nep-cba New Economics Papers
on Central Banking
Issue of 2022‒10‒10
23 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Endogenous Monetary Policy Credibility in Ukraine By Kateryna Savolchuk; Anton Grui
  2. Reactions of household inflation expectations to a symmetric inflation target and high inflation By Gabriele Galati; Richhild Moessner; Maarten van Rooij
  3. Uncertainty shocks and the monetary-macroprudential policy mix By Valeriu Nalban; Andra Smadu
  4. Monetary Interventions and the Rise of Non-Bank Lenders By Gianluca Cafiso; Giulia Rivolta
  5. How QE changes the nature of sovereign risk By Dirk Broeders; Leo de Haan; Jan Willem van den End
  6. Inflation, price stability, and monetary policy: On the legality of inflation targeting by the Eurosystem By Siekmann, Helmut
  7. How to release capital requirements during a pandemic? Evidence from euro area banks By Couaillier, Cyril; Reghezza, Alessio; Rodriguez d’Acri, Costanza; Scopelliti, Alessandro
  8. Excess liquidity and the usefulness of the money multiplier By Jan Marc Berk; Jan Willem van den End
  9. Choosing a Taylor Rule with Limited Data Availability: The Benchmark Approach By Anton Grui; Jeffrey Liebman; Sergiy Nikolaychuk; Alex Nikolsko-Rzhevskyy
  10. Monetary policy frameworks since Bretton Woods, across the world and its regions By Cobham, David
  11. How does the Bank of Canada’s balance sheet impact the banking system? By Daniel Bolduc; Brad Howell; Grahame Johnson
  12. Trade credit and the transmission of unconventional monetary policy By Manuel Adelino; Miguel A. Ferreira; Mariassunta Giannetti; Pedro Pires
  13. Exchange-Rate Swings and Foreign Currency Intervention By Andrew Filardo; Thomas McGregor; Mr. R. G Gelos
  14. Debt Overhang, Risk Shifting and Zombie Lending By Nicolas Aragon
  15. US Monetary Policy and BRICS Stock Market Bubbles By Rangan Gupta; Jacobus Nel; Joshua Nielsen
  16. Immigrants and the distribution of income and wealth in the euro area: first facts and implications for monetary policy By Dossche, Maarten; Kolndrekaj, Aleksandra; Propst, Maximilian; Ramos Perez, Javier; Slacalek, Jiri
  17. Foreign Reserves Management and Original Sin By Michael B. Devereux; Steve Pak Yeung Wu
  18. Is a Global Recession Imminent? By Justin Damien Guenette; M. Ayhan Kose; Naotaka Sugawara
  19. What analytical framework for Sovereign Money? Some insight from the 100% Money literature, and a comment on criticisms By Samuel Demeulemeester
  20. Behavioral Learning Equilibria in New Keynesian Models By Cars Hommes; Kostas Mavromatis; Tolga Özden; Mei Zhu
  21. No pension and no house? The effect of LTV limits on the housing wealth accumulation of self-employed By Mauro Mastrogiacomo; Cindy Biesenbeek
  22. The Trilemma for Low Interest Rate Macroeconomics By Jean-Baptiste Michau
  23. Measuring the Velocity of Money By Carolina E. S. Mattsson; Allison Luedtke; Frank W. Takes

  1. By: Kateryna Savolchuk (National Bank of Ukraine); Anton Grui (National Bank of Ukraine)
    Abstract: In this paper, authors introduce endogenous monetary policy credibility into a semi-structural New Keynesian model. The model is estimated based on data for Ukraine, which de facto adopted inflation-targeting at the end of 2015. Authors model credibility as a nonlinear function of two gaps – actual and expected deviations of inflation from its target. Credibility is asymmetric as above-target inflation reduces it more than below-target. Authors show how low policy credibility can make economic stabilization more costly, and expansionary policy – counterproductive. It can also generate the price puzzle. Furthermore, we estimate the historical path of monetary policy credibility in Ukraine.
    Keywords: New Keynesian model, monetary policy credibility, inflation expectations
    JEL: C51 E52 E58
    Date: 2022–06
  2. By: Gabriele Galati; Richhild Moessner; Maarten van Rooij
    Abstract: We provide evidence on the reactions of the level and probability distribution of households’ expectations of inflation in the euro area to the ECB’s monetary strategy change to a symmetric inflation target in July 2021, and to the subsequent strong rise in euro area inflation above target. We use a randomised control trial within a monthly representative Dutch household survey of short and long-term inflation expectations, where half of respondents receive information about the ECB’s inflation target and actual inflation. The survey responses give rise to three main findings. First, we find that households’ median expectations of euro area inflation ten years ahead showed no reaction to the introduction of a symmetric inflation target by the ECB, and short-term expectations changed very little. Second, and by contrast, median euro area expectations rose in response to the strong increase in inflation above target, both for short- and long term expectations. Taken together, the results document that the ECB strategy revision itself did not have a material impact on household inflation expectations, but the high realisations of actual inflation did. These findings suggest that when it comes to household inflation expectations and central bank credibility, inflation outcomes speak louder than words. The third finding is that households’ expected probabilities of high inflation (4% or higher) increased as well in response to high above-target inflation, both for the short- and long term horizons. These results suggest that long-term euro area inflation expectations of households have become less well anchored as inflation has increased strongly above target in the wake of the pandemic. While the long-term expectations of households who received information remained better anchored than those who did not, the expectations of both groups became less well anchored with inflation rising strongly above target.
    JEL: E31 E58
    Date: 2022–04
  3. By: Valeriu Nalban; Andra Smadu
    Abstract: How should policymakers respond to uncertainty shocks? To analyze the macroeconomic effects of uncertainty shocks associated with various conventional structural shocks, we develop a New Keynesian model with financial frictions and time-varying volatility, which features a monetary- acroprudential policy mix. We find that it matters whether the economy experiences heightened demand, supply or financial uncertainty. More specifically, the underlying source of uncertainty matters for the shocks’ propagation, aggregate economic outcomes and appropriate policy responses. Financial uncertainty shocks appear to generate stronger effects and a broad complementarity between the interest rate response and the macroprudential policy stance. Supply-side and demand-side uncertainty shocks reveal important trade-offs between price stability and financial stability objectives, despite their quantitative effects being overall modest. Importantly, simulating a financial turmoil scenario reveals that heightened financial uncertainty exacerbates the negative macroeconomic effects triggered by a first-moment financial shock. Our results underscore the importance of timely and accurate identification of uncertainty surges, which is crucial for the appropriate design and calibration of the monetary-macroprudential policy mix.
    Keywords: Uncertainty shocks, financial frictions, monetary policy, macroprudential policy
    JEL: E30 E32 E44 E47 E50
    Date: 2022–02
  4. By: Gianluca Cafiso; Giulia Rivolta
    Abstract: The amount of assets managed by non-bank lenders has increased significantly over the last decades. Our research aims to clarify whether such an increase has had any impact on the effectiveness of monetary policy. To this end, we consider several credit aggregates granted from bank and non-bank institutions for different scopes and developments in the US economy. Our analysis is based on the estimation of a large Bayesian VAR. The results suggest that the rise of non-bank lenders has reduced and altered the monetary policy transmission mechanism.
    Keywords: bank loans, non-bank loans, monetary interventions, Bayesian VAR
    JEL: E44 E51 G20 G21 C11
    Date: 2022
  5. By: Dirk Broeders; Leo de Haan; Jan Willem van den End
    Abstract: We examine the effect of Quantitative Easing (QE) by the ECB on the sovereign bond risks of Italy, Ireland, Spain and Portugal. First, outcomes of panel regression models suggest that QE lowered the effect of volatility on sovereign bond spreads by 1 to 2 percentage points. Compared to asset purchases aimed at easing the monetary stance, purchase programmes supporting monetary transmission by countering financial market stress most clearly reduced the effect of volatility on spreads. Second, using a contingent claims model (CCM), the values of the implicit put options provided by QE as a backstop to investors are calculated to be substantial. Our results guide policymakers on the use of backstop facilities for sovereign bond markets.
    Keywords: Quantitative Easing, Sovereign risk, Sovereign spreads, Contingent Claims Model
    JEL: E52 E58 G12
    Date: 2022–02
  6. By: Siekmann, Helmut
    Abstract: In the communication of the European Central Bank (ECB), the statement that "we act within our mandate" is often referred to. Also among practitioners of the Eurosystem the term "mandate" has become popular. In his Working Paper, Helmut Siekmann analyzes the legal foundation of the tasks and objectives of the Eurosysstem and price stability as a legal term. He finds that the primary law of the EU only very sparsely employs the term "mandate". It is never used in the context of monetary policy and its institutions. Moreover, he comes to the conclusion that inflation targeting as a task, competence, or objective of the Eurosystem is legally highly questionable according to the common standards of interpretation.
    Date: 2022
  7. By: Couaillier, Cyril; Reghezza, Alessio; Rodriguez d’Acri, Costanza; Scopelliti, Alessandro
    Abstract: This paper investigates the impact of the capital relief package adopted to support euro area banks at the outbreak of the COVID-19 pandemic. By leveraging confidential supervisory and credit register data, we uncover two main findings. First, capital relief measures support banks' capacity to supply credit to firms. Second, not all measures are equally successful. Banks adjust their credit supply only if the capital relief is permanent or implemented through established processes that foresee long release periods. By contrast, discretionary relief measures are met with limited success, possibly owing to the uncertainty surrounding their capital replenishment path. Moreover, requirement releases are more effective for banks with a low capital headroom over requirements and do not trigger additional risk-taking. These findings provide key insights on how to design effective bank capital requirement releases in crisis time. JEL Classification: E61, G01, G18, G21
    Keywords: bank capital requirements, coronavirus, countercyclical policy, credit register, macroprudential policy
    Date: 2022–09
  8. By: Jan Marc Berk; Jan Willem van den End
    Abstract: Despite being an identity, the money multiplier (MM) is also a useful summary of the financial intermediation process as it can be interpreted as the rate of substitution between inside and outside money. By modelling the supply and demand for inside and outside money, we provide this rate of money substitution with behavioural underpinnings. Our model illustrates how the creation of large outside money balances by central banks induces behavioural changes, creating an environment characterised by a low MM and low market interest rates. The outcomes of switching regressions for the US and the euro area confirm that such a low regime can be distinguished from a conventional MM regime. The low regime reflects a state in which the functioning of the financial system changes fundamentally due to excess supply of reserves. This so-called excess liquidity trap has adverse economic consequences, is persistent, and cannot be solved by monetary policy alone. We argue that government and supervisory measures taken during the pandemic provide an example of supporting policies that are effective in escaping the excess liquidity trap.
    Keywords: monetary policy; interest rates; money multipliers
    JEL: E51 E52
    Date: 2022–03
  9. By: Anton Grui (National Bank of Ukraine); Jeffrey Liebman (Lehigh College of Business); Sergiy Nikolaychuk (National Bank of Ukraine); Alex Nikolsko-Rzhevskyy (Lehigh College of Business)
    Abstract: In this paper, authors propose and test a new methodology that aims to select the best performing monetary policy rule when macroeconomic data are very limited, as is often the case for developing countries. The methodology is based on calculating economic losses during the periods when a country implicitly followed an assumed rule and when its central bank exercised discretion. For countries with short data spans where such analysis is not possible, authors propose adopting the rules that historically worked well for their peers. As an intermediate step, authors develop a novel approach to the calculation of the equilibrium real interest rate for developing countries that accounts for their substantial risk premia and the expected real appreciation of the domestic currency. The methodology is then applied to Czechia, Hungary, Poland, and Ukraine to construct the optimal policy rate path and contrast it with the actual one.
    Keywords: Taylor rules, monetary policy, real-time data, discretion
    JEL: E52 E58
    Date: 2022–03
  10. By: Cobham, David
    Abstract: The Comprehensive Monetary Policy Framework (CMPF) project, which considers de jure and de facto, domestic (money, inflation) and external (exchange rate), monetary policy targets, has now classified 179 countries/currency areas from 1974 to 2017. This means that it is now possible to track the evolution of monetary policy frameworks across the world and its regions. This paper outlines the methodology of the classification, presents the broad trends at global, regional and sub-regional levels, discusses the economic performance associated with different frameworks and the policy implications thereof, and identifies scope for further work.
    Keywords: monetary policy framework; exchange rates; inflation targeting; inflation; economic growth
    JEL: E42 E52 E58 F33
    Date: 2022–09–07
  11. By: Daniel Bolduc; Brad Howell; Grahame Johnson
    Abstract: The COVID‑19 pandemic caused severe stress in fixed-income markets. In response, in April 2020, the Bank of Canada launched the Government of Canada (GoC) bond purchase program. Initially, the program focused on restoring market functioning in the GoC bond market. In July 2020, that focus shifted to providing additional monetary stimulus through quantitative easing (QE).
    Keywords: Financial institutions; Financial stability; Monetary policy
    JEL: E E51 G G23 G32
    Date: 2022–09
  12. By: Manuel Adelino; Miguel A. Ferreira; Mariassunta Giannetti; Pedro Pires
    Abstract: We show that production networks are important for the transmission of unconventional monetary policy. Firms with bonds eligible for purchase under the European Central Bank’s Corporate Sector Purchase Program act as financial intermediaries by extending more trade credit to their customers. The increase in trade credit is more pronounced from core countries to periphery countries and for financially constrained customers. Customers increase investment and employment in response to the increase in trade financing, while suppliers expand their customer base, contributing to upstream industry concentration. Our findings suggest that trade credit redistributes the effects of monetary policy across regions and firms.
    Keywords: Monetary policy, Trade credit, Corporate bonds, Investment, Employment
    JEL: E50 G30
    Date: 2022
  13. By: Andrew Filardo; Thomas McGregor; Mr. R. G Gelos
    Abstract: This paper develops a new approach for exploring the effectiveness of foreign currency intervention, focusing on real exchange cycles. Using band spectrum regression methods, it examines the role of macroeconomic fundamentals in determining the equilibrium real exchange rate at short-, medium-, and low frequencies. Next, it assesses the effectiveness of FX intervention depending on the degree of cycle-specific misalignments for 26 advanced- and emerging market economies, covering the period 1990–2018, and using different techniques to mitigate endogeneity concerns. Evidence supports the hypothesis that central banks can lean effectively against short-run cyclical misalignments of the real exchange rate. The effects are present in quarterly data—i.e., at policy-relevant horizons. The effectiveness of intervention rises with the size of the misalignment, and with the duration of one-sided interventions. FX sales appear to be somewhat more effective than FX purchases, and intervention is less effective in more liquid FX markets.
    Keywords: Foreign exchange intervention; real exchange rates; equilibrium exchange rate; classical cycles; central banking; band spectrum regression.; exchange rate intervention; macro fundamentals; FX sale; FX purchase; FX intervention; measuring exchange rate misalignment; Exchange rates; Real effective exchange rates; Foreign assets; Global
    Date: 2022–07–29
  14. By: Nicolas Aragon (National Bank of Ukraine; Universidad Carlos III de Madrid; Kyiv School of Economics)
    Abstract: After bubbles collapse, banks have often rolled-over debt at subsidized rates to insolvent borrowers or "zombie firms." This paper explores the incentives to restructure debt in a game with risk shifting under debt overhang. We provide conditions under which it is privately optimal to zombielend even when it is socially ineffcient. When a farm becomes insolvent, the firm loses access to competitive funding and its bank can exert monopoly power. The bank prefers to zombie-lend given that owing funds for investment is not profitable due to risk shifting and liquidation entails costs. The model explains the inefficiency of traditional policies in the presence of zombies such as bank recapitalization and monetary policy and highlights the necessity of debt haircuts.
    JEL: G2 G21 G28 G33 G32
    Date: 2022–01
  15. By: Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Jacobus Nel (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Joshua Nielsen (Boulder Investment Technologies, LLC, 1942 Broadway Suite 314C, Boulder, CO ,80302, USA)
    Abstract: We use the multi-scale Log-Periodic Power Law Singularity (LPPLS) confidence indicator approach to detect both positive and negative bubbles at short-, medium- and long-run for the stock markets of the BRICS countries. We were able to detect major crashes and rallies in the five stock markets over 2nd week of February, 1999 to 2nd week of September, 2020. We also observed similar timing of strong (positive and negative) LPPLS indicator values across the countries, suggesting interconnectedness of the extreme movements in these stock markets. Then, we utilize impulse responses obtained from the local projection method (LPM) framework to capture the effect of US monetary policy shocks on a specific-type of bubble of a particular equity market of the BRICS bloc, by controlling for lagged values of the category of bubble under consideration of all the five countries, due to the synchronicity of bubbles. In general, the effect of US monetary policy shocks on the six bubble indicators for each country is limited, with strong positive impact observed under the medium-term negative bubble indicator of Brazil, China and South Africa. Given the findings, associated policy implications are discussed.
    Keywords: Multi-Scale Bubbles, Local Projection Method, US Monetary Policy, BRICS Countries
    JEL: C22 E52 G15
    Date: 2022–09
  16. By: Dossche, Maarten; Kolndrekaj, Aleksandra; Propst, Maximilian; Ramos Perez, Javier; Slacalek, Jiri
    Abstract: We use household surveys to describe differences in wages, income, wealth and liquid assets of households born in their country of residence (“natives”) vs. those born in other EU and non-EU countries (“immigrants”). The differences in wealth are more substantial than the differences in wages and incomes: immigrants earn on average about 30% lower wages than natives and hold roughly 60% less net wealth. For all variables, only a small fraction of differences between natives and immigrants—around 30%—can be explained by differences in demographics (age, gender, marital status, education, occupation, sector of employment). Immigrants are more likely to be liquidity constrained: while about 17% of natives can be labelled as “hand-to-mouth” (holding liquid assets worth less than two weeks of income), the corresponding share is 20% for households born in another EU country and 29% for those born outside the EU. Employment rates of immigrants are substantially more sensitive to fluctuations in aggregate employment. Monetary policy easing stimulates more strongly employment of individuals born outside the EU. JEL Classification: J15, D31, E52
    Keywords: distribution of income and wealth, inequality, migration, monetary policy
    Date: 2022–09
  17. By: Michael B. Devereux; Steve Pak Yeung Wu
    Abstract: This paper studies the interaction between foreign exchange reserves and the currency composition of sovereign debt in emerging countries. Focusing on inflation targeting countries, we find that holdings of foreign reserves are associated with higher local currency sovereign debt, an exchange rate which is less sensitive to global shocks, and a lower exchange rate risk premium in local currency sovereign spreads. We rationalize these findings within a financially constrained model of a small open economy. The Sovereign values local currency debt as a hedge against endowment risk, but since the exchange rate tends to depreciate in times of global downturns, risk averse international investors charge an additional currency risk premium on this debt. When a country optimally uses foreign reserves to lean against the wind in response to global shocks, this dampens the response of the exchange rate, providing insurance for the global investor. By reducing the risk premium on local currency debt, foreign exchange reserves therefore facilitate a higher share of local currency debt in the sovereign portfolio. Quantitatively, we find the welfare benefits for the sovereign from optimal foreign reserves management can be very large.
    JEL: F30 F40
    Date: 2022–09
  18. By: Justin Damien Guenette (World Bank); M. Ayhan Kose (World Bank, Brookings Institution, CEPR, CAMA); Naotaka Sugawara (World Bank)
    Abstract: Global growth prospects have deteriorated significantly since the beginning of the year, raising the specter of global recession. This paper relies on insights gleaned from previous global recessions to analyze the recent evolution of economic activity and policies and presents plausible scenarios for the global economy in 2022–24. We report three major findings. First, every global recession since 1970 was preceded by a significant weakening of global growth in the previous year, as has happened recently. Second, the global economy is in the midst of one of the most internationally synchronous episodes of monetary and fiscal policy tightening of the past five decades. The policy actions in many countries are necessary to contain inflationary pressures, but their mutually compounding effects could have larger impacts than envisioned—both in tightening financial conditions and in steepening the global growth slowdown. Third, if the degree of global monetary policy tightening markets now expect is not enough to reduce inflation to targets, experience from previous global recessions suggests that the additional tightening needed could cause significant financial stress and increase the likelihood of a global recession next year. These findings imply that policymakers need to carefully calibrate, clearly communicate, and credibly implement their policy actions while considering potential international spillovers, especially given the globally synchronous withdrawal of monetary and fiscal policies. They also need to pursue supply-side measures to overcome constraints confronting labor markets, energy markets, and trade networks.
    Keywords: Global economy; growth scenarios; monetary policy; fiscal policy; global inflation; synchronization of policies.
    JEL: E17 E32 E37 E58 F44 G01
    Date: 2022–09
  19. By: Samuel Demeulemeester (TRIANGLE - Triangle : action, discours, pensée politique et économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - IEP Lyon - Sciences Po Lyon - Institut d'études politiques de Lyon - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The 2007-2008 Global Financial Crisis has brought renewed interest in the 100% Money reform idea of the 1930s', the essence of which was to require 100% reserves on transaction deposits so as separate money issuance from bank loans. A modern version of this idea, the Sovereign Money proposal, has been much discussed in recent years. Some heterodox economists have harshly criticized Sovereign Money advocates for lacking a clear analytical framework, as well as for disregarding "established" literature on such topics as the causality relationship between money and prices, the accommodation of business needs, financial instability, or the seigniorage privilege. The literature on 100% Money, however, appears to have been largely overlooked by both sides of the debate-even though, as this article shows, it could have brought valuable theoretical insight to the discussion. Building upon the arguments of the 100% Money writers, this paper concludes that many of the criticisms addressed to the Sovereign Money proposal are either inconclusive or misplaced.
    Keywords: 100% money,Sovereign Money,full reserve banking,endogenous money,financial instability B26,E30,E42
    Date: 2022–08–15
  20. By: Cars Hommes; Kostas Mavromatis; Tolga Özden; Mei Zhu
    Abstract: We introduce behavioral learning equilibria (BLE) into a multi-variate linear framework and apply it to New Keynesian DSGE models. In a BLE, boundedly rational agents use simple but optimal first-order autoregressive (AR(1)) forecasting rules whose parameters are consistent with the observed sample mean and autocorrelation of past data. We study the BLE concept in a standard three-equation New Keynesian model and develop an estimation methodology for the canonical Smets and Wouters (2007) model. A horse race between rational expectations equilibrium (REE), BLE and constant gain learning models shows that the BLE model outperforms the REE benchmark and is competitive with constant gain learning models in terms of in-sample and out-of-sample fitness. Sample autocorrelation learning of optimal AR(1) beliefs provides the best fit when short-term survey data on inflation expectations are considered in the estimation. As a policy application, we show that optimal Taylor rules under AR(1) expectations inherit history dependence, requiring a lower degree of interest rate smoothing than REE.
    Keywords: Business fluctuations and cycles; Inflation and prices; Economic models; Monetary policy
    JEL: C11 E62 E3 D83 D84
    Date: 2022–09
  21. By: Mauro Mastrogiacomo; Cindy Biesenbeek
    Abstract: Investing in housing could be an attractive alternative to privately saving for a pension, definitely so for those who are not obliged to save for an occupational pension, the self-employed for instance. But access to the housing market requires a down payment. Macroprudential measures, such as loan to value (LTV) norms could hamper access to the housing market for young buyers and require additional saving for this purpose. We study the effect of the introduction and sharpening of the LTV limit in The Netherlands on the probability of self-employed and wage employed to become homeowners. We construct a treatment and control group using parental wealth as a proxy for being liquidity constrained. We show that during the period in which the LTV limit was introduced, self-employed were 47% less likely to purchase their first home, relative to wage employed and relative to periods without LTV being limited. However we show that this was not caused by lowering the LTV limit, but by contemporaneous cofounding factors. Sharpening the LTV limit has not reduced the probability to become home owners for self-employed. We also show some evidence suggesting that their status put self-employed workers at a disadvantage when the policy was enacted, possibly inducing dynamic selection out of self-employment.
    Keywords: LTV limit; self-employed pension savings
    JEL: G51 R21
    Date: 2022–05
  22. By: Jean-Baptiste Michau (Ecole Polytechnique, France)
    Abstract: Three desirable goals of macroeconomic policy are: full employment, low inflation, and a low debt level with no Ponzi scheme. This paper shows that, when the natural real interest rate is persistently depressed, at most two of these three goals can be simultaneously achieved. Depending of the parameters of the economy, each of the three possibilities can be the preferred option, resulting in a non-trivial policy trilemma.
    Keywords: Liquidity trap, Ponzi scheme, Secular stagnation.
    JEL: E12 E31 E63 H63
    Date: 2022–09–27
  23. By: Carolina E. S. Mattsson; Allison Luedtke; Frank W. Takes
    Abstract: The velocity of money is an important driver of inflation that is conventionally measured as an average for an economy as a whole. While easy to calculate from macroeconomic aggregates, such measures overlook possibly relevant heterogeneity between payment systems, across regions, and intrinsic to spending patterns. This paper proposes a new measurement methodology that leverages large-scale micro-level transaction data and modern computational techniques to measure the transfer velocity of money at the level of individual spenders, enabling comparison between subgroups. Notably, our definition of transfer velocity extends to payment systems where users are free to deposit and withdraw, even as the total balance fluctuates. This is a common feature of real-world payment systems that is not accounted for by previous approaches. We estimate the transfer velocity of Sarafu, a digital community currency in Kenya, using a newly available data set describing individual transactions over a period of time that includes the COVID-19 pandemic. Our analysis reveals distributional, temporal and geographical heterogeneity in spending patters. Some units of Sarafu are held for minutes, others for months. The system experienced dramatic changes in its total balance and in its average transfer velocity as the COVID-19 pandemic unfolded, and in response to known administrative operations. Moreover, transaction rhythms differed substantially between rural and urban areas, in particular, money moves faster in urban communities. Successful macroeconomic policies require understanding how individuals experience the economy and when those experiences diverge. The data-driven approach described in this paper improves our understanding of the heterogeneity underlying macroeconomic indicators, and represents an advance in measurement that stands to improve economic monitoring.
    Date: 2022–09

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