nep-cba New Economics Papers
on Central Banking
Issue of 2019‒01‒14
23 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  2. Monetary policy frameworks and the effective lower bound on interest rates By Mertens, Thomas M.; Williams, John C.
  3. The paradox of global thrift By Luca Fornaro; Federica Romei
  4. Transmission of U.S. Monetary Policy to Commodity Exporters and Importers By Myunghyun Kim
  5. Negative Nominal Interest Rates and the Bank Lending Channel By Gauti B. Eggertsson; Ragnar E. Juelsrud; Lawrence H. Summers; Ella Getz Wold
  6. Central Bank Credibility and Monetary Policy By Kwangyong Park
  7. Forecasting FOMC Forecasts By S. Yanki Kalfa; Jaime Marquez
  8. Stress Testing Frameworks and Practices in Dual Banking System: A Preliminary Assessment By Zulkhibri, Muhamed; Ismail, Abdul Ghafar
  9. What Determines the Neutral Rate of Interest in an Emerging Economy? By Carrillo Julio A.; Elizondo Rocío; Rodríguez-Pérez Cid Alonso; Roldán-Peña Jessica
  10. Spillovers from US monetary policy: Evidence from a time-varying parameter GVAR model By Crespo Cuaresma, Jesus; Doppelhofer, Gernot; Feldkircher, Martin; Huber, Florian
  11. Capital Requirements in a Quantitative Model of Banking Industry Dynamics By Dean Corbae; Pablo D'Erasmo
  12. Banks, Sovereign Risk and Unconventional Monetary Policies By Stéphane Auray; Aurélien Eyquem; Xiaofei Ma
  13. The Financial Alchemy that Failed By Miller, Marcus
  14. Bank Leverage, Welfare, and Regulation By Anat R. Admati; Martin F. Hellwig
  15. Negative Interest Rate, QE and Exit By Samuel Reynard
  16. Overconfidence and Bailouts By Gietl, Daniel
  17. Macroprudential policy in the lab By Gortner, Paul; Massenot, Baptiste
  18. Monetary theory and policy : the debate revisited By Jean-Luc Gaffard
  19. The Single Supervisory Mechanism: competitive implications for the banking sectors in the euro area By Iryna Okolelova; Jacob Bikker
  20. The impact of guidance, short-term dynamics and individual characteristics on firms' long-term inflation expectations By Hans-Ueli Hunziker; Christian Raggi; Rina Rosenblatt-Wisch; Attilio Zanetti
  21. Does Central Bank Independence Matter in Arab Oil Exporters By Hoda Selim
  22. Bank capital, lending booms, and busts. Evidence from Spain in the last 150 years By Mikel Bedayo; Ángel Estrada; Jesús Saurina
  23. Assessing Expectations as a Monetary/Fiscal State-Dependent Phenomenon By Martin Geiger; Marios Zachariadis

  1. By: Paulo R. Mota (University of Porto – School of Economics and Business and CEF.UP); Abel L. C. Fernandes (University of Porto – School of Economics and Business and NIFIP)
    Abstract: A fundamental aspect of the ECB’s monetary policy is that it aims to pursue price stability “over the medium term.” However, the ECB has not defined the medium term with reference to a predetermined horizon, retaining some flexibility with regard to the exact time frame. The objective of this paper is to shed some light on how the horizon of price stability is being achieved in practice, in a context where the ECB faces convex and non-convex costs of adjusting the target interest rate. We assume that ECB’s monetary policy follows an average flexible inflation target framework, and we analyse the R2 of an equation where the target interest rate is specified as a function of the j-period window over which average inflation rate is measured. Target interest rate inertia is incorporate through a switching interest rate equation based on the play model of hysteresis. We have found that the ECB is targeting the key interest rate over a seven years window, implying that the ECB is following a hybrid approach to price stability in line with average inflation target. We also have found hysteresis effects in the dynamic adjustment of ECB´s target interest rate.
    Keywords: inflation target, price-level targeting, key interest rates
    JEL: E43 E52
    Date: 2019–01
  2. By: Mertens, Thomas M. (Federal Reserve Bank of San Francisco); Williams, John C. (Federal Reserve Bank of New York)
    Abstract: This paper applies a standard New Keynesian model to analyze the effects of monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will become anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained. Second, a dynamic strategy such as price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at the target level and potentially further reduce the effects of the lower bound on the economy.
    Keywords: monetary policy; zero lower bound; natural rate of interest; inflation targeting; inflation expectations
    JEL: E52
    Date: 2019–01–01
  3. By: Luca Fornaro (CREI, Universitat Pompeu Fabra, Barcelona GSE and CEPR); Federica Romei (Stockholm School of Economics and CEPR)
    Abstract: This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the economy. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In fact, prudential policies generate a rise in the global supply of savings and a drop in global aggregate demand. Weaker global aggregate demand depresses output in countries at the zero lower bound. Due to this effect, non-cooperative financial and fiscal policies might lead to a fall in global output and welfare
    Keywords: liquidity traps, zero lower bound, capital flows, fiscal policies, macroprudential policies, current account policies, aggregate demand externalities, international cooperation
    JEL: E32 E44 E52 F41 F42
    Date: 2018–12
  4. By: Myunghyun Kim (Economic Research Institute, The Bank of Korea)
    Abstract: This paper studies international transmission of U.S. monetary policy shocks to commodity exporters and importers. After first showing empirically that the shocks have stronger effects on commodity exporters than on importers, I then augment a standard three-country model to include commodities. Consistent with the empirical evidence, the model indicates that an expansionary monetary policy shock to the U.S. increases the aggregate output of commodity exporters by more than that of importers. This is because the increased U.S. aggregate demand triggered by the shock leads to greater U.S. demand for commodities and higher real commodity prices, and thus the exports of commodity exporters increase relative to those of commodity importers. Furthermore, I show that if commodity exporters¡¯ currencies are pegged to the U.S. dollar, then the U.S. monetary policy shocks have stronger spillovers to commodity exporters and importers. In the event that the U.S. becomes a net energy exporter, the shocks will have weaker effects on commodity exporters and stronger impacts on importers.
    Keywords: Monetary policy shocks, International transmission, Commodity exporters, Commodity importers, VAR with external instruments
    JEL: E52 F42 Q43
    Date: 2018–12–18
  5. By: Gauti B. Eggertsson; Ragnar E. Juelsrud; Lawrence H. Summers; Ella Getz Wold
    Abstract: Following the crisis of 2008, several central banks engaged in a new experiment by setting negative policy rates. Using aggregate and bank level data, we document that deposit rates stopped responding to policy rates once they went negative and that bank lending rates in some cases increased rather than decreased in response to policy rate cuts. Based on the empirical evidence, we construct a macro-model with a banking sector that links together policy rates, deposit rates and lending rates. Once the policy rate turns negative, the usual transmission mechanism of monetary policy through the bank sector breaks down. Moreover, because a negative policy rate reduces bank profits, the total effect on aggregate output can be contractionary. A calibration which matches Swedish bank level data suggests that a policy rate of -0.50 percent increases borrowing rates by 15 basis points and reduces output by 7 basis points.
    JEL: E3 E31 E4 E41 E42 E43 E44 E5 E51 E52 E58 E65
    Date: 2019–01
  6. By: Kwangyong Park (Economic Research Institute, The Bank of Korea)
    Abstract: A numerical measure of central bank credibility, which can be incorporated into a New Keynesian model under bounded rationality, is proposed and analyzed. This measure arises mainly due to the existence of the drifts in private long-term predictions, which are different from those of the central bank. It is shown that central bank credibility matters for macroeconomic stability. As the credibility increases, macroeconomic variables vary less. This generates endogenous volatility changes. Lastly, the magnitude of response of inflation to monetary policy depends on the level of credibility. This suggests that ignoring credibility changes might leads to overestimate of the cost of disinflation.
    Keywords: Monetary policy, Credibility, Learning, Bounded Rationality
    JEL: E3 E52 E58 D8
    Date: 2018–12–24
  7. By: S. Yanki Kalfa (International Monetary Fund); Jaime Marquez (Johns Hopkins School of Advanced International Studies (SAIS))
    Abstract: Summarizing Hendry’s forty years of work on taming uncertainty is "clear and distinct": Test, test, test. Sure - but test what? Test the maintained assumptions of the disturbances. Test the parameter restrictions of a given model. Test the explanatory power of a model against a rival model. In brief, test everything that is not clear and distinct. We implement Hendry’s view to forecast FOMC forecasts. Specifically, monetary policy is forward looking and, in its pursuit of transparency, it communicates its economic projections to the public at large. As a result, there is interest in whether these projections are credible. We argue that central to that credibility is the public’s ability to replicate FOMC’s projections using publicly available data only. In other words, is it possible to anticipate, reliably and independently, what the FOMC will anticipate for the federal funds rate? To address this question, we assemble FOMC projections from 1992 to 2017; examine their statistical properties; postulate models to predict FOMC projections; estimate the parameters of these models; and generate out-of-sample predictions for inflation, unemployment, and the federal funds rate for 2018. As the reader will soon realize, there is a lot more testing to be done.
    Keywords: Autometrics, Federal Funds Rate, FOMC, Survey of Professional Forecasters
    JEL: E5 C4
    Date: 2018–11
  8. By: Zulkhibri, Muhamed (The Islamic Research and Teaching Institute (IRTI)); Ismail, Abdul Ghafar (The Islamic Research and Teaching Institute (IRTI))
    Abstract: This paper critically reviews and evaluates stress-testing frameworks and practices of supervisory authorities in a dual banking system namely Malaysia, Indonesia and Pakistan. The analysis suggests that similar to single banking system, there are two main designs to stress testing -bottom-up and top-down - depending on the institutional responsibilities and computational capabilities, while relying on two main techniques of stress tests, sensitivity tests and scenario tests (historical or hypothetical). None of these countries differentiates the stress testing design and approach between conventional and Islamic banking industry. The application of stress testing in these countries follows similar approach to conventional banking system. The analysis also suggests that stress-testing approach for Islamic banking system should be developed capturing the unique balance sheets structure and risks of Islamic banking so that it provides accurate assessments of vulnerability in the Islamic banking system.
    Keywords: Islamic bank; stress-tests; systemic risks; financial stability
    Date: 2017–05–17
  9. By: Carrillo Julio A.; Elizondo Rocío; Rodríguez-Pérez Cid Alonso; Roldán-Peña Jessica
    Abstract: Evidence suggests that potential growth and the neutral rate co-move in advanced economies. In contrast, this co-movement is not observed in emerging economies. We argue that capital flows may explain this behavior. We focus on Mexico, a benchmark emerging economy, and find that capital inflows may account for a temporary reduction in the Mexican neutral rate after the global financial crisis. These inflows surged during the implementation of unconventional monetary policies in advanced economies. In turn, low-frequency changes in the neutral rate may be attributed to increasing domestic savings, demographics, and a decreasing global long-run real interest rate. These results are largely consistent with other studies showing that the neutral rate has decreased in the last 25 years in advanced and emerging economies.
    Keywords: Neutral rate of interest;emerging market economies;transitory and structural factors
    JEL: C10 E43 E52
    Date: 2018–11
  10. By: Crespo Cuaresma, Jesus; Doppelhofer, Gernot (Dept. of Economics, Norwegian School of Economics and Business Administration); Feldkircher, Martin; Huber, Florian (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This paper develops a global vector autoregressive (GVAR) model with time-varying parameters and stochastic volatility to analyze whether international spillovers of US monetary policy have changed over time. The proposed model allows assessing whether coefficients evolve gradually over time or are better characterized by infrequent, but large breaks. Our findings point towards pronounced changes in the international transmission of US monetary policy throughout the sample period, especially so for the reaction of international output, equity prices, and exchange rates against the US dollar. In general, the strength of spillovers has weakened in the aftermath of the global financial crisis. Using simple panel regressions, we link the variation in international responses to measures of trade and financial globalization. We find that a broad trade base and a high degree of financial integration with the world economy tend to cushion risks stemming from a foreign shock such as a US monetary policy tightening, whereas a reduction in trade barriers and/or a liberalization of the capital account increase these risks.
    Keywords: Spillovers; zero lower bound; globalization; mixture innovation models
    JEL: C30 E52 F41
    Date: 2018–12–21
  11. By: Dean Corbae; Pablo D'Erasmo
    Abstract: We develop a model of banking industry dynamics to study the quantitative impact of capital requirements on equilibrium bank risk taking, commercial bank failure, interest rates on loans, and market structure. We propose a market structure where big banks with market power interact with small, competitive fringe banks. Banks face idiosyncratic funding shocks in addition to aggregate shocks to the fraction of performing loans in their portfolio. A nontrivial bank size distribution arises out of endogenous entry and exit, as well as banks' buffer stock of net worth. We show the model predictions are consistent with untargeted business cycle properties, the bank lending channel, and empirical studies of the role of concentration on financial stability. We then conduct a series of counterfactuals (including countercyclical and size contingent (e.g. SIFI) capital requirements). We find that regulatory policies can have an important impact on market structure in the banking industry which, along with selection effects, can generate changes in allocative efficiency.
    JEL: E44 G21 L11
    Date: 2019–01
  12. By: Stéphane Auray (ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information - Ensai, Ecole Nationale de la Statistique et de l'Analyse de l'Information, CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], ULCO - Université du Littoral Côte d'Opale); Aurélien Eyquem (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Xiaofei Ma (CREST - Centre de Recherche en Economie et Statistique [Bruz] - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz], UEVE - Université d'Évry-Val-d'Essonne)
    Abstract: We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Calibrated to the core and the periphery of the Euro Area, the model gives rise to a debt-banks-credit loop that substantially amplifies the effects of financial shocks, especially for the periphery. We use the model to investigate the effects of a stylized public asset purchase program at the steady state and during a crisis. We find that it is more effective in stimulating the economy during a crisis, in particular for the periphery.
    Keywords: Recession,Interbank Market,Sovereign Default Risk,Asset Purchases
    Date: 2018
  13. By: Miller, Marcus (University of Warwick and CAGE)
    Abstract: With his conception of successive ‘Ages of Capitalism’, Anatole Kaletsky provides a canvas broad enough to encompass the banking crisis of 2008 and much more. After briefly outlining the Four Ages he identifies, we focus on the period of the Great Moderation when Inflation Targeting seemed to have solved the problem macroeconomic management – until it ended in spectacular failure. The rapid growth of cross-border banking – with securitized assets funded by wholesale money – evidently posed threats to financial stability that had been ignored by a regime targeting consumer prices. We look at three: the pecuniary externalities exerted by asset price changes on investment banking; information failures leading to an exaggerated banking boom; and the risk of insolvency in the subsequent ‘bank run’. The financial system pre-crash was, it seems, flawed by two Fallacies of Composition: by regulation that reckoned making individual banks safe guaranteed systemic stability; and a business model that reckoned securitization ensured liquidity whenever necessary. Finally, we discuss how, in different countries, the law has variously been invoked to handle reckless banking.
    Keywords: JEL Classification:
    Date: 2019
  14. By: Anat R. Admati (Graduate School of Business, Stanford University); Martin F. Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: We take issue with claims that the funding mix of banks, which makes them fragile and crisis-prone, is efficient because it reflects special liquidity benefits of bank debt. Even aside from neglecting the systemic damage to the economy that banks’ distress and default cause, such claims are invalid because banks have multiple small creditors and are unable to commit effectively to their overall funding mix and investment strategy ex ante. The resulting market outcomes under laissez-faire are inefficient and involve excessive borrowing, with default risks that jeopardize the purported liquidity benefits. Contrary to claims in the literature that “equity is expensive” and that regulation requiring more equity in the funding mix entails costs to society, such regulation actually helps create useful commitment for banks to avoid the inefficiently high borrowing that comes under laissez-faire. Effective regulation is beneficial even without considering systemic risk; if such regulation also reduces systemic risk, the benefits are even larger.
    Keywords: Liquidity in banking, leverage in banking, banking regulation, capital structure, capital regulations, agency costs, commitment, contracting, maturity rat race, leverage ratchet effect, Basel
    JEL: D53 D61 G01 G18 G21 G24 G28 G32 G38 H81 K23
    Date: 2018–11
  15. By: Samuel Reynard
    Keywords: Quantitative Easing, Negative Interest Rate, Exit, Monetary Policy Transmission, Money Supply, Banking
    JEL: E52 E58 E51 E41 E43
    Date: 2018
  16. By: Gietl, Daniel (LMU Munich)
    Abstract: Empirical evidence suggests that managerial overconfidence and government guarantees contribute substantially to excessive risk-taking in the banking industry. This paper incorporates managerial overconfidence and limited bank liability into a principal-agent model, where the bank manager unobservably chooses effort and risk. An overconfident manager overestimates the returns to effort and risk. We find that managerial overconfidence necessitates an intervention into banker pay. This is due to the bank\'s exploitation of the manager\'s overvaluation of bonuses, which causes excessive risk-taking in equilibrium. Moreover, we show that the optimal bonus tax rises in overconfidence, if risk-shifting incentives are sufficiently large. Finally, the model indicates that overconfident managers are more likely to be found in banks with large government guarantees, low bonus taxes, and lax capital requirements.
    Keywords: overconfidence; bailouts; banking regulation; bonus taxes;
    JEL: H20 H30 G28
    Date: 2018–12–20
  17. By: Gortner, Paul; Massenot, Baptiste
    Abstract: Higher capital ratios are believed to improve system-wide financial stability through three main channels: (i) higher loss-absorption capacity, (ii) lower moral hazard, (iii) stabilization of the financial cycle if capital ratios are increased during good times. We examine these mechanisms in a laboratory asset market experiment with indebted participants. We find support for the loss-absorption channel: higher capital ratios reduce the bankruptcy rate. However, we do not find support for the moral hazard channel. Higher capital ratios (insignificantly) increase asset price bubbles, an aggregate measure of excessive risk-taking. Additional evidence suggests that bankruptcy aversion explains this surprising result. Finally, the evidence supports the idea that higher capital ratios in good times stabilize the financial cycle.
    JEL: G28 E58
    Date: 2018
  18. By: Jean-Luc Gaffard (Observatoire français des conjonctures économiques)
    Abstract: This paper is aimed at revisiting monetary analysis in order to better understand erroneous choices in the conduct of monetary policy. According to the prevailing consensus, the market economy is intrinsically stable and is upset only by poor behaviour by government or the banking system. We maintain on the contrary that the economy is unstable and that achieving stability requires a discretionary economic policy. This position relies upon an analytical approach in which monetary and financial organisations are devices that help markets to function. In this perspective, which focuses on the heterogeneity of markets and agents, and, consequently, on the role of institutions in determining overall performance, it turns out that nominal rigidities and financial commitment offer the means to achieve economic stability. This is because they prevent successive, unavoidable disequilibria from becoming explosive.
    Keywords: Inflation; Market; Money; Stability
    JEL: E31 E32 E5 E61 E62
    Date: 2018–11
  19. By: Iryna Okolelova; Jacob Bikker
    Abstract: This paper investigates the impact of the SSM's launch on the market power of banks in the large euro area economies. We employ the Lerner index and the Boone estimator, non-structural measures that capture different aspects of competition. Using the results of the Lerner index, we find evidence of the significant decrease in market power for the ECB supervised entities in Austria, France, Germany and Spain. In a similar vein, the Boone indicator points toward an increase in competition among significant supervised entities of Austria, France, Germany, Italy and Spain. The evidence on changes for the total banking sector are mixed, whereas no significant effect is found for the banks remaining under national supervision. We do not find any support for significant increases in the market power of banks in Italy or Spain, suggesting that large increases in concentration do not necessarily result in anticompetitive conduct.
    Keywords: Banking; SSM; competition; market structure; concentration; Lerner index; Boone indicator
    JEL: G21 G28 L1
    Date: 2018–12
  20. By: Hans-Ueli Hunziker; Christian Raggi; Rina Rosenblatt-Wisch; Attilio Zanetti
    Keywords: Long-term inflation expectations, firms' inflation expectations, guidance and uncertainty
    JEL: C22 E31 E50 D83
    Date: 2018
  21. By: Hoda Selim (International Monetary Fund)
    Abstract: The paper shows that central banks in Arab oil exporters are not independent. Low independence reflects institutional arrangements that allow the executive branch to influence, interfere and in some cases, dominate over central bank operations. The paper argues that in a context of weak institutions, CBI has not always mattered for macroeconomic policy outcomes in Arab oil exporters. GCC central banks delivered a better macroeconomic policy performance than those of the populous group. CBI mattered less for the GCC because the credible peg discouraged discretion and was a good substitute for it. Soft peg arrangements in the populous economies in a context of weak institutions and discretionary policymaking in the absence of a de facto independent central bank led to disappointing monetary policy outcomes. As oil exporters adapt to a new normal of low oil prices, the sustainability of fixed exchange regimes may not be guaranteed without sound macroeconomic institutions. Stronger institutions and effective accountability mechanisms are needed to insulate central banks from political pressures. In the short-term, a rules-based framework could help.
    Date: 2018–09–18
  22. By: Mikel Bedayo (Banco de España); Ángel Estrada (Banco de España); Jesús Saurina (Banco de España)
    Abstract: In this paper we analyze the effect of bank capital on lending expansion and contraction for nearly 150 years in Spain. We fi rst build up thoroughly a measure of bank leverage (i.e. the capital to assets ratio) for the Spanish banking sector starting in year 1880. Then, we run a proper econometric test to analyze the impact that bank capital levels have on lending cycles, controlling for other determinants of credit growth. We do fi nd robust empirical evidence of an asymmetric relationship between bank capital and credit cycle. In particular, an increase in the bank capital before expansions reduces credit growth while it increases credit growth when the recession arrives. Conversely, a too depleted level of bank capital when entering in a recession has a severe impact on lending (i.e. may bring about a deep credit crunch) with quite negative and lasting effects in the economy and the wellbeing of the society as a whole. The paper is particularly useful to support macroprudential policies (dynamic provisions and the countercyclical capital buffer) that have been very recently put in place as they will help to smooth the credit cycle. The experience of Spain over more than a century, with very marked lending cycles, provides a fertile ground for analyzing and supporting them, not only based on the last lending cycle, but also on those occurred in the more distant past.
    Keywords: lending cycles, bank crisis, capital ratio, leverage ratio, macroprudential tools.
    JEL: G01 G21 N23 N24
    Date: 2018–12
  23. By: Martin Geiger; Marios Zachariadis
    Abstract: We assess the impact of monetary and fiscal policy shocks on US survey-based macroeconomic expectations elicited from consumers and financial experts, within and outside low-debt states of the world. While we fail to detect a clear response to shocks in a linear model, our analysis reveals a number of state-dependent patterns. The response of consumers' expectations to the monetary and fiscal shocks we jointly consider is typically strong and distinctly different outside states of low debt as compared to within states of low debt where we observe little action. Outside low-debt states, an increase in government spending has adverse effects on expectations consistent with the anticipation of negative effects from a future fiscal consolidation. Moreover, contractionary monetary policy shocks induce pessimistic macroeconomic expectations outside the low-debt state but not within it, suggesting that the fiscal burden matters in how monetary policy affects expectations. Our findings are in line with rationally inattentive consumers not paying attention to shocks occurring when the fiscal burden is low. Finally, consumer expectations' responses more closely resemble those of experts outside the low-debt state, in line with consumers becoming more attentive to fiscal and monetary developments when the stakes are high.
    Keywords: policy shocks; public debt; rational inattention; fiscal theory of the price level
    JEL: E31 E52 E62
    Date: 2019–01

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