nep-cba New Economics Papers
on Central Banking
Issue of 2020‒09‒14
twenty-six papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The interaction between macroprudential and monetary policies: The cases of Norway and Sweden By Cao, Jin; Dinger, Valeriya; Grodecka, Anna; Juelsrud, Ragnar; Zhang, Xin
  2. The Power of Helicopter Money Revisited: A New Keynesian Perspective By Thomas J. Carter; Rhys R. Mendes; Kim Huynh; Gradon Nicholls; Mitchell Nicholson
  3. The macroeconomic effects of forward communication By Brubakk, Leif; ter Ellen, Saskia; Robstad, Ørjan; Xu, Hong
  4. Strengthening Inflation Targeting: Review and Renewal Processes in Canada and Other Advanced Jurisdictions By Robert Amano; Thomas J. Carter; Lawrence L. Schembri
  5. Should Banks Create Money? By Christian Wipf
  6. Money, inflation and the financial crisis: the case of Switzerland By Peter Kugler; Samuel Reynard
  7. Medium-Term Money Neutrality and the Effective Lower Bound By Gauti B. Eggertsson; Marc Giannoni
  8. Dollar Safety and the Global Financial Cycle By Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
  9. European Banks and the Covid-19 Crash Test By Jézabel Couppey-Soubeyran; Erica Perego; Fabien Tripier
  10. Central bank funding and credit risk-taking By Bednarek, Peter; Dinger, Valeriya; te Kaat, Daniel Marcel; von Westernhagen, Natalja
  11. Does communication influence executives' opinion of central bank policy? By In Do Hwang; Thomas Lustenberger; Enzo Rossi
  12. New Evidence on the Anchoring of Inflation Expectations in the Euro Area By Sascha Möhrle
  13. Capital-constrained loan creation, stock markets and monetary policy in a behavioral new Keynesian model By Kotb, Naira; Proaño Acosta, Christian
  14. Credit Booms, Financial Crises and Macroprudential Policy By Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
  15. Burying Libor By Sven Klingler; Olav Syrstad
  16. International Coordination of Macroprudential Policies with Capital Flows and Financial Asymmetries By William Chen; Gregory Phelan
  17. After 25 years as faithful members of the EU. Public support for the euro and trust in the ECB in Austria, Finland and Sweden By Roth, Felix; Jonung, Lars
  18. Finance, Growth and (Macro)Prudential Policy: European Evidence By Martin Hodula; Ngoc Anh Ngo
  19. The Role of Money in Monetary Policy at the Lower Bound By Billi, Roberto M.; Söderström, Ulf; Walsh, Carl E.
  20. The Determinants of Fiscal and Monetary Policies During the Covid-19 Crisis By Efraim Benmelech; Nitzan Tzur-Ilan
  21. Comparing Means of Payment: What Role for a Central Bank Digital Currency? By Jesse Leigh Maniff; Paul Wong
  22. Trade Wars, Currency Wars By Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
  23. The Riddle of the Natural Rate of Interest By Razzak, Weshah
  24. Exchange-Rate Policy in a Dollarized Economy: Implications for Growth and Employment in Bolivia By Martin Cicowiez Author-Name: Carlos Gustavo Machicado Author-Name: Beatriz Muriel Author-Name: Alejandro Herrera Jiménez Author-Name: Alejandra Goytia
  25. Trade, Unemployment, and Monetary Policy By Matteo Cacciatore; Fabio Ghironi
  26. Regulatory Arbitrage and Economic Stability By Uluc Aysun; Sami Alpanda

  1. By: Cao, Jin (Norges Bank); Dinger, Valeriya (University of Osnarbruck and and Leeds University Business School); Grodecka, Anna (Department of Economics, Lund University and Knut Wicksell Centre for Financial Studies); Juelsrud, Ragnar (Norges Bank); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: To shed light on the interaction between macroprudential and monetary policies, we study the inward transmission of foreign monetary policy in conjunction with domestic macroprudential and monetary policies in Norway and Sweden. Using detailed bank-level data we show how Norwegian and Swedish banks' lending reacts to monetary policy surprises arising abroad, controlling for the domestic macroprudential stance and the interaction between monetary and macroprudential policies. In both countries, the domestic macroprudential policy helps mitigate the effects arising after foreign monetary surprises.
    Keywords: monetary policy; macroprudential policy; policy interactions; bank lending; inward transmission; international bank lending channel
    JEL: E43 E52 E58 F34 F42 G21 G28
    Date: 2020–07–01
  2. By: Thomas J. Carter; Rhys R. Mendes; Kim Huynh; Gradon Nicholls; Mitchell Nicholson
    Abstract: We analyze money financing of fiscal transfers (helicopter money) in two simple New Keynesian models: a “textbook†model in which all money is non-interest-bearing (e.g., all money is currency), and a more realistic model with interest-bearing reserves. In the textbook model with only non-interest-bearing money, we find the following: * A money-financed fiscal expansion can be more stimulative than a debt-financed fiscal expansion of equal magnitude. However, the extra stimulus requires that the central bank abandon its usual feedback rule for an extended period, allowing interest rates to instead be determined by the rate of money creation. * Moreover, the extra stimulus associated with money financing stems solely from its implications for the path of short-term interest rates and cannot be attributed to an oft-cited Ricardian-equivalence argument that money financing avoids the adverse wealth effects associated with higher taxes under debt financing. * Because the stimulative effects of money financing are driven by its implications for interest rates, a combination of debt financing and sufficiently accommodative forward guidance can replicate all welfare-relevant outcomes while bypassing the potential political-economic complications associated with helicopter money. * Apart from these complications, money financing also has the drawback that it would allow money-demand shocks to generate volatility in output and inflation, much as was the case under the money-targeting regimes of the 1970s and 1980s. In the model with interest-bearing reserves, we find the following: * The rate of money creation determines the interest rate on reserves, but broader interest rates are invariant across debt- and money-financing regimes. * As a result, money financing delivers no extra stimulus relative to debt financing. Overall, results suggest that helicopter money cannot be justified on the grounds that it would allow policy-makers to get more stimulus out of a given fiscal expansion: either money financing has no extra stimulative benefits to offer, or all potential benefits could be pursued more effectively and robustly using alternative policies.
    Abstract: The role of cash in Canadians’ lives has evolved over the past decade. During this period, two diverging trends have emerged in Canada: the use of cash for transactions at the point of sale has declined, but overall demand for cash has increased. The 2019 Cash Alternative Survey was designed to study these trends and update the Bank of Canada’s understanding of Canadians’ use of cash. We asked Canadians about their cash holdings, planned future use of cash and views on how they would be affected if cash were to disappear. In addition to declining cash use, the emergence of privately issued digital currencies has motivated many central banks to conduct research into central bank digital currencies (CBDCs). We contribute to the Bank of Canada’s research on CBDC by monitoring Canadians’ use of cash and their adoption of digital payment methods. We find that Canadians’ cash holdings are stable and the adoption of cryptocurrencies remains limited and concentrated in a few sub-demographics. Moreover, we find that few Canadians plan to stop using cash entirely and that a considerable share of them would find the disappearance of cash problematic.
    Keywords: Credibility; Economic models; Fiscal Policy; Inflation targets; Interest rates; Monetary Policy; Monetary policy framework; Transmission of monetary policy; Uncertainty and monetary policy; Bank notes, Central bank research, Digital currencies and fintech, Econometric and statistical methods
    JEL: E12 E41 E43 E51 E52 E58 E61 E63 C1 C12 C9 E4 O5 O51
    Date: 2020–02
  3. By: Brubakk, Leif; ter Ellen, Saskia; Robstad, Ørjan; Xu, Hong
    Abstract: This paper provides an empirical assessment of the power of forward guidance at different horizons, shedding new light on the strength of the “forward guidance puzzle”. Our identification strategy allows us to disentangle the change in future interest rates stemming from deviations from the systematic part of monetary policy (“target” and “forward guidance” shocks) and changes in future interest rates that are due to unanticipated revisions in the central bank’s economic outlook (“information” shocks). This enables us to make a qualitative assessment of the relative importance of forward guidance. We investigate to what extent the horizon of guidance matters for its macroeconomic effects, and find that the more forward the shock is, the weaker is its impact on output and inflation. This runs contrary to the prediction from standard New Keynesian models that the power of forward guidance increases with its horizon.
    Keywords: monetary policy, forward guidance puzzle, high-frequency identification, structural VAR, central bank information
    JEL: E43 E44 E52 E58
    Date: 2019–11–04
  4. By: Robert Amano; Thomas J. Carter; Lawrence L. Schembri
    Abstract: A growing number of advanced economies with monetary policy frameworks that involve inflation targeting have adopted formal processes of review and renewal. These allow policy-makers and other stakeholders to assess the current framework’s performance to date, explore the merits of potential alternative frameworks and reach decisions about how best to enhance design and implementation. In this paper, we argue that well-governed review and renewal processes can contribute importantly to the success of a monetary policy framework: (1) they help to adjust the framework in response to experience, theoretical developments and changes in the economy; and (2) they enhance the legitimacy and credibility of changes made to the framework. However, as these processes involve inputs from the government or legislature, they also create potential for tensions regarding central bank independence. We use an international comparison to show that these considerations have been balanced in different ways across countries and time, with a spectrum running from relatively technocratic processes to ones more closely linked to the political cycle. We also highlight several unique aspects of the modern review and renewal experience in Canada, where renewals of the Bank of Canada’s joint inflation-control agreement with the government have regularly been preceded by in-depth framework reviews, each involving a large amount of original research and significant levels of transparency.
    Keywords: Central bank research; Inflation targets; Monetary policy framework
    JEL: E E5 E52 E58
    Date: 2020–08
  5. By: Christian Wipf
    Abstract: The paper compares the welfare properties of two competing organi- zations of the monetary system: The current fractional reserve banking system versus a narrow banking system where inside money is fully backed by outside money issued by the central bank. Using a New Monetarist model, the analysis shows that fractional reserve banking is bene cial because of the interest payments on inside money. Since inside money funds loans, it pays interest, compensating the agents for the in ation tax and thus reducing the welfare costs of in ation. Since narrow banking provides no such compensation fractional reserve banking typically domi- nates narrow banking in terms of welfare. This also holds if outside money pays interest. Only if fractional reserve banking is suciently constrained, narrow banking can yield higher welfare.
    JEL: E42 E51 G21
    Date: 2020–08
  6. By: Peter Kugler; Samuel Reynard
    Abstract: Unconventional monetary policies have sometimes raised inflation-related fears that have not materialized. Switzerland presents an interesting case, as the central bank reacted to an appreciating currency by injecting Swiss francs through foreign exchange interventions, and bank lending increased considerably throughout the financial crisis. The low inflation that occurred after the crisis can be reconciled with the substantial money growth during the crisis by accounting for the effects of the lower equilibrium velocity and portfolio shifts associated with the Swiss National Bank's foreign exchange interventions.
    Keywords: Monetary policy, monetary aggregates, inflation, equilibrium velocity, foreign exchange interventions
    JEL: E52 E58 E41 E30
    Date: 2020
  7. By: Gauti B. Eggertsson; Marc Giannoni
    Abstract: Conventional wisdom suggests that medium-term money neutrality imposes strong limitations on the effects of monetary policy. The point of this paper is that models with medium- and long-term money neutrality are prone to generate non-existence of equilibria at the effective lower bound (ELB) on interest rates. Non-existence is suggestive of sharp output contractions --- so-called contractionary black holes --- at the ELB. Paradoxically, the case for expansionary monetary policy at the ELB is even stronger in models that feature near money neutrality. The results highlight the benefits of a monetary policy regime in which the central bank temporarily overshoots its inflation target once confronted by the ELB.
    JEL: E0 E13 E40 E58
    Date: 2020–08
  8. By: Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig
    Abstract: We build a model of the global financial cycle with one key ingredient: the demand for safe dollar assets. The model matches patterns of dollar borrowing and currency mismatch, the U.S. external balance sheet, low U.S. interest rates and exorbitant privilege, spillovers of the U.S. monetary policy to the rest of the world, and the dollar as a global risk factor. In doing so, we lay out a novel transmission mechanism through which the U.S. monetary policy affects the currency market and the global economy.
    JEL: E4 F3 G15
    Date: 2020–08
  9. By: Jézabel Couppey-Soubeyran; Erica Perego; Fabien Tripier
    Abstract: European banks are stronger today than they were on the eve of the 2007-2008 financial crisis, thanks to the reforms that have taken place since then. But will they be strong enough in the face of a health crisis closer to the Great Depression of the 1930s than the stress scenarios envisaged by the European banking Authority for 2020? Access to central bank liquidity probably eliminates the risk of bank illiquidity, but it is not unthinkable that a bank insolvency crisis would have to be managed. The non-repayment of one in five loans would be enough to exhaust the current level of capital. The resolution mechanism would then have to be mobilised, which is unlikely to be sufficient in a context where, according to the European Systemic Risk Board, the risk of simultaneous defaults is increasing sharply. This would leave the possible mobilisation of the European Stability Mechanism. If this complement proves insufficient, a sovereign debt crisis in the euro area could re-emerge.
    Date: 2020
  10. By: Bednarek, Peter; Dinger, Valeriya; te Kaat, Daniel Marcel; von Westernhagen, Natalja
    Abstract: This paper examines the relationship between central bank funding and credit risk-taking. Employing comprehensive bank-firm-level data from the German credit registry during 2009:Q1-2014:Q4, we find that borrowing from the central bank is associated with rebalancing of bank portfolios towards ex-ante riskier firms. We further establish that this relationship is associated with the ECB's maturity extensions and that the risk-taking sensitivity of banks borrowing from the ECB is independent of idiosyncratic bank characteristics. Finally, we highlight that these shifts in bank lending might lead to an ex-post deterioration of bank balance sheets, but increase firm-level investment and employment.
    Keywords: Monetary Policy,LTRO,Bank Lending,Credit Risk-Taking,Real Effects,TFP Growth
    JEL: E44 E52 G21 O40
    Date: 2020
  11. By: In Do Hwang; Thomas Lustenberger; Enzo Rossi
    Abstract: We analyze the economic impact of central banks sensed by business executives in a sample of 61 countries from 1998 to 2016. Based on a survey conducted by the Institute for Management Development (IMD), we find compelling evidence that intensive central bank communication worsens the perceived impact. During the global financial crisis (GFC), this effect became even stronger. In contrast, economic growth and a positive output gap improve the opinion executives have of their central bank's impact on the economy. Moreover, although less robustly, higher unemployment, and higher short-term interest rates worsen executives' opinion, while market uncertainty improves it. The level of inflation and an inflation targeting regime, central bank independence and transparency, financial crises, the zero lower bound constraint, forward guidance, the performance of the stock exchange, and the volatility of the exchange rate seem to be unimportant in this regard.
    Keywords: Central bank communication, economic impact, perceived competence and trust in central banks, panel data, executive survey
    JEL: E58 E52 D83 D80
    Date: 2020
  12. By: Sascha Möhrle
    Abstract: This paper examines the anchoring of inflation expectations in the euro area based on data from the Survey of Professional Forecasters (SPF). The analysis shows that the overall distribution of medium- and long-term inflation forecasts has changed considerably following the global financial crisis. Moreover, micro level expectations of professional forecasters are found to be sensitive to short-term economic developments. These patterns suggest that euro area inflation expectations are significantly less anchored to the ECB’s definition of price stability in recent years compared to the pre-crisis period.
    Keywords: Inflation expectations, anchoring, euro area, ECB, financial crisis
    JEL: E31 E58
    Date: 2020
  13. By: Kotb, Naira; Proaño Acosta, Christian
    Abstract: In this paper we incorporate a stock market and a banking sector in a behavioral macro-finance model with heterogenous and boundedly rational expectations. Households' savings are diversified among bank deposits and stock purchases, and banks' lending to firms is subject to capital-related costs. We find that households' participation in the stock market, coupled to the existence of a capital-constrained banking sector affects the transmission of monetary policy to the economy significantly, and that households' deposits act as a critical spill-over channel between the real and the financial sectors. In other words, we relate the regulatory stance in the banking sector with the degree of pass-through of monetary policy shocks. Further, we investigate the performance of a leaning-against-the-wind (LATW) monetary policy which targets asset prices concerning macroeconomic and financial stability.
    Keywords: Behavioral Macroeconomics,Banking,Stock Markets,Monetary Policy
    JEL: E44 E52 G21
    Date: 2020
  14. By: Mark Gertler; Nobuhiro Kiyotaki; Andrea Prestipino
    Abstract: We develop a model of banking crises which Is consistent with two important features of the data: First, banking crises are usually preceded by credit booms. Second, credit booms often do not result in a crisis. That is, there are "good" booms as well as "bad" booms in the language of Gorton and Ordonez (2019). We then consider how the optimal macroprudential policy weighs the benefits of preventing a crisis against the costs of stopping a good boom. We show that countercyclical capital buffers are a critical feature of a successful macropudential policy.
    JEL: E00
    Date: 2020–07
  15. By: Sven Klingler; Olav Syrstad
    Abstract: We argue that the planned transition toward alternative benchmark rates gives reason to mourn Libor. Guided by a model in which banks and non-banks can lend to each other, subject to realistic regulatory constraints, we show empirically that tighter financial regulation increases interbank rates but lowers broad rates (in which lenders are non-banks) and that all market rates increase with more Treasury bill issuance. Hence, the proportion of non-bank lenders affects the alternative rates, introducing variation in the benchmark that is unrelated to banks’ marginal funding costs and creating a basis between regions with interbank rates and broad rates.
    Keywords: Benchmark rates, financial regulation, Libor, repo rates, collateral
    JEL: E43 G12 G18
    Date: 2019–08–09
  16. By: William Chen (Williams College); Gregory Phelan (Williams College)
    Abstract: Lack of coordination for prudential regulation hurts developing economies but benefits advanced economies. We consider a two-country macro model in which countries have limited ability to issue state-contingent contracts in international markets. Both countries have incentives to stabilize their economy by using prudential limits, but the emerging economy depends on the advanced economy to bear global risk. Financially developed economies are unwilling to intermediate global risk, which means bearing systemic risk, preferring financial stability over credit flows. Advanced economies prefer tighter prudential limits than would occur with coordination, giving them greater bargaining power when negotiating international agreements.
    Keywords: International Capital Flows, Capital Controls, Macroeconomic Instability, Macroprudential Regulation, Policy Coordination, Spillovers, Financial Crises.
    JEL: E44 F36 F38 F42 G15
    Date: 2020–05
  17. By: Roth, Felix; Jonung, Lars
    Abstract: Austria, Finland and Sweden became members of the EU in 1995. This paper examines how support for the euro and trust in the European Central Bank (ECB) have evolved in these three countries since their introduction at the turn of the century. Support for the euro in the two euroarea members Austria and Finland has remained high and relatively stable since the physical introduction of the new currency nearly 20 years ago, while the euro crisis significantly reduced support for the euro in Sweden. Since the start of the crisis, trust in the ECB was strongly influenced by the pronounced increase in unemployment in the euro area, demonstrating that the ECB was held accountable for macroeconomic developments. Our results indicate that citizens in the EU, both within and outside the euro area, judge the euro and the ECB based on the economic performance of the euro area. Thus, the best way to foster support for the euro and trust in the ECB is to pursue policies aimed at achieving low unemployment and high growth.
    Keywords: euro,trust,ECB,EU,monetary union,Austria,Finland,Sweden
    JEL: E42 E52 E58 F33 F45
    Date: 2020
  18. By: Martin Hodula; Ngoc Anh Ngo
    Abstract: This paper examines the interactions between financial development, economic growth and (macro)prudential policy on a sample of euro area countries. Our main takeaway is that active (macro)prudential policy supports the positive finance-growth nexus instead of disrupting it. These benefits are found to be more likely to materialize during tightening of (macro)prudential policy measures and not during easing. This result is conditional on the ability of (macro)prudential policy to curb excess credit growth and mitigate systemic risk, which would otherwise disrupt the market. Moreover, we assert that when analysing the effects of (macro)prudential policy, it is important to account for the direction of (macro)prudential measures, not just for the frequency at which they are implemented.
    Keywords: Development, finance, growth, macroprudential policy, panel analysis
    JEL: G10 G28 O16 O40
    Date: 2020–09
  19. By: Billi, Roberto M. (Research Department, Central Bank of Sweden); Söderström, Ulf (Research Department, Central Bank of Sweden); Walsh, Carl E. (University of California, Santa Cruz)
    Abstract: In light of the current low-interest-rate environment, we reconsider the merit of a money growth target (MGT) relative to a conventional ination targeting (IT) regime, and to the notion of price level targeting (PLT). Through the lens of a New Keynesian model, and accounting for a zero lower bound (ZLB) constraint on the nominal interest rate, we show, not surprisingly, that PLT performs best in terms of social welfare. However, the ranking between IT and MGT is not a foregone conclusion. In particular, although MGT makes monetary policy vulnerable to money demand shocks, it contributes to achieving price level stability and reduces the incidence and severity of the ZLB relative to both IT and PLT. We also show that MGT lessens the need for the scal authority to engage alongside the central bank in ghting recessions. To illustrate this scal bene t of MGT, we introduce a simple rule for the scal authority to raise government purchases when GDP falls below potential. If the government fails to make up for a substantial share of the shortfalls in GDP, then IT performs worse than MGT from the perspective of society.
    Keywords: Friedmans k-percent rule; ZLB constraint; scal policy; automatic stabilizers
    JEL: E31 E42 E52
    Date: 2020–06–01
  20. By: Efraim Benmelech; Nitzan Tzur-Ilan
    Abstract: As countries around the world grapple with Covid-19, their economies are grinding to a halt. For the first time since the Great Depression both advanced economies and developing economies are in recession. Governments and central banks have responded to the pandemic and the economic crisis using both fiscal and monetary tools on a scale that the world has not witnessed before. This paper analyzes the determinants of fiscal and monetary policies during the Covid-19 crisis. We find that high-income countries announced larger fiscal policies than lower-income countries. We also find that a country’s credit rating is the most important determinant of its fiscal spending during the pandemic. High-income countries entered the crisis with historically low interest rates and as a result were more likely to use nonconventional monetary policy tools. These findings raise the concern that countries with poor credit histories – those with lower credit ratings and, in particular, lower-income countries – will not be able to deploy fiscal policy tools effectively during economic crises.
    JEL: E43 E44 E52 E62 E63 G01 G28
    Date: 2020–07
  21. By: Jesse Leigh Maniff; Paul Wong
    Abstract: This paper looks at the potential benefit that a central bank digital currency (CBDC) could provide in the context of existing payment mechanisms. Central banks today provide the primary payment mechanisms for trade and commerce: cash, used by the public, and electronic payment services, used by eligible financial institutions.
    Date: 2020–08–13
  22. By: Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
    Abstract: For most of the post WWII period, until recently, trade protectionism followed a downward trend, and was formulated in multilateral or bilateral agreements between countries. Recently however, there hasbeen a sharp shift towards unilateral, discretionary trade policy focused on short term macroeconomic objectives, and as a consequence, the use of trade policy has become entangled with that of monetary policy. This paper explores the consequences of this shift within a standard DSGE open economy macroeconomic model. We find that a discretionary non-cooperative approach to trade policy can significantly worsen macroeconomic conditions. Moreover, the stance of monetary policy has major implications for the degree of protection in a non-cooperative equilibrium. In particular, cooperative determination of monetary policy implies an increase in both equilibrium tariffs and inflation, and a significant fall in welfare. By contrast, when the exchange rate is pegged by one country, equilibrium rates of protection are generally lower, but in this case, there are multiple asymmetric equilibria in tariff rates which benefit one country relative to another. We also explore the determination of non-cooperative tariffs in a situation where monetary policy is constrained by the zero lower bound on nominal interest rates.
    JEL: F30 F40 F41
    Date: 2020–07
  23. By: Razzak, Weshah
    Abstract: We rely on microeconomics theory to compute the natural rate of interest for the G7 countries from 2001 to 2017. The equilibrium natural rate of interest is determined by a parsimonious equation that is easily computed from readily observable data, hence no estimation errors. The model predicts that the natural rate of interest is equal to the consumption-leisure growth rate less the capital-labor growth rate, which is zero in the steady state, no growth. It is positive (negative) when the consumption-leisure growth gap is greater (smaller) than the capital-labor growth gap. The model predicts that fiscal expansion is an expensive policy to stimulate the economy when the Zero Lower Bound (ZLB) constraint is binding.
    Keywords: Natural rate of interest, Monetary policy
    JEL: C68 E43 E52
    Date: 2020–04
  24. By: Martin Cicowiez Author-Name: Carlos Gustavo Machicado Author-Name: Beatriz Muriel Author-Name: Alejandro Herrera Jiménez Author-Name: Alejandra Goytia
    Abstract: We analyzed the impact of currency devaluation on the Bolivian economy, employing a dynamic and extended version of the PEP 1-1 standard model to simulate effects impact on both the main macroeconomic aggregates and the financial stocks and flows of economic agents. We built a new Financial Social Accounting Matrix for the year 2014 and calibrated the model to it. Besides simulating a devaluation of the nominal exchange rate, we also analyzed a policy-response scenario, an external-shock scenario, and a gradual-devaluation scenario. In the policy-response scenario, devaluation was accompanied by a reduction in government expenses (fiscal adjustment); in the external-shock scenario, devaluation came with an increase in the export price of gas (main export commodity); and, in the gradual-devaluation scenario, the exchange-rate policy relaxed gradually. The external-shock scenario dominated the other scenarios in terms of higher average growth and less average unemployment. The fiscal-adjustment scenario, however, dominated in terms of inflation, though it implied an inflationary shock in 2020.
    Keywords: Foreign exchange policy, macroeconomic policy, CGE modelling, Bolivia
    JEL: C68 E61 O24 O54
    Date: 2020
  25. By: Matteo Cacciatore; Fabio Ghironi
    Abstract: We study how trade linkages affect the conduct of monetary policy in a two-country model with heterogeneous firms, endogenous producer entry, and labor market frictions. We show that the ability of the model to replicate key empirical regularities following trade integration---synchronization of business cycles across trading partners and reallocation of market shares toward more productive firms---is central to understanding how trade costs affect monetary policy trade-offs. First, productivity gains through firm selection reduce the need of positive inflation to correct long-run distortions. As a result, lower trade costs reduce the optimal average inflation rate. Second, as stronger trade linkages increase business cycle synchronization, country-specific shocks have more global consequences. Thus, the optimal stabilization policy remains inward looking. By contrast, sub-optimal, inward-looking stabilization---for instance too narrow a focus on price stability---results in larger welfare costs when trade linkages are strong due to inefficient fluctuations in cross-country aggregate demand.
    JEL: E24 E32 E52 F16 F41 J64
    Date: 2020–07
  26. By: Uluc Aysun (University of Central Florida, Orlando, FL); Sami Alpanda (University of Central Florida, Orlando, FL)
    Abstract: This paper shows that national bank regulation can ensure nancial and economy stability only if business cycles are driven by domestic and non- nancial global shocks. If global nancial shocks are more important, by contrast, national regulatory policies can be destabilizing. These inferences are drawn from a two-country DSGE model with global banking, nancial regulation and the nancial accelerator mechanism. The results indicate that bank regulation suppresses the ampli cation e¤ects of the nancial accelerator mechanism when countries face domestic and non- nancial global shocks. When there is a global nancial shock, however, highly-regulated countries are more vulnerable to the ebbs and ows of global bank lending since their rms are more leveraged and externally funded. More generally, the results imply that the nancial trilemma is not binding in economies where domestic and non- nancial global shocks drive the business cycle.
    Keywords: bank regulation, DSGE, nancial accelerator, global banks, nancial trilemma.
    JEL: E32 E44 F33 F44
    Date: 2020–08

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