nep-cba New Economics Papers
on Central Banking
Issue of 2021‒04‒05
thirty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Exchange Rate Parities and Taylor Rule Deviations By Christina Anderl; Guglielmo Maria Caporale
  2. A global database on central banks' monetary responses to Covid-19 By Carlos Cantú; Paolo Cavallino; Fiorella De Fiore; James Yetman
  3. A Monetary Policy Rule using Gravity Models By Peña, Guillermo
  4. Optimal capital adequacy ratio: an investigation of Vietnamese commercial banks using two-stage DEA By Phuong Anh Nguyen; Bich Le Tran; Michel Simioni
  5. Exchange Rate Pass-Through to Consumer Prices in Turkey: Nonparametric Kernel Estimation Evidence By Yilmaz, Nejat; Yucel, Eray
  6. Machine Learning and Central Banks: Ready for Prime Time? By Hans Genberg; Özer Karagedikli
  7. Central Bank Swap Arrangements in the COVID-19 Crisis By Joshua Aizenman; Hiro Ito; Gurnain Kaur Pasricha
  8. The Voice of Monetary Policy By Yuriy Gorodnichenko; Tho Pham; Oleksandr Talavera
  9. Opacity and risk-taking: Evidence from Norway By Jin Cao; Ragnar E. Juelsrud
  10. Why Are Fiscal Multipliers Moderate Even Under Monetary Accommodation? By Christian Bredemeier; Falko Juessen; Andreas Schabert
  11. Price-setting in the foreign exchange swap market: Evidence from order flow By Olav Syrstad; Ganesh Viswanath-Natraj
  12. Monetary Policy and the Racial Unemployment Rates in the US By Hamza Bennani
  13. Foreign Bank Assets and Presence on Banking Stability in Africa: Does Strong and Weak Corporate Governance Systems under different Regulatory Regimes Matter? By Baah Aye Kusi; Elikplimi Agbloyor; Simplice A. Asongu; Joshua Yindenaba Abor
  14. The interaction of forward guidance in a two-country new Keynesian model By Ida, Daisuke; Iiboshi, Hirokuni
  15. Identification at the Zero Lower Bound By Sophocles Mavroeidis
  16. Regulatory and Bailout Decisions in a Banking Union By Andreas Haufler
  17. The Impact of Remittance Flow on Real Effective Exchange Rate: Empirical Evidence from The Gambia By Joof, Foday; Touray, Sheriff
  18. Imperfect Exchange Rate Pass-through: Empirical Evidence and Monetary Policy Implications By Maryam Mirfatah; Vasco J. Gabriel; Paul Levine
  19. Asset managers, market liquidity and bank regulation By Iñaki Aldasoro; Wenqian Huang; Nikola Tarashev
  20. The black hole of logistics costs of digitizing commodity money By Boliang Lin; Ruixi Lin
  21. Monetary Policy, Inflation, and Distributional Impact: South Africa’s Case By Ken Miyajima
  22. Credit Cycles, Fiscal Policy, and Global Imbalances By Callum Jones; Pau Rabanal
  23. Facing the Global Financial Cycle: What Role for Policy By Nicoletta Batini; Luigi Durand
  24. How to prevent a new global financial crisis By Víctor A. Beker
  25. Global Risk and Portfolio Flows to Emerging Markets: Evidence from Irish-Resident Investment Funds By Bianchi, Benedetta; Galstyan, Vahagn; Herzberg, Valerie
  26. Forecasting inflation with twitter By J. Daniel Aromí; Martín Llada
  27. SVARs With Occasionally-Binding Constraints By S. Borağan Aruoba; Marko Mlikota; Frank Schorfheide; Sergio Villalvazo
  28. Long-run neutrality of money and inflation in Spanish economy, 1830-1998 By Rafael Emilio Congregado; Vicente Esteve
  29. Uncertainty and Monetary Policy during the Great Recession By Giovanni Pellegrino; Efrem Castelnuovo; Giovanni Caggiano
  30. The “Place Of The Phillips Curve” in Macroeconometric Models: The Case of the First Federal Reserve Board’s Model (1966-1980s) By Rancan, Antonella
  31. An econometric analysis of the effectiveness of fiscal and monetary policies in India By Nadar, Anand

  1. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper investigates the PPP and UIP conditions by taking into account possible nonlinearities as well as the role of Taylor rule deviations under alternative monetary policy frameworks. The analysis is conducted using monthly data from January 1993 to December 2020 for five inflation-targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeting ones (the US, the Euro-Area and Switzerland). Both a benchmark linear VECM and a nonlinear Threshold VECM are estimated; the latter includes Taylor rule deviations as the threshold variable. The results can be summarised as follows. First, the nonlinear specification provides much stronger evidence for the PPP and UIP conditions, the estimated adjustment speed towards equilibrium being twice as fast. Second, Taylor rule deviations play an important role: the adjustment speed is twice as fast when deviations are small and the credibility of the central bank is higher. Third, inflation targeting tends to generate a higher degree of credibility for the monetary authorities thereby reducing deviations of the exchange rate from the PPP- and UIP-implied equilibrium.
    Keywords: PPP, UIP, nonlinearities, Taylor rules deviations, inflation targeting
    JEL: C32 F31 G15
    Date: 2021
  2. By: Carlos Cantú; Paolo Cavallino; Fiorella De Fiore; James Yetman
    Abstract: The Covid-19 pandemic has been a global shock of unprecedented size that has hit most countries around the world. Central banks have responded quickly, on a massive scale. We present a novel database that provides information on central banks' responses to Covid-19 in 39 economies, including both advanced and emerging market economies. Monetary policy announcements are listed and classified under five types of tools: interest rate measures, reserve policies, lending operations, asset purchase programmes and foreign exchange operations. Within each category, the database provides additional information such as maturity, eligible counterparties, types of assets and the availability of fiscal backup. It also indicates whether the policy tool was newly introduced or had been previously deployed. The database has a companion dashboard to visualise the data graphically.
    Keywords: Covid-19 crisis, monetary policy, lending operations, asset purchase programmes, FX policy, reserve policy
    JEL: E43 E44 E52 E58 G01
    Date: 2021–03
  3. By: Peña, Guillermo
    Abstract: Monetary policy, when rules-based, usually follows rules regarding inflation or output, but not always quantity, endemic and financial endogenous rules that minimize the gap between optimal and current rates of inflation and output. This paper proposes a rules-based monetary policy focused on reducing differences between short-term Treasury bill and implicit pure interest rate given by gravity models. Satisfying this rule is highly explanatory for reaching potential GDP growth, and for inflation targets such as the 2%. The results are confirmed with worldwide data. Central Banks could follow this rule, or combinations with other complementary alternatives, when deciding rates and amounts.
    Keywords: Pure interest, Policy Rules, Financial Services, Marginal Productivity, Value added
    JEL: D78 E43 E44 E52 E58
    Date: 2021–02–09
  4. By: Phuong Anh Nguyen (VNU-HCM - Vietnam National University - Ho Chi Minh City); Bich Le Tran (VNU-HCM - Vietnam National University - Ho Chi Minh City); Michel Simioni (UMR MoISA - Montpellier Interdisciplinary center on Sustainable Agri-food systems (Social and nutritional sciences) - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - CIHEAM-IAMM - Centre International de Hautes Etudes Agronomiques Méditerranéennes - Institut Agronomique Méditerranéen de Montpellier - CIHEAM - Centre International de Hautes Études Agronomiques Méditerranéennes - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Over the last years the Vietnamese banking system has been struggling to restructure, reform governance, consolidate financial statements and build up merge and acquisition, in line with international standards. The Bank for International Settlements (BIS) proposed BASEL III in 2010, whereby banks must increase their minimum Capital Adequacy Ratios (CAR) year by year with a goal of 10.5% by 2019. The objective of this paper is to address the questions: (1) what are the optimal CAR levels for Vietnamese Commercial Banks (2) whether the minimum required CARs stipulated in the Basel II and III are reasonable for Vietnam banking system? The data set consists of a sample of Vietnamese commercial banks over the six-year period from 2010 to 2015. The optimal CARs of banks are calculated using the nonparametric two-stage Data Envelopment Analysis (DEA) model, with two inputs: fixed assets, employee expense and two outputs: interest income, non-interest income. The findings indicate that 92.4% of the banks have the optimal CAR higher than the minimum ratio 10.5% defined in BASEL III. Moreover, 57.98% of the banks should raise their current level of CAR to reach their optimal ones. To conclude, this paper will provide a guideline for Vietnamese banks to decide their optimal CAR to reach the efficiency frontier.
    Keywords: Vietnam banking system,Two-stage DEA,BASEL II,BASEL III,Capital adequacy ratios
    Date: 2021–01–01
  5. By: Yilmaz, Nejat; Yucel, Eray
    Abstract: Exchange rate pass-through (ERPT) in the Turkish economy appeared again, especially after mid-2018 when policies to re-balance and soft-land the economy failed to a wide extent. Such re-appearance of the feedback from exchange rates to domestic prices deserves investigative efforts, having recalled that part of the stabilization success of the Central Bank of Turkey in early 2000s directly stemmed from its ability to reduce ERPT. In this paper, we aim to contribute to current policy discussions on Turkey by presenting our nonparametric kernel-based density function and regression estimates of the pass-through effect. Our findings are indicative not only of a sizable level of ERPT but also of its dependence on the size of currency depreciation.
    Keywords: Exchange Rate; Currency Depreciation; Pass-through to Inflation; Consumer Prices; Monetary Policy; Inflation Targeting; Central Bank Performance
    JEL: C51 E52 E58
    Date: 2021–02–08
  6. By: Hans Genberg (Asia School of Business); Özer Karagedikli (South East Asian Central Banks (SEACEN) Research and Training Centre and Centre for Applied Macroeconomic Analysis (CAMA))
    Abstract: In this article we review what machine learning might have to offer central banks as an analytical approach to support monetary policy decisions. After describing the central bank’s “problem†and providing a brief introduction to machine learning, we propose to use the gradual adoption of Vector Auto Regression (VAR) methods in central banks to speculate how machine learning models must (will?) evolve to become influential analytical tools supporting central banks’ monetary policy decisions. We argue that VAR methods achieved that status only after they incorporated elements that allowed users to interpret them in terms of structural economic theories. We believe that the same has to be the case for machine learning model.
    Date: 2021–03
  7. By: Joshua Aizenman; Hiro Ito; Gurnain Kaur Pasricha
    Abstract: Facing acute strains in the offshore dollar funding markets during the COVID-19 crisis, the Federal Reserve (Fed) implemented measures to provide US dollar liquidity by reinforcing swap arrangements with five major central banks, reactivating them with nine other central banks and establishing a financial institutions and monetary authorities (FIMA) repo facility in March 2020. This paper assesses motivations for the Fed liquidity lines, and the effects and spillovers of US dollar auctions by central banks, for about 50 economies. We find that the access to the liquidity arrangements is driven by the recipient economies’ close trade ties with the US. Higher US bank and trade exposure to an economy increases its access to dollar liquidity lines through the swap arrangements and the new repo facility. Access to dollar liquidity also reflects global trade exposure. We investigate the announcement effects of the liquidity arrangements on several key financial variables, and find that announcements of expansion of Fed liquidity facilities led to appreciation of partner currencies against the US dollar, improved CDS spreads, and lowered the long-term interest rates of the recipient economies. Further, US dollar auctions by economies’ own central banks lead to temporary appreciation of their currencies, but dollar auctions by major central banks (BoE, ECB, BoJ and SNB) have persistent spillovers – they led to appreciation of other non-dollar currencies. These responses do not differ whether the economies have larger or smaller financial or trade ties with the US.
    JEL: F15 F21 F32 F36 G15
    Date: 2021–03
  8. By: Yuriy Gorodnichenko; Tho Pham; Oleksandr Talavera
    Abstract: We develop a deep learning model to detect emotions embedded in press conferences after the meetings of the Federal Open Market Committee and examine the influence of the detected emotions on financial markets. We find that, after controlling for the Fed’s actions and the sentiment in policy texts, positive tone in the voices of Fed Chairs leads to statistically significant and economically large increases in share prices. In other words, how policy messages are communicated can move the stock market. In contrast, the bond market appears to take few vocal cues from the Chairs. Our results provide implications for improving the effectiveness of central bank communications.
    JEL: D84 E31 E58 G12
    Date: 2021–03
  9. By: Jin Cao; Ragnar E. Juelsrud
    Abstract: This paper investigates how balance sheet opacity affects banks' risk-taking behavior. We measure bank balance sheet opacity according to two metrics: the ratio of available-for-sale (AFS) securities and the ratio of off-balance sheet items. We show that balance sheet opacity is positively correlated with realized bank risk. Specifically, banks with more AFS securities have lower realized risk, while banks with more off-balance sheet items have higher realized risk. The correlation between opacity and risk depends on both macroeconomic variables and bank characteristics. The positive relationship between bank opacity and bank risk is weaker for better capitalized banks and banks that are subject to more market discipline. The relationship is also weaker during periods of favorable market conditions. Motivated by this analysis, we then investigate how regulation affects bank opacity. We show that higher capital requirements reduce bank opacity and bank risk through a portfolio rebalancing channel.
    Keywords: opacity, transparency, available-for-sale securities, off-balance sheet items, risktaking
    JEL: G21 G23 G28
    Date: 2020–10–07
  10. By: Christian Bredemeier; Falko Juessen; Andreas Schabert (UniversityofCologne,CenterforMacroeconomicResearch,Albertus-Magnus-Platz,50931Cologne, Germany)
    Abstract: Estimated fiscal multipliers for the US are typically moderate, despite evidence for the Fed lowering, rather than raising, interest rates after government spending hikes. We rationalize these puzzling observations building on imperfect substitutability of assets. We document empirically that interest rates important for private borrowing/saving do not follow the response of the monetary policy rate, which is reflected by rising liquidity premia after spending hikes. A model with a structural specification of asset liquidity can replicate these findings and predicts moderate output effects fiscal expansions even when monetary policy rates fall or are fixed at the zero lower bound.
    Keywords: Fiscal multiplier, monetary policy, real interest rates, liquidity premium, zero lower bound
    JEL: E32 E42 E63
    Date: 2021–03
  11. By: Olav Syrstad; Ganesh Viswanath-Natraj
    Abstract: This paper investigates price discovery in foreign exchange (FX) swaps. Using data on inter-dealer transactions, we find that a 1 standard deviation increase in order flow (i.e. net pressure to obtain USD through FX swaps) increases the cost of dollar funding by up to 4 basis points after the 2008 crisis. This is explained by increased dispersion in dollar funding costs and quarter-end periods. We find central bank swap lines reduced the order flow to obtain USD through FX swaps, subsequently affecting the forward rate. In contrast, during quarter-ends and monetary announcements we observe high frequency adjustment of the forward rate.
    Keywords: interest rate parity, exchange rates, currency swaps, order flow, dollar funding
    JEL: E43 F31 G15
    Date: 2020
  12. By: Hamza Bennani
    Abstract: This paper analyses the effects of monetary policy on labor market responses of different racial groups in the US from 1970-2013. Employing a narrative approach to identify monetary policy shocks and local projections, we find that monetary policy has a significant impact on White's unemployment rate. Empirical evidence indicates that an accommodative monetary shock affects positively and significantly White workers, while the effect on African-American workers is more uncertain and not significant for the Hispanic workers. These results are robust when considering unconventional monetary policy measures in the specification and when exploring the impact of monetary policy on different genders and age groups. Finally, we highlight that these results are mainly driven by a \enquote{recession effect}, whereby as a result of occupational, segregation minorities do not benefit from the Federal Reserve's accommodative monetary policy during recessions. Our findings suggest that monetary policy is ineffective in reducing the unemployment gap among minorities in the US, and that the Fed should specifically target the African-American unemployment rate in its reaction function. Finally, structural policies that aim to improve the skills of minorities and the fight against racial discrimination in the labor market, in particular during recessions, are also likely to mitigate the racial unemployment gap.
    Keywords: minorities; monetary policy; employment.
    JEL: E52 E58
    Date: 2021
  13. By: Baah Aye Kusi (University of Ghana Business School, Ghana); Elikplimi Agbloyor (University of Ghana Business School, Ghana); Simplice A. Asongu (Yaoundé, Cameroon); Joshua Yindenaba Abor (University of Ghana Business School, Ghana)
    Abstract: This study examines the effect of foreign bank assets and presence on banking stability in the economies with strong and weak country-level corporate governance in Africa between 2006 and 2015. Employing a Prais-Winsten panel data model on 86 banks in about 30 African economies, the findings on how foreign bank assets and presence influence banking stability in strong and weak corporate governance economies under different regulatory regimes are reported for the first time in Africa. The initial findings show that foreign bank presence and assets promote banking stability. However, the positive effect of foreign bank assets and presence is enhanced in economies with strong country-level corporate governance, while the positive effect of foreign bank assets and presence is weakened in economies with weak country-level corporate governance. After introducing different regulatory variables (regimes), it is observed that the enhancing effect of foreign bank presence and assets on banking stability in the full sample and economies with strong and weak country level corporate governance systems is deepened or improved under loan loss provision regulation regime. However, under the private and public sector-led financial transparency regulations, the reducing effect of foreign bank presence and assets on banking stability in economies with weak corporate governance systems is further dampened. These findings show that the relationship between foreign bank presence and assets is deeply shaped by corporate governance systems and regulatory regimes in Africa. Hence, policymakers must build strong corporate governance and sound regulatory regimes to enhance how foreign bank operations promote banking stability.
    Keywords: Stability; Foreign banks; Regulation, Corporate governance; Africa
    JEL: G0 G2 G3
    Date: 2021–01
  14. By: Ida, Daisuke; Iiboshi, Hirokuni
    Abstract: Using the method of Haberis and Lipinska (2020), this paper explores the effect of forward guidance (FG) in a two-country New Keynesian (NK) economy under the zero lower bound (ZLB). We simulate the effect of different lengths of FG or the zero interest rate policy under the circumstance of the global liquidity trap. We show that the size of the intertemporal elasticity of substitution plays an important role in determining the beggar-thy-neighbor effect or the prosper-thy-neighbor effect of home FG policy on the foreign economy. And in the former case, by targeting a minimum welfare loss of the individual country alone but not global welfare loss, two central banks can perform interesting FG bargaining in which they cooperatively adopt the same length of FG or strategically deviate from cooperation.
    Keywords: Forward guidance; Zero lower bound on nominal interest rates; Two-country new-Keynesian model; Taylor rule
    JEL: E52 E58 F41
    Date: 2021–03–22
  15. By: Sophocles Mavroeidis
    Abstract: I show that the Zero Lower Bound (ZLB) on interest rates can be used to identify the causal effects of monetary policy. Identification depends on the extent to which the ZLB limits the efficacy of monetary policy. I develop a general econometric methodology for the identification and estimation of structural vector autoregressions (SVARs) with an occasionally binding constraint. The method provides a simple way to test the efficacy of unconventional policies, modelled via a `shadow rate'. I apply this method to U.S. monetary policy using a three-equation SVAR model of inflation, unemployment and the federal funds rate. I reject the null hypothesis that unconventional monetary policy has no effect at the ZLB, but find some evidence that it is not as effective as conventional monetary policy.
    Date: 2021–03
  16. By: Andreas Haufler
    Abstract: We model a banking union of two countries whose banking sectors differ in their average probability of failure and externalities between the two countries arise from cross-border bank ownership. The two countries face (i) a regulatory decision of which banks are to be shut down before they can go bankrupt, and (ii) a loss allocation – or bailout – decision of who pays for banks that have failed despite regulatory oversight. Each of these choices can either be taken in a centralized or in a decentralized way. In our benchmark model the two countries always agree on a centralized regulation policy. In contrast, bailout policies are centralized only when international spillovers from cross-border bank ownership are strong, and banking sectors are highly profitable.
    Keywords: banking union, bank regulation, bailout policies
    JEL: G28 F33 H87
    Date: 2021
  17. By: Joof, Foday; Touray, Sheriff
    Abstract: The paper investigates the impact of remittance on real effective exchange rate in The Gambia. The Fully Modified OLS and Dynamic OLS are used on a monthly data from 2009M1 to 2019M12. FMOLS and DOLS estimations revealed that remittance has a positive significant impact on real effective exchange rate in The Gambia, implying that 1% increment in remittance leads to a real appreciation of the Gambian Dalasi (GMD) against the major currencies by 1.5%. Likewise, inflation is positively associated with REER, while the relationship amid foreign reserves and REER is inconclusive. Contrarily, money supply and monetary policy rate were found to have a depreciating impact on REER in both models.
    Keywords: Remittance, Real effective exchange rate, FMOLS, DOLS, The Gambia
    JEL: C1 E6
    Date: 2021–02–11
  18. By: Maryam Mirfatah (University of Surrey and CIMS); Vasco J. Gabriel (University of Surrey and NIPE-UM); Paul Levine (University of Surrey and CIMS)
    Abstract: We construct a small open economy (SOE) DSGE model interacting with the rest of the world (ROW). We depart from the standard SOE model along several dimensions. Firstly, we nest two different pricing paradigms: local currency pricing (LCP) alongside producer currency pricing (PCP). Second, the production function incorporates capital and intermediate inputs produced domestically and abroad. Finally, international asset markets are incomplete. Using US and Canadian data, we explore the empirical evidence for PCP vs LCP pricing paradigms through a Bayesian estimation likelihood race and a comparison with the second moments of the data. We then examine the implications of these two paradigms for the conduct of monetary policy using optimized Taylor-type inertial interest rate rules with a zero lower bound constraint. The main results are: first, in a likelihood race LCP easily beats PCP and fits reasonably the second moments of the data; second, whereas for the closed economy ROW the price-level rule closely mimics the optimized general inflation-output rule, for the SOE the corresponding result requires a nominal income rule.
    Date: 2021–03
  19. By: Iñaki Aldasoro; Wenqian Huang; Nikola Tarashev
    Abstract: We challenge the argument that bank regulation amplifies the adverse effect of asset managers' fire sales. Evidence from investments by US money market funds over the past decade is consistent with asset managers herding for reputational reasons. In the presence of such herding, we derive that the asset management sector may take on too much liquidity risk from a social perspective. Importantly, asset managers' investment decisions today are affected by the spread that banks will charge for absorbing fire sales tomorrow. When regulation constrains banks' balance-sheet space, the resulting higher spread reins in asset managers' excessive risk-taking, thus raising social welfare.
    Keywords: investment funds, herding, bank regulation, leverage ratio, social welfare
    JEL: G21 G23 G28 D62
    Date: 2021–03
  20. By: Boliang Lin; Ruixi Lin
    Abstract: In this paper, we reveal the depreciation mechanism of representative money (banknotes) from the perspective of logistics warehousing costs. Although it has long been the dream of economists to stabilize the buying power of the monetary units, the goal we have honest money always broken since the central bank depreciate the currency without limit. From the point of view of modern logistics, the key functions of money are the store of value and low logistics (circulation and warehouse) cost. Although commodity money (such as gold and silver) has the advantages of a wealth store, its disadvantage is the high logistics cost. In comparison to commodity money, credit currency and digital currency cannot protect wealth from loss over a long period while their logistics costs are negligible. We proved that there is not such honest money from the perspective of logistics costs, which is both the store of value like precious metal and without logistics costs in circulation like digital currency. The reason hidden in the back of the depreciation of banknotes is the black hole of storage charge of the anchor overtime after digitizing commodity money. Accordingly, it is not difficult to infer the inevitable collapse of the Bretton woods system. Therefore, we introduce a brand-new currency named honest devalued stable-coin and built a attenuation model of intrinsic value of the honest money based on the change mechanism of storage cost of anchor assets, like gold, which will lay the theoretical foundation for a stable monetary system.
    Date: 2021–03
  21. By: Ken Miyajima
    Abstract: The South African Reserve Bank has continued to fulfill its constitutional mandate to protect the value of the local currency by keeping inflation low and steady. This paper provides evidence that monetary policy tightening aimed at maintaining low and stable inflation could at the same time reduce consumption inequality over a 12–18 month horizon, commonly understood as the transmission lag of monetary policy action to the real economy, and similar to the distance between survey waves used in the analysis. In response to “exogenous” monetary policy tightening, the real consumption of individuals at lower ends of the consumption distribution declines relatively modestly, or even increases. With greater reliance on government transfers, thus smaller reliance on labor income, and relatively larger food consumption, these individuals appear to benefit mainly from lower inflation. By contrast, the real consumption of individuals at higher ends of the consumption distribution is more likely to decline due to lower labor income, weaker asset price performance, and higher debt service cost.
    Date: 2021–03–19
  22. By: Callum Jones; Pau Rabanal
    Abstract: We study the role that changes in credit and fiscal positions play in explaining current account fluctuations. Empirically, the current account declines when credit increases, and when the fiscal balance declines. We use a two-country model with financial frictions and fiscal policy to study these facts. We estimate the model using annual data for the U.S. and “a rest of the world” aggregate that includes main advanced economies. We find that about 30 percent of U.S. current account balance fluctuations are due to domestic credit shocks, while fiscal shocks explain about 14 percent. We evaluate simple macroprudential policy rules and show that they help reduce global imbalances. By taming the financial cycle, macroprudential rules that react to domestic credit conditions or to domestic house prices would have led to a smaller and less volatile U.S. current account deficit. We also show that a countercylical fiscal policy rule that stabilizes output growth reduces the level and volatility of the U.S. current account deficit.
    Date: 2021–02–19
  23. By: Nicoletta Batini; Luigi Durand
    Abstract: Abstract In this paper we ask whether countries can influence their exposure to changes in global financial conditions. Specifically, we show that even though we can model cross-country capital flows via a global factor that closely tracks changes in global financial conditions, there is a large degree of heterogeneity in the sensitivity of each country to this same global factor. We then evaluate whether this cross-country heterogeneity can be attributed to different policy choices, including measures of capital flow management, such as capital controls and macroprudential policies. In our main results, we show that higher levels of capital controls and macroprudential policies both dampen the sensitivity to the global factor. Furthermore, we show that countries’ monetary and exchange rate policies can also be successfully deployed. Overall, our results have implications that extend beyond the surge that preceded the 2008 global financial crisis, and that closely resonate in light of the financial disruptions that followed the COVID-19 pandemic.
    Keywords: Capital flows;Capital inflows;Capital controls;Capital flow surges;Exchange rates;Global Financial Cycle,Macroprudential Policy,IMF Institutional View.,WP,GFCy spillover,surge episode,capital flow data,capital flow episode happening,capital flow surge episode,capital flows shock
    Date: 2021–02–12
  24. By: Víctor A. Beker
    Abstract: The main issue addressed in this paper is whether a new financial crisis can be avoided. After reviewing the key elements that were present in the 2007/2009 financial crisis, there is an analysis of the regulatory reforms which took place during and after the financial meltdown. The role played in it by the shadow banking system and the regulatory reforms dealing with it deserve particular attention. The regulatory reforms are assessed in the context of systemic risk and run vulnerability in order to recommend what should be done to prevent a new financial crisis from happening. A revision of what has already been done and what should be done in micro and macroprudential regulation completes the paper. The main conclusions are: 1) A key issue to avoid a new financial crisis is to prevent an excessive concentration of loans in any one sector, region or kind of assets of the economy. 2) The role of the central bank as lender of last resort should be reassessed in light of the experience of what has been done in the context of the COVID 19 pandemic. 3) In order to prevent managers from taking excessive risks using other people´s money, managerial compensation schemes should be changed. 4) Issues which have to do with the conflict of interests in the credit rating agencies are still waiting for better regulation.
    Keywords: financial crisis, shadow banking system, micro-prudential regulation, macroprudential regulation, lender of last resort, dealer of last resort.
    JEL: G01 G21 G23
    Date: 2020–11
  25. By: Bianchi, Benedetta (Central Bank of Ireland); Galstyan, Vahagn (Central Bank of Ireland); Herzberg, Valerie (Central Bank of Ireland)
    Abstract: In this paper we analyse the behaviour of investment fund flows to emerging markets after the Global Financial Crisis (GFC). Our data points towards a structural growth in investment funds that purchase debt rather than equity securities. Empirically, we find that debt flows have higher sensitivity to global risk than equity flows, suggesting an increasing policy focus primarily on debt funds. We also show that Irish-resident funds’ sensitivity to changes in global risk sentiment co-varies negatively with a measure of sovereign credit rating of the receiving emerging market economy, a finding consistent with a notion that good fundamentals in host countries can mitigate outflows arising from swings in external funding conditions. Finally, we show that funds whose equity structure is tilted towards investors residing further away tend to invest less in countries than funds whose investors are closer to the same countries. This is noteworthy, given these results refer to Irish-resident investment funds that intermediate global financial flows.
    Keywords: Investment Funds, Financial Flows, Emerging Markets, VIX.
    JEL: F20 F32
    Date: 2020–12
  26. By: J. Daniel Aromí; Martín Llada
    Abstract: We use Twitter content to generate an indicator of attention allocated to inflation. The analysis corresponds to Argentina for the period 2012-2019. The attention index provides valuable information regarding future levels of inflation. A one standard deviation increment in the index is followed by an increment of approximately 0.4% in expected inflation in the consecutive month. Out-of-sample exercises confirm that social media content allows for gains in forecast accuracy. Beyond point forecasts, the index provides valuable information regarding inflation uncertainty. The proposed indicator compares favorably with other indicators such as media content, media tweets, google search intensity and consumer surveys.
    JEL: E31 C53
    Date: 2020–11
  27. By: S. Borağan Aruoba; Marko Mlikota; Frank Schorfheide; Sergio Villalvazo
    Abstract: We develop a structural VAR in which an occasionally-binding constraint generates censoring of one of the dependent variables. Once the censoring mechanism is triggered, we allow some of the coefficients for the remaining variables to change. We show that a necessary condition for a unique reduced form is that regression functions for the non-censored variables are continuous at the censoring point and that parameters satisfy some mild restrictions. In our application the censored variable is a nominal interest rate constrained by an effective lower bound (ELB). According to our estimates based on U.S. data, once the ELB becomes binding, the coefficients in the inflation equation change significantly, which translates into a change of the inflation responses to (unconventional) monetary policy and demand shocks. Our results suggest that the presence of the ELB is indeed empirically relevant for the propagation of shocks. We also obtain a shadow interest rate that shows a significant accommodation in the early parts of the Great Recession, followed by a mild and steady accommodation until liftoff in 2016.
    JEL: C11 C22 C34 E32 E52
    Date: 2021–03
  28. By: Rafael Emilio Congregado (Universidad de Huelva, Spain); Vicente Esteve (Departamento de Economia Aplicada II, Universidad de Valencia, Avda. dels Tarongers, s/n, 46022 Valencia, Spain)
    Abstract: In this article, we test a classical model of inflation with rational expec- tations for the case of Spain during the period 18301998. The principal testable implication is that money growth and inflation are cointegrated ruling out speculative bubbles. First, to detect episodes of potential explosive behaviour in the Spanish ination rate, we use the recursive unit root tests for explosiveness recently proposed by Phillips, Wu, and Yu (2011), and Phillips, Shi, and Yu (2015a,b). Second, we consider the possibility that a linear cointegrated regression model with multiple structural changes would provide a good empirical description of the classical model of ination for Spain over this long period. Our methodology is based on the instability tests recently proposed in Kejriwal and Perron (2008, 2010) as well as the cointegration tests developed in Arai and Kurozumi (2007) and Kejriwal (2008).
    Keywords: Classical model of ination; Money demand; Money growth; Ination; Explosiveness; Cointegration; Multiple structural breaks
    JEL: C22 E31 E41
    Date: 2021–03
  29. By: Giovanni Pellegrino (Department of Economics and Business Economics, Aarhus University); Efrem Castelnuovo (University of Padova); Giovanni Caggiano (Monash University and University of Padova)
    Abstract: We employ a nonlinear VAR framework and a state-of-the-art identification strategy to document the large response of real activity to a financial uncertainty shock during and in the aftermath of the great recession. We replicate this evidence with an estimated DSGE framework featuring a concept of uncertainty comparable to that in our VAR. We then use the estimated framework to quantify the output loss due to the large uncertainty shock that materialized in 2008Q3. We find such a shock to be able to explain about 60% of the output loss in the 2008-2014 period. The same estimated model unveils the role successfully played by the Federal Reserve in limiting the output loss that would otherwise have occurred had monetary policy been conducted as in normal times. Finally, we show that the rule estimated during the great recession is able to deliver an economic outcome closer to the flexible price one than the rule describing the Federal Reserve’s conduct in normal times.
    Keywords: Uncertainty shock, nonlinear IVAR, nonlinear DSGE framework, minimum-distance estimation, great recession
    JEL: C22 E32 E52
    Date: 2021–03–26
  30. By: Rancan, Antonella
    Abstract: In the article I examine how model builders from the academia and from the Federal Reserve Board confronted with the Phillips curve in the construction and subsequent modifications of the Federal Reserve, MIT and University of Pennsylvania macroeconometric model. It is argued that academic debates on Friedman’s and Phelps’ accelerationist hypothesis, and the subsequent evolution of the macroeconomics discipline, did not affect the model building agenda at the Research and Statistics Division of the Board over the 1970s and 1980s.
    Date: 2021–03–26
  31. By: Nadar, Anand
    Abstract: This study investigate the effectiveness of fiscal policy and monetary policy in India. We collected the time series data for India ranging from 1960 to 2019 from World Development Indicator (WDI). We applied the bound test to check the long-run relationship between fiscal policy, monetary policy and economic growth. The short-run and long-run effects of fiscal policy and monetary policy have been estimated using ARDL models. The results showed that there is a long-run relationship between fiscal and monetary policies with economic growth. The estimated short-run coefficients indicated that a few immediate short run impact of fiscal and monetary policies are insignificant. However, the shortrun impacts become significant as time passes. The long-run results suggested that the long-run impact of both fiscal and monetary policies on economic growth are positive and significant. More specifically, the GDP level increases if the money supply and government expenditure increase (Expansionary fiscal and monetary policies). On the other hand, the GDP level decrease if the money supply and government expenditure decrease (contractionary fiscal and monetary policies). Therefore, this study recommend to use expansionary policies to spur the Indian economy.
    Date: 2021–03–26

This nep-cba issue is ©2021 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.