-defined outlines in its operational toolbox and the system of rules it relies upon. |
| Keywords: | inflation, conservative banker, Principal-Agent contract, financial autonomy, budgetary financing |
| Date: | 2024–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04183244&r=mon |
| By: | Bahaj, Saleem; Reis, Ricardo |
| Abstract: | Liquidity lines between central banks are a key part of the international financial safety net. In this review article, we lay out some of the economic questions that they pose. Research has provided answers to some of these questions, but many more require further research. |
| Keywords: | EUREP; Eurosystem Repo Facility for Central Banks; FIMA; financial stability international currency; Foreign and International Monetary Authorities; lender of last resort; swap lines |
| JEL: | E44 G15 F33 |
| Date: | 2022–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:118127&r=mon |
| By: | Bjarni G. Einarsson |
| Abstract: | The paper presents a method for online evaluation of the optimality of the current stance of monetary policy given the most up to date data available. The framework combines estimates of the causal effects of monetary policy tools on inflation and the unemployment gap with forecasts for these target variables. The forecasts are generated with a nowcasting model, incorporating new data as it becomes available, while using entropy tilting to anchor the long end of the forecast at long run survey expectations. In a retrospective analysis of the Fed's monetary policy decisions in the lead up to the Great Recession the paper finds rejections of the optimality of the policy stance as early as the beginning of February 2008. This early detection stems from the timely nowcasting of the deteriorating unemployment outlook. |
| JEL: | C01 C32 C52 C53 C55 E31 E32 E37 E52 E58 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp95&r=mon |
| By: | Gasparini, Tommaso; Lewis, Vivien; Moyen, Stéphane; Villa, Stefania |
| Abstract: | Increases in firm default risk raise the default probability of banks while decreasing output and inflation in US data. To rationalize the empirical evidence, we analyse firm risk shocks in a New Keynesian model where entrepreneurs and banks engage in a loan contract and both are subject to default risk. In the model, a wave of corporate defaults leads to losses on banks' balance sheets; banks respond by selling assets and reducing credit provision. A highly leveraged banking sector exacerbates the contractionary effects of firm defaults. We show that high minimum capital requirements jointly implemented with a countercyclical capital buffer are effective in dampening the adverse consequences of firm risk shocks. |
| Keywords: | bank default, capital buffer, firm risk, macroprudential policy |
| JEL: | E44 E52 E58 E61 G28 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:287761&r=mon |
| By: | Jens H. E. Christensen; Mark M. Spiegel |
| Abstract: | We provide market-based estimates of Japanese inflation expectations using an arbitrage-free dynamic term structure model of nominal and real yields that accounts for liquidity premia and the deflation protection afforded by Japanese inflation-indexed bonds, known as JGBi’s. We find that JGBi liquidity premia exhibit significant variation, and even switch sign. Properly accounting for them significantly lowers the estimated value of the indexed bonds’ deflation protection and affects inflation risk premium estimates. After liquidity adjustment, long-term Japanese inflation expectations have remained relatively stable at levels modestly exceeding one percent during the pandemic period. We then utilize our estimated liquidity measure to confirm the existence of statistically significant and economically meaningful spillovers to the JGBi market from global bond market illiquidity, as proxied by periods of low U.S. Treasury market depth. |
| Keywords: | affine arbitrage-free term structure model; deflation risk; deflation protection; Liquidity Spillovers |
| JEL: | C32 E43 E52 G12 G17 |
| Date: | 2024–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:98059&r=mon |
| By: | Lloyd, S. P.; Marin, E. A. |
| Abstract: | How does the conduct of optimal cross-border financial policy change with prevailing trade agreements? We study the joint optimal determination of trade policy and capital-flow management in a two-country, two-good model with trade in goods and assets. While the cooperative optimal allocation is efficient and involves no intervention, a country planner acting unilaterally can achieve higher domestic welfare by departing from free trade in addition to levying capital controls. However, time variation in the optimal tariff induces households to over- or under-borrow through its effects on the real exchange rate. In response to fluctuations where incentives for the planner to manipulate the terms of trade inter-and intra-temporally are aligned-e.g., the availability of domestic goods changes, or when faced with trade disruptions to imports-optimal capital controls are larger when used in conjunction with optimal tariffs. In contrast, when the incentives are misaligned, the optimal trade tariff partly substitutes for the use of capital controls. Accounting for strategic interactions, we show that committing to a free-trade agreement can reduce incentives to engage in costly capital-control wars. |
| Keywords: | Capital-Flow Management, Free-Trade Agreements, Ramsey Policy, Tariffs, Trade Policy |
| JEL: | F13 F32 F33 F38 |
| Date: | 2023–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camjip:2307&r=mon |
| By: | Adam Brzezinski; Nuno Palma; François R. Velde |
| Abstract: | Debates about the nature and economic role of money are mostly informed by evidence from the 20th century, but money has existed for millennia. We argue that there are many lessons to be learned from monetary history that are relevant for current topics of policy relevance. The past acts as a source of evidence on how money works across different situations, helping to tease out features of money that do not depend on one time and place. A close reading of history also offers testing grounds for models of economic behavior and can thereby guide theories on how money is transmitted to the real economy. |
| Keywords: | monetary policy, monetary history, natural experiments, policy experiments, identification in macroeconomics |
| JEL: | E40 E50 N10 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:man:allwps:0004&r=mon |
| By: | Paula Patzelt (London School of Economics (LSE); Centre for Macroeconomics (CFM)); Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM)) |
| Abstract: | When the price of electricity increases by 1%, households’ average expected inflation increases by 1.0 to 1.3 basis points. But, if those expectations have become unanchored, as happened between the start of 2021 and 2023, then the effect is higher by 0.2 to 1.6 basis points. This paper arrives at these estimates by exploiting variation both in the time series, and especially in the cross section, from newly-available public data on expected inflation by Euro area households across region, gender, education, and income, and on the cost of energy across region and source. The impact of exogenous shocks to energy prices on expected inflation increases for 8 to 12 months, but they can only account for a small share of the rise in expected inflation in 2021-23. |
| Keywords: | Great Inflation, Monetary policy, Inattention |
| JEL: | D84 E31 Q43 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2411&r=mon |
| By: | Stefania D'Amico; Max Gillet; Sam Schulhofer-Wohl; Tim Seida |
| Abstract: | We exploit the Fed’s Treasury purchases conducted from March 2020 to March 2022 to assess whether asset purchases can be tailored to accomplish different objectives: restoring market functioning and providing stimulus. We find that, on average, flow effects are significant in the market-functioning (MF) period (March-September 2020), while stock effects are strong in the QE period (September 2020-March 2022). In the MF period, the elevated frequency and size of the purchase operations allowed flow effects to greatly improve relative price deviations, especially at the long-end of the yield curve. But stock effects remained localized, thus not large enough to be stimulative. In contrast, in the QE period, stock effects were stimulative because cross-asset price impacts got larger as the Fed communication and implementation moved toward “traditional” QE, increasing purchases’ predictability. Lower uncertainty about the expected size and duration of total purchases facilitated their impounding into prices. Overall, these findings suggest that communication and implementation can be used to tailor the goals of asset purchases. |
| Keywords: | Monetary policy tools; Qualitative Easing; Asset purchases |
| JEL: | E43 E44 E52 E58 |
| Date: | 2024–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:98006&r=mon |
| By: | Vu Chau; Mrs. Marina Conesa Martinez; Mr. Taehoon Kim; John A Spray |
| Abstract: | We study the inflationary impacts of pandemic lockdown shocks and fiscal and monetary stimulus during 2020-2022 using a novel harmonized dataset of sectoral producer price inflation and input-output linkages for more than 1000 sectors in 53 countries. The inflationary impact of shocks is identified via a Bartik shift-share design, where shares reflect the heterogeneous sectoral exposure to shocks and are derived from a macroeconomic model of international production network. We find that pandemic lockdowns, and subsequent reopening policies, were the most dominant driver of global inflation in this period, especially through their impact on aggregate demand. We provide a decomposition of lockdown shock by sources, and find that between 20-30 percent of the demand effect of lockdown/reopening is due to spillover from abroad. Finally, while fiscal and monetary policies played an important role in preventing deflation in 2020, their effects diminished in the recovery years. |
| Keywords: | Inflation; global value chains; network; pandemic; spillovers |
| Date: | 2024–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/062&r=mon |
| By: | Lukas Schmid (Marshall School of Business, University of Southern California; Centre for Economic Policy Research (CEPR)); Vytautas Valaitis (University of Surrey); Alessandro T. Villa (Federal Reserve Bank of Chicago) |
| Abstract: | Can governments use Treasury Inflation-Protected Securities (TIPS) to tame inflation? We propose a novel framework of optimal debt management with sticky prices and a government issuing nominal and real state-uncontingent bonds. Nominal debt can be monetized giving ex-ante flexibility, whereas real bonds are cheaper but constitute a commitment ex-post. Under Full Commitment, the government chooses a leveraged and volatile portfolio of nominal liabilities and real assets to use inflation to smooth taxes. With No Commitment, it reduces borrowing costs ex-ante using a stable real debt share strategically to prevent future governments from monetizing debt ex-post. Such policies rationalize the small and persistent real debt share in U.S. data, with higher TIPS shares effectively curbing inflation. Reducing future governments’ temptation to monetize debt renders debt and inflation endogenously sticky. |
| Keywords: | Optimal Fiscal Policy, Monetary Policy, Debt Management, TIPS, Incomplete Markets, Inflation, Limited Commitment, Time-consistency, Markov-perfect Equilibria |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2413&r=mon |
| By: | Michal Franta; Jan Vlcek |
| Abstract: | The discussion about wage-price spirals has revived recently due to the wave of elevated inflation. We propose a framework based on quantile regression to assess the risk of simultaneous rapid growth in wages and prices. We show that for the UK and US, the risk of such growth in wages and prices coincides with the risk of their heightened persistence or even acceleration. The materialization of the risk then defines the occurrence of a wage-price spiral. The proposed framework allows us to identify forthcoming episodes of elevated wage-price spiral risk and episodes of its materialization. Moreover, we show that the risk of a wage-price spiral varies with the usual business cycle factors and monetary policy. Based on the outcomes, we suggest general lessons for policymakers. Finally, the framework is also applied to the Czech Republic to show its usefulness and properties in the case of short time series. |
| Keywords: | Inflation, inflation and wage growth at risk, quantile regression, wage-price spiral |
| JEL: | C32 E24 E31 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2024/1&r=mon |
| By: | Kopiec, Paweł |
| Abstract: | When central banks announce cuts to future interest rates, the expected costs of government debt service decrease, generating additional resources in future budgets. This paper demonstrates that if the rational-expectations assumption is dropped, fiscal authority can exploit those gains by spending them on future transfers and, by announcing those transfers to households today, can enhance the output effects of forward guidance. Employing a version of the New Keynesian setup featuring bounded rationality in the form of level-k thinking, I derive an analytical expression capturing the output effects of that additional fiscal announcement. Subsequently, a similar formula is derived in a tractable heterogeneous agent New Keynesian model with bounded rationality, uninsured idiosyncratic risk, and redistributive effects of transfers. Finally, I use these analytical insights to explore the effects of the forward-guidance-induced fiscal announcement in a fully-blown heterogeneous agent New Keynesian framework with level-k thinking calibrated to match US data. The findings suggest that fiscal communication can amplify the output effects of standard forward guidance by 66%. Moreover, those gains can reach 120% when the debt-to-GDP ratio doubles. This suggests that forward guidance enriched with fiscal announcements about future transfers can be considered an effective policy option when both monetary and fiscal policies are constrained, e.g., during liquidity trap episodes accompanied by high levels of public debt. |
| Keywords: | Forward Guidance, Monetary Policy, Fiscal Policy, Heterogeneous Agents, Bounded Rationality |
| JEL: | D31 D52 D81 E21 E43 E52 E58 |
| Date: | 2024–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120563&r=mon |
| By: | Daniel Ofori-Sasu (University of Ghana Business School); Elikplimi Komla Agbloyor (University of Ghana Business School); Dennis Nsafoah (Niagara University); Simplice A. Asongu (Johannesburg, South Africa) |
| Abstract: | This study examines the effect of regulatory independence of the central bank in shaping the impact of electoral cycles on bank lending behaviour in Africa. It employs the dynamic system Generalized Method of Moments (SGMM) Two-Step estimator for a panel dataset of 54 African countries over the period, 2004-2022. The study found that banks lend substantially higher during election years, and reduce lending patterns thereafter. The study shows that countries that enforce monetary policy autonomy of the central bank induce a negative impact on bank lending behaviour while those that apply strong macro-prudential independent action and central bank independence reduce lending in the long term. The study provides evidence to support that regulatory independence of the central bank dampens the positive effect of elections on bank lending around election years while they amplify the reductive effects on bank lending after election periods. There is a wake-up call for countries with weak independent central bank regulatory policy to strengthen their independent regulatory policy frameworks and political institutions. This will enable them better strategize to yield a desirable outcome of bank lending to the real economy during election years. |
| Keywords: | Political Economy; Political Credit Cycles, Electoral Cycle; Central Bank Regulatory Independence; Bank lending Behaviour |
| JEL: | D7 D72 G2 G3 E3 E5 E61 G21 L10 L51 M21 P16 P26 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:exs:wpaper:24/002&r=mon |