nep-cba New Economics Papers
on Central Banking
Issue of 2021‒12‒06
28 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The implementation and the rationale of the new inflation target of the ECB By Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  2. Monetary Policy Spillover to Small Open Economies: Is the Transmission Different under Low Interest Rates? By Jin Cao; Valeriya Dinger; Tomas Gomez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovana; Yaz Terajima
  3. Inflation Targeting Mattered: a multivariate synthetic control approach By Ricardo D. Brito; Robison F. Kudamatsu, Vladimir K. Teles
  4. Social Capital and Monetary Policy By Rustam Jamilov
  5. Dampening the financial accelerator? Direct lenders and monetary policy By Ryan Niladri Banerjee; José María Serena Garralda
  6. Losing traction? The real effects of monetary policy when interest rates are low By Rashad Ahmed; Claudio Borio; Piti Disyatat; Boris Hofmann
  7. The Effects of Macroprudential and Monetary Policy Shocks in BRICS economies By Kaelo Mpho Ntwaepelo
  8. Monetarist arithmetic at Covid-19 time: a take on how not to misapply the quantity theory of money By Julien Pinter
  9. The natural rate of interest through a hall of mirrors By Phurichai Rungcharoenkitkul; Fabian Winkler
  10. The Price of Money: How Collateral Policy Affects the Yield Curve By Kjell G. Nyborg; Jiri Woschitz
  11. To be or not to be “green”: how can monetary policy react to climate change? By Boneva, Lena; Ferrucci, Gianluigi; Mongelli, Francesco Paolo
  12. On the Time-varying Effects of the ECB's Asset Purchases By Andrejs Zlobins
  13. Quantitative easing and corporate innovation By Grimm, Niklas; Laeven, Luc; Popov, Alexander
  14. Financial Dominance in the Pandemic and Post-Pandemic European Economy By Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  15. The ECB's policy measures during the COVID-19 crisis By Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  16. The impact of a macroprudential borrower based measure on households’ leverage and housing choices By Sónia Félix; Daniel Abreu; Vítor Oliveira; Fátima Silva
  17. Discount Rates, Debt Maturity, and the Fiscal Theory By Alexandre Corhay; Thilo Kind; Howard Kung; Gonzalo Morales
  18. Adapting lending policies in a “negative-for-long” scenario By Oscar Arce; Miguel Garcia-Posada; Sergio Mayordomo; Steven Ongena
  19. Policy Uncertainty Shocks and Small Open Economies in Monetary Union: a Case Study of Ireland By Jonathan Rice
  20. Central bank’s stabilization and communication policies when firms have motivated overconfidence in their own information accuracy or processing By Camille Cornand; Rodolphe Dos Santos Ferreira
  21. Non-bank financial intermediaries and financial stability By Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin
  22. Central Banks’ responses to the Covid-19 pandemic: The case of the Bank of Central African States By Simplice A. Asongu; Nathanael Ojong; Valentine B. Soumtang
  23. Macroeconomic Impact of Foreign Exchange Intervention: Some Cross-country Empirical Findings By Mr. Zhongxia Jin; Haobin Wang; Yue Zhao
  24. “Impossible Trinity” Hypothesis: The causal Relation between Trilemma and Macro Policy Performance By Zhai, Weiyang
  25. Revisiting the Properties of Money By Isaiah Hull; Or Sattath
  26. Central bank digital currencies: motives, economic implications and the research frontier By Raphael Auer; Jon Frost; Leonardo Gambacorta; Cyril Monnet; Tara Rice; Hyun Song Shin
  27. Potential output, the Taylor Rule and the Fed By Omar Licandro; Francesca Vinci
  28. What does digital money mean for emerging market and developing economies? By Erik Feyen; Jon Frost; Harish Natarajan; Tara Rice

  1. By: Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: In July 2021, the ECB's target has been revised specifying that the threshold of 2% inflation rate has to be applied symmetrically and with a medium-term orientation. We argue that a symmetric inflation target can offer a strong contribution to anchoring inflation expectations and to limiting the risks due to the zero and effective lower bound constraints. The monetary policy strategy revision plays a key role in the policy mix between fiscal and monetary policies for the post pandemic recovery.
    Keywords: Secular stagnation; zero-lower bound; monetary policy
    JEL: E31 E51 E58
    Date: 2021–11
  2. By: Jin Cao; Valeriya Dinger; Tomas Gomez; Zuzana Gric; Martin Hodula; Alejandro Jara; Ragnar Juelsrud; Karolis Liaudinskas; Simona Malovana; Yaz Terajima
    Abstract: We explore the impact of low and negative monetary policy rates in core world economies on bank lending in four small open economies - Canada, Chile, the Czech Republic and Norway - using confidential bank-level data. Our results show that the impact on lending in these small open economies depends on the interest rate level in the core. When interest rates are high, monetary policy cuts in core economies can reduce credit supply in small open economies. In contrast, when interest rates in core economies are low, further expansionary monetary policy increases lending in small open economies, consistent with an international bank lending channel. These results have important policy implications, suggesting that central banks in small open economies should watch for the impact of potential regime switches in core economies' monetary policy when rates shift to and from the very low end of the distribution.
    Keywords: Cross-border monetary policy spillover, international bank lending channel, low and negative interest rate environment (LNIRE), portfolio channel
    JEL: E43 E52 E58 F34 F42 G21 G28
    Date: 2021–11
  3. By: Ricardo D. Brito; Robison F. Kudamatsu, Vladimir K. Teles
    Abstract: We use a multivariate synthetic control method that matches the price and output dynamics jointly to evaluate the effects of the inflation targeting regime (IT) on the inflation and output growth of its early adopters (the ITers) – New Zealand, Canada, the United Kingdom, Sweden, and Australia. Once accounting for the inflation-output tradeoff in the conduct of monetary policy, the ITers enjoyed lower inflation and/or higher output growth than their counterfactuals. These performances were economically important to justify IT central banks’ optimism with IT, both case-by-case and on average.
    Keywords: Inflation targeting; Multivariate synthetic control
    JEL: E52 E58
    Date: 2021–11–18
  4. By: Rustam Jamilov
    Abstract: This paper studies the social capital channel of monetary non-neutrality in the United States. Empirically, identification is achieved by combining state-level local projections and high-frequency monetary surprises with survey data on trust, historical accounts of slavery from the 1860 Census, and the Trump vote. I find that states with high social capital - as measured by high trust towards institutions, low slavery intensity, or low Trump vote - are more responsive to monetary policy shocks. Theoretically, I embed a micro-founded circle of trust block into the New Keynesian model in continuous time. Equilibrium reduces to a four-equation NK model with distrust dampening the potency of monetary policy shocks, like in the data, and reducing the possibility of determinate equilibria. The framework also formalizes an equilibrium interaction between social capital, monetary policy and populism cycles - an exogenous decline in institutional trust boosts scepticism and weakens monetary policy.
    Keywords: Social capital, trust, monetary policy, central banking, macroeconomics, populism
    Date: 2021–10–22
  5. By: Ryan Niladri Banerjee; José María Serena Garralda
    Abstract: Direct lenders, non-bank credit intermediaries with low leverage, have become increasingly important players in corporate loan markets. In this paper we investigate the role they play in the monetary policy transmission mechanism, using syndicated loan data covering the 2000-2018 period. We show that direct lenders are more likely to join loan syndicates whenever monetary policy announcements trigger a contraction in borrowers' net worth irrespective of the directional change in interest rates. Thus, our findings suggest that direct lenders dampen the financial accelerator channel of monetary policy.
    Keywords: direct lending, monetary policy, financial accelerator, credit channel
    JEL: G21 G32 F32 F34
    Date: 2021–11
  6. By: Rashad Ahmed; Claudio Borio; Piti Disyatat; Boris Hofmann
    Abstract: Are there limits to how far reductions in interest rates can boost aggregate demand? In particular, as interest rates fall to very low levels, does the effectiveness of monetary policy in boosting the economy wane? We provide evidence consistent with this hypothesis. Based on a panel of 18 advanced countries starting in 1985, we find that monetary transmission to economic activity is substantially weaker when interest rates are low. The results hold even when controlling for potential confounding non-linearities associated with debt levels and the business cycle as well as for the trend decline in equilibrium interest rates. We also find evidence that the effectiveness of monetary policy wanes the longer interest rates stay low. These findings suggest that the observed flattening of the Phillips curve has gone hand in hand with a corresponding steepening of the IS curve. Monetary policy trade-offs may have become more challenging.
    Keywords: monetary policy, low interest rates, monetary transmission mechanism
    JEL: E20 E52 E58
    Date: 2021–11
  7. By: Kaelo Mpho Ntwaepelo
    Abstract: This paper examines the macroeconomic effects of the macroprudential and monetary policy shocks, in a framework where the policies target both the price and financial stability objectives. I employ the system-generalised method of moments (system-GMM) technique in a dynamic panel data model, over the 1990-2016 period. The study uses the novel integrated macroprudential policy dataset (iMaPP) in the context of the five major emerging market economies: Brazil, Russia, India, China and South Africa (BRICS). The results indicate that a contractionary monetary policy shock eliminates the excessive growth of credit and house prices but increases the price levels (price puzzle). The presence of a price puzzle after a contractionary monetary policy shock indicates that there is a trade-off between the financial stability and price stability objectives. Similarly, the impulse response function analysis reveals the presence of a negative correlation between the financial variables and output, after a contractionary macroprudential policy shock. Overall, the empirical findings suggest that there is a policy conflict when the policies respond to additional objectives beyond their primary targets. It is therefore beneficial for each policy to focus on its primary objective while considering the spillover effects of the other policy.
    Keywords: emerging markets, macroprudential policy, financial stability, monetary policy, price stability
    JEL: E58 E61 G28
    Date: 2021–11–10
  8. By: Julien Pinter (NIPE - University of Minho)
    Abstract: The Covid-19 crisis has revived an old heated debate on whether significant increases in the money supply -such as the ones accompanying central banks’ unconventional policies- ultimately lead to higher inflation. Some observers have alluded to the quantity theory of money for that purpose, sometimes in a misleading way in our view. Against this background, this paper seeks to clarify several aspects of the quantity theory of money and the so-called "monetarist" approach to it, useful to apply it fairly in the current world. First, we review and discuss the meaning of the velocity term in the quantity equation. We argue that it has no relevance as a behavioral concept: there is no such thing as a "desired velocity". Rather, income velocity should be seen as a reduced-form variable, obtained from a larger system of parameters and variables related to money demand, as the monetarist approach clearly puts it. Second, we clarify the practical relevance that the quantity theory approach can bear in the 21st century. We argue that although the quantity theory is unsuitable to explain conventional monetary policies, the mechanism on which it builds bears relevance in analyzing some recent unconventional monetary policies. Third, we review the channels and assumptions underlying the asserted quantity theory link between money growth and inflation. In light of our analysis, we conclude that the high money growth rates seen since the Covid-19 outbreak are not likely to automatically translate into higher inflation rates.
    Keywords: quantity theory of money; quantity equation; money growth; inflation; velocity of money
    JEL: B00 E41 E50 E58
    Date: 2021
  9. By: Phurichai Rungcharoenkitkul; Fabian Winkler
    Abstract: Prevailing justifications of low-for-long interest rates appeal to a secular decline in the natural interest rate, or r-star, due to factors outside monetary policy's control. We propose informational feedback via learning as an alternative explanation for persistently low rates, where monetary policy plays a crucial role. We extend the canonical New Keynesian model to an incomplete information setting where the central bank and the private sector must learn about r-star and infer each other's information from observed macroeconomic outcomes. An informational feedback loop emerges when each side underestimates the effect of its own action on the other's inference, leading to large and persistent changes in perceived r-star disconnected from fundamentals. Monetary policy, through its influence on the private sector's beliefs, endogenously determines r-star as a result. We simulate a calibrated model and show that this 'hall of mirrors' effect can explain much of the decline in real interest rates since 2008.
    JEL: E43 E52 E58 D82 D83
    Date: 2021–11
  10. By: Kjell G. Nyborg (University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Jiri Woschitz (University of Zurich)
    Abstract: Central-bank collateral policy governs the convertibility of assets into central-bank money provided directly by the central bank. Focusing on government bonds, we develop clean identification of variation in such convertibility by exploiting differential treatment of same-country government bonds in the euro area. Combining difference-in-differences analysis with yield-curve modeling on four separate events, we show that reduced convertibility lifts yields, but with the effect tapering off at longer maturities. Our findings imply that central-bank money is priced in the market and that a central bank can move and shape the yield curve through collateral policy.
    Keywords: Yield curve, central bank, collateral policy, monetary policy, haircuts, repo, asset prices, liquidity, central-bank money, government bonds
    JEL: G12 E43 E52
    Date: 2021–11
  11. By: Boneva, Lena; Ferrucci, Gianluigi; Mongelli, Francesco Paolo
    Abstract: Climate change has profound effects not only for societies and economies, but also for central banks’ ability to deliver price stability in the future. This paper starts by documenting why climate change matters for monetary policy: it impacts the economic variables relevant to setting the monetary policy stance, it interacts with fiscal and structural responses and it can generate dislocations in financial markets, which are impossible for monetary policy to ignore. Next, we survey several possible ways central banks can respond to climate change. These range from protective actions to more proactive measures aimed at mitigating climate change and supporting green finance and the transition to sustainable growth. We also discuss the constraints and trade-offs faced by central banks as they respond to climate risks. Finally, focusing on the specific challenges faced by inflation-targeting central banks, we consider how certain design features of this regime might interact with, and evolve in response to, the climate challenge. JEL Classification: E52, E58, Q54
    Keywords: climate change, environmental economics, green finance, monetary policy, sustainable growth economics
    Date: 2021–11
  12. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: This paper (re-)evaluates the effectiveness of central bank asset purchases in the euro area given their prominent role in the ECB's response to the pandemic as well as the evidence from the US suggesting diminishing returns of this policy measure over time. We analyse their macroeco- nomic impact in the euro area using a time-varying parameter structural vector autoregression with stochastic volatility and perform identification via sign and zero restrictions of Arias et al. (2018), their fusion with high frequency information approach akin to Jarocinski and Karadi (2020) and a novel method which merges high frequency identification with narrative sign re- strictions of Antolin-Diaz and Rubio-Ramirez (2018). We find that the potency of the ECB's asset purchases to lift inflation has indeed considerably declined over time with several factors contributing to a more muted response of prices to central bank asset purchases. Our results show that the reanchoring channel is no longer active while the counterproductive effects via the mechanism outlined in Boehl et al. (2020), which we dub the capacity utilization channel, have emerged lately and are further complemented with disinflationary effects stemming from the cost channel. Also, the effects passed through more standard transmission channels of central bank asset purchases like portfolio rebalancing and signalling, while still significant, appear to be less persistent recently. Overall, our findings point to a diminishing returns of the ECB's asset purchases to stabilize inflation and its expectations in the euro area.
    Keywords: quantitative easing, central bank asset purchases, monetary policy, euro area, non-linearities
    JEL: E50 E52
    Date: 2021–10–28
  13. By: Grimm, Niklas; Laeven, Luc; Popov, Alexander
    Abstract: To what extent can Quantitative Easing impact productivity growth? We document a strong and heterogeneous response of corporate R&D investment to changes in debt financing conditions induced by corporate debt purchases under the ECB’s Corporate Sector Purchase Program. Companies eligible for the program increase significantly their investment in R&D, relative to similar ineligible companies operating in the same country and sector. The evidence further suggests that by subsidizing the cost of debt, corporate bond purchases by the central bank stimulate innovation through a wealth transfer to innovative companies with low debt levels, rather than by supporting credit constrained firms. JEL Classification: E5, G10, O3
    Keywords: corporate innovation, productivity growth, quantitative easing, unconventional monetary policy
    Date: 2021–11
  14. By: Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: Differently from past episodes, the European institutions responded to the pandemic shock with an appropriate policy mix. However, the expansionary convergence between monetary and fiscal policies is strengthening the role and the possible distortionary effects of financial dominance. Due to the consequent growing imbalances in financial markets, European institutions could deem it necessary to abandon the current policy approach and to re-attribute the function of the "only game in town" to monetary policy. However, in the post-pandemic context, the ECB could hardly act again as a last-resort player. Hence, it is convenient to pursue the policies that are compatible with sustainable post-pandemic development.
    Keywords: Fiscal dominance; ECB; Monetary policy
    JEL: E31 E51 E58
    Date: 2021–11
  15. By: Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: This paper illustrates the ECB's monetary policies, implemented in response to the Covid-19 crisis, and discusses their macroeconomic impact. By using an event-based analysis, it argues that these policies have stabilised the economic and financial system by incentivising banks' lending to households and businesses and by indirectly creating short-term fiscal capacity for those euro-area member states characterised by high government debt/GDP ratio.
    Keywords: Covid-19; ECB policy announcements; Financial market volatility; ECB policy reaction; Event-study analysis; Bank and Government borrowing costs
    JEL: E58 E44 E52
    Date: 2021–11
  16. By: Sónia Félix; Daniel Abreu; Vítor Oliveira; Fátima Silva
    Abstract: Banco de Portugal implemented new limits to the loan-to-value (LTV) ratio in July 2018. This paper investigates the impact of these new lending limits on households’ leverage and housing choices. Using credit register data that covers the universe of loans granted to households, which allows us to account for loan and households’ characteristics and bank heterogeneity, we document a decline in the LTV ratio after the implementation of the macroprudential measure. Importantly, using a difference-in-differences estimation strategy we estimate the impact of the policy change on households that were more likely to exceed the new LTV limits in the absence of the policy change. Our results show that the policy change was effective in reducing households’ leverage as constrained households take out smaller loans and have lower loan-to-income ratios. These households pay higher interest rate spreads and have higher loan-service-to-income ratios than the control group. This paper also shows that the policy change affected households’ housing choices as constrained households bought cheaper houses. Overall, our results highlight the improvement of the risk profile of households following the introduction of the LTV limits.
    JEL: D14 E58 E61 G21 G28
    Date: 2021
  17. By: Alexandre Corhay; Thilo Kind; Howard Kung; Gonzalo Morales
    Abstract: This paper examines how the transmission of government portfolio risk arising from maturity operations depends on the stance of monetary/fiscal policy. Accounting for risk premia in the fiscal theory allows the government portfolio to affect the expected inflation, even in a frictionless economy. The effects of maturity rebalancing on expected inflation in the fiscal theory directly depend on the conditional nominal term premium, giving rise to an optimal debt maturity policy that is state dependent. In a calibrated macro-finance model, we demonstrate that maturity operations have sizable effects on expected inflation and output through our novel risk transmission mechanism.
    Keywords: Fiscal policy; Interest rates; Monetary policy
    JEL: E44 E63 G12
    Date: 2021–11
  18. By: Oscar Arce (Banco de España); Miguel Garcia-Posada (Banco de España); Sergio Mayordomo (Banco de España); Steven Ongena (University of Zurich - Department of Banking and Finance; NTNU Business School; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: What is the long-term impact of negative interest rates on bank lending? To answer this question we construct a unique summary measure of negative rate exposure by individual banks based on exclusive survey data and banks’ balance sheets and couple it with the credit register of Spain and firms’ balance sheets to identify this impact on the supply of credit to firms. We find that only after a few years of negative rates do affected banks (relative to non-affected banks) decrease their supply and increase their rates, especially when lowly capitalized and lending to risky firms. This suggests that the adverse effects of the negative interest rates on banks’ intermediation capacity only show up after a protracted period of ultra-low rates.
    Keywords: negative interest rates, risk taking, lending policies
    JEL: G21 E52 E58
    Date: 2021–11
  19. By: Jonathan Rice (Department of Economics, Trinity College Dublin)
    Abstract: This paper explores the implications of policy uncertainty shocks for Ireland, a small open economy operating within monetary union. Exogenous domestic uncertainty shocks foreshadow persistent declines in Irish investment and employment, with no clear response by the ECB. On the other hand, no such decline in demand is observed following global uncertainty shocks, largely resulting from an accommodative monetary policy stance by the ECB. Results from this paper suggest that policy uncertainty shocks have negative and persistent effects on Irish real activity, only when monetary policy does not counteract these shocks. Common identification problems in the literature are also discussed and suggestions are made for future work in the area.
    Keywords: Small Open Economy, Uncertainty, Investment, Consumption, Interest Rates, Monetary Policy.
    JEL: E2 E3 E4
    Date: 2020–01
  20. By: Camille Cornand (Univ Lyon, CNRS, GATE. Address: LSE UMR 5824, F-69130 Ecully, France); Rodolphe Dos Santos Ferreira (BETA, University of Strasbourg, 61 avenue de la Forˆet Noire, 67085 Strasbourg Cedex, France and Cat ´olica Lisbon School of Business and Economics)
    Abstract: Using a simple microfounded macroeconomic model with price making firms and a central bank maximizing the welfare of a representative household, it is shown that the presence of firms’ motivated beliefs has stark consequences for the conduct of optimal communication and stabilization policies. Under pure communication (resp. communication and stabilization policies), motivated beliefs about own private information (resp. own ability to process information) reverse the bang-bang solution of transparency (resp. opacity with full stabilization) found in the literature under objective beliefs and lead to intermediate levels of communication (and stabilization).
    Keywords: Motivated beliefs, public and private information (accuracy),overconfidence, communication policy, stabilization policy
    JEL: D83 D84 E52 E58
    Date: 2021
  21. By: Sirio Aramonte; Andreas Schrimpf; Hyun Song Shin
    Abstract: The heft of non-bank financial intermediaries (NBFIs) in the financial system has grown significantly after the Great Financial Crisis of 2008. This paper reviews structural shifts in intermediation and how NBFIs have shaped the demand and supply of liquidity in financial markets. We then lay out a framework for the key channels of systemic-risk propagation in the presence of NBFIs, emphasising the central role of leverage fluctuations through changes in margins. The debt capacity of an investor is increasing in the debt capacity of other investors in the system, so that leverage enables greater leverage, and spikes in margins can lead to system-wide deleveraging. In our framework, deleveraging and `dash for cash' scenarios (as during the Covid-19 crisis) emerge as two sides of the same coin, rather than being two distinct channels of stress propagation. These findings have implications for the design of NBFI regulations and of central bank backstops.
    JEL: G22 G23 G28
    Date: 2021–10
  22. By: Simplice A. Asongu (Yaounde, Cameroon); Nathanael Ojong (York University, Toronto, Canada); Valentine B. Soumtang (University of Yaoundé II, Cameroon)
    Abstract: This study explores the responses to the COVID-19 pandemic by the Bank of Central African States (BEAC), which is the central bank for countries in the Central African Economic and Monetary Community (CEMAC), that is, Cameroon, Chad, Gabon, Equatorial Guinea, Central African Republic, and the Republic of Congo. While hitherto, BEAC had fundamentally focused on fighting inflation and promoting monetary integration and financial stability in its member states, the COVID-19 pandemic, among other factors, has motivated it to also shift its policies towards targeted credit programmes and more economic growth. This study sheds light on four core aspects: (i) the socio-economic context of the CEMAC region prior to the COVID-19 pandemic, (ii) BEAC as a lender of last resort, (iii) historical, contemporary, and future insights surrounding targeted credit programmes, and (iv), suggestions for the path forward in terms of reforms, with emphasis on inclusive growth and monitoring economic development at the regional level.
    Keywords: Covid-19 pandemic; monetary policy; central bank responses; CEMAC, BEAC
    Date: 2021–08
  23. By: Mr. Zhongxia Jin; Haobin Wang; Yue Zhao
    Abstract: Based on VAR analyses across 26 countries, we show that, although foreign exchange intervention (FXI) is effective in stabilizing the nominal exchange rate in the short run, its impacts on the real exchange rate are less significant: Limitations on nominal exchange rate flexibility may induce adjustments to the real exchange rate through domestic prices. We find that countries that intervene more heavily in response to external shocks experience greater general and asset price volatility, which is not conducive to countering the impact of external shocks. We show that China’s macroeconomic responses to external shocks are broadly consistent with international experiences among intervening countries. The simple methodological framework adopted in this paper is meant to examine a broad set of macroeconomic variables and bears limitations; our findings serve to motivate more structural analysis on FXI’s macroeconomic impacts going forward.
    Keywords: nominal exchange rate IRF; asset price volatility; housing price IRF; floaters IRF; stock price IRF; Real exchange rates; Nominal effective exchange rate; Asset prices; Real interest rates; Exchange rates; Global
    Date: 2021–04–30
  24. By: Zhai, Weiyang
    Abstract: This paper investigates how trilemma policy and economic performance mutually affected each other in developing and emerging countries between 1990 and 2017. We find that higher capital openness lowers output volatility and the inflation rate. However, trilemma policy decisions are also affected by economic performance. Under a high inflation regime, a country is pressured to reduce its financial integration by restricting its capital openness. During periods of heightened global risk and financial crisis, a country is pressured to reduce its exchange rate stability.
    Keywords: financial crisis; financial liberalization; impossible trinity; trilemma policy
    JEL: F15 F31 F36 O24
    Date: 2021–11–14
  25. By: Isaiah Hull; Or Sattath
    Abstract: The properties of money commonly referenced in the economics literature were originally identified by Jevons (1876) and Menger (1892) in the late 1800s and were intended to describe physical currencies, such as commodity money, metallic coins, and paper bills. In the digital era, many non-physical currencies have either entered circulation or are under development, including demand deposits, cryptocurrencies, stablecoins, central bank digital currencies (CBDCs), in-game currencies, and quantum money. These forms of money have novel properties that have not been studied extensively within the economics literature, but may be important determinants of the monetary equilibrium that emerges in the forthcoming era of heightened currency competition. This paper makes the first exhaustive attempt to identify and define the properties of all physical and digital forms of money. It reviews both the economics and computer science literatures and categorizes properties within an expanded version of the original functions-and-properties framework of money that includes societal and regulatory objectives.
    Date: 2021–11
  26. By: Raphael Auer; Jon Frost; Leonardo Gambacorta; Cyril Monnet; Tara Rice; Hyun Song Shin
    Abstract: In just a few years, central banks have rapidly ramped up their research and development effort on central bank digital currencies (CBDCs). A growing body of economic research informs these activities, often focusing on the "reserves for all" aspect of CBDCs for retail use. However, CBDCs should be considered in the full context of the digital economy and the centrality of data, which raises concerns around competition, payment system integrity and privacy. This paper gives a guided tour of the growing literature on CBDCs on the microeconomic considerations related to operational architectures, technologies and privacy, and the macroeconomic implications for the financial system, financial stability and monetary policy. A set of questions, particularly on the cross-border dimensions of CBDCs, remains unresolved, and calls for further work to expand the research frontier.
    JEL: C72 C73 D4 E42 E58 G21 O32 L86
    Date: 2021–11
  27. By: Omar Licandro; Francesca Vinci
    Abstract: The Taylor Rule is widely considered a useful tool to summarise the Fed's policy, but the information set employed in practice to assess the state of economic activity is still an object of debate. The contribution of this paper is to provide evidence in favour of the following hypotheses. First, the original Taylor Rule is a valid representation of the actual working of the Fed's monetary policy. Second, the real time beliefs of the Fed concerning potential output can be proxied by the estimates published by the Congressional Budget Office. Third, potential output estimates were revised down following the Great Recession.
    Keywords: monetary policy, Taylor Rule, Great Recession, Economic recovery
    Date: 2021
  28. By: Erik Feyen; Jon Frost; Harish Natarajan; Tara Rice
    Abstract: Proposals for global stablecoins have put a much-needed spotlight on deficiencies in financial inclusion and cross-border payments and remittances in emerging market and developing economies (EMDEs). Yet stablecoin initiatives are no panacea. While they may achieve adoption in certain EMDEs, they may also pose particular development, macroeconomic and cross-border challenges for these countries and have not been tested at scale. Several EMDE authorities are weighing the potential costs and benefits of central bank digital currencies (CBDCs). We argue that the distinction between token-based and account-based money matters less than the distinction between central bank and non-central bank money. Fast-moving fintech innovations that are built on or improve the existing financial plumbing may address many of the issues in EMDEs that both private stablecoins and CBDCs aim to tackle.
    JEL: E42 E51 E58 F31 G28 O33
    Date: 2021–10

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