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on Central Banking |
| By: | Michel Alexandre; Gilberto Tadeu Lima, Luca Riccetti, Alberto Russo |
| Abstract: | The purpose of this paper is to contribute to a further understanding of the impact of monetary policy shocks on a financial network, which we dub the “financial network channel of monetary policy transmission†. To this aim, we develop an agent-based model (ABM) in which banks extend loans to firms. The bank-firm credit network is endogenously time-varying as determined by plausible behavioral assumptions, with both firms and banks being always willing to close a credit deal with the network partner perceived to be less risky. We then assess through simulations how exogenous shocks to the policy interest rate affect some key topological measures of the bank-firm credit network (density, assortativity, size of largest component, and degree distribution). Our simulations show that such topological features of the bank-firm credit network are significantly affected by shocks to the policy interest rate, and this impact varies quantitatively and qualitatively with the sign, magnitude, and duration of the shocks. |
| Keywords: | Financial network; monetary policy shocks; agent-based modeling. |
| JEL: | C63 E51 E52 G21 |
| Date: | 2022–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2022wpecon1&r= |
| By: | William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Giovanni Bella (University of Cagliari, Italy); Taniya Ghosh (Indira Gandhi Institute of Development Research, Mumbai, India); Paolo Mattana (University of Cagliari, Italy); Beatrice Venturi (University of Cagliari, Italy) |
| Abstract: | In a New Keynesian model, it is believed that combining active monetary policy using a Taylor rule with a passive fiscal rule can achieve local equilibrium determinacy. However, even with such policies, indeterminacy can occur from the emergence of a Shilnikov chaotic attractor in the region of the feasible parameter space. That result, shown by Barnett et al. (2021), implies that the presence of the Shilnikov chaotic attractor can cause the economy to drift towards and finally become stuck in the vicinity of lower-than-targeted inflation and nominal interest rates. The result can become the source of a liquidity trap phenomenon. We propose policy options for eliminating or controlling Shilnikov chaotic dynamics to help the economy escape from the liquidity trap or avoid drifting into it in the first place. We consider ways to eliminate or control the chaos by replacing the usual Taylor rule by an alternative policy design without interest rate feedback, such as a Taylor rule with monetary quantity feedback, an active fiscal policy rule with passive monetary rule, or an open loop policy without feedback. We also consider approaches that retain the Taylor rule with interest rate feedback and the associated Shilnikov chaos, while controlling the chaos through a well-known engineering algorithm using a second policy instrument. We find that a second instrument is needed to incorporate a long-run terminal condition missing from the usual myopic Taylor rule. |
| Keywords: | Shilnikov chaos criterion, Global indeterminacy, Long-term un-predictability, Liquidity trap, Long-run anchor. |
| JEL: | C61 C62 E12 E52 E63 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:202202&r= |
| By: | George W. Evans (University of Oregon); Seppo Honkapohja (Aalto University School of Business); Kaushik Mitra (University of Birmingham) |
| Abstract: | Stagnation and fiscal policy are examined in a nonlinear stochastic New- Keynesian model with adaptive learning. There are three steady states. The steady state targeted by policy is locally but not globally stable under learning. A severe pessimistic expectations shock can trap the economy in a stagnation regime, underpinned by a low-level steady state, with falling inflation and output. A large fiscal stimulus may be needed to avoid or emerge from stagnation, and the impacts of forward guidance, credit frictions, central bank credibility and policy delay are studied. Our model encompasses a wide range of outcomes arising from pessimistic expectations shocks. |
| Keywords: | Stagnation Trap, Expectations, Fiscal Policy, Adaptive Learning, New-Keynesian Model |
| JEL: | E62 E63 E52 D84 E71 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:22-01&r= |
| By: | William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Unal Eryilmaz (Ministry of Treasury and Finance, Ankara, Turkey) |
| Abstract: | We analyze determinacy in the baseline open-economy New Keynesian model developed by Gali and Monacelli (2005). We find that the open economy structure causes multifaceted behaviors in the system creating extra challenges for policy making. The degree of openness significantly affects determinacy properties of equilibrium under various forms and timing of monetary policy rules. Conditions for the uniqueness and local stability of equilibria are established. Determinacy diagrams are constructed to display the regions of unique and multiple equilibria. Numerical analyses are performed to confirm the theoretical results. Limit cycles and periodic behaviors are possible, but in some cases only for unrealistic parameter settings. Complex structures of open economies require rigorous policy design to achieve optimality. |
| Keywords: | Bifurcation; Determinacy; Dynamic systems; New Keynesian; Stability; Open economy; Taylor Principle |
| JEL: | C14 C22 C52 C61 C62 E32 E37 E61 L16 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:202203&r= |
| By: | Felipe Alves; Christian Bustamante; Xing Guo; Katya Kartashova; Soyoung Lee; Thomas Michael Pugh; Kurt See; Yaz Terajima; Alexander Ueberfeldt |
| Abstract: | The heterogeneity of businesses and households impacts aggregate economic fluctuations and, in turn, is shaped by aggregate fluctuations. This view has emerged over the last decade with strong implications for the transmission and conduct of monetary policy. Our thematic review focuses on key aspects of this new theory as well as its underlying assumptions. We place the insights in a Canadian context using relevant microeconomic and macroeconomic data. |
| Keywords: | Economic models; Monetary policy and uncertainty; Monetary policy transmission |
| JEL: | D31 E24 E50 E52 D25 E22 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:22-2&r= |
| By: | Mr. Marc C Dobler; Mr. Atilla Arda |
| Abstract: | This paper argues that in the European Union (EU) deposit insurance funds are too difficult to use in bank resolution and too easy to use outside resolution. The paper proposes reforms in three areas for the effective management of bank failures of small and medium-sized banks in the European Union: making resolution the norm for dealing with failing banks; establishing a common DIS for the European Union; and increasing funding and backstops for deposit insurance while removing constraints on their use for resolution measures. Without these changes, the European Union will continue to be challenged by banks that are too small for resolution and too large for liquidation. |
| Keywords: | Deposit Insurance, Bank Resolution, Banking Union, Crisis Preparedness, Crisis Management, Euro Area, European Union, Financial Crisis, Financial Stability |
| Date: | 2022–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2022/002&r= |
| By: | William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Taniya Ghosh (Indira Gandhi Institute of Development Research (IGIDR), Gen. A. K. Vaidya Marg, Filmcity Road, Mumbai, 400065, India); Masudul Hasan Adil (Institute Postdoctoral Fellow, Humanities and Social Sciences-Economics, Indian Institute of Technology Bombay (IITB), Mumbai 400076, India) |
| Abstract: | We revisit the issue of stable demand for money, using quarterly data for the European Monetary Union, India, Israel, Poland, the UK, and the US. We use a modern version of the same linear time-series macro-econometric modeling and specification approach that had previously cast doubt on money demand stability. Autoregressive distributed lag (ARDL) cointegration models are used in the study to establish a long-term relationship among real money balances, real output, interest rate, and real effective exchange rate. For all the countries analyzed, evidence of stable demand for money is found. Broad money in general is better at capturing a stable demand for money than narrow money. The The stability results are especially strong, when broad Divisia money is used instead of its simple sum counterpart. Our results are consistent with the large literature on the Barnett critique, which is based on a different methodological tradition that employs micro-econometric modeling of integrable consumer demand systems. That literature has never found the demand for monetary services, measured using reputable index number and aggregation theory, to be any more difficult to model or less stable than the demand for any other good or service in the economy. |
| Keywords: | Narrow money demand, broad money demand, simple-sum monetary aggregates, Divisia monetary aggregates, ARDL cointegration approach |
| JEL: | C23 E41 E52 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:202204&r= |
| By: | Alberto Botta; Giuliano Toshiro Yajima; Gabriel Porcile |
| Abstract: | The outbreak of COVID-19 brought back to the forefront the crucial importance of structural change and productive development for economic resilience to economic shocks. Several recent contributions have already stressed the perverse relationship that may exist between productive backwardness and the intensity of the COVID-19 socioeconomic crisis. In this paper, we analyze the factors that may have hindered productive development for over four decades before the pandemic. We investigate the role of (non-FDI) net capital inflows as a potential source of premature deindustrialization. We consider a sample of 36 developed and developing countries from 1980 to 2017, with major emphasis on the case of emerging and developing economies (EDE) in the context of increasing financial integration. We show that periods of abundant capital inflows may have caused the significant contraction of manufacturing share to employment and GDP, as well as the decrease of the economic complexity index. We also show that phenomena of "perverse" structural change are significantly more relevant in EDE countries than advanced ones. Based on such evidence, we conclude with some policy suggestions highlighting capital controls and external macroprudential measures taming international capital mobility as useful tools for promoting long-run productive development on top of strengthening (short-term) financial and macroeconomic stability. |
| Keywords: | COVID-19; Structural Change; Capital Inflows; Macroprudential Policies |
| JEL: | O14 O30 F32 F38 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_999&r= |