nep-cba New Economics Papers
on Central Banking
Issue of 2021‒04‒26
twenty-six papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Stock prices and monetary policy in Japan: An analysis of a Bayesian DSGE model By Hoshino, Satoshi; Ida, Daisuke
  2. Communicating Monetary Policy Rules By Troy A. Davig; Andrew Foerster
  3. Optimal monetary policy with the risk-taking channel By Angela Abbate; Dominik Thaler
  4. Sentiment Regimes and Reaction of Stock Markets to Conventional and Unconventional Monetary Policies: Evidence from OECD Countries By Oguzhan Cepni; Rangan Gupta; Qiang Ji
  5. On selling sovereigns held by the ECB to the ESM: Institutional and economic policy implications By Avgouleas, Emilios; Micossi, Stefano
  6. Monetary-Fiscal Interactions and Redistribution in Small Open Economies By Gergo Motyovszki
  7. Optimal Deposit Insurance By Eduardo Dávila; Itay Goldstein
  8. Optimal Constrained Interest-Rate Rules under Heterogeneous Expectations By Gasteiger, Emanuel
  9. Uncertainty about exchange rates affects import prices in the Euro Area By Blagov, Boris
  10. Optimal Algorithmic Monetary Policy By Luyao Zhang; Yulin Liu
  11. Semiparametric GARCH models with long memory applied to Value at Risk and Expected Shortfall By Sebastian Letmathe; Yuanhua Feng; André Uhde
  12. Deep Reinforcement Learning in a Monetary Model By Mingli Chen; Andreas Joseph; Michael Kumhof; Xinlei Pan; Rui Shi; Xuan Zhou
  13. Home Bias in Sovereign Exposure and the Probability of Bank Default - Evidence from EU Stress Test Data By Dominik Meyland; Dorothea Schäfer
  14. The Euro Crisis in the Mirror of the EMS: How Tying Odysseus to the Mast Avoided the Sirens but Led Him to Charybdis By Corsetti, G; Eichengreen, B; Hale, G; Tallman, E
  15. 'Liked', 'Shared', 'Commented': Central Bank Communication on Facebook and Twitter By Yuriy Gorodnichenko; Tho Pham; Oleksandr Talavera
  16. Risk-Taking and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms By Cecilia R. Caglio; R. Matthew Darst; Ṣebnem Kalemli-Özcan
  17. On robustness of average inflation targeting By Honkapohja, Seppo; McClung, Nigel
  18. The Bright and Dark Side of Financial Support from Local and Central Banks after a Natural Disaster: Evidence from the Great Kanto Earthquake, 1923 Japan By Tetsuji Okazaki; Toshihiro Okubo; Eric Strobl
  19. Oil, Equities, and a “Nonbinding” Zero Lower Bound: The Monetary Policy Response to COVID-19 By Deepa Dhume Datta; Benjamin K. Johannsen; Robert J. Vigfusson
  20. Exchange rate policy and firm dynamics By Masahige Hamano; Francesco Pappadà
  21. Real interest rates and demographic developments across generations: A panel-data analysis over two centuries By Lucas Marc Fuhrer; Nils Herger
  22. The Costs of Hyperinflation: Germany 1923 By Gregori Galofre-Vila
  23. Loan syndication under Basel II: How do firm credit ratings affect the cost of credit? By Hasan, Iftekhar; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza
  24. How does international monetary leadership end? The Sterling Area revisited By De Bromhead, Alan; Jordan, David; Kennedy, Francis; Seddon, Jack
  25. The Forecasts of Individual FOMC Members: New Evidence after Ten Years By Jaime Marquez; S Yanki Kalfa
  26. What Matters in Households' Inflation Expectations? By Philippe Andrade; Erwan Gautier; Eric Mengus

  1. By: Hoshino, Satoshi; Ida, Daisuke
    Abstract: This paper reevaluates the role of asset price stabilization in Japan during the 1980s through a Bayesian estimation of the dynamic stochastic general equilibrium model. Our results show the presence of the wealth channel from increased stock prices in Japan. In addition, we argue the possibility that the Bank of Japan (BOJ) may have conducted its monetary policy by targeting the stock price stability in addition to inflation and the output gap. The BOJ's response to stock price movements as a matter of policy, however, is subject to considerable uncertainty. Our results indicate that while the BOJ may have reacted to stock prices deviated from their fundamental values, it could not prevent a stock price bubble simply by implementing a contractionary monetary policy shock. Therefore, we conclude that the BOJ's monetary policy stance aimed at stabilizing stock price fluctuations and minimizing macroeconomic volatility, whereas endogenous volatility was caused by bad shocks.
    Keywords: Monetary policy; Bayesian estimation; DSGE model; Stock prices; Wealth effect;
    JEL: E52 E58
    Date: 2021–04–21
  2. By: Troy A. Davig; Andrew Foerster
    Abstract: Despite the ubiquity of inflation targeting, central banks communicate their frameworks in a variety of ways. No central bank explicitly expresses their conduct via a policy rule, which contrasts with models of policy. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. The approach requires central banks to specify an inflation target, inflation tolerance bands, and provide economic projections. When inflation moves outside the band, inflation forecasts provide a time frame over which inflation will return to within the band. We show how this communication replicates and provides the same information as a rule-based policy. In addition, the communication strategy produces a natural benchmark for assessing central bank performance.
    Keywords: monetary policy; inflation targeting; Taylor rule; communication
    JEL: E10 E52 E58 E61
    Date: 2021–04–12
  3. By: Angela Abbate; Dominik Thaler
    Abstract: Empirical research suggests that lower interest rates induce banks to take higher risks. We assess analytically what this risk-taking channel implies for optimal monetary policy in a tractable New Keynesian model. We show that this channel creates a motive for the planner to stabilize the real rate. This objective conflicts with the standard inflation stabilization objective. Optimal policy thus tolerates more inflation volatility. An inertial Taylor-type reaction function becomes optimal. We then quantify the significance of the risk-taking channel for monetary policy in an estimated medium-scale extension of the model. Ignoring the channel when designing policy entails non-negligible welfare costs (0.7% lifetime consumption equivalent).
    Keywords: Risk-taking channel, optimal monetary policy
    JEL: E44 E52
    Date: 2021
  4. By: Oguzhan Cepni (Copenhagen Business School, Department of Economics, Porcelaenshaven 16A, Frederiksberg DK-2000, Denmark; Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050, Ankara, Turkey); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield, 0028, South Africa); Qiang Ji (Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China; School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing 100049, China)
    Abstract: In this paper, we investigate how conventional and unconventional monetary policy shocks affect the stock market of eight advanced economies, namely, Canada, France, Germany, Japan, Italy, Spain, the U.K., and the U.S., conditional on the state of sentiment. In this regard, we use a panel vector auto-regression (VAR) with monthly data (on output, prices, equity prices, metrics of monetary policies, and consumer and business sentiments) over the period of January 2007 till July 2020, with the monetary policy shock identified through the use of both zero and sign restrictions. We find robust evidence that, compared to the low investor sentiment regime, the reaction of stock prices to expansionary monetary policy shocks is stronger in the state associated with relatively higher optimism, both for the overall panel and the individual countries (with some degree of heterogeneity). Our findings have important implications for academicians, investors, and policymakers.
    Keywords: Conventional and unconventional monetary policies, equity prices, sentiment, OECD countries, panel VAR, zero and sign restrictions
    JEL: C32 C33 E30 E51 E52 G15
    Date: 2021–04
  5. By: Avgouleas, Emilios; Micossi, Stefano
    Abstract: A repetition of austerity policies of the early 2010s is not consistent with maintaining adequate growth and sovereign debt sustainability in the post-pandemic environment, argue the authors of this CEPS Policy Insight. Likewise, a debt restructuring process with deep haircuts will just upset the fragile state of the markets and create a run on the debt of the most vulnerable member states, forcing the ECB to buy even more debt. Common policies are thus required to keep the sovereigns acquired by the ECB with its Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) programmes out of financial markets for an indefinite period. The European Stability Mechanism (ESM) can offer the appropriate instrument by purchasing the ECB-held sovereign debt and issuing own liabilities to fund the purchases. The programme could develop gradually, over several years, to ensure the smooth rollover of expiring securities. As the purchases would be funded by the ESM’s own liabilities, backed by the sovereign holdings, ESM debt would become the long- sought-after European safe asset. The authors argue that this ESM action could be conducted without an ESM Treaty change. It would be premised on the legal framework of the revised Article 14 (precautionary financial assistance). The ESM could then gradually evolve into a debt management agency for the euro area. The transfer of much of ECB sovereign holdings to the ESM would restore monetary policy independence and ease any frictions in this field, thereby allowing EU policymakers’ focus to shift to the completion of the European Banking Union. This paper follows up on a CEPS Policy Insight of October 2020, in which Stefano Micossi argued that the increase in sovereign indebtedness under way in the euro area should be managed through collective policy actions.
    Date: 2021–03
  6. By: Gergo Motyovszki
    Abstract: Ballooning public debts in the wake of the covid-19 pandemic can present monetary-fiscal policies with a dilemma if and when neutral real interest rates rise, which might arrive sooner in emerging markets: policymakers can stabilize debts either by relying on fiscal adjustments (AM-PF) or by tolerating higher inflation (PM-AF). The choice between these policy mixes affects the efficacy of the fiscal expansion already today and can interact with the distributive properties of the stimulus across heterogeneous households. To study this, I build a two agent New Keynesian (TANK) small open economy model with monetary-fiscal interactions. Targeting fiscal transfers more towards high-MPC agents increases the output multiplier of a fiscal stimulus, while raising the degree of deficit-financing for these transfers also helps. However, precise targeting is much more important under the AM-PF regime than the question of financing, while the opposite is the case with a PM-AF policy mix: then deficit-spending is crucial for the size of the multiplier, and targeting matters less. Under the PM-AF regime fiscal stimulus entails a real exchange rate depreciation which might offset "import leakage" by stimulating net exports, if the share of hand-to-mouth households is low and trade is price elastic enough. Therefore, a PM-AF policy mix might break the Mundell-Fleming prediction that open economies have smaller fiscal multipliers relative to closed economies.
    Keywords: monetary-fiscal interactions, small open economy, hand-to-mouth agents, redistribution, public debt, Ricardian equivalence
    Date: 2021
  7. By: Eduardo Dávila; Itay Goldstein
    Abstract: This paper studies the optimal determination of deposit insurance when bank runs are possible. We show that the welfare impact of changes in the level of deposit insurance coverage can be generally expressed in terms of a small number of sufficient statistics, which include the level of losses in specific scenarios and the probability of bank failure. We characterize the wedges that determine the optimal ex-ante regulation, which map to asset- and liability-side regulation. We demonstrate how to employ our framework in an application to the most recent change in coverage, which took place in 2008.
    JEL: G01 G21 G28
    Date: 2021–04
  8. By: Gasteiger, Emanuel
    Abstract: This paper examines optimal monetary policy under heterogeneous expectations. To this end, we develop a stochastic New Keynesian model with a cost-push shock and coexistence of one-step-ahead rational and adaptive expectations in decentralized markets. On the one side, heterogeneous expectations imply an amplification mechanism that has many adverse consequences missing under the rational expectations paradigm. On the other side, even discretionary optimal monetary policy can manipulate expectations via a novel channel. We argue that the incorporation of heterogeneous expectations in both the design and implemen tation of discretionary optimal monetary policy to exploit this channel lowers macroeconomic volatility. We find that: (1.) surprisingly, a more hawkish policy can reduce losses due to volatility, but an overly hawkish policy does not; (2.) overestimating the share of rational expectations in the design and implementation of policy creates additional losses, while the underestimation does not; (3.) credible commitment eliminates or mitigates many of the ramifications of heterogeneous expectations.
    Keywords: heterogeneous expectations,optimal monetary policy,policy design,policy implementation
    JEL: D84 E52
    Date: 2021
  9. By: Blagov, Boris
    Abstract: RWI research shows that monetary policy should take uncertainty about exchange rate fluctuations into account. When aiming at price stability, central banks closely monitor exchange rates. Their level is known to influence prices, since many product components are sourced internationally. An RWI study suggests that central bankers should also take the level of uncertainty about future exchange rates into account when aiming at price stability. The study finds that in the Euro Area, importers bear the main burden of the uncertainty. Mainly affected are countries like Germany, Italy, and the Netherlands, whose industries rely heavily on intermediate goods imports. When uncertainty increases, importers buy less goods to lower the risk. Consequently, prices for intermediate goods fall.
    Date: 2021
  10. By: Luyao Zhang; Yulin Liu
    Abstract: Centralized monetary policy, leading to persistent inflation, is often inconsistent, untrustworthy, and unpredictable. Algorithmic stable coins enabled by blockchain technology are promising in solving this problem. Algorithmic stable coins utilize a monetary policy that is entirely rule-based. However, there is little understanding about how to optimize the rule. We propose a model that trade-offs between the price and supply stability. We further study the comparative statistics by varying several design features. Finally, we discuss the empirical implications and further research for industry applications.
    Date: 2021–04
  11. By: Sebastian Letmathe (Paderborn University); Yuanhua Feng (Paderborn University); André Uhde (Paderborn University)
    Abstract: In this paper new semiparametric GARCH models with long memory are in- troduced. The estimation of the nonparametric scale function is carried out by an adapted version of the SEMIFAR algorithm (Beran et al., 2002). Recurring on the revised recommendations by the Basel Committee to measure market risk in the banks' trading books (Basel Committee on Banking Supervision, 2013), the semi- parametric GARCH models are applied to obtain rolling one-step ahead forecasts for the Value at Risk (VaR) and Expected Shortfall (ES) for market risk assets. In addition, standard regulatory traffic light tests (Basel Committee on Banking Supervision, 1996) and a newly introduced traffic light test for the ES are carried out for all models. The practical relevance of our proposal is demonstrated by a comparative study. Our results indicate that semiparametric long memory GARCH models are an attractive alternative to their conventional, parametric counterparts.
    Keywords: Semiparametric, long memory, GARCH models, forecasting, Value at Risk, Expected Shortfall, traffic light test, Basel Committee on Banking Supervision
    JEL: C14 C51 C52 G17 G32
    Date: 2021–04
  12. By: Mingli Chen; Andreas Joseph; Michael Kumhof; Xinlei Pan; Rui Shi; Xuan Zhou
    Abstract: We propose using deep reinforcement learning to solve dynamic stochastic general equilibrium models. Agents are represented by deep artificial neural networks and learn to solve their dynamic optimisation problem by interacting with the model environment, of which they have no a priori knowledge. Deep reinforcement learning offers a flexible yet principled way to model bounded rationality within this general class of models. We apply our proposed approach to a classical model from the adaptive learning literature in macroeconomics which looks at the interaction of monetary and fiscal policy. We find that, contrary to adaptive learning, the artificially intelligent household can solve the model in all policy regimes.
    Date: 2021–04
  13. By: Dominik Meyland; Dorothea Schäfer
    Abstract: Since the European debt crisis economists and politicians discuss intensively the sovereign-bank nexus. The high activity in sovereign bond issuance required to mitigate the burden of the Covid19 crisis will rather intensify this debate than calm it down. Surprisingly, however, we still have only limited knowledge about the impact of a home bias in sovereign exposure on bank stability. This paper provides a new way to use European stress test data to study this relationship. In addition, we explore the effect on a bank’s probability of default if the existing capital requirement privilege for EU sovereign exposures were abolished. Our results support the conceptual idea behind the nexus theory. Interestingly, the effect of a home bias on bank stability is contingent on the home country’s solvency. If the home country is sufficiently solvent, investments in home sovereign bonds may improve bank stability. The findings clearly support the benefits of additional CET1 capital buffers. Regulation focusing on the home bias should account for heterogeneous effects depending on the home country’s solvency.
    Keywords: Home bias, sovereign bonds, bank stability, equity requirements, financial regulation
    JEL: G21 G28 K15
    Date: 2021
  14. By: Corsetti, G; Eichengreen, B; Hale, G; Tallman, E
    Abstract: Why was recovery from the euro area crisis delayed for a decade? The explanation lies in the absence of credible and timely policies to backstop financial intermediaries and sovereign debt markets. In this paper we add light and color to this analysis, contrasting recent experience with the 1992–3 crisis in the European Monetary System, when national central banks and treasuries more successfully provided this backstop. In the more recent episode, the incomplete development of the euro area constrained the ability of the ECB and other European institutions to do likewise.
    Keywords: Financial crisis, Currency crisis, Euro, European Monetary System, Economics
    Date: 2020–04–01
  15. By: Yuriy Gorodnichenko (University of California, Berkeley); Tho Pham (University of Reading); Oleksandr Talavera (University of Birmingham)
    Abstract: This study is a comprehensive analysis of the Federal Reserve System (FED) communication on social media and its effectiveness. Our examination shows that although the FED uses both Twitter and Facebook for public outreach, communication via Twitter is more popular and gains greater public engagement. There are heterogeneous effects across different topics of the FED's social media posts, post types, as well as across Twitter user groups. The general public is most active in engaging with the FED accounts, followed by media, investors, academics, and government accounts. Further investigation suggests inconclusive evidence of stock market reactions to the FED communication on social media. However, market participants do update their inflation expectations based on information contained in the FED's social media posts.
    Keywords: central bank communication, social media, public engagement, financial market.
    JEL: E50 E58
    Date: 2021–05
  16. By: Cecilia R. Caglio; R. Matthew Darst; Ṣebnem Kalemli-Özcan
    Abstract: Using confidential regulatory firm-bank-loan level data from the U.S., we document four new facts about the credit market. First, private SMEs typically utilize all available bank credit which comprises their entire balance sheet debt, compared to large listed firms who can switch between corporate bonds and drawing from credit lines. Second, SMEs borrow shorter maturity and pay higher interest rates relative to large publicly listed firms. Third, SMEs more frequently use future claims to their enterprise value as collateral rather than physical assets and real estate that can be liquidated upon default. Fourth, the relation between collateral and risk—where risk is measured by the loan spread—is positive for large listed firms but negative for SMEs. Motivated by these facts, we investigate the transmission of monetary policy and risk-taking behavior. We show that, when monetary policy is expansionary, banks do not lend differently to risky and non-risky firms, whether they are private SMEs or publicly listed firms. Instead, risk-taking is driven by credit demand since SMEs who lack collateral in terms of physical assets increase their leverage due to low interest rates, which increases their ability to payback the loan. Since SMEs cover 99 percent of all U.S. firms and over 50 percent of U.S. employment and output, our results have important implications for the aggregate boom-bust cycles in a low interest rate environment.
    JEL: E32 E44 E52 G20 O16
    Date: 2021–04
  17. By: Honkapohja, Seppo; McClung, Nigel
    Abstract: This paper considers the performance of average inflation targeting (AIT) policy in a New Keynesian model with adaptive learning agents. Our analysis raises concerns regarding robustness of AIT when agents have imperfect knowledge. In particular, the target steady state can be locally unstable under learning if details about the policy are not publicly available. Near the low steady state with interest rates at the zero lower bound, AIT does not necessarily outperform a standard inflation targeting policy. Policymakers can improve outcomes under AIT by (i) targeting a discounted average of inflation, or (ii) communicating the data window for the target.
    JEL: E31 E52 E58
    Date: 2021–04–21
  18. By: Tetsuji Okazaki (Graduate School of Economics, University of Tokyo, Japan); Toshihiro Okubo (Faculty of Economics, Keio University, Japan); Eric Strobl (Department of Economics, Bern University, Switzerland)
    Abstract: Natural disasters can seriously damage firms as well as the banks that they use independent of their size. However, it is small- and medium-sized firms in particular that will be affected by this because they tend to be financially constrained and thus greatly depend on these potentially damaged local banks for financing. In this paper, we focus on the Great Kanto Earthquake of 1923, which resulted in serious damage to small- and medium-sized firms and banks in Yokohama City, to investigate how effective the provision of loans by local banks, as well as the Earthquake Bills policy implemented by the Bank of Japan, was in helping firms recover. Using linked firm- and bank-level datasets, we find that larger local banks allowed damaged firms to survive and grow. The Earthquake Bills policy mitigated the negative impact of bank damage on firms and prevented credit crunch, although this deteriorated the balance sheet of local banks and resulted in financial instability and a banking crisis as a side effect.
    Date: 2021–04
  19. By: Deepa Dhume Datta; Benjamin K. Johannsen; Robert J. Vigfusson
    Abstract: We analyze the recent behavior of oil and equity prices in the context of our earlier work, Datta, et al. (2021), which focuses on the previous zero lower bound (ZLB) episode, in the aftermath of the Global Financial Crisis. We find that the correlation between oil and equity returns and the responsiveness of these returns to macroeconomic surprises are perhaps elevated relative to normal times but somewhat moderated relative to the previous ZLB episode.
    Date: 2021–04–14
  20. By: Masahige Hamano (Waseda University); Francesco Pappadà (Paris School of Economics and Banque de France)
    Abstract: This paper examines the exchange rate policy in a two-country model with nom- inal wage rigidities and firm dynamics. We show that a exible exchange rate is unable to replicate the exible price allocation under incomplete financial markets. In our setting with heterogeneous firms, a monetary intervention dampens nominal exchange rate uctuations and stabilizes the firm selection in the export market. The reduction in wage setting uncertainty ensured by a fixed exchange rate is par- ticularly relevant when firms are small and homogeneous, thus providing a rationale for currency manipulation in exchange rate policies.
    Keywords: exchange rate policy, firm heterogeneity, nominal rigidities
    JEL: F32 F41 E40
  21. By: Lucas Marc Fuhrer; Nils Herger
    Abstract: This paper empirically examines the effect of population growth on long-term real interest rates. Although this effect is well founded in macroeconomic theory, the corresponding empirical results have been rather tenuous and surprisingly unstable. As the demographic interest rate impact is theoretically based on intergenerational relationships, we not only contemplate gross population growth rates but also distinguish between demographic growth resulting from a birth surplus and net migration. Within a panel covering 12 countries and the years since 1820, our results suggest that there is a positive, statistically significant, and stable effect from the birth surplus on real interest rates. Conversely, the corresponding effect of net migration seems to be much more volatile. Hence, our results suggest that it is mainly population growth occurring through a birth surplus that affects the equilibrium real interest rate.
    Keywords: Demographics, population growth, real interest rate
    JEL: E43 E52 J11
    Date: 2021
  22. By: Gregori Galofre-Vila (Departamento de Economia - UPNA)
    Abstract: I study the link between monetary policy and populism by looking at the hyperinflation in Germany in 1923, one of the worst spells of inflation in history, and the Nazi electoral boost in 1933. Contrary to received wisdom, inflation data for over 500 cities show that areas more affected by inflation did not see a higher vote share for the Nazi party in each and every German federal election between 1924 and 1933. Yet, the inflation does predict the vote share of the Volksrechtspartei, an association-turned-party of inflation victims, and the vote share of the Social Democrats. In places where hyper-inflation was higher, mortality and anti-Semitism also increased. Unobservables are unlikely to account for these results.
    Date: 2021
  23. By: Hasan, Iftekhar; Kim, Suk-Joong; Politsidis, Panagiotis; Wu, Eliza
    Abstract: This paper investigates how lenders react to borrowers’ rating changes under heterogeneous conditions and different regulatory regimes. Our findings suggest that corporate downgrades that increase capital requirements for lending banks under the Basel II framework are associated with increased loan spreads and deteriorating non-price loan terms relative to downgrades that do not affect capital requirements. Ratings exert an asymmetric impact on loan spreads, as these remain unresponsive to rating upgrades, even when the latter are associated with a reduction in risk weights for corporate loans. The increase in firm borrowing costs is mitigated in the presence of previous bank-firm lending relationships and for borrowers with relatively strong performance, high cash flows and low leverage.
    Keywords: corporate credit ratings, cost of credit, rating-contingent regulation, capital requirements, Basel II
    JEL: G21 G24 G28 G32
    Date: 2021–03
  24. By: De Bromhead, Alan; Jordan, David; Kennedy, Francis; Seddon, Jack
    Abstract: How does international monetary leadership end? This paper examines the decline of the Sterling Area between 1945 and 1979 to understand the process of international economic disintegration. Using an original cross-national panel dataset, we conduct survival analysis which systematically evaluates a comprehensive set of economic and political factors about when and why countries chose to leave the Sterling Area. We find that membership of the Sterling Area was determined by multidimensional aspects. Our results highlight the significance of international economic and geopolitical factors, such as trade and diplomatic alignment, on the decision to leave. However we also find that domestic political and historical factors, such as democracy and imperial legacy, played a role in the Sterling Area's unravelling. Finally, we use our results to examine the experience of individual countries and their decisions to leave the Sterling Area. Revisiting this history of a gradually dissolving economic order, played out in the shadow of Britain's waning imperial and economic power, has cautionary implications for the future of the US dollar order.
    Keywords: The Sterling Area,international monetary regime,internationalcurrency,sterling,decline,disintegration
    JEL: N10 F02 F22 F33
    Date: 2021
  25. By: Jaime Marquez (Johns Hopkins SAIS); S Yanki Kalfa (University of California San Diego)
    Abstract: A central tenet of Macroeconomics is that monetary policy is forward looking. But Romer (2010) uses the forecasts of the participants of the U.S. Federal Open Market Committee’s (FOMC) and shows a remarkable heterogeneity in these participants’ outlooks. What accounts for this forecast heterogeneity? And how can one reconcile the tension between the need for a single monetary and the heterogeneity of forecasts that are steering it? To study these two questions, we continue the line of work initiated by Romer (2010). We study two sources of heterogeneity: Institutional and Dynamic. Institutional Heterogeneity is about differences in participants’ education, voting status, and regional affiliation — and the associated implications for forecast rationality. Dynamic Heterogeneity is about herd behavior, extreme forecasts, temporal aggregation, and macroeconomic shocks. These factors emphasize that forecast heterogeneity is not a given constant but rather, that it changes in response to the alignment between private and social interests of the FOMC. We find that forecast revisions are large and remarkably heterogenous across participants. Specifically, the FOMC’s forecast heterogeneity is systematically related to differences in participants’ education, voting status, and regional affiliation, as Romer anticipated. These results should not be surprising: heterogeneity is a built-in feature of the functioning of the Federal Reserve System and the role of the FOMC is to reconcile the differences. The reconciliation of private and public interests, and the implied heterogeneity of courses of action, involves a conversation in which the Chair gets the benefit of the doubt.
    JEL: E5 C3
    Date: 2021–04
  26. By: Philippe Andrade; Erwan Gautier; Eric Mengus
    Abstract: We provide survey evidence on how households’ inflation expectations matter for their spending highlighting a behavioral distortion compared to the New Keynesian setup. A large share of households expects prices to remain stable instead of increasing. Such a belief is linked to individual experience with non-durable goods frequently purchased. Households expecting stable prices consume less durable goods than those expecting positive inflation. In contrast, differences across households expecting positive inflation are associated with insignificant differences in durable consumption decisions. That distortion implies that managing aggregate demand through households’ inflation expectations is limited and can run out of ammunition.
    Keywords: behavioural macroeconomics, heterogeneous beliefs, expectation formation, households’ spending, inflation expectation channel, stabilization policies
    JEL: D12 D83 E21 E31 E52
    Date: 2021

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