nep-cba New Economics Papers
on Central Banking
Issue of 2022‒11‒28
27 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Dancing on the edge of stagflation By Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  2. Unconventional Monetary Policy and Inequality By Salvatore Nisticò; Marialaura Seccareccia
  3. Money and Banking with Reserves and CBDC By Dirk Niepelt
  4. Into the Universe of Unconventional Monetary Policy: State-dependence, Interaction and Complementarities By Andrejs Zlobins
  5. Fiscal Stimulus Under Average Inflation Targeting By Zheng Liu; Jianjun Miao; Dongling Su
  6. Endogenous money interpretation of the operations of the Swiss central bank (2005-2020) By Simona Bozhinovska
  7. An Estimated DSGE Model of the Euro Area with Expectations about the Timing and Nature of Liftoff from the Lower Bound By Haderer, Michaela
  8. The Case for Convenience: How CBDC Design Choices Impact Monetary Policy Pass-Through By Rodney J Garratt; Jiaheng Yu; Haoxiang Zhu
  9. Monetary Policy in a World of Cryptocurrencies By Pierpaolo Benigno
  10. Collateral requirements in central bank lending By Du, Chuan
  11. Assessing Unconventional Monetary Policy in Japan Using Market Operation-based Monetary Policy Indices By Markus HECKEL; INOUE Tomoo; NISHIMURA Kiyohiko G.; OKIMOTO Tatsuyoshi
  12. What’s that noise? Analysing sentiment-based variation in central bank communication By Bernd Hayo; Johannes Zahner
  13. MPC monetary communication: children of the revolution(s) By Delia Sih Chien Macaluso; Michael McMahon
  14. Monetary Policy, Funding Cost and Banks’ Risk-Taking: Evidence from the United States By Constantin Bürgi; Bo Jiang
  15. Stagflation and Topsy-Turvy Capital Flows By Julien Bengui; Louphou Coulibaly
  16. Blowing against the Wind? A Narrative Approach to Central Bank Foreign Exchange Intervention By Naef, Alain
  17. A tail of labour supply and a tale of monetary policy By Cantore, Cristiano; Ferroni, Filippo; Mumtaz, Hroon; Theophilopoulou, Angeliki
  18. The Dynamics of Large Inflation Surges By Andrés Blanco; Pablo Ottonello; Tereza Ranosova
  19. A Quantitative Evaluation of Interest Rate Liberalization Reform in China By Jing Yuan; Yan Peng; Zongwu Cai; Zhengyi Zhang
  20. Is Inflation Uncertainty a Self-Fulfilling Prophecy? The Inflation-Inflation Uncertainty Nexus and Inflation Targeting in South Africa By Chevaughn van der Westhuizen; Renee van Eyden; Goodness C. Aye
  21. Assessing the Impact of Country-Specific Sovereign Risk on Financial and Banking System in EMU: the Role of Italy By Capasso Salvatore; D’Uva Marcella,; Fiorelli Cristiana; Napolitano Oreste
  22. Core inflation over the COVID-19 pandemic By Mikael Khan; Elyse Sullivan
  23. The Impact of U.S. Monetary Policy on Foreign Firms By Julian di Giovanni; John H. Rogers
  24. Understanding U.S. Inflation During the COVID Era By Laurence M. Ball; Daniel Leigh; Prachi Mishra
  25. The effects of climate change on the natural rate of interest: a critical survey By Mongelli, Francesco Paolo; Pointner, Wolfgang; van den End, Jan Willem
  26. The European Monetary Integration Trap: incomplete sovereignty and the State-mimicking method By Costa Cabral, Nazare
  27. Climate Policies, Macroprudential Regulation, and the Welfare Cost of Business Cycles By Barbara Annicchiarico; Marco Carli; Francesca Diluiso

  1. By: Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: The European Central Bank (ECB) is facing a dangerous trade-off between the control of supply-led inflation and the need to avoid a further recession in the euro area. The paper argues that an effective ECB monetary strategy to handle this trade-off would have been to anticipate the increase in the policy interest rates and postpone the end of the asset net purchase programs. Unfortunately, the ECB did not follow this sequence, which is why its current monetary policy, bound in a tricky balance, risks favoring euro-area stagflation and financial market fragmentation. Moreover, the new anti-fragmentation instrument (TPI) introduced by the ECB appears ineffective and subject to excessive discretion. Therefore, the ECB should instead activate a compelling combination of its rules-based monetary policy with EU centralized and national fiscal policies.
    Keywords: Stagflation; monetary policy; ECB
    JEL: E58 E44 E52
    Date: 2022–11
  2. By: Salvatore Nisticò (Department of Social Sciences and Economics, Sapienza University of Rome); Marialaura Seccareccia (Department of Economics and Finance, LUISS Guido Carli)
    Abstract: Cyclical inequality and idiosyncratic risk imply additional channels that amplify the transmission of persistent balance-sheet policies, through their effects on private sector's expectations and consumption risk. Through these channels, unconventional monetary policy improves the central bank's ability to anchor expectations and rule out endogenous instability. Moreover, they allow the central bank to optimally complement interest-rate policy in particular in response to financial shocks that expose the economy to the effective-lower-bound on the policy rate, and can promote a swifter exit from the liquidity trap.
    Keywords: Cyclical inequality; idiosyncratic risk; optimal monetary policy; HANK; THANK, ELB.
    JEL: E21 E32 E44 E58
    Date: 2022–11
  3. By: Dirk Niepelt
    Abstract: We analyze retail central bank digital currency (CBDC) in a two-tier monetary system with bank deposit market power and externalities from liquidity transformation. Resource costs of liquidity provision determine the optimal monetary architecture and modified Friedman (1969) rules the optimal monetary policy. Optimal interest rates on reserves and CBDC differ. A calibration for the U.S. suggests a weak case for CBDC in the baseline but a much clearer case when too-big-to-fail banks, tax distortions or instrument restrictions are present. Depending on central bank choices CBDC raises U.S. bank funding costs by up to 1.5 percent of GDP
    Keywords: Central bank digital currency, reserves, two-tier system, bank, liquidity, equivalence
    JEL: E42 E43 E51 E52 G21 G28
    Date: 2022–10
  4. By: Andrejs Zlobins (Latvijas Banka)
    Abstract: This paper studies the interaction among non-standard monetary policy measures – the negative interest rate policy, forward guidance and quantitative easing – and their ability to substitute conventional policy rate setting when it is constrained by the effective lower bound. In this paper, the euro area serves as our laboratory since the European Central Bank has deployed all three unconventional measures in the past decade to bypass the binding effective lower bound constraint and stabilize the inflation trajectory towards the target. Our empirical setup makes use of a smooth-transition structural vector autoregression, while identification of monetary innovations is done via fusion of high frequency information with narrative sign restrictions, first introduced in Zlobins (2021b) and now further extended to isolate rate cuts in positive/negative territory, allowing to simultaneously identify the impact of both conventional and unconventional policy actions. Our findings show that unconventional measures can substitute the standard policy rate setting but their effectiveness is highly dependent on the overall policy mix and the state of the economy. However, the evidence also suggests that non-standard measures serve as complements to the conventional policy as they are particularly powerful in circumstances when standard policy rate setting loses its stabilization properties, for example, during market turbulence or when the risk of de-anchoring of inflation expectations is elevated.
    Keywords: quantitative easing, negative interest rate policy, forward guidance, monetary policy, non-linearities
    JEL: C54 E50 E52 E58
    Date: 2022–11–11
  5. By: Zheng Liu; Jianjun Miao; Dongling Su
    Abstract: The stimulus effects of expansionary fiscal policy under average inflation targeting (AIT) depends on both monetary and fiscal policy regimes. AIT features an inflation makeup under the monetary regime, but not under the fiscal regime. In normal times, AIT amplifies the short-run fiscal multipliers under both regimes while mitigating the cumulative multiplies due to intertemporal substitution. In a zero-lower-bound (ZLB) period, AIT reduces fiscal multipliers under a monetary regime by shortening the duration of the ZLB through expected inflation makeup. Under the fiscal regime, AIT has a nonlinear effect on fiscal multipliers because of the absence of inflation makeup and the presence of a nominal wealth effect.
    Keywords: average inflation targeting; fiscal multipliers; monetary policy rules; fiscal policy; DSGE models
    JEL: E13 E32 E44 E52 G12
    Date: 2022–11–09
  6. By: Simona Bozhinovska (CEPN - Centre d'Economie de l'Université Paris Nord - LABEX ICCA - UP13 - Université Paris 13 - Université Sorbonne Nouvelle - Paris 3 - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité - Université Sorbonne Paris Nord - CNRS - Centre National de la Recherche Scientifique - Université Sorbonne Paris Nord)
    Abstract: The present article deals with the evolution of the operational framework of the Swiss central bank, brought forward by its extensive official foreign exchange purchases following the outburst of the global financial crisis. It provides an endogenous money interpretation of the operations of the Swiss National Bank under both shortage and surplus in the aggregate liquidity position of the banking sector vis-à-vis the central bank, reinforcing thus the claim that the compensating movements on the central bank balance sheet in response to foreign exchange accumulation are nothing more than interest rate targeting operations. Given the rather unusual choice of a longer-term interest rate abroad as its policy rate, initially the SNB only partially compensated these movements, so as to ensure a rather generous supply of central bank reserves and bring this rate down to its targeted level, while domestic market rates were set lower. The later adoption of a floor system with ample reserves, allowed the SNB to maintain a near-perfect control over its policy interest rate while at the same time establishing a direct link between foreign reserves and the monetary base, leaving little room to assume a further quantitative effect from this expansion of central bank reserves.
    Keywords: central bank operations,foreign exchange accumulation,monetary policy implementation,Swiss National Bank
    Date: 2022–10–31
  7. By: Haderer, Michaela
    Abstract: I investigate the implications of the zero lower bound (ZLB) in a structural New-Keynesian model for the euro area. The medium-scale DSGE model accommodates forward guidance by treating the expected durations of the ZLB constraint as free parameters in estimation. Incorporating professional forecasters’ expectations about the future path of the policy rate provides well-identified estimates of the durations. These estimates indicate that unconventional monetary policy becomes increasingly important from 2018 on. Furthermore, when monetary policy is expected to be passive in its response to inflation after liftoff, forward guidance has weaker effects with deflationary pressures on the economy. Finally, including data from the Covid-19 pandemic in estimation leads to stable estimates and allows an assessment of monetary policy during that period.
    Keywords: monetary policy; zero lower bound; forward guidance; liftoff; Covid-19
    Date: 2022–11
  8. By: Rodney J Garratt; Jiaheng Yu; Haoxiang Zhu
    Abstract: Banks of different sizes respond differently to interest on reserve (IOR) policy. For low IOR rates, large banks are non-responsive to IOR rate changes, leading to weak pass-though of IOR rate changes to deposit rates. In these circumstances, a central bank digital currency (CBDC) may be used to provide competitive pressure to drive up deposit rates and improve monetary policy transmission. We explore the implications of two design features: interest rate and convenience value. Increasing the CBDC interest rate past a point where it becomes a binding floor, increases deposit rates but leads to a wider divergence of market shares in both deposit and lending markets and can reduce the responsiveness of deposit rates to changes in the IOR rate. In contrast, increasing convenience, from sufficiently high levels, increases deposit rates, causes market shares to converge and can increase the responsiveness of deposit rates to changes in the IOR rate.
    Keywords: central bank digital currency, interest on reserves, payment convenience, deposit rates, bank lending.
    JEL: E42 G21 G28 L11 L15
    Date: 2022–10
  9. By: Pierpaolo Benigno
    Abstract: Can currency competition affect central banks' control of interest rates and prices? Yes, it can. In a two-currency world with competing cash (material or digital), the growth rate of the cryptocurrency sets an upper bound on the nominal interest rate and the attainable inflation rate, if the government currency is to retain its role as medium of exchange. In any case, the government has full control of the inflation rate. With an interest-bearing digital currency, equilibria in which government currency loses medium-of-exchange property are ruled out. This benefit comes at the cost of relinquishing control over the inflation rate.
    Date: 2022–09
  10. By: Du, Chuan (Bank of England)
    Abstract: In periods of stress, acute liquidity squeeze can manifest in the riskier segments of the credit market, even amid a surplus of aggregate liquidity. In such scenarios, central bank interventions that directly lower the risky interest rate can be more effective than reductions in the risk-free interest rate. Specifically, the central bank lends to the market at more favourable interest rates while simultaneously reducing the haircuts imposed on eligible collateral. In doing so, the central bank takes on greater credit risk, but achieves an outcome that is more productively efficient than simply reducing the risk-free interest rate.
    Keywords: Collateral; leverage; credit conditions; monetary policy; general equilibrium
    JEL: D53 E44 E51 E52 E58
    Date: 2022–07–21
  11. By: Markus HECKEL; INOUE Tomoo; NISHIMURA Kiyohiko G.; OKIMOTO Tatsuyoshi
    Abstract: Open market operations (MOs) were not originally designed for making monetary policy changes during normal times. However, they became an integral part of the unconventional monetary policy (UMP) when the policy rates hit the effective lower bound during the 2008 global financial crisis in the major advanced countries. This study quantifies the effect of UMP carried out by MO on the macroeconomy in Japan, from 2002 to 2019, based on four market operation-based monetary policy indices (MO-MPIs), namely a broadly-defined quantitative easing index and three liquidity supply indices targeting different financial market segments. Our results indicate that there were three distinctive regimes with different policy impacts: (1) before mid-2008, (2) mid-2008 – mid-2016, and (3) after mid-2016. Moreover, UMP carried out using MO was the most effective in the second regime, with very strong effects of all MO-MPIs on almost all macroeconomic variables. Furthermore, MO-MPIs became substantially less effective in the third regime (after mid-2016) after the Bank of Japan introduced yield curve control.
    Date: 2022–11
  12. By: Bernd Hayo (Marburg University); Johannes Zahner (Marburg University)
    Abstract: To which degree can variation in sentiment-based indicators of central bank communication be attributed to changes in macroeconomic, financial, and monetary variables; idiosyncratic speaker effects; sentiment persistence; and random ‘noise’? Using the Loughran and McDonald (2011) dictionary on a text corpus containing more than 10,000 speeches and press statements, we construct sentiment-based indicators for the ECB and the Fed. An analysis of variance (ANOVA) shows that sentiment is strongly persistent and influenced by speaker-specific effects. With about 80% of the variation in sentiment being due to noise, our findings cast doubt on the reliability of conclusions based on variation in dictionary-based indicators.
    Keywords: Sentiment index, monetary policy, central banks, Loughran and McDonald (2011) dictionary, information content of sentiment indices
    JEL: C55 E58 E61 Z13
    Date: 2022
  13. By: Delia Sih Chien Macaluso; Michael McMahon
    Abstract: The Bank of England’s Monetary Policy Committee (MPC) celebrated 25 years of existence in June 2022. This period is marked by a global trend toward greater transparency and more communication in central banks. While some of these changes took place before the Bank of England was given independent operational control of monetary policy, the Bank has played a leading role in many of these trends. This short paper takes a look back the communication of the Bank of Eng¬land, and considers the impact of current trends going forward.
    Date: 2022–10–11
  14. By: Constantin Bürgi; Bo Jiang
    Abstract: How much deposits and equity a bank has influences how a banks’ lending responds to monetary policy. While the responsiveness for the bank lending channel has been well established, this is not the case for the risk-taking channel (RTC). We show in a value-at-risk RTC model that the lending for banks with relatively more equity and non-interest-bearing deposits should respond less to monetary policy tightening. This suggests that non-interest-bearing deposits act as “pseudo capital”. In a panel of US banks, we find strong evidence in support of our model for various risk measures.
    Keywords: bank lending, deposits, value-at-risk, pseudo capital
    JEL: E43 E52 G21
    Date: 2022
  15. By: Julien Bengui; Louphou Coulibaly
    Abstract: Are unregulated capital flows excessive during a stagflation episode? We argue that they likely are, owing to a macroeconomic externality operating through the economy’s supply side. Inflows raise domestic wages through a wealth effect on labor supply and cause unwelcome upward pressure on marginal costs in countries where monetary policy is trying to drive down costs to stabilize inflation. Yet market forces are likely to generate such inflows. Optimal capital flow management instead requires net outflows, suggesting topsy-turvy capital flows following markup shocks.
    Keywords: Inflation and prices; International financial markets; International topics; Monetary policy
    JEL: D62 E52 F38 F41
    Date: 2022–10
  16. By: Naef, Alain
    Abstract: Most countries in the world use foreign exchange intervention, but measuring the success of the policy is difficult. By using a narrative approach, I identify interventions when the central bank manages to reverse the exchange rate based on pure luck. I separate them from interventions when the central bank actually impacted the exchange rate. Because intervention records are daily aggregates, an intervention might appear to have changed the direction of the exchange rate, when it is more likely to have been caused by market news. This analysis allows to have a better understanding of how successful central bank operations really are. I use new daily data on Bank of England interventions in the 1980s and 1990s. Some studies find that interventions work in up to 80% of cases. Yet, by accounting for intraday market moving news, I find in adverse conditions, the Bank of England managed to influence the exchange rate only in 8% of cases. I use natural language processing to confirm the validity of the narrative approach. Using lasso and a VAR analysis, I investigate what makes the Bank of England intervene. I find that only movement on the Deutschmark and not US dollar exchange rate made the Bank intervene. Also, I find that interest rate hikes were mostly a tool for currency management and accompanied by large reserve sales.
    Date: 2022–10–08
  17. By: Cantore, Cristiano (Bank of England); Ferroni, Filippo (Chicago Fed); Mumtaz, Hroon (Queen Mary, University of London); Theophilopoulou, Angeliki (Brunel University London)
    Abstract: We study the interaction between monetary policy and labour supply decisions at the household level. We uncover evidence of heterogeneous responses and a strong income effect on labour supply in the left tail of the income distribution, following a monetary policy shock in the US and the UK. That is, while aggregate hours and labour earnings decline, employed individuals at the bottom of the income distribution increase their hours worked in response to an interest rate hike. Moreover, their response is stronger in magnitude relative to other income groups. We rationalize this using a two-agent New-Keynesian (TANK) model where our empirical findings can be replicated with a lower intertemporal elasticity of substitution for the Hand-to-Mouth households. This setup has important implications for the impact of inequality on the transmission of monetary policy. We unveil a novel dampening effect on aggregate demand generated by the Hand-to-Mouth substitution of leisure for consumption following a negative income shock. Therefore we show that the impact of inequality on the transmission mechanism of monetary policy is highly dependent on the different layers of heterogeneity on the household side and the different combinations of nominal and real frictions. More inequality does not necessarily generate a stronger response of aggregate demand after a monetary policy shock.
    Keywords: Monetary policy; household survey; FAVARs; TANK; hand to mouth
    JEL: C10 E32 E52
    Date: 2022–07–21
  18. By: Andrés Blanco; Pablo Ottonello; Tereza Ranosova
    Abstract: We empirically characterize episodes of large inflation surges that have been observed worldwide in the last three decades. We document four facts. (1) Inflation following surges tends to be persistent, with the duration of disinflation exceeding that of the initial inflation increase. (2) Surges are initially unexpected but followed by a gradual catch-up of average short-term expectations with realized inflation. (3) Long-term inflation expectations tend to exhibit mild increases that persist throughout disinflation. (4) Policy responses are characterized by hikes in nominal interest rates but no tightening of real rates or fiscal balances. Our findings highlight the challenges monetary authorities face in avoiding persistent inflation dynamics following large inflation surges.
    JEL: E31 E40 F40
    Date: 2022–10
  19. By: Jing Yuan (School of Statistics, Shandong Technology and Business University, Yantai, Shandong 264005, China); Yan Peng (School of Statistics, Shandong Technology and Business University, Yantai, Shandong 264005, China); Zongwu Cai (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA); Zhengyi Zhang (International School of Economics and Management, Capital University of Economics and Business, Beijing, Beijing 100070, China)
    Abstract: Based on the characteristics of monetary policy and term structure of bond yields, this paper proposes an interest rate model to evaluate the consequences of interest rate liberalization in China. Our empirical results show that bench- mark interest rates and expected inflation are strongly correlated, although the relationship between expected inflation and market interest rates of all terms is relatively weak. Additionally, our model provides a superior goodness-of-fit over the predicted mean, the variance and the correlations of treasury bond yields, and the inflation estimated from the proposed model demonstrates more preferable forecasting accuracy by outperforming the results estimated from either Langrun or Baidu CPI index. Our findings suggest that adjustment of benchmark rates and reserve requirement are the most important price-based tools for the central bank to transmit the effects of monetary policy along the yield curve. The development of interest rate liberalization further requires prudential managements by the central bank to focus on short-term interest rate intervention besides policy support, in emphasizing the power of market forces to eventually link the change in market interest rates with economic fundamentals.
    Keywords: Economic fundamentals; Expected inflation rate, Interest rate term structure, Interest rate marketization reform.
    JEL: G1 E4 C5
    Date: 2022–11
  20. By: Chevaughn van der Westhuizen (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria); Goodness C. Aye (Department of Economics, University of Pretoria)
    Abstract: Inflation uncertainty expedites macroeconomic ills and instability in the economy. This paper investigates if inflation uncertainty is potentially a self-fulfilling prophecy in that rising levels of uncertainty serve as a source of higher inflation outcomes and vice versa. In addition, this paper examines the impact of inflation targeting, implemented in South Africa in February 2000, on the level of inflation and inflation uncertainty. Using a generalised autoregressive conditional heteroskedasticity (GARCH) and GARCH-in-mean model and monthly data spanning the period 1970:01 to 2022:05, the empirical outcomes from this study suggest the existence of a bi-directional relationship between inflation and inflation uncertainty, with strong evidence in favour of the Friedman-Ball hypothesis and weaker evidence in support of the Cukierman-Meltzer hypothesis. This study also finds that inflation targeting has contributed significantly to reducing the level of inflation and inflation uncertainty since its adoption as policy framework. Time-varying Granger causality tests accounting for instabilities underscore the above results, namely that inflation uncertainty led to increased inflation uncertainty in the full pre-inflation targeting period, while increased uncertainty led to increased inflation only during the decade preceding inflation targeting. The results heed important policy implications, as it is imperative inflation is kept low, stable and predictable.
    Keywords: Inflation, Inflation uncertainty, Inflation targeting, Friedman-Ball hypothesis, Cukierman-Meltzer hypothesis, GARCH modelling, time-varying causality tests
    JEL: C22 E52 E58
    Date: 2022–11
  21. By: Capasso Salvatore (Università di Napoli Parthenope, ISMed-CNR, and CSEF.); D’Uva Marcella, (Università di Napoli Parthenope); Fiorelli Cristiana (Università di Napoli Parthenope); Napolitano Oreste (Università di Napoli Parthenope)
    Abstract: This work investigates the bank-sovereign risk transmission across EMU countries, assessing how sovereign risk in Italian government bonds can affect the sovereign and credit risk of non-stressed countries. We employ a GVAR technique and measure spatial proximity by using the cross-country “distance” in debt-to-GDP ratio. Our results confirm the hypothesis of a sovereign-bank loop: a shock in Credit Default Swaps spread of one country propagates to other CDS and bank indices. The effects are stronger in more fragile financial systems. Overall, our findings highlight the importance of spillover effects and suggest a monetary policy tailored on “back-door” propagation of shocks.
    Keywords: sovereign CDS, GVAR, spillovers, euro area.
    JEL: C31 C58 E44
  22. By: Mikael Khan; Elyse Sullivan
    Abstract: We assess the usefulness of various measures of core inflation over the COVID-19 pandemic. We find that Cpi-trim and CPI-median provided the best signal of underlying inflation. The favourable performance of these measures stems from their lack of reliance on historical experience, an especially valuable feature in unprecedented times.
    Keywords: Econometric and statistical methods; Inflation and prices; Monetary policy
    JEL: C18 E E3 E31
    Date: 2022–11
  23. By: Julian di Giovanni; John H. Rogers
    Abstract: This paper uses cross-country firm-level data to explore the impact of U.S. monetary policy shocks on firms’ sales, investment, and employment. We estimate a sizable impact of U.S. monetary policy on the average foreign firm, while controlling for other macroeconomic and financial variables like the VIX and exchange rate fluctuations that accompany U.S. monetary policy changes. We then quantify the role of international trade exposure and financial constraints in transmitting monetary policy shocks to firms, allowing for a better identification of the importance of external demand effects and the interest rate channel. We first exploit cross-country sector-level data on intermediate and final goods trade to show that greater global production linkages amplify the impact of U.S. monetary policy at the firm level. We then show that the impact varies along the firm-level distribution of proxies for firms’ financial constraints (for example, size and net worth), with the impact being significantly attenuated for less constrained firms.
    Keywords: U.S. monetary policy spillovers; Foreign firms; production linkages; financial constraints
    JEL: E52 F40
    Date: 2022–11–01
  24. By: Laurence M. Ball; Daniel Leigh; Prachi Mishra
    Abstract: This paper analyzes the dramatic rise in U.S. inflation since 2020, which we decompose into a rise in core inflation as measured by the weighted median inflation rate and deviations of headline inflation from core. We explain the rise in core with two factors, the tightening of the labor market as captured by the ratio of job vacancies to unemployment, and the pass-through into core from past shocks to headline inflation. The headline shocks themselves are explained largely by increases in energy prices and by supply chain problems as captured by backlogs of orders for goods and services. Looking forward, we simulate the future path of inflation for alternative paths of the unemployment rate, focusing on the projections of Federal Reserve policymakers in which unemployment rises only modestly to 4.4 percent. We find that this unemployment path returns inflation to near the Fed’s target only under optimistic assumptions about both inflation expectations and the Beveridge curve relating the unemployment and vacancy rates. Under less benign assumptions about these factors, the inflation rate remains well above target unless unemployment rises by more than the Fed projects.
    JEL: E31
    Date: 2022–10
  25. By: Mongelli, Francesco Paolo; Pointner, Wolfgang; van den End, Jan Willem
    Abstract: This survey reviews the literature about the impact of climate change on the natural rate of interest (r*), an important yardstick for monetary policy. Economic and financial developments can lower r* in scenarios with increasing climate-related damages and uncertainty that reduce productivity growth and raise precautionary savings. Instead, in scenarios that assume innovations and investments induced by transition policies, r* could be affected positively. Orderly climate policies have a pivotal role by facilitating the transition to a carbon-neutral economy and supporting a steady investment flow. We discuss the main models used to simulate the effects of climate change on r* and summarize the outcomes. The downward effects of climate change on r* can be substantial, even taking into account the high degree of uncertainty about the outcomes. Moreover, the downward pressure on r* will further challenge monetary policy in the long run, by limiting its policy space. JEL Classification: E52, Q54
    Keywords: climate change, interest rate, monetary policy, natural rate of interest, social cost of carbon
    Date: 2022–10
  26. By: Costa Cabral, Nazare
    Abstract: The author identifies the two main (external and internal) dimensions of incomplete sovereignty in the EMU and the respective caveats affecting the scope of the single monetary policy, here described as a ‘monetary policy integration trap’. The author details the main implications caused by this curtailed sovereignty both in its external and internal dimensions – e.g. on the one hand, the polarisation of external positions and, on the other hand, the effects of limited European fiscal/budgetary sovereignty and the atypical interaction between the latter and the single monetary policy. Finally, the way the E(M)U has in recent years addressed this integration trap is analysed, making use of a heterodox method here labelled as the ‘State-mimicking’ method.
    Keywords: Sovereignties – Balance of Payments - Monetary policy – Integration trap – State-mimicking method
    JEL: E5 E6 F12 F45
    Date: 2022–11–02
  27. By: Barbara Annicchiarico (CEIS & DEF, University of Rome "Tor Vergata"); Marco Carli (DEF, University of Rome "Tor Vergata"); Francesca Diluiso (Mercator Research Institute on Global Commons and Climate Change)
    Abstract: We study the performance of alternative climate policies in a dynamic stochastic general equilibrium model that includes an environmental externality and agency problems associated with financial intermediation. Heterogeneous polluting producers finance their capital acquisition by combining their resources with loans from banks, are subject to environmental regulation, are hit by idiosyncratic shocks, and can default. The welfare analysis suggests that a cap-and-trade system will entail substantially lower costs of the business cycle than a carbon tax if financial frictions are stringent, firm leverage is high, and agents are sufficiently risk-averse. Simple macroprudential policy rules can go a long way in reining in business cycle fluctuations, aligning the performance of price and quantity pollution policies, and reducing the uncertainty inherent to the chosen climate policy tool.
    Keywords: Business Cycle; Cap-and-Trade; Carbon Tax; E-DSGE
    JEL: Q58 E32 E44
    Date: 2022–10–31

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