nep-cba New Economics Papers
on Central Banking
Issue of 2022‒10‒24
33 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy for the Climate? A Money View Perspective on Green Central Banking By Jakob Vestergaard
  2. Global Monetary and Financial Spillovers: Evidence from a New Measure of Bundesbank Policy Shocks By James Cloyne; Patrick Hürtgen; Alan M. Taylor
  3. Central bank digital currency and cryptocurrency in emerging markets By Le, Anh H.
  4. Gini in the Taylor Rule: Should the Fed Care About Inequality? By Eunseong Ma; Kwangyong Park
  5. Estimating Causal Effects of Monetary Policy for a Small Open Economy: Econometric Model and Estimation Framework By Markus Brueckner
  6. Market Effects of Central Bank Credit Markets Support Programs in Europe By Yuriy Kitsul; Oleg Sokolinskiy; Jonathan H. Wright
  7. Causal Impulse Responses for Time Series By Leonardo Marinho
  8. Foreign exchange reserves, imperfect substitutability of financial assets and the monetary policy quadrilemma By Thibault Laurentjoye
  9. Economic research at central banks: Are central banks interested in the history of economic thought? By Ivo Maes
  10. Monetary Policy Shocks for Sweden By Kilman, Josefin
  11. Central Bank Digital Currency: Financial Inclusion vs. Disintermediation By Jeremie Banet; Lucie Lebeau
  12. Monetary Policy Cyclicality in Emerging Economies By Pierre De Leo; Gita Gopinath; Ṣebnem Kalemli-Özcan
  13. The Transmission of US Monetary Policy Shocks: The Role of Investment & Financial Heterogeneity By Santiago Camara; Sebastian Ramirez Venegas
  14. Monetary Policy and Inequality: How Does One Affect the Other? By Eunseong Ma
  15. Real Wage Cyclicality and Monetary Policy. By Eunseong Ma
  16. Quantifying "Quantitative Tightening" (QT): How Many Rate Hikes Is QT Equivalent To? By Bin Wei
  17. The effect of structural risks on financial downturns By Hodula, Martin; Pfeifer, Lukáš; Janků, Jan
  18. Monetary, fiscal and demographic interactions in Japan: impact and a comparative assessment By Pierre L Siklos
  19. Systemic bank runs without aggregate risk: how a misallocation of liquidity may trigger a solvency crisis By Lukas Altermatt; Hugo van Buggenum; Lukas Voellmy
  20. A Model of the Gold Standard By Jesús Fernández-Villaverde; Daniel Sanches
  21. Exchange rate pass-through in India By Prashant Parab
  22. What drives Indian inflation? Demand or supply By Ashima Goyal; Abhishek Kumar
  23. The Financial Stability Implications of Digital Assets By Pablo Azar; Garth Baughman; Francesca Carapella; Jacob Gerszten; Arazi Lubis; JP Perez-Sangimino; David E. Rappoport; Chiara Scotti; Nathan Swem; Alexandros Vardoulakis; Aurite Werman
  24. Classifying Exchange Rate Regimes: 20 Years Later By Eduardo Levy-Yeyati; Federico Sturzenegger
  25. External Wealth of Nations and Systemic Risk By Alin Marius Andries; Alexandra-Maria Chiper; Steven Ongena; Nicu Sprincean
  26. Assessment of the Nature of the Pandemic Shock: Implications for Monetary Policy By Oxana Babecka Kucharcukova; Jan Bruha; Petr Kral; Martin Motl; Jaromir Tonner
  27. Decomposing Supply and Demand Driven Inflation By Adam Hale Shapiro
  28. Intensive and Extensive Margins of Labor Supply in HANK: Aggaregate and Disaggregate Implications. By Eunseong Ma
  29. Inflation, inflation uncertainty, and Markov regime switching heteroskedasticity: Evidence from European countries By Don Bredin; Stilianos Fountas
  30. Short-Dated Term Premia and the Level of Inflation By Richard K. Crump; Charles Smith; Peter Van Tassel
  31. Losing the inflation anchor By Reis, Ricardo
  32. Capital Controls, Corporate Debt and Real Effects By Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
  33. Sudden Stops and Optimal Policy in a Two-agent Economy By Nina Biljanovska; Alexandros Vardoulakis

  1. By: Jakob Vestergaard (Roskilde University, Denmark.)
    Abstract: Central banks can potentially influence the investment decisions of private financial institutions, which in turn will create incentives towards green technology adoption and development of lower emission business models. This paper examines how monetary policies can be deployed to promote a greening of finance. To guide the efforts, the paper mobilizes the Money View literature. This enables a comparative assessment of different monetary policy options. The main finding is that a promising way forward for green monetary policy is to adopt a strategy of expanding collateral eligibility through positive screening and widening haircut spreads to change relative incentives in favor of green over brown assets.
    Keywords: Climate change, green central banking, monetary policy, collateral policy, haircuts.
    JEL: E42 E52 E58 G18 G28
    Date: 2022–07–02
  2. By: James Cloyne; Patrick Hürtgen; Alan M. Taylor
    Abstract: Identifying exogenous variation in monetary policy is crucial for investigating central bank policy transmission. Using newly-collected archival real-time data utilized by the Central Bank Council of the German Bundesbank, we identify unexpected changes in German monetary policy from 580 policy meetings between 1974 and 1998. German monetary policy shocks produce conventional effects on the German domestic economy: activity, prices, and credit decline significantly following a monetary contraction. But given Germany’s central role in the European Monetary System (EMS), we can also shed light on debates about the international transmission of monetary policy and the relative importance of the U.S. Federal Reserve for the global cycle during these years. We find that Bundesbank policy spillovers were much stronger in major EMS economies with Deutschmark pegs than in non-EMS economies with floating exchange rates. Furthermore, compared to monetary spillovers from the U.S., German spillovers were comparable or even larger in magnitude for both pegs and floats.
    JEL: E32 E52 F42 F44
    Date: 2022–09
  3. By: Le, Anh H.
    Abstract: Blockchain technology has opened up the possibility of digital currency, smart contracts and much more applications including the launch of central bank digital currencies (CBDC). However, literature about the effect of CBDC with the presence of cryptocurrency for an emerging market economy seems to be left behind. In this paper, we introduce a New Keynesian - Dynamic Stochastic General Equilibrium (NK-DSGE) model to examine the implications of CBDC and cryptocurrency in an open economy for emerging markets. In our model, cryptocurrency is implemented as a form of deposit in banks where bankers can also receive deposits from abroad. Lastly, CBDC is introduced as a payment and saving instrument. We find that cryptocurrency has a crucial role in banking sectors and a significant effect on the dynamic of foreign debt which is deeply important for emerging markets. We also conduct optimal monetary policy under different scenarios. Hence, we uncover that a flexible rate in CBDC can affect the responses of the monetary rate and can reinforce the conventional monetary policy to achieve the central bank's targets.
    Keywords: Central bank digital currency, Cryptocurrency, Open-economy, Financial frictions, Optimal monetary policy
    JEL: E50 F30 F31 G15 G18 G23
    Date: 2022–09–20
  4. By: Eunseong Ma (Yonsei University); Kwangyong Park (Bank of Korea)
    Abstract: This study investigates whether the Federal Reserve (Fed) should care about inequality. We develop a Heterogeneous Agent New Keynesian (HANK) model, which generates empirically realistic inequalities and business cycle properties observed in the U.S. data. We consider the income Gini coefficient in a monetary policy rule to see how an inequality-targeting monetary policy affects aggregate and disaggregate outcomes, as well as economic welfare. We find that a monetary policy rule with an explicit inequality target can be welfare improving, even if inequality becomes volatile. In particular, the policy reform can improve the welfare of the poorest the most. Finally, we demonstrate the feasibility of a subgroup targeting monetary policy as a tool for an implementable inclusive monetary policy.
    Keywords: Monetary Policy; Inequality; Welfare; Taylor Rule; Nonconvexity.
    JEL: E52 D31 D52 D63 J21
    Date: 2022–08
  5. By: Markus Brueckner
    Abstract: This paper provides an econometric model and estimation framework that enables to obtain estimates of causal effects of monetary policy in a small open economy. The model and estimation framework explicitly takes into account the endogeneity of monetary policy: i.e. if the central bank has an target inflation, then monetary policy itself is a function of economic shocks that affect inflation and other macroeconomic outcomes of interest. This is the standard simultaneity problem, which to date has not been satisfactorily addressed in the empirical monetary policy literature. The simultaneity problem can only be addressed if one has a valid instrument for monetary policy. In this paper I provide a local projections instrumental variables framework that enables to provide causal estimates of the dynamic effects that monetary policy in a small open economy has on inflation, the output gap, credit growth, and the exchange rate in the presence of external shocks.
    JEL: C3 E3 E4 E6
    Date: 2022–10
  6. By: Yuriy Kitsul; Oleg Sokolinskiy; Jonathan H. Wright
    Abstract: Using responses of credit default swap indexes to ECB monetary policy announcements, we isolate a novel credit policy component of monetary policy surprises. We examine how such unconventional monetary policy surprises affect investor perceptions of credit risk and the functioning of primary corporate debt markets. Favorable credit surprises cause declines in uncertainty about credit risk and suggest a more stable outlook on its dynamics over the following months. Both net and gross corporate bond issuance increase as a result of favorable credit surprises, with the largest response in investment grade issuance. We argue that this provides evidence for the efficacy of a local channel of unconventional monetary policy.
    Keywords: CDS; Central banks; Credit derivatives; Credit programs; Debt issuance; Uncertainty
    JEL: E58 G10
    Date: 2022–08–30
  7. By: Leonardo Marinho
    Abstract: I develop the concept of impulse response in a causal fashion, defining analytical tools suitable for different policy analysis. Applications of techniques presented to models containing features like confounders or nonlinearities through Monte Carlo experiments are given. I also apply some of these techniques to practical macroeconomic problems, computing impulse responses of GDP, interest rate, inflation and real exchange rate to monetary policy decisions of Banco Central do Brasil, the Brazilian Central Bank.
    Date: 2022–09
  8. By: Thibault Laurentjoye (EHESS Paris (FR))
    Abstract: In this paper, I investigate how the use of foreign exchange reserves can turn the monetary policy trilemma into a quadrilemma. After surveying recent developments in international macroeconomics literature, including the dilemma vs trilemma debate and the dominant currency paradigm, I make a twofold contribution to support the case for the quadrilemma. The first contribution is a logical characterisation of the quadrilemma in the form of a single equation which includes exchange rate variations, interest rate differential, capital controls and the level of reserves. The second contribution consists of a nominal stock-flow consistent model with two countries, characterised by perfect capital mobility and imperfect asset substitutability, to study the pure effect of international investors’ portfolio reallocation following unanticipated changes in the policy rate of the domestic economy. The model is run several times, varying the direction of the monetary policy shock and the relative size of the two countries. Two constraints on reserves are highlighted, one in the short run and one in the long run – albeit less significant – which define the limit between the classical trilemma and the quadrilemma.
    Keywords: International reserves, foreign exchange intervention, monetary policy trilemma, quadrilemma, stock-flow consistent modelling
    JEL: E43 E58 F31 F32 F36 F41
    Date: 2022–10
  9. By: Ivo Maes (: Robert Triffin Chair, University of Louvain and ICHEC Brussels Management School)
    Abstract: With central banks becoming monetary authorities, research departments have become a core element of a modern central bank. Crucial elements of a central bank research department are contributing to monetary policymaking and sustaining a dialogue with the academic community. The importance of historical research (and central banks do not really make a difference between economic history and the history of economic thought) varies a lot. The historical curiosity of influential central bankers and the commemoration of anniversaries are important factors hereby. Historical research can allow central banks to take more distance and can help to avoid a “this time is different” view.
    Keywords: : central banking, economic research, economic history, history of thought.
    JEL: E42 E58 G28 N10
    Date: 2022–09
  10. By: Kilman, Josefin (Department of Economics, Lund University)
    Abstract: This paper estimates monetary policy shocks for Sweden between 1996-2019. I employ the Romer and Romer (2004) (R&R) approach and use annual forecasts of output growth and inflation to estimate monetary policy shocks. I complement the analysis with shocks from a recursive VAR including output, prices, and the repo rate, as well as a set of high-frequency shocks. A comparison of the three sets of shocks shows that the R&R and VAR shocks are similar, while the high-frequency shocks are fewer and smaller in size. Local projections show expected impulse responses on most economic variables, regardless of data frequency, but responses to the recursive VAR shocks are more in line with textbook findings compared to responses to the R&R and high-frequency shocks. Overall, results are robust to alternative model specifications and lag lengths in local projections.
    Keywords: Monetary policy; monetary policy shocks; vector autoregression; local projections
    JEL: C22 C32 E32 E43 E52 E58
    Date: 2022–09–15
  11. By: Jeremie Banet; Lucie Lebeau
    Abstract: An overlapping-generations model with income heterogeneity is developed to analyze the impact of introducing a Central Bank Digital Currency (CBDC) on financial inclusion, and its potential adverse effect on bank funding. We highlight the role of two design parameters: the fixed cost of CBDC usage and the interest rate it pays, and derive principles for maximum inclusion and for mitigating the inclusion-intermediation trade-off. Agents’ choice of money instrument is endogenously driven by income heterogeneity. Pre-CBDC, wealthier agents adopt deposits, while poorer agents adopt cash and remain unbanked. CBDCs with low fixed costs (and low interest rates) are adopted by cash holders and directly increase inclusion. CBDCs with high fixed costs (and high interest rates) are adopted by deposit holders and increase inclusion by raising deposit rates. The former allows for more favorable inclusion-intermediation trade-offs. We calibrate the model to match the U.S. income distribution and aggregate share of unbanked households. A CBDC 50% cheaper (30% more expensive) than bank deposits decreases financial exclusion by 93% (71%) without impacting intermediation. In comparison, making the deposit market perfectly competitive would only decrease exclusion by 45%.
    Keywords: central bank digital currency; financial inclusion; payments; monetary policy
    JEL: E42 E51 E58 G21
    Date: 2022–09–24
  12. By: Pierre De Leo; Gita Gopinath; Ṣebnem Kalemli-Özcan
    Abstract: Conventional wisdom holds that monetary policy in emerging economies is procyclical, unlike in advanced economies. Using a large sample of countries from the mid-1990s onwards, we show that the conduct of monetary policy is not fundamentally different across these two groups of countries. Emerging and advanced economies alike lower their policy rates when economic activity decelerates, both unconditionally and following exogenous U.S. monetary policy tightening. We show that the common practice of using market rates, such as government bond rates, to proxy for the stance of monetary policy leads one to draw inaccurate conclusions about emerging economies’ monetary policy cyclicality due to inherent risk premia in those market rates.
    JEL: E0 F0 F3
    Date: 2022–09
  13. By: Santiago Camara; Sebastian Ramirez Venegas
    Abstract: This paper studies the transmission of US monetary policy shocks into Emerging Markets emphasizing the role of investment and financial heterogeneity. First, we use a panel SVAR model to show that a US interest tightening leads to a persistent recession in Emerging Markets driven by a sharp reduction in aggregate investment. Second, we study the role of firms' financial heterogeneity in the transmission of US interest rate shocks by exploiting detailed balance sheet dataset from Chile. We find that more indebted firms experience greater drops in investment in response to a US tightening shock than less indebted firms. This result is at odds with recent evidence from US firms, even when using the same identification strategy and econometric methods. Third, we rationalize this finding using a stylized model of heterogeneous firms subject to a tightening leverage constraint. Finally, we present evidence in support of this hypothesis as well as robustness checks to our main results. Overall, our results suggests that the transmission channel of US monetary policy shocks within and outside the US differ, a result novel to the literature.
    Date: 2022–09
  14. By: Eunseong Ma (Yonsei University)
    Abstract: This paper studies a labor-supply-side channel affecting the relationship between monetary policy and income inequality. To this end, I build a heterogeneous-agent New Keynesian economy with indivisible labor in which both macro and micro labor supply elasticities are endogenously generated. First, I find that monetary policy shocks have distributional consequences due to a substantial heterogeneity in labor supply elasticity across households. Second, a more equal economy is associated with more effective monetary policy in terms of output. I document supporting empirical evidence for the key mechanism of the model using micro-level data and state-level data in the U.S.
    Keywords: Monetary policy; Inequality; Labor supply elasticity; Indivisible labor.
    JEL: E52 D31 D52 J21
    Date: 2022–09
  15. By: Eunseong Ma (Yonsei University)
    Abstract: Conventional wisdom based on many empirical studies has long held that real wages are procyclical conditional on a monetary policy shock. This paper challenges this conventional view by developing a quantitative heterogeneous-agent New Keynesian economy with sticky wages. I find that true real wages may be countercyclical conditional on a monetary policy shock, but the data may predict the wrong direction of the real wage dynamics due to the inconsistent definition. This result implies that the predictions of New Keynesian models with wage rigidities are consistent with the data.
    Keywords: Monetary policy; Real wages; Labor share; Earnings inequality.
    JEL: E52 J31 D31
    Date: 2022–08
  16. By: Bin Wei
    Abstract: How many interest rate hikes is quantitative tightening (QT) equivalent to? In this paper, I examine this question based on the preferred-habitat model in Vayanos and Vila (2021). I define the equivalence between rate hikes and QT such that they both have the same impact on the 10-year yield. Based on the model calibrated to fit the nominal Treasury data between 1999 and 2022, I show that a passive roll-off of $2.2 trillion over three years is equivalent to an increase of 29 basis points in the current federal funds rate at normal times. However, during a crisis period with risk aversion being doubled, it is equivalent to a 74 basis point increase. I also quantify the effect of QT implemented by active sales. Lastly, based on the model-based estimates, I show that if the Treasury were to issue bills to offset maturing securities, the resulting equivalent rate hikes in the current federal funds rate would decrease dramatically to 7.4 (12.6) basis points during normal (crisis) periods.
    Keywords: monetary policy; quantitative tightening; QT; quantitative easing; QE; rate hikes; preferred-habitat; reserves; reverse repo
    JEL: E43 E44 E52 E58 G12
    Date: 2022–07–15
  17. By: Hodula, Martin; Pfeifer, Lukáš; Janků, Jan
    Abstract: We investigate the extent to which various structural risks exacerbate the materialization of cyclical risk. We use a large database covering all sorts of cyclical and structural features of the financial sector and the real economy for a panel of 30 countries over the period 2006Q1–2019Q4. We show that elevated levels of structural risks may have an important role in explaining the severity of cyclical and credit risk materialization during financial cycle contractions. Among these risks, private and public sector indebtedness, banking sector resilience and concentration of real estate exposures stand out. Moreover, we show that the elevated levels of some of the structural risks identified may be related to long-standing accommodative economic policy. Our evidence implies a stronger role for macroprudential policy, especially in countries with higher levels of structural risks. JEL Classification: E32, G15, G21, G28
    Keywords: cyclical risk, event study, financial cycle, panel regression, structural risks, systemic risk
    Date: 2022–09
  18. By: Pierre L Siklos (WLU - Wilfrid Laurier University, Balsillie School of International Affairs)
    Abstract: Macroeconomic models used to downplay demographic and fiscal factors. For Japan, narratives suggest that its experience is unlike that of other large economies persisted. I revisit how demographic and fiscal shocks impact Japan, the Euro Area and the US since 1990. Several models and methodologies are used to investigate macro-financial factors, including demographic and fiscal variables. Many, but not all, of the shocks examined have comparable impact across all three economies considered. This is true for monetary policy and the response of global inflation to ageing and demographic shocks. The response of real economic activity to several of the shocks considered is also comparable. Perhaps most notably, demographic and fiscal factors have significant real economic impact although the size of the response does differ across the three economies examined. Japan may not be like other systemically important economies in all respects but it does offer lessons for other large economies.
    Keywords: Japan,monetary and fiscal policy,Eurozone,USA,demographic and global factors,panel VAR,local projections JEL classifications: E31
    Date: 2022–07–31
  19. By: Lukas Altermatt; Hugo van Buggenum; Lukas Voellmy
    Abstract: We develop a general equilibrium model of self-fulfilling bank runs in a setting without aggregate risk. The key novelty is the way in which the banking system's assets and liabilities are connected. Banks issue loans to entrepreneurs who sell goods to households, which in turn pay for the goods by redeeming bank deposits. The return on bank assets is thus contingent on households being able to withdraw their deposits. In a run, not all households that wish to consume manage to withdraw, since part of banks' cash reserves end up in the hands of households without consumption needs. This lowers revenues of entrepreneurs, which causes some of them to default on their loans and thereby rationalises the run in the first place. Interventions that restrict redemptions in a run - such as deposit freezes - can be self-defeating due to their negative effect on demand in goods markets. We show how runs may be prevented with combinations of deposit freezes and redemption penalties as well as with the provision of emergency liquidity by central banks.
    Keywords: Fragility, deposit freezes, emergency liquidity
    JEL: E4 E5 G2
    Date: 2022
  20. By: Jesús Fernández-Villaverde; Daniel Sanches
    Abstract: The gold standard emerged as the international monetary system by the end of the 19th century. We formally study its properties in a micro-founded model and find that the scarcity of the world gold stock not only results in a suboptimal output of goods that are purchased with money but also subjects the domestic economy of a country to external shocks. The creation of inside money in the form of private credit instruments adds to the money supply, usually resulting in a Pareto improvement, but opens the door to the international transmission of banking crises. These properties of the gold standard can explain the limited adherence by peripheral countries because of the potential risks to their economies. We argue that the gold standard can be sustainable at the core but not at the periphery.
    JEL: E42 E58 G21
    Date: 2022–09
  21. By: Prashant Parab (Indira Gandhi Institute of Development Research)
    Abstract: Investigating exchange rate fluctuations is important to understand their influence on domestic inflation dynamics of the country as well as to study the stabilisation role played by the monetary policy. Understanding exchange rate pass-through (ERPT) is important especially from emerging markets' perspective since they tend to be net importers. This study examines ERPT for India from 2005Q2 to 2021Q2, i.e., the effects of the nominal effective exchange rate (NEER) on the domestic inflation captured using CPI and WPI. Using linear and non-linear ARDL models, we discover less than perfect exchange rate pass-through for India. The influence is higher for WPI than CPI on account of inelastic crude oil imports. This study also finds a higher influence of exchange rate appreciation than that of depreciation due to the policy measures to limit the pass-through effect of exchange rate depreciation but allowing appreciation to have a complete pass-through.
    Keywords: Exchange rate pass-through, ARDL, NARDL, Nominal effective exchange rate, Inflation dynamics
    JEL: C32 E31 E32 F31
    Date: 2022–08
  22. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Abhishek Kumar
    Abstract: Understanding the drivers of inflation is an important issue in business cycle research and has been a matter of debate. In this paper, using data from a large emerging economy, we identify a structural shock (inflation shock) that explains the maximum forecast error variance of consumer prices. The inflation shock explains more than 80 per cent of the forecast error variance of consumer price up to 40 quarters. This shock increases prices and decreases output, implying that it is a supply shock. We also show that the food inflation shock is the primitive shock, which makes the inflation shock a supply shock and also feeds into non-food inflation. A large interest rate reaction to this shock leads to a prolonged decline in credit, investment, and output. Using the shocks obtained from a medium-scale new Keynesian model, we provide additional evidence that most of the variance of estimated inflation and food inflation shocks is explained by model-based supply shocks. These results suggest that central banks in emerging economies need to be more pragmatic in implementing inflation-targeting policies.
    Keywords: Inflation, India, SVAR, FEV, supply shock, demand shock
    JEL: E43 E44 E52
    Date: 2022–09
  23. By: Pablo Azar; Garth Baughman; Francesca Carapella; Jacob Gerszten; Arazi Lubis; JP Perez-Sangimino; David E. Rappoport; Chiara Scotti; Nathan Swem; Alexandros Vardoulakis; Aurite Werman
    Abstract: The value of assets in the digital ecosystem has grown rapidly amid periods of high volatility. Does the digital financial system create new potential challenges to financial stability? This paper explores this question using the Federal Reserve’s framework for analyzing vulnerabilities in the traditional financial system. The digital asset ecosystem has recently proven itself to be highly fragile. However, adverse digital asset market shocks have had limited spillovers to the traditional financial system. Currently, the digital asset ecosystem does not provide significant financial services outside the ecosystem, and it exhibits limited interconnections with the traditional financial system. The paper describes emerging vulnerabilities that could present risks to financial stability in the future if the digital asset ecosystem becomes more systemic, including run risks among large stablecoins, valuation pressures in crypto-assets, fragilities of DeFi platforms, growing interconnectedness, and a general lack of regulation.
    Keywords: digital assets; stablecoins; DeFi; financial stability; financial vulnerabilities; systemic risk
    JEL: G20 G21 G28
    Date: 2022–09–01
  24. By: Eduardo Levy-Yeyati (Universidad Torcuato Di Tella); Federico Sturzenegger (Universidad de San Andrés/ Harvard Kennedy School)
    Abstract: Twenty years ago, in Levy-Yeyati and Sturzenegger (2001) we proposed a de facto classification of exchange rate regimes which contrasted with the –at the time, standard– de jure classifications based on self-reporting by monetary authorities. This paper extends our original classification through 2021 more than doubling the number of country-year observations (from 3335 to 8491). It also introduces an updating methodology to keep the classification updated in real time. Also, based on this extension, the paperdocuments the main stylized facts about exchange rate regime choices in the past two decades, which shows a jump in the prevalence of flexible regimes in the early 2000s and a gradual convergence between de jure and de facto groupings over time.
    Keywords: Exchange rate regimes; fear of floating; fear of appreciation
    JEL: F30 F33
    Date: 2022–10
  25. By: Alin Marius Andries (Alexandru Ioan Cuza University of Iasi; Romanian Academy - Institute for Economic Forecasting); Alexandra-Maria Chiper (Alexandru Ioan Cuza University of Iasi); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Alexandru Ioan Cuza University of Iasi)
    Abstract: External imbalances played a pivotal role in the run-up to the global financial crisis, being an important underlying cause of the ensuing turmoil. While current account (flow) imbalances have narrowed in the aftermath of the crisis, net international investment position (stock) imbalances still persist. In this paper, we explore the implications of countries’ net foreign positions on systemic risk. Using a sample composed of 450 banks located in 46 advanced, developing and emerging countries over the period 2000-2020, we document that banks can reduce their systemic risk exposure when the countries where they are incorporated maintain creditor positions vis-à-vis the rest of the world. However, only the equity components of the net international investment positions are responsible for this outcome, whereas debt flows do not contribute significantly. In addition, we find that the heterogeneity across countries is substantial and that only banks located in advanced markets that maintain their creditor positions have the potential to improve their resilience to system-wide shocks. Our findings are relevant for policy makers who seek to improve banks’ resilience to adverse shocks and to maintain financial stability.
    Keywords: External Wealth of Nations, External Imbalances, Net International Investment Position, Systemic Risk, Financial Stability
    JEL: F32 G21 G32
    Date: 2022–09
  26. By: Oxana Babecka Kucharcukova; Jan Bruha; Petr Kral; Martin Motl; Jaromir Tonner
    Abstract: The coronavirus pandemic and the related anti-epidemic measures represented an unprecedented negative shock to the global economy in the form of a dramatic fall in economic activity. Since the onset of the pandemic, the question has been to what extent the contraction of economic activity, largely related to anti-epidemic measures (lockdowns), can be interpreted as a negative anti-inflationary shock to demand and, conversely, what proportion of the observed decline in GDP can be attributed to a negative (cost) inflationary shock on the supply side. To contribute to the debate, we have set out our own narrative and conducted model analyses. We have focused on the world's two largest advanced economies - the US and the euro area. An empirical comparison of the pandemic-induced crisis with the global financial and economic crisis and model simulations indicate that the sharp economic downturn observed in 2020 bears, for the most part, the hallmarks of a supply shock. The combination of a negative supply shock, worldwide accommodative monetary policy and large fiscal stimuli led to strong inflationary overheating across the globe. The Czech National Bank reassessed the macroeconomic story from a demand to supply driven economic downturn. This reassessment, together with a gradual, but steady, recovery of economic activity, enabled the CNB - as one of the first central banks in the world to do so - to appropriately tighten its monetary policy from mid-2021 onwards.
    Keywords: E31, E32, F47
    Date: 2022–09
  27. By: Adam Hale Shapiro
    Abstract: The extent to which either supply or demand factors drive inflation has important implications for economic policy. I propose a framework to decompose inflation into supply- and demand-driven components. I generate two new data series, the supply and demand-driven contributions to personal consumption expenditures (PCE) inflation, which quantify the degree to which either demand or supply is driving inflation in a current month. The series show expected time-series patterns. The demand-driven contribution tends to decline during recessions, while the supply-driven contribution tends to follow food and energy prices. Monetary policy tightening acts to reduce the demand-driven contribution of inflation. Oil-supply shocks act to increase the supply driven contribution, but decrease the demand-driven contribution of inflation. The decompositions can be used to test theory or by policymakers and practitioners to track inflation drivers in real time.
    Keywords: supply and demand; inflation; decomposition
    Date: 2022–09–22
  28. By: Eunseong Ma (Yonsei University)
    Abstract: This paper studies how adjustment along intensive and extensive margins of labor supply affects aggregate and disaggregate effects of monetary policy. To this end, I develop a heterogeneous-agent New Keynesian (HANK) economy where a nonlinear mapping from hours worked into labor services generates operative adjustment along intensive and extensive margins of labor supply. I find that monetary policy has significantly different effects on earnings inequality, depending on the extent to which margin is dominant, even if it generates similar aggregate responses.
    Keywords: Monetary policy; Intensive and extensive margins; Earnings inequality.
    JEL: E52 D31 D52 J21
    Date: 2022–09
  29. By: Don Bredin (Graduate School of Business, University College Dublin); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: We use a Markov regime-switching heteroskedasticity model in order to examine the association between inflation and inflation uncertainty in four European countries over a forty-year period. This approach allows for regime shifts in both the mean and variance of inflation in order to assess the association between inflation and its uncertainty in short and long horizons. We find that this association differs (i) between transitory and permanent shocks to inflation and (ii) across countries. In particular, the association is positive or zero for transitory shocks and negative or zero for permanent shocks. Hence, Friedman’s belief that inflation is positively associated with inflation uncertainty is only partially supported in this study, i.e., with short-run inflation uncertainty.
    Keywords: Inflation, Inflation uncertainty, Markov process, regime-switching heteroskedasticity
    JEL: C22 C51 C52 E0
    Date: 2022–03
  30. By: Richard K. Crump; Charles Smith; Peter Van Tassel
    Abstract: Since the advent of derivatives trading on short-term interest rates in the 1980s, financial commentators have often interpreted market prices as directly reflecting the expected path of future interest rates. However, market prices generally embed risk premia (or “term premia” in reference to measures of risk premia over different horizons) reflecting the compensation required to bear the risk of the asset. When term premia are large in magnitude, derivatives prices may differ substantially from investor expectations of future rates. In this post, we assess whether term premia have increased with the recent rise in inflation, given the historically positive relationship between the two series, and what this means for the interpretation of derivatives prices.
    Keywords: term premia; inflation; monetary policy expectations; Federal Open Market Committee (FOMC)
    JEL: E52 G1
    Date: 2022–09–28
  31. By: Reis, Ricardo
    Abstract: Inflation has an anchor in people’s expectations of what its long-run value will be. If expectations persistently change, then the anchor is adrift; if they differ from the central bank’s target, the anchor is lost. This paper uses data on expectations from market prices, from professional surveys, and from the cross-sectional distribution of household surveys to measure shifts in this anchor. Its main application is to the US Great Inflation. The data suggests that the anchor started drifting as early as 1967 and that this could have been spotted well before policymakers did. Using this approach on expectations data from Brazil, Turkey, South Africa, the US in the 1970s, and the US in 2021, confirms their usefulness to measure the inflation anchor in real time.
    JEL: J1 N0
    Date: 2022–06–24
  32. By: Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
    Abstract: Non-US firms have massively borrowed dollars (foreign currency, FX), which may lead to booms and crises. We show the real effects of capital controls, including prudential benefits, through a firm-debt mechanism. Our identification exploits the introduction of a tax on FX-debt inflows in Colombia before the global financial crisis (GFC), and administrative, proprietary datasets, including loan-level credit register data and firm-level information on FX-debt inflows and imports/exports. Our results show that capital controls substantially reduce FX-debt inflows, particularly for firms with larger ex-ante FX-debt exposure. Moreover, firms with weaker local banking relationships cannot substitute FX-debt with domestic-debt and experience a reduction in total debt and imports upon implementation of the policy. However, our results suggest that, by preemptively reducing pre-crisis firm-level debt, capital controls boost exports during the subsequent GFC, especially among financially-constrained firms.
    Keywords: capital controls, corporate FX-debt, real effects, macroprudential, capital inflows
    JEL: F3 F38 F4 F6 G01 G15 G21 G28
    Date: 2022–04
  33. By: Nina Biljanovska; Alexandros Vardoulakis
    Abstract: We introduce heterogeneity in terms of workers and entrepreneurs in an otherwise standard Fisherian model to study Sudden Stop dynamics and optimal policy. We show that the distinction between workers and entrepreneurs introduces a distributive externality that is absent from the representative-agent setup. While in tranquil times redistribution is driven by the relative marginal utilities of consumption, the planner additionally favors entrepreneurs during Sudden Stops to mitigate Fisherian deation. Although agentheterogeneity does not add much in explaining the Sudden Stop phenomena, it adds to the understanding of how policies can best be designed to alleviate the negative effects of Sudden Stops.
    Keywords: Sudden Stops; agent heterogeneity; macroprudential policy; payroll tax policy; representative-agent economy; representative-agent setup; two-agent Economy; two-agent economy; Payroll tax; Self-employment; Collateral; Asset prices; Global
    Date: 2022–07–22

This nep-cba issue is ©2022 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.