nep-ban New Economics Papers
on Banking
Issue of 2023‒02‒06
35 papers chosen by
Sergio Castellanos-Gamboa, , Pontificia Universidad Javeriana

  1. Is Capital Account Convertibility Required for the Renminbi to Acquire Reserve Currency Status? By Barry Eichengreen; Camille Macaire; Arnaud Mehl; Eric Monnet; Alain Naef
  2. CBDC: Banking and Anonymity By Yuteng Cheng; Ryuichiro Izumi
  3. The stable in stablecoins By Garth Baughman; Francesca Carapella; Jacob Gerszten; David C. Mills
  4. Information for Banking Efficiency in Africa: Evidence from Income Levels and Legal Origins By Asongu, Simplice; Odhiambo, Nicholas
  5. The impact of risk cycles on business cycles: a historical view By Danielsson, Jon; Valenzuela, Marcela; Zer, Ilknur
  6. Macro Effects of Formal Adoption of Inflation Targeting By Surjit Bhalla; Karan Bhasin; Mr. Prakash Loungani
  7. Loan-to-Value Shocks and Macroeconomic Stability By Emmanuel De Veirman
  8. Central Bank Communication of Uncertainty By Rayane Hanifi; Klodiana Istrefi; Adrian Penalver
  9. International Spillovers of Tighter Monetary Policy By Dario Caldara; Francesco Ferrante; Albert Queraltó
  10. From Multi- to National- and Back Again: Realizing the SDG Potential of Public Development Banks By Thomas MAROIS; Jacob STEWART; Régis MARODON
  11. Unstable Prosperity: How Globalization Made the World Economy More Volatile By Enrique G. Mendoza; Vincenzo Quadrini
  12. Financial inclusion, mobile money and regulatory architecture By Metzger, Martina; Were, Maureen; Pédussel Wu, Jennifer
  13. Sovereign Debt and International Trade By Charles Serfaty
  14. Shedding lights on Leaning Against the Wind By Federica Vassalli; Massimiliano Tancioni
  15. The Bank of Amsterdam and the limits of fiat money By Wilko Bolt; Jon Frost; Hyun Song Shin; Peter Wierts
  16. A scientific note on the Italian Mini BOTs and the proposal of the CCCFs By Saccal, Alessandro
  17. Monetary policy and credit card spending By Francesco Grigoli; Damiano Sandri
  18. Gender quotas, board diversity and spillover effects. Evidence from Italian banks By Silvia Del Prete; Giulio Papini; Marco Tonello
  19. ई रुपी आणि अर्थकारण By BAGDE, RAKSHIT MADAN
  20. The Information Value of Past Losses in Operational Risk By Filippo Curti; Marco Migueis
  21. The Effects of the LIBOR Scandal on Volatility and Liquidity in LIBOR Futures Markets By Bachmair, K.
  22. Assessment of creditworthiness models privacy-preserving training with synthetic data By Ricardo Mu\~noz-Cancino; Cristi\'an Bravo; Sebasti\'an A. R\'ios; Manuel Gra\~na
  23. Switching Monetary-Fiscal Regimes in Egypt: Is the Fiscal Stimulus Necessarily Good in Bad Times? By Dina Kassab
  24. The U.K. and the Flow of Funds involving: the Bank of England, U.K. households and the U.K. Government By De Koning, Kees
  25. Financial Crisis and Long-Run Labor Demand: Evidence from the Swedish Banking Crisis in the Early 90s By Julien Grenet; Hans Grönqvist; Daniel Jahnson
  26. The Fiscal Consequences of Missing an Inflation Target By Michele Andreolli; Hélène Rey
  27. Understanding the Global Drivers of Inflation: How Important are Oil Prices? By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge; Hakan Yilmazkuday
  28. A pure jump model for the valuation of options on a credit index By Yoshihiro Shirai
  29. Gazing at r-star: A Hysteresis Perspective By Paul Beaudry; Katya Kartashova; Césaire Meh
  30. The impact of high inflation on trust in national politics and central banks By Carin van der Cruijsen; Jakob de Haan; Maarten van Rooij
  31. Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience By Mathieu Pedemonte; Hiroshi Toma; Estaban Verdugo
  32. Measuring Inflation Expectations: How the Response Scale Shapes Density Forecasts By Becker, Christoph; Duersch, Peter; Eife, Thomas
  33. The Federal Reserve’s Response to the Global Financial Crisis and its Effects: An Interrupted Time-Series Analysis of the Impact of its Quantitative Easing Programs By KAMKOUM, Arnaud Cedric
  34. Identifying Monetary Policy Shocks Through External Variable Constraints By Francesco Fusari
  35. Make-up strategies and exchange rate pass-through in a low-interest-rate environment By Alessandro Cantelmo; Pietro Cova; Alessandro Notarpietro; Massimiliano Pisani

  1. By: Barry Eichengreen; Camille Macaire; Arnaud Mehl; Eric Monnet; Alain Naef
    Abstract: It is widely assumed that the renminbi (RMB) cannot acquire a meaningful place in central bank reserve portfolios without full liberalization of China’s capital account. We argue that the RMB can in fact develop into a consequential reserve currency in the absence of capital account convertibility. Trade and investment links can drive official use and accumulation despite limited access to Chinese financial markets. But this route to currency internationalization requires policy support. China must allow access to RMB through loans and People’s Bank of China (PBoC) currency swaps. It must ensure convertibility of RMB into US dollars on offshore markets. It must provide these RMB services at a stable and predictable price. Currency internationalization without full capital account liberalization thus requires the RMB to be backed by dollar reserves, which the PBoC consequently will continue to hold and use. Hence we do not foresee RMB internationalization as supplanting dollar dominance.
    Keywords: International Monetary System, Renminbi, International Reserve Currencies
    JEL: F31 F38 E58
    Date: 2022
  2. By: Yuteng Cheng (Bank of Canada); Ryuichiro Izumi (Department of Economics, Wesleyan University)
    Abstract: What is the optimal design of anonymity in a central bank digital currency (CBDC)? We examine this question in the context of bank lending by building a stylized model of anonymity in payment instruments. We specify the anonymity of payment instruments in two dimensions: The bank has no information about the entrepreneur’s investment, and the bank has less control over the entrepreneur’s profits. An instrument with higher anonymity may discourage the bank from lending, and thus, the entrepreneur strategically chooses payment instruments. Our analysis shows that introducing a CBDC with modest anonymity can improve welfare in one equilibrium, but can also destroy valuable information in bank lending, leading to inefficient lending in another equilibrium. Our results suggest that central banks should either make a CBDC highly anonymous or share CBDC data with banks to eliminate this bad equilibrium.
    Keywords: CBDC, Anonymity, Bank lending
    JEL: E42 E58 G28
    Date: 2023–01
  3. By: Garth Baughman; Francesca Carapella; Jacob Gerszten; David C. Mills
    Abstract: Stablecoins have garnered much attention as a key part of the emerging decentralized finance (or "DeFi") ecosystem, and as a potential way to pay for goods and services. Stablecoins facilitate trades on crypto exchanges, serve as the underlying asset for many crypto loans, and allow market participants to avoid inefficiencies stemming from converting back to fiat currency for crypto trades.
    Date: 2022–12–17
  4. By: Asongu, Simplice; Odhiambo, Nicholas
    Abstract: The study assesses how information sharing through mobile phones affects banking system efficiency in Africa with particular emphasis on income levels (middle-income versus low-income countries) and legal origins (English Common law versus French Civil law countries). The focus is on 53 African countries with data for the period 1996-2019, and the empirical evidence is based on Quantile regressions which enable the study to assess the nexus throughout the conditional distribution of banking system efficiency. The following findings are established: (i) mobile phone penetration promotes banking system efficiency in the 25th quantile and the median of banking system efficiency in low-income countries, while for middle-income countries, it is significant exclusively in the bottom quantile (i.e., 10th quantile). (ii) Except for the highest (i.e., 90th) quantile in which the effect of the mobile phone is not significant in English Common law countries, the impact is significant throughout the conditional distribution of banking system efficiency in Common law countries. (iii) As for French Civil law countries, the nexus is only significant in the median and highest (i.e., 90th) quantile of the conditional distribution of banking system efficiency. Policy implications are discussed.
    Keywords: Allocation efficiency; Information asymmetry; Mobile phones
    Date: 2022–12
  5. By: Danielsson, Jon; Valenzuela, Marcela; Zer, Ilknur
    Abstract: We investigate the effects of financial risk cycles on business cycles, using a panel spanning 73 countries since 1900. Agents use a Bayesian learning model to form their beliefs on risk. We construct a proxy of these beliefs and show that perceived low risk encourages risk-taking, augmenting growth at the cost of accumulating financial vulnerabilities, and therefore, a reversal in growth follows. The reversal is particularly pronounced when the low-risk environment persists and credit growth is excessive. Global-risk cycles have a stronger effect on growth than local-risk cycles via their impact on capital flows, investment, and debt-issuer quality.
    Keywords: stock market volatility; uncertainty; monetary policy independance; financial instability; risk-taking; global financial cycles; ES/K002309/1; OUP deal
    JEL: F30 G15 G18 N10 N20
    Date: 2022–12–13
  6. By: Surjit Bhalla; Karan Bhasin; Mr. Prakash Loungani
    Abstract: We examine the impact of formal adoption of inflation targeting (IT) on inflation, growth and anchoring of inflation expectations in advanced economies and emerging markets and developing economies (EMDEs). Our paper reports several findings relevant to assessing the success of IT regimes. We find that while the early adopters of IT (pre-2000) all saw declines in inflation rates following adoption, IT adopters since then have enjoyed such success in only about half the cases. Since there is not much difference, on average, between IT and non-IT countries in mean inflation, inflation volatility and the extent of inflation anchoring, it is not easy to sort out what role IT has played in ensuring good outcomes; in particular, we cannot rule out the possibility that the success of IT may be due to ‘regression to the mean’. Our country-level analysis—using the Synthetic Control Method (SCM) to compare outcomes in IT countries to a synthetic cohort—shows that IT adoption delivers significant inflation gains in about a third of the cases. At the same time, we also find limited support for the concern that adoption of IT systematically leads to poorer growth outcomes. At a time when central banks are struggling to keep inflation in check, our results suggest that the belief that IT adoption will be sufficient to achieve this goal cannot be taken for granted.
    Keywords: Inflation targeting; Inflation expectations; Inflation forecasts
    Date: 2023–01–13
  7. By: Emmanuel De Veirman
    Abstract: This paper documents the macroeconomic effects of changes in downpayment re- quirements on mortgage loans in a model where investment is undertaken by collateral- constrained agents. I find that a permanent tightening in lending standards substan- tially lowers aggregate spending in the short run and permanently lowers house prices. These effects are much larger than in earlier findings from a model where unconstrained agents invest. Furthermore, I document that the amplification of macroeconomic shocks is much stronger when steady-state loan-to-value ratios are high. The loan-to-value shock itself is amplified to a greater extent when the loan-to-value ratio starts out at a higher level. In that sense, the effects of loan-to-value ratios on the economy are non-linear.
    Keywords: Collateral effect; financial accelerator
    JEL: D11 D50 D52 E21
    Date: 2023–01
  8. By: Rayane Hanifi; Klodiana Istrefi; Adrian Penalver
    Abstract: In this paper, we examine how the monetary policy setting committees of the Federal Reserve, the Bank of England and the European Central Bank communicate their reaction to incoming data in their policy deliberation process by expressing confidence, surprise or uncertainty with respect to existing narratives. We use text analysis techniques to calculate forward and backward looking measures of relative surprise from the published Minutes of these decision-making bodies. We find many common patterns in this communication. Interestingly, policymakers tend to express more surprise and uncertainty with regard to developments in the real economy, whereas they are more likely to confirm their expectations with regard to inflation and monetary policy. When considering the monetary policy stance, we observe a tendency for policymakers to highlight surprise and uncertainty several meetings in advance of changes, particularly when easing monetary policy. Importantly, we document that a higher proportion of expressions of surprise and uncertainty increases the likelihood of an easier policy stance. By contrast, a higher proportion of expressions of confirmation tends to increase the likelihood of a tighter policy stance.
    Keywords: Central Banks, Monetary Policy, Communication, Minutes, Uncertainty
    JEL: E52 E58 C55
    Date: 2022
  9. By: Dario Caldara; Francesco Ferrante; Albert Queraltó
    Abstract: Central banks around the world are tightening monetary policy in response to a global surge in inflation not seen since the 1970s. This synchronization of global interest rate hikes and further increases expected by markets, illustrated in figure 1, have raised concerns about adverse international spillovers of tighter monetary policy.
    Date: 2022–12–23
  10. By: Thomas MAROIS; Jacob STEWART; Régis MARODON
    Abstract: Public multilateral (MDBs) and national development banks (NDBs) are already working to advance the 2030 Sustainable Development Goals (SDGs).But can they do more to help deliver finance at the right pace and scale and on the terms appropriate for catalyzing global green and just transitions? What potential roles might enhanced cooperation between multilateral and national development banks play in achieving green and just transitions?This paper contributes to our understanding of the potential of public development banks by mapping out the inter-relations between nine MDBs and select NDBs in four regions. The analysis finds that MDBs are lending to NDBs in their regions, but unevenly so; that MDB reporting of cooperation with NDBs is uneven; that MDBs see multiple barriers to lending to NDBs; and that, with a few exceptions, MDBs are not aligning or tracking SDG financing systematically.
    JEL: Q
    Date: 2023–01–12
  11. By: Enrique G. Mendoza; Vincenzo Quadrini
    Abstract: The sharp, secular decline in the world real interest rate of the past thirty years suggests that the surge in global demand for financial assets outpaced the growth in their supply. We argue that this phenomenon was driven by: (i) faster growth in emerging markets, (ii) changes in the financial structure of both emerging and advanced economies, and (iii) changes in demand and supply of public debt issued by advanced economies. We then show that the low-interest-rate environment made the world economy more vulnerable to financial crises. These findings are the quantitative predictions of a two-region model in which privately-issued financial assets (i.e., inside money) provide productive services but can be defaulted on.
    JEL: F34 F36 F62 F65
    Date: 2023–01
  12. By: Metzger, Martina; Were, Maureen; Pédussel Wu, Jennifer
    Abstract: This paper discusses first the role of mobile money accounts to enhance financial inclusion towards vulnerable groups in developing countries in the light of recent empirical evidence. Second, we explore the role of regulation to address risks to consumers and the financial system arising from the use of mobile money accounts, a question which has not been thoroughly addressed in the literature. Although financial inclusion via mobile money accounts is increasing, the outreach to particular disadvantaged and poor groups is still limited. However, remittances and G2P payments might develop into game changers for financial inclusion of poor and vulnerable households. Many countries from Sub-Saharan Africa are outperformers in terms of use of mobile money accounts in comparison to developing countries in other regions. Strikingly, the empirical evidence suggests that the regulatory landscape was of strategic importance to unleash the developmental potential of mobile money networks and the crowding-in of formerly unbanked households. Regulation on consumer protection particularly is of strategic relevance for the lasting acceptance and smooth operation of mobile money services and sharing the benefits with disadvantaged and poor households. A lack of effective and convincing consumer safeguards in place could diminish the trust in mobile money services and subsequently their acceptance and use. As mobile money services involve similar risks as traditional banking services, similar rules should apply. In addition, there are risks arising from the particular technology for mobile money account holders and institutions of the financial sector, including DFS providers. To these risks belong hysteresis effects to the disadvantage of poor households due to the use of alternative data and biased algorithms as well as displacement effects in local traditional and digital financial services due to BigTech.
    Keywords: Mobile money, financial inclusion, regulation, consumer protection, digital financial services, Big Data, Sub-Saharan Africa
    JEL: D18 G18 G23 G51 G59
    Date: 2022
  13. By: Charles Serfaty
    Abstract: Evidence suggests that sovereign defaults disrupt international trade. As a consequence, countries that are more open have more to lose from a sovereign default and are less inclined to renege on their debt. In turn, lenders should trust more open countries and charge them with lower interest rate. In most cases, the country should also borrow more debt as it gets more open. This paper formalizes this idea in a sovereign debt model à la Eaton and Gersovitz (1981), proves these theoretical relations, and quantifies them in a calibrating model. We also provide evidence suggesting a causal relationship between trade and debt or CDS spreads, using gravitational instrumental variables from Frankel and Romer (1999) and Feyrer (2019) as a source for exogenous variation in trade openness.
    Keywords: Sovereign Debt, International Trade and Finance, Economic Integration
    JEL: H63 B17 F15
    Date: 2022
  14. By: Federica Vassalli; Massimiliano Tancioni
    Abstract: The efficacy of monetary policy intervention against stock market bubbles depends on monetary policy shock identification. We estimate a Bayesian VAR identified with mixed zero-sign restriction, where we distinguish a pure monetary policy shock from a central bank information shock. We show that the two shocks affect the asset price components differently, where the asset price is the sum between the fundamental and the bubbly components. A pure tightening monetary policy shock reduces the S&P500 Index but causes the bubble to increase. In contrast, by disclosing information on the economy's future path, a central bank information shock increases the fundamental component causing a drop in the bubble. Ignoring the distinction between the two types of monetary shock helps to explain the ambiguity surrounding the efficacy of leaning against the wind policy in terms of the ability to deflate a bubble.
    Keywords: Monetary Policy; Bubbles; LAW; BVAR
    JEL: E44 E52 E58 G12
    Date: 2023–01
  15. By: Wilko Bolt; Jon Frost; Hyun Song Shin; Peter Wierts
    Abstract: Central banks can operate with negative equity, and many have done so in history without undermining trust in fiat money. However, there are limits. How negative can central bank equity be before fiat money loses credibility? We address this question using a global games approach motivated by the fall of the Bank of Amsterdam (1609–1820). We solve for the unique break point where negative equity and asset illiquidity renders fiat money worthless. We draw lessons on the role of fiscal support and central bank capital in sustaining trust in fiat money.
    Keywords: central banks, negative equity, fiat money, trust
    JEL: E42 E58 N13
    Date: 2023–01
  16. By: Saccal, Alessandro
    Abstract: This note shows that the Italian Mini BOTs proposed in 2019 bore the potential neither to become Italian legal tender nor to practically increase Italian government debt, but to practically cause a mere reduction in taxation and thence in government spending or transfers. Since the Eurozone practically excluded an increase in government debt or a monetisation of that which the Italian treasury owed certain firms the Italian Mini BOTs, precisely because of the probable uncertainty associated with them, would have (i) stimulated expenditure more than a taxation rebate to the said firms and (ii) facilitated Italy’s hypothetical abandonment of the Eurozone, seemingly being the one and only reason for which all of their critics opposed them. This note in fact proposes the direct emission of Italian taxation credit certificates endowed with a further reduction in taxation conditional on their use for consumption, termed “Certificati a Consumo di Compensazione Fiscale”, thereby attaining to the said two ends as well as to that of alleviating the liquidity shortage on the part of firms and the private sector at large without recourse to monetary policy.
    Keywords: CCCFs; government budget constraint; government debt; government spending; Italian Mini BOTs; miniature treasury bills; money supply; public finance; taxation; taxation credit certificates; transfers.
    JEL: E19 E42 E44 E51 E52 E58 E61 E62 E63 E65 G21 G23 G28 H20 H30 H60
    Date: 2023–01–04
  17. By: Francesco Grigoli; Damiano Sandri
    Abstract: We analyze the impact of monetary policy on consumer spending using confidential credit card data. Being available at daily frequency, these data improve the identification of the monetary transmission and allow for a more precise characterization of the transmission lags. We find that shocks to short-term interest rates affect spending much more rapidly than shocks to medium-term interest rates. We also document significant asymmetries in the effects of monetary policy. While interest rate hikes strongly curb spending-especially if coupled with reductions in stock prices reflecting pure monetary policy shocks-interest rate cuts appear unable to lift spending. Finally, we exploit the disaggregation of credit card data to examine the heterogeneous effects of monetary policy across spending categories and users' characteristics.
    Keywords: credit card spending, heterogeneity, monetary policy, transmission
    JEL: E21 E52
    Date: 2023–01
  18. By: Silvia Del Prete (Bank of Italy); Giulio Papini (Bank of Italy); Marco Tonello (Bank of Italy)
    Abstract: We study the impact of a 2011 law on the diversity of bank boards. The law required all listed companies in Italy (including banks) to increase the share of female representatives on their boards up to one third of total seats. We look at listed banks (the ones directly targeted by the law), but also test whether the law led to spillover effects on non-listed banks belonging to listed groups. Using administrative data on board composition between 2007 and 2019, we compare some measures of diversity of boards of listed and unlisted banks belonging to listed groups with those of institutions included in non-listed groups, before and after the introduction of the law. We find that female representation increased only for listed banks, with no spillover effects of the law on those belonging to listed groups, while the economic performance of listed banks remained broadly unchanged.
    Keywords: bank board composition, diversity, gender, corporate governance
    JEL: G21 G38 J48 J78
    Date: 2022–12
  19. By: BAGDE, RAKSHIT MADAN (Late. Mansaramji Padole Arts College, Ganeshpur, Bhandara)
    Abstract: Hon'ble Prime Minister of India Shri Narendra Modi has started digital initiatives from time to time. In the last few years, we can see that a kind of digital revolution has taken place in India. Indian citizens have become more aware of digital payment methods which is improving the standard of living. Finance Minister Nirmala Sitharaman had announced in the budget that India will start issuing digital currency in the financial year 2023. On 2 August 2021, Prime Minister of India Shri Narendra Modi has launched a digital payment platform called e-RUPI Digital Platform. National Payments Corporation of India (NPCI) in collaboration with Department of Financial Services (DFS), National Health Authority (NHA), Ministry of Health and Family Welfare (MoHFW) and partner banks has launched an innovative digital solution called 'e-RUPI' The name has been given. Through this paper, what is e-rupee, its functions and its impact on the Indian economy will be studied.
    Date: 2022–12–30
  20. By: Filippo Curti; Marco Migueis
    Abstract: Operational risk is a substantial source of risk for US banks. Improving the performance of operational risk models allows banks’ management to make more informed risk decisions by better matching economic capital and risk appetite, and allows regulators to enhance their understanding of banks’ operational risk. We show that past operational losses are informative of future losses, even after controlling for a wide range of financial characteristics. We propose that the information provided by past losses results from them capturing hard to quantify factors such as the quality of operational risk controls, the risk culture, and the risk appetite of the bank.
    Keywords: Banking; Operational risk; Risk management
    JEL: G15 G18 G19 G21 G32
    Date: 2023–01–06
  21. By: Bachmair, K.
    Abstract: In 2008, first suspicions arose that the London Interbank Offered Rate (LIBOR) had been systematically manipulated by financial institutions involved with its fixing; in June 2012, several major international banks officially admitted to this. The regulatory response could not have been stronger: the LIBOR was not just reformed but discontinued altogether. By studying 3-months LIBOR futures, this paper evaluates the consequences four scandal-related events have had on liquidity and volatility in LIBOR markets. The goal is to document the market disruption, or lack thereof, caused by the manipulation and discontinuation and to draw the relevant policy lessons. One finding is that the liquidity outflows necessitated by the discontinuation and the associated volatility increases were confined to a period of a few weeks before the discontinuation, easing potential concerns that market transitions of the scale of LIBOR could only be done at the cost of major and prolonged disruption.
    Keywords: LIBOR manipulation scandal, market manipulation, LIBOR discontinuation, LIBOR futures, market microstructure, liquidity, volatility, market reform
    JEL: G13 G14 G18 G28
    Date: 2023–01–09
  22. By: Ricardo Mu\~noz-Cancino; Cristi\'an Bravo; Sebasti\'an A. R\'ios; Manuel Gra\~na
    Abstract: Credit scoring models are the primary instrument used by financial institutions to manage credit risk. The scarcity of research on behavioral scoring is due to the difficult data access. Financial institutions have to maintain the privacy and security of borrowers' information refrain them from collaborating in research initiatives. In this work, we present a methodology that allows us to evaluate the performance of models trained with synthetic data when they are applied to real-world data. Our results show that synthetic data quality is increasingly poor when the number of attributes increases. However, creditworthiness assessment models trained with synthetic data show a reduction of 3\% of AUC and 6\% of KS when compared with models trained with real data. These results have a significant impact since they encourage credit risk investigation from synthetic data, making it possible to maintain borrowers' privacy and to address problems that until now have been hampered by the availability of information.
    Date: 2022–12
  23. By: Dina Kassab (Cairo University)
    Abstract: This paper investigates the monetary-fiscal interaction in Egypt for the period 2001Q1 to 2020Q2, a period that includes several reform programs, the 2011 revolution but also the global financial and the Covid-crises. Markov-switching regression methods are employed to estimate fiscal and monetary policy feedback rules in Egypt and the overlay of the smoothed probabilities is used, in the spirit of Davig and Leeper (2007), to show the estimated timing of the joint monetary-fiscal regime and depict its evolution. A sign restricted vector autoregression (SRVAR) model is then used to analyze the effects of different potential fiscal-monetary policy mixes, similar to those undertaken by different governments the during the coronavirus pandemic, on macro variables in Egypt. Three main findings emerge from the analysis. First, fiscal policy in Egypt always responds to government debt, although the magnitude of this response differs throughout the periods. Second, regime-switches in monetary and fiscal policy rules do not exhibit any degree of synchronization which represents a novel way of tracking the time-series behaviour of government debt and inflation in Egypt. Third, the effect of a fiscal stimulus on real consumption and GDP in Egypt does not outlive the stimulus due to a Ricardian Equivalence effect, where agents expect higher future taxes to finance deficits resulting from the stimulus. This effect can be mitigated with an accommodating monetary policy, at the expense however of inflationary pressures that inflation targeting central bank will have to face.
    Date: 2022–12–20
  24. By: De Koning, Kees
    Abstract: In the U.K., like in other countries, households have usually two main savings objectives: Buying a home and saving for a pension. Both are long term commitments. When the Bank of England increases its base rates, households are often forced to limit ordinary expenses in order to give priority to serving the two savings objectives. Their is another solution: using existing savings levels in home equity. The Bank of England could create a funding scheme "QE Home Equity" which could help households to overcome the cost of living crisis and thereby maintain economic growth.
    Keywords: Fund flows from households into savings for pensions and home equity. Bank of England support.
    JEL: E2 E21 E24 E3 E31 E4 E42 E44 E5
    Date: 2023–01–03
  25. By: Julien Grenet (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Hans Grönqvist (Uppsala University, IFAU - Institute for Evaluation of Labour Market and Education Policy); Daniel Jahnson (Uppsala University)
    Abstract: The Swedish banking crisis in the early 90s counts as one of the five most severe financial crises in history. We examine how firms more exposed to this event adjusted employment in the longrun and the mechanisms involved. Our analysis draws on matched employer-employee data containing the financial statements for a large sample of firms. Our difference-indifferences estimates show that firms with a greater pre-crisis debt burden experienced more difficulties in accessing external capital during the crisis compared to firms with lower baseline debts. This is consistent with the most exposed firms becoming financially constrained. More exposed firms exhibit stronger downward employment adjustments than less exposed firms, and the reductions are mainly concentrated among low-skilled workers. Employment in more exposed firms started to recover four years after the crisis and had fully recuperated about a decade later. These firms also temporarily saw a larger drop in both productivity and investment. We do not find a significant effect on the wage bill, and the estimates are precise enough to rule out even moderate effect sizes.
    Keywords: Financial Crisis, Matched Employer-Employee Data, Macroeconomic Shocks, Labor Demand
    Date: 2023–01
  26. By: Michele Andreolli; Hélène Rey
    Abstract: The European Central Bank is unique in setting monetary policy for several sovereign states with heterogeneous debt levels and different maturity structures. The monetary-fiscal nexus is central to the functioning of the euro area. We focus on one particular aspect of that nexus, the effect the reliability of the European Central Bank's monetary policy on public finances. We show that when the ECB misses its inflation target this has large heterogeneous fiscal consequences for Euro Area countries. For comparison we also estimate the fiscal consequences of the Federal Reserve and the Bank of England missing their inflation targets. They are also sizeable.
    JEL: E31 E44 E52 E60 F45 H63
    Date: 2023–01
  27. By: Jongrim Ha (World Bank, Prospects Group); M. Ayhan Kose (World Bank, Prospects Group; Brookings Institution; CEPR, and CAMA); Franziska Ohnsorge (World Bank, Prospects Group; CEPR; CAMA); Hakan Yilmazkuday (Florida International University)
    Abstract: This paper examines the global drivers of inflation in 55 countries over the 1970–2022 period. We estimate a Factor-Augmented Vector Autoregression model for each country and assess the importance of several global (demand, supply, and oil price) and domestic shocks. We report three main results. First, global shocks have explained about 26 percent of inflation variation in a typical economy. Oil price shocks accounted for only about 4 percent of inflation variation, but they had a statistically significant impact on inflation in three quarters of countries. Second, global shocks have become more important in driving inflation variation over time. The share of inflation variance caused by oil price shocks increased from 4 percent prior to 2000 to roughly 9 percent over the 2001–2022 period. They also accounted for some of the steep runup in inflation between mid-2021 and mid-2022. Finally, oil price shocks tended to contribute significantly more to inflation variation in advanced economies; countries with stronger global trade and financial linkages; commodity importers; net energy importers; countries without inflation-targeting regimes; and countries with pegged exchange rate regimes. Our headline results are robust to a wide range of exercises—including alternative measures of global factors and oil prices— and aggregation of countries.
    Keywords: Inflation; oil prices; global shock; domestic shock; FAVAR; exchange rates.
    JEL: E31 E32 Q43
    Date: 2023–01
  28. By: Yoshihiro Shirai
    Abstract: A two-dimensional pure jump process is proposed to model the evolution of the risk-free rate and default intensities for the purpose of evaluating option contracts on a credit index. Time evolution in credit markets is assumed to follow a gamma process evaluated at calendar time in order to reflect different levels of business activity in the credit and Treasury markets, which ultimately reflect differences in preferences and incentives of credit products investors, as well as the structure of the credit market itself, with those of their respective counterparts in the Treasury market. Formulas for the characteristic function, zero coupon bonds and moments of the process are derived, and its parameters calibrated to market prices of options on a credit index. Model and market implied credit spreads moments are estimated and compared.
    Date: 2023–01
  29. By: Paul Beaudry; Katya Kartashova; Césaire Meh
    Abstract: Many explanations for the decline in real interest rates over the last 30 years point to the role that population aging or rising income inequality plays in increasing the long-run aggregate demand for assets. Notwithstanding the importance of such factors, the starting point of this paper is to show that the major change driving household asset demand over this period is instead an increased desire—for a given age and income level—to hold assets. We begin by presenting a simple explanation for this pattern that relies on integrating retirement and inter-temporal substitution motives in saving decisions. We then show how the interaction of these two saving motives can have profound implications in terms of the shape of asset demands, the possibility of multiple steady state real interest rates, and a potential role for monetary policy to influence the long-run evolution of real rates. The framework highlights how an inflationary episode followed by a strong monetary response, as we are currently witnessing, can have long-term implications for real interest rates.
    Keywords: Economic models; Fiscal policy; Inflation and prices; Inflation targets; Interest rates; Monetary policy; Monetary policy framework
    JEL: E21 E52 E31 E43 E58 E62 G51 H6
    Date: 2023–01
  30. By: Carin van der Cruijsen; Jakob de Haan; Maarten van Rooij
    Abstract: Little is known about the impact of high inflation on public trust. Using a survey in the Netherlands, we find that the recent increase in inflation is associated with a decline in trust in the Dutch central bank and Dutch politics. The higher individuals’ perceived inflation is and the harder it is for them to make ends meet, the lower their trust in the European Central Bank, the Dutch central bank, and Dutch politics. We also find that people trust authorities considered responsible for bringing inflation down less. Quite remarkably, most people think government is responsible for maintaining price stability.
    Keywords: inflation; trust; financial stress; central banks; national politics
    JEL: D12 D83 E31 E58
    Date: 2023–01
  31. By: Mathieu Pedemonte; Hiroshi Toma; Estaban Verdugo
    Abstract: We show that inflation expectations are heterogeneous and depend on past individual experiences. We propose a diagnostic expectations-augmented Kalman filter to represent consumers’ heterogeneous inflation expectations-formation process, where heterogeneity comes from an anchoring-to-the-past mechanism. We estimate the diagnosticity parameter that governs the inflation expectations-formation process and show that the model can replicate systematic differences in inflation expectations across cohorts in the US. We introduce this mechanism into a New Keynesian model and find that heterogeneous expectations anchor aggregate responses to the agents’ memory, making shocks more persistent. Central banks should be more active to prevent agents from remembering current shocks far into the future.
    Keywords: Expectations; Survey Data; Belief Formation; Heterogeneous Expectations
    JEL: D84 E31 E58 E71
    Date: 2023–01–10
  32. By: Becker, Christoph; Duersch, Peter; Eife, Thomas
    Abstract: In density forecasts, respondents are asked to assign probabilities to pre-specified ranges of inflation. We show in two large-scale experiments that responses vary when we modify the response scale. Asking an identical question with modified response scales induces different answers: Shifting, compressing or expanding the scale leads to shifted, compressed and expanded forecasts. Mean forecast, uncertainty, and disagreement can change by several percentage points. We discuss implications for survey design and how central banks can adjust the response scales during times of high inflation.
    Keywords: density forecast; Inflation; Experiment
    Date: 2023–01–13
  33. By: KAMKOUM, Arnaud Cedric
    Abstract: The financial crisis that started in the U.S. at the end of 2007 and later spread to other countries was the most severe economic and financial disaster since the Great Depression. The crisis began in the U.S. housing market in August 2007, rapidly extended to other sectors of the U.S. economy, and became global following the collapse of various U.S.-based international financial institutions. To counter the negative effects of the crisis, the Federal Reserve (the central bank of the United States) and other central banks conducted monetary policies that are widely considered unconventional. This master’s thesis examines the monetary policies the Federal Reserve implemented in response to the crisis. More specifically, the thesis analyzes the Federal Reserve’s quantitative easing (QE) programs, liquidity facilities, and forward guidance operations implemented from 2007 to 2018. The thesis’ detailed examination of these policies is concluded with an interrupted time-series (ITS) analysis of the causal effects of the QE programs on U.S. inflation and real GDP. The results of this design-based natural experimental approach show that the QE operations positively affected U.S. real GDP but did not significantly impact U.S. inflation. Specifically, it is found that, for the 2011Q2-2018Q4 post-QE period, real GDP per capita in the U.S. increased by an average of 231 dollars per quarter relative to how it would have changed had the QE programs not been conducted. Moreover, the results show that, in 2018Q4, ten years after the beginning of the Federal Reserve’s QE programs, real GDP per capita in the U.S. increased by 14% relative to what it would have been during that quarter had there not been the QE programs.
    Date: 2023–01–05
  34. By: Francesco Fusari (University of Surrey)
    Abstract: This paper proposes a new strategy for the identification of monetary policy shocks in structural vector autoregressions (SVARs). It combines traditional sign restrictions with external variable constraints on high-frequency monetary surprises and central bank’s macroeconomic projections. I use it to characterize the transmission of US monetary policy over the period 1965-2007. First, I find that contractionary monetary policy shocks unequivocally decrease output, sharpening the ambiguous implications of standard sign-restricted SVARs. Second, I show that the identified structural models are consistent with narrative sign restrictions and restrictions on the monetary policy equation. On the contrary, the shocks identified through these alternative methodologies turn out to be correlated with the information set of the central bank and to weakly comove with monetary surprises. Finally, I implement an algorithm for robust Bayesian inference in set-identified SVARs, providing further evidence in support of my identification strategy.
    JEL: E52 C51
    Date: 2023–01
  35. By: Alessandro Cantelmo (Bank of Italy); Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the macroeconomic stabilization properties, with particular reference to the exchange rate pass-through, of price level targeting (PLT), average inflation targeting (AIT) and inflation targeting (IT) strategies when the effective lower bound on the monetary policy rate can be binding. The results of simulating the canonical open-economy New Keynesian model -- in which the assumption of local currency pricing holds and which is calibrated without loss of generality to the euro area -- are as follows. First, make-up strategies (PLT and AIT) stabilize inflation better than IT, by favoring a smaller appreciation (larger depreciation) of the nominal exchange rate in the event of disinflationary demand (supply) shocks. Second, and in connection with this, the exchange rate pass-through to import prices is more limited under make-up strategies than under IT, as the former stabilize the inflation rate of imports to a greater extent. Third, the results are robust to alternative values of import price stickiness and elasticity of substitution between domestic and imported goods. Fourth, the stabilization properties of make-up strategies are qualitatively preserved under partially backward-looking inflation expectations, although the relative gains of make-up strategies with respect to IT are smaller than under model-consistent inflation expectations.
    Keywords: effective lower bound, exchange rate pass-through, local currency pricing, make-up strategies, monetary policy
    JEL: E31 E52 F31 F41
    Date: 2022–12

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