nep-cba New Economics Papers
on Central Banking
Issue of 2020‒08‒17
twenty-six papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The evolution of monetary policy in Latin American economies: Responsiveness to inflation under different degrees of credibility By Gießler, Stefan
  2. Compositional effects of O-SII capital buffers and the role of monetary policy By Cappelletti, Giuseppe; Reghezza, Alessio; d’Acri, Costanza Rodriguez; Spaggiari, Martina
  3. Testing the Effectiveness of Unconventional Monetary Policy in Japan and the United States By Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti
  4. Peer Effects in Central Banking By Roman Horvath
  5. Implementing Monetary Policy in an "Ample-Reserves" Regime: The Basics (Note 1 of 3) By Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
  6. A quantitative easing experiment By Adrian Penalver; Nobuyuki Hanaki; Eizo Akiyama; Yukihiko Funaki
  7. Financial shocks and inflation dynamics By Angela Abbate; Sandra Eickmeier; Esteban Prieto
  8. Managing a New Policy Framework: Paul Volcker, the St. Louis Fed, and the 1979-82 War on Inflation By Kevin L. Kliesen; David C. Wheelock
  9. Bank resolution and multinational banks By Vittoria Cerasi; Stefano Montoli
  10. Output-Inflation Trade-offs and the Optimal Inflation Rate By Takushi Kurozumi; Willem Van Zandweghe
  11. Japan's Monetary Policy: A Literature Review and Empirical Assessment By Masahiko Shibamoto; Wataru Takahashi; Takashi Kamihigashi
  12. A North-South monetary model of endogenous growth with international trade By Óscar Afonso; Tiago Miguel Guterres Neves Sequeira
  13. The Hidden Heterogeneity of Inflation Expectations and its Implications By Lena Drager; Michael J. Lamla; Damjan Pfajfar
  14. Turnover liquidity and the transmission of monetary policy By Lagos, Ricardo; Zhang, Shengxing
  15. The potential effect of a central bank digital currency on deposit funding in Canada By Alejandro García; Bena Lands; Xuezhi Liu; Joshua Slive
  16. Spillover Effects of Russian Monetary Policy Shocks on the Eurasian Economic Union By Vladislav Abramov
  17. Central banks in parliaments: a text analysis of the parliamentary hearings of the Bank of England, the European Central Bank and the Federal Reserve By Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois
  18. Monetary Policy in an Endogenous Growth Model with R&D and Human Capital Accumulation By Tiago Miguel Guterres Neves Sequeira
  19. The non-linear effects of the Fed's asset purchases By Alessio Anzuini
  20. Building Credibility and Influencing Expectations- The Evolution of Central Bank Communication By Monique Reid; Pierre Siklos
  21. An Econometric Analysis of a Calibrated Macroeconomic Model for the Dominican Republic: A Closer Look into Monetary Policy By Paola Mariell Brens Ortega
  22. Stock Market Participation, Inequality, and Monetary Policy By Davide Melcangi; Vincent Sterk
  23. Financial spillovers to emerging economies: the role of exchange rates and domestic fundamentals By Alessio Ciarlone; Daniela Marconi
  24. The Ends of 30 Big Depressions By Kevin Hjortshøj O’Rourke; Sang Seok Lee; Martin Ellison
  25. Pandemic Shocks and Fiscal-Monetary Policies in the Eurozone: COVID-19 Dominance During January - June 2020 By Yothin Jinjarak; Rashad Ahmed; Sameer Nair-Desai; Weining Xin; Joshua Aizenman
  26. Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight By Michael Woodford; Yinxi Xie

  1. By: Gießler, Stefan
    Abstract: This paper investigates the forward-lookingness of monetary policy related to stabilising inflation over time under different degrees of central bank credibility in the four largest Latin American economies, which experienced a different transition path to the full-fledged inflation targeting regime. The analysis is based on an interest rate-based hybrid monetary policy rule with time-varying coefficients, which captures possible shifts from a backward-looking to a forward-looking monetary policy rule related to inflation stabilisation. The main results show that monetary policy is fully forward-looking and exclusively reacts to expected inflation under nearly perfect central bank credibility. Under a partially credible central bank, monetary policy is both backward-looking and forward-looking in terms of stabilising inflation. Moreover, monetary authorities put increasingly more priority on stabilising expected inflation relative to actual inflation if central bank credibility tends to improve over time.
    Keywords: forward-lookingness,central bank credibility,inflation targeting,hybrid monetary policy rule,time-varying coefficients
    JEL: C32 E42 E58
    Date: 2020
  2. By: Cappelletti, Giuseppe; Reghezza, Alessio; d’Acri, Costanza Rodriguez; Spaggiari, Martina
    Abstract: We investigate the impact of macroprudential capital requirements on bank lending behaviour across economic sectors, focusing on their potentially heterogenous effects and transmission channel. By employing confidential loan-level data for the euro area over 2015-18, we find that the reaction of banks to structural capital surcharges depends on the level of the required capital buffer and the economic sector of the borrowing counterpart. Although tighter buffer requirements correspond to stronger lending contractions, targeted banks curtail their lending towards credit institutions the most, while leaving loan supply to non-financial corporations almost unchanged. We find that this lending is mitigated when banks resort to central bank funding. These results have important policy implications as they provide evidence on the impact of macroprudential policy frameworks and their interaction with unconventional monetary policies. JEL Classification: E51, E58, E60, G21, G28
    Keywords: credit supply, large exposure, loan-level data, macroprudential policy, unconventional monetary policy
    Date: 2020–07
  3. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Shangshang Li (Department of Economics, University of Oxford (E-mail:; Sophocles Mavroeidis (Professor, Department of Economics, University of Oxford and INET (E-mail:; Francesco Zanetti (Associate Professor, Department of Economics, University of Oxford (E-mail:
    Abstract: The effective lower bound (ELB) on a short term interest rate may not constrain a central bank's capacity to achieve its objectives if unconventional monetary policy (UMP) is powerful enough. We formalize this 'irrelevance hypothesis' using a dynamic stochastic general equilibrium model with UMP and test it empirically for the United States and Japan using a structural vector autoregressive model that includes variables subject to occasionally binding constraints. The hypothesis is strongly rejected for both countries. However, a comparison of the impulse responses to a monetary policy shock across regimes shows that UMP has had strong delayed effects in each country.
    Keywords: Effective lower bound, unconventional monetary policy, structural VAR
    JEL: E52 E58
    Date: 2020–07
  4. By: Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: We provide a new explanation for why central banks have become transparent over the last three decades. We apply recently developed social interaction panel regression models for the observational data, which allow the identification of peer effects. The identification is based on variations in the past monetary policy régime exogenously determined with respect to transparency. Previous literature has argued that domestic factors such as macroeconomic stability were behind the trend toward greater transparency. In contrast, our results indicate that transparency primarily increased because of a favorable global environment and, importantly, because of the peer effects among central bankers. Central bankers thus learned from each other's experiences regarding transparency. To our knowledge, our paper is the first econometric analysis of peer effects among public institutions or in the macroeconomic literature. Despite being the best available, existing data is still imperfect, and we therefore call for better data in the form of MNCs’ unconsolidated, public country-by-country reporting data.
    Keywords: peer effects, central banks, transparency
    JEL: C31 D83 E58
    Date: 2020–08
  5. By: Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
    Abstract: The FOMC has stated that it intends to continue implementing monetary policy in a regime with an ample supply of reserves. This Note, the first in a three-part series, provides an introductory discussion of what it means to implement policy in such a regime and how the Fed ensures interest rate control in an environment with an ample supply of reserves in the banking system.
    Date: 2020–07–01
  6. By: Adrian Penalver; Nobuyuki Hanaki; Eizo Akiyama; Yukihiko Funaki
    Abstract: We experimentally investigate the effect of a central bank buying bonds for cash in a quantitative easing (QE) operation. In our experiment, the bonds are perfect substitutes for cash and have a constant fundamental value which is not affected by QE in the rational expectations equilibrium. We find that QE raises bond prices above those in the benchmark treatment without QE. Subjects in the benchmark treatment learned to trade the bonds at their fundamental value but those in treatments with QE became more convinced after repeated exposure to the same treatment that QE boosts bond prices. This suggests the possibility of a behavioural channel for the observed effects of actual QE operations on bond yields.
    Date: 2020–07
  7. By: Angela Abbate; Sandra Eickmeier; Esteban Prieto
    Abstract: We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the "missing disinflation" during the Great Recession. We apply a Bayesian vector autoregressive model to US data and identify financial shocks through a combination of narrative and short-run sign restrictions. Our main finding is that contractionary financial shocks temporarily increase inflation. This result withstands a large battery of robustness checks. Negative financial shocks help therefore to explain why inflation did not drop more sharply in the aftermath of the financial crisis. Our analysis suggests that higher borrowing costs after negative financial shocks can account for the modest decrease in inflation after the financial crisis. A policy implication is that financial shocks act as supply-type shocks, moving output and inflation in opposite directions, thereby worsening the trade-off for a central bank with a dual mandate.
    Keywords: Financial shocks, inflation dynamics, monetary policy, financial frictions, cost channel, sign restrictions
    JEL: E31 E44 E58
    Date: 2020
  8. By: Kevin L. Kliesen; David C. Wheelock
    Abstract: In October 1979, Federal Reserve Chairman Paul Volcker persuaded his FOMC colleagues to adopt a new policy framework that i) accepted responsibility for controlling inflation and ii) implemented new operating procedures to control the growth of monetary aggregates in an effort to restore price stability. These moves were strongly supported by monetarist-oriented economists, including the leadership and staff of the Federal Reserve Bank of St. Louis. The next three years saw inflation peak and then fall sharply, but also two recessions and considerable volatility in interest rates and money supply growth rates. This article reviews the episode through the lens of speeches and FOMC meeting statements of Volcker and St. Louis Fed president Lawrence Roos, and articles by Roos’ staff. The FOMC adopted monetarist principles to establish the Fed’s anti-inflation credibility but Volcker was willing to accept deviations of money growth from the FOMC’s targets, unlike Roos, who viewed the targets as sacrosanct. The FOMC abandoned monetary aggregates in October 1982, but preserved the Fed’s commitment to price stability. The episode illustrates how Volcker used a change in operating procedures to alter policy fundamentally, and later adapt the procedures to changed circumstances without abandoning the foundational features of the policy.
    Keywords: monetarism; inflation; money supply; Federal Open Market Committee; monetary policy; recession
    JEL: E42 E52 E58 N22
    Date: 2020–07–23
  9. By: Vittoria Cerasi; Stefano Montoli
    Abstract: This paper studies the impact of different resolution policies on the choice of banks to expand abroad. The regulator can choose to resolve banks through bail-in or bail-out or a combination of the two. The choice of the regulator affects the cost of funding of banks, endogenous in the model. We study the relative profitability of alternative bank corporate structures, either multinational (large and diversified) or domestic (small and non diversified) for different levels of public support. Our model allows us to identify the potential impact of the resolution policy on the structure of the banking system. Lower levels of public support increase the cost of funding for all banks, in line with recent empirical evidence. We show that a reduction in the level of public support (from bail-out to bail-in) induces banks to expand abroad in search for alternatives to save on their funding costs. Finally, we are able to identify the optimal resolution mix by taking into account the reaction of banks to the policy.
    Keywords: Bank regulation; bail-in; multinational banks; bank funding cost
    JEL: G21 G28
    Date: 2020–07
  10. By: Takushi Kurozumi; Willem Van Zandweghe
    Abstract: In staggered price models, a non-CES aggregator of differentiated goods generates empirically plausible short- and long-run trade-offs between output and inflation: lower trend inflation flattens the Phillips curve and decreases steady-state output by increasing markups. We show that the aggregator reduces both the steady-state welfare cost of higher trend inflation and the inflation-related weight in a model-based welfare function for higher trend inflation. Consequently, optimal trend inflation is moderately positive even without considering the zero lower bound on nominal interest rates. Moreover, the welfare difference between 2 percent and 4 percent inflation targets is much smaller than in the CES aggregator case.
    Keywords: non-CES aggregator; output-inflation trade-off; optimal trend inflation
    JEL: E52 E58
    Date: 2020–07–02
  11. By: Masahiko Shibamoto (Research Institute for Economics and Business Administration, Kobe University, Japan); Wataru Takahashi (Faculty of Economics, Osaka University of Economics, Japan); Takashi Kamihigashi (Research Institute for Economics and Business Administration, Kobe University, Japan)
    Abstract: Although various studies examine how monetary policy affects the economy using real-world data, a consensus has yet to be reached. This study reviews and assesses the monetary policy implemented by the Bank of Japan, focusing on policies that employ short-term interest rate as the operational target. Our review of empirical studies on monetary policy that influenced the policy of the Bank of Japan prior to and during the 1980s reveals that the studies focused on (1) bank behavior, (2) the interest rate mechanism, (3) financial deregulation and monetary aggregates, and (4) the systematic reaction regarding the achievement of the ultimate goal. Our empirical results on the causal effect of monetary policy in the framework of a structural vector autoregressive model attest to the significant impact of Japan’s monetary policy on the financial market and macroeconomy from the 1980s onward. Our counterfactual simulations affirm that the central bank should consistently shift its policy stance to achieve macroeconomic stability. Moreover, even tiny policy rate cuts in a low-interest-rate environment make significant contributions to economic recovery.
    Keywords: Japanese macroeconomy; Short-term interest rate; Causal effect of monetary policy; Counterfactual simulation; Vector autoregressive model
    Date: 2020–03
  12. By: Óscar Afonso (CEF-UP, CEFAGE-UBI and Faculty of Economics of University of Porto); Tiago Miguel Guterres Neves Sequeira (University of Coimbra, Centre for Business and Economics,CeBER, Faculty of Economics)
    Abstract: We devise a North-South endogenous growth model with international trade and money to study the effects of inflation (and monetary policy) on wage inequality, specialization, and growth. The relationship between monetary policy and wage inequality depends on the fact that skilled-production firms are less credit constrained than unskilled-production firms. Interestingly, inflation affects the structure of production by increasing the production share made by skilled-intensive firms, and decreases economic growth. Furthermore, inflation decreases the difference of wage inequality between countries; shrinking the skill premia difference. Moreover, inflation and trade have opposite effects on wage inequality and on specialization: while trade tends to decrease intra-South wage inequality, inflation tends to increase it; while trade tends to increase the number of different intermediate goods produced with unskilled technology in the South; inflation acts the other way around. Results are confirmed quantitatively.
    Keywords: Inflation; Wage inequality; North-South trade; CIA constraints; Technological knowledge bias.
    JEL: F16 F43 O31 O33 O40 E41
    Date: 2020–06
  13. By: Lena Drager; Michael J. Lamla; Damjan Pfajfar
    Abstract: Using a new consumer survey dataset, we document a new dimension of heterogeneity in inflation expectations that has implications for consumption and saving decisions as well as monetary policy transmission. We show that German households with the same inflation expectations differently assess whether the level of expected inflation and of nominal interest rates is appropriate or too high/too low. The `hidden heterogeneity' in expectations stemming from these opinions is related to demographic characteristics and affects current and planned spending in addition to the Euler equation effect of the perceived real interest rate. Furthermore, these differences in opinions affect German households differently depending on whether they are renters or homeowners.
    Keywords: Macroeconomic expectations; Monetary policy perceptions; Survey microdata
    JEL: D84 E31 E52 E58
    Date: 2020–07–10
  14. By: Lagos, Ricardo; Zhang, Shengxing
    Abstract: We provide empirical evidence of a novel liquidity-based transmission mechanism through which monetary policy influences asset markets, develop a model of this mechanism, and assess the ability of the quantitative theory to match the evidence.
    JEL: E44 E52 G12 G14 G35
    Date: 2020–06–01
  15. By: Alejandro García; Bena Lands; Xuezhi Liu; Joshua Slive
    Abstract: A retail central bank digital currency denominated in Canadian dollars could, in theory, create competition for bank deposit funding. We look at the potential implications increased competition for deposit funding could have on income and liquidity for the six largest Canadian banks, using regulatory data from 2018 and 2019.
    Keywords: Digital currencies and fintech; Financial institutions; Financial stability
    JEL: E4 E41 E44 E5 G1 G10 G17 G2 G21 G3 G32 O
    Date: 2020–07
  16. By: Vladislav Abramov (Bank of Russia, Russian Federation)
    Abstract: Russian monetary policy could translate on the countries of Eurasian Economic Union (EAEU) through different channels. However, there is still a lack of evidence of the significance of so called spillover effects of Russian monetary policy. This work investigates the influence of Russian monetary policy shocks, proxied by shocks of MIACR, on the EAEU countries. For that purpose, firstly, monetary policy shocks were identified via FAVAR model for the Russian economy, estimated on the monthly data of more than 50 indicators. Further, separately for each country of the union VAR models with previously extracted MP shocks were estimated and both impulse response functions (IRF) and forecast error variance decomposition (FEVD) were analysed. The main result of the work is that effects of shocks in MIACR on industrial production and inflation are not statistically significant. At the same time, such shocks have statistically significant effect on money supply, nominal exchange rates and money market rates in some union’s countries. However, obtained effects are mostly small and heterogeneous.
    Keywords: Transmission effects, monetary policy, Eurasian economic union
    JEL: E52 E58 E59
    Date: 2020–07
  17. By: Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois
    Abstract: As the role of central banks expanded, demand for public scrutiny of their actions increased. This paper investigates whether parliamentary hearings, the main tool to hold central banks accountable, are fit for this purpose. Using text analysis, it detects the topics and sentiments in parliamentary hearings of the Bank of England, the European Central Bank and the Federal Reserve from 1999 to 2019. It shows that, while central bank objectives play the most relevant role in determining the topic, unemployment is negatively associated with the focus of hearings on price stability. Sentiments are more negative when uncertainty is higher and when inflation is more distant from the central bank’s inflation aim. These findings suggest that parliamentarians use hearings to scrutinise the performance of central banks in line with their objectives and economic developments, but also that uncertainty is associated with a higher perceived risk of under-performance of central banks. JEL Classification: E02, E52, E58
    Keywords: central bank accountability, monetary policy, text analysis, uncertainty
    Date: 2020–07
  18. By: Tiago Miguel Guterres Neves Sequeira (University of Coimbra, Centre for Business and Economics Research, CeBER andFaculty of Economics)
    Abstract: Despite some recent evidence according to which different inflation rates have effects on long run growth, endogenous growth theory had advanced little on explaining the mechanics of monetary influence on economic growth. We follow the increasing interest in the issue offering a new explanation for the influence of monetary policy on growth in both long and short run: the cash requirements for households expenditures in education. Quantitatively, the model replicates both the small influence of monetary policy on growth while also highlighting the effects it can have on welfare and allocations of resources throughout different sectors in the economy.
    Keywords: endogenous economic growth, inflation, interest rate, monetary policy, cash-in-advance (CIA).
    JEL: O30 O40 E13 E17 E61
    Date: 2020–07
  19. By: Alessio Anzuini (Banca d’Italia)
    Abstract: The Federal Reserve responded to the global financial crisis of 2008 with the deployment of new monetary policy tools, the most notable of them being the expansion of its balance sheet. In a recent paper, Weale and Wiladeck (2016) show that the asset purchases were effective in stimulating economic activity, inflation and asset prices. In this paper, we show that the results of asset purchases are state-dependent: large scale purchases are effective only when financial markets are impaired. Using an estimated threshold vector autoregressive model conditional on the volatility regime, we show that an increase in the balance sheet has expansionary effects on GPD and inflation when volatility is high, but not when it is low (in which case its effects become mostly insignificant). We argue that high volatility can be interpreted as a proxy of market dysfunction, and therefore only when this transmission channel is active is unconventional monetary policy particularly effective. This suggest that models of transmission mechanisms of unconventional policies that are based on asset purchases should focus more on the market functioning channel and not only on the portfolio rebalance channel.
    Keywords: threshold vector autoregression, unconventional monetary policy.
    JEL: C32 E52
    Date: 2020–06
  20. By: Monique Reid; Pierre Siklos
    Abstract: We provide a brief historical overview of the rise of central bank communication (CBC) limiting the analysis to the conduct of monetary policy but with a focus on emerging market economies which have been neglected somewhat. After the financial crisis a shift emerged- CBC evolved from being a complement to a substitute for monetary policy actions. We explore the implications of this shift. We conclude CBC must first and foremost always complement central bank decisions. Whether crisis conditions prevail plays an important role in CBC. We list various channels and devices central banks use to communicate. Next, we focus on the key characteristics of CBC, namely credibility, clarity and consistency. The choice is based on the extant literature’s views about the forms of CBC that move markets and expectations the most. Finally, we consider some of the challenges in seeking the best possible CBC strategy. These include- audience heterogeneity; the state of the economy; the volume of CBC. We are especially interested in the impact in emerging markets. Our approach draws on and provides evidence from the international experience but we aim to highlight differences between advanced and emerging market economies. We also speculate about the future of CBC as a result of the pandemic.
    Date: 2020–08–03
  21. By: Paola Mariell Brens Ortega
    Abstract: The aim of this paper is to quantify the effects of an unanticipated monetary policy shock in key macroeconomic variables for the Dominican Republic. The modelling framework in the paper is based on Del Negro and Schorfheide (2004) DSGE-VAR procedure. The procedure allows the addition of theory to empirical models, characterized by a high degree of data fit. Given that the Dominican Republic’s key economic variables time series have a relative short span; this procedure represents a more suitable framework for monetary policy macroeconomic modelling as it incorporates policymaker's initial belief to the observed data. The results are aligned with macroeconomic theory and with previous empirical papers for the Dominican Republic that measure the impact of a monetary policy shock in output growth and in inflation.
    Keywords: DSGE-VAR, Monetary Policy, New Keynesian Models
    JEL: C32 C51 C53 C54 C61 E52
    Date: 2020–07–23
  22. By: Davide Melcangi; Vincent Sterk
    Abstract: What role does stock investment play in the transmission of monetary policy to the real economy? We study this question using a New Keynesian model with heterogeneous households. Following a monetary tightening, stock market participants rebalance their investments away from stocks, in line with empirical evidence on mutual fund flows. This response depresses aggregate investment and hence aggregate output and income, which feeds back into an even larger decline in stock investment. The strength of this channel is, however, highly sensitive to household heterogeneity. Therefore, we design the model to account endogenously for the observed population share of stockholders, their income characteristics, and their saving behavior. We find that, quantitatively, the stock investment channel of monetary policy dominates the consumption channels often emphasized in the literature, and also that it has become more powerful since the 1980s, as stock market participation increased.
    Keywords: monetary policy; stock investment; heterogeneity
    JEL: E21 E30 E50 E58
    Date: 2020–07–01
  23. By: Alessio Ciarlone (Bank of Italy); Daniela Marconi (Bank of Italy)
    Abstract: Financial integration of emerging economies is on the rise and so are financial and monetary spillovers, especially those originating from US economic policy decisions and the (related) evolution of the US dollar. We revisit the “trilemma” vs. “dilemma” hypothesis and assess whether, and to what extent, exchange rate regimes and other relevant country fundamentals affect the sensitivity of domestic financial conditions to global risk aversion and US financial conditions. Results for a sample of 17 emerging economies over the period 1990-2018 suggest that the trilemma hypothesis appears to be still valid, as more flexible exchange rate regimes help in mitigating spillovers to stock market returns, sovereign spreads and real credit growth. However, other country fundamentals such as the current account, trade integration and US dollar debt exposure are also important factors.
    Keywords: trilemma, global financial cycle, financial conditions, emerging market economies, international policy transmission, spillovers
    JEL: E42 E44 E52 F31 F36 F41 G15
    Date: 2020–07
  24. By: Kevin Hjortshøj O’Rourke; Sang Seok Lee; Martin Ellison (Division of Social Science)
    Abstract: How did countries recover from the Great Depression? In this paper we explore the argument that leaving the gold standard helped by boosting inflationary expectations and lowering real interest rates. We do so for a sample of 30 countries, using modern nowcasting methods and a new dataset containing more than 230,000 monthly and quarterly observations for over 1,500 variables. In those cases where the departure from gold happened on clearly defined dates, it seems clear that inflationary expectations rose in the wake of departure. Synthetic matching techniques suggest that the relationship is causal.
    Date: 2020–01
  25. By: Yothin Jinjarak; Rashad Ahmed; Sameer Nair-Desai; Weining Xin; Joshua Aizenman
    Abstract: This case study compares the importance of prevailing market factors against that of COVID-19 dynamics and policy responses in explaining the evolution of Eurozone (EZ) sovereign spreads during the first half of 2020. Focusing on daily Eurozone CDS spreads, we adopt a multi-stage econometric approach. First, we estimate a multi-factor model for changes in EZ CDS spreads over the pre-COVID-19 period of January 2014 through June 2019. Then, we apply a synthetic control-type procedure to extrapolate model-implied changes in the CDS from July 2019 through June 2020. We find that the factor model does very well in tracing the realized sovereign spreads over the rest of 2019, but breaks down during the pandemic – diverging substantially in March 2020. In the second stage, focusing specifically on the 2020 period, we find that the March 2020 divergence is well accounted for by COVID-specific risks and associated policies. In particular, mortality outcomes and policy announcements, rather than traditional determinants like fiscal space and systematic risk, drove CDS adjustment over this period. Daily CDS spread widening ceased almost immediately after the ECB announced the PEPP, but the divergence between actual and model-implied changes persisted. This divergence can be traced back to the fact that fiscally secure EZ Core countries saw spreads widen further than implied – comparable to the widening of more fragile countries - as several of the Core countries were hit hard by COVID-19. Taken all together, this points to COVID-19 Dominance: The widening spreads during the pandemic induced by COVID-specific risks and fiscal responses has led to unconventional monetary policies that primarily aim to mitigate the short-run fear of the worst economic outcomes, temporarily pushing away concerns over fiscal risk.
    JEL: F3 F34 F41 F45 H12 H5 H51
    Date: 2020–06
  26. By: Michael Woodford; Yinxi Xie
    Abstract: This paper reconsiders the degree to which macroeconomic stabilization is possible when the zero lower bound is a relevant constraint on the effectiveness of conventional monetary policy, under an assumption of bounded rationality. In particular, we reconsider the potential role of countercyclical fiscal transfers as a tool of stabilization policy. Because Ricardian Equivalence no longer holds when planning horizons are finite (even when relatively long), we find that fiscal transfers can be a powerful tool to reduce the contractionary impact of an increased financial wedge during a crisis, and can even make possible complete stabilization of both aggregate output and inflation under certain circumstances, despite the binding lower bound on interest rates. However, the power of such policies depends on the degree of monetary policy accommodation. We also show that a higher level of welfare is generally possible if both monetary and fiscal authorities commit themselves to history-dependent policies in the period after the financial disturbance that causes the lower bound to bind has dissipated. Hence forward guidance continues to play an important role in increasing the effectiveness of stabilization policy.
    JEL: E52 E63
    Date: 2020–07

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