nep-cba New Economics Papers
on Central Banking
Issue of 2023‒02‒06
27 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Central Bank Communication of Uncertainty By Rayane Hanifi; Klodiana Istrefi; Adrian Penalver
  2. The Fiscal Consequences of Missing an Inflation Target By Michele Andreolli; Hélène Rey
  3. Shedding lights on Leaning Against the Wind By Federica Vassalli; Massimiliano Tancioni
  4. Identifying Monetary Policy Shocks Through External Variable Constraints By Francesco Fusari
  5. Make-up strategies and exchange rate pass-through in a low-interest-rate environment By Alessandro Cantelmo; Pietro Cova; Alessandro Notarpietro; Massimiliano Pisani
  6. Monetary policy and credit card spending By Francesco Grigoli; Damiano Sandri
  7. Green Transmission: Monetary Policy in the Age of ESG By Patozi, A.
  8. The Transmission of International Monetary Policy Shocks on Firms' Expectations By Serafin Frache; Rodrigo Lluberas; Mathieu Pedemonte; Javier Turen
  9. The impact of high inflation on trust in national politics and central banks By Carin van der Cruijsen; Jakob de Haan; Maarten van Rooij
  10. CBDC: Banking and Anonymity By Yuteng Cheng; Ryuichiro Izumi
  11. Stock Price Wealth Effects and Monetary Policy under Imperfect Knowledge By Ifrim, Adrian
  12. Is Capital Account Convertibility Required for the Renminbi to Acquire Reserve Currency Status? By Barry Eichengreen; Camille Macaire; Arnaud Mehl; Eric Monnet; Alain Naef
  13. The Federal Reserve’s Response to the Global Financial Crisis and its Effects: An Interrupted Time-Series Analysis of the Impact of its Quantitative Easing Programs By KAMKOUM, Arnaud Cedric
  14. Evolving Reputation for Commitment: The Rise, Fall and Stabilization of US Inflation By Robert G. King; Yang K. Lu
  15. The Bank of Amsterdam and the limits of fiat money By Wilko Bolt; Jon Frost; Hyun Song Shin; Peter Wierts
  16. Switching Monetary-Fiscal Regimes in Egypt: Is the Fiscal Stimulus Necessarily Good in Bad Times? By Dina Kassab
  17. Gazing at r-star: A Hysteresis Perspective By Paul Beaudry; Katya Kartashova; Césaire Meh
  18. Real-time ineuqalities and policies during the pandemic in the US By Luisa Corrado; Daniela Fantozzi; Simona Giglioli
  19. Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience By Mathieu Pedemonte; Hiroshi Toma; Estaban Verdugo
  20. The EA-BDF Model and Government Spending Multipliers in a Monetary Union By Aldama Pierre; Gaulier Guillaume; Lemoine Matthieu; Robert Pierre-Antoine; Turunen Harri; Zhutova Anastasia
  21. Controlling Chaotic Fluctuations through Monetary Policy By Takao Asano; Akihisa Shibata; Masanori Yokoo
  22. Time-Consistent Implementation in Macroeconomic Games By Jean Barthélemy; Eric Mengus
  23. The Regional Keynesian Cross By Marco Bellifemine; Adrien Couturier; Rustam Jamilov
  24. Macro Effects of Formal Adoption of Inflation Targeting By Surjit Bhalla; Karan Bhasin; Mr. Prakash Loungani
  25. The preferential treatment of green bonds By Giovanardi, Francesco; Kaldorf, Matthias; Radke, Lucas; Wicknig, Florian
  26. The Hard Road to a Soft Landing: Evidence from a (Modestly) Nonlinear Structural Model By Randal Verbrugge; Saeed Zaman
  27. A Framework for Macroprudential Stress Testing By Morell, Joe; Rice, Jonathan; Shaw, Frances

  1. By: Rayane Hanifi; Klodiana Istrefi; Adrian Penalver
    Abstract: In this paper, we examine how the monetary policy setting committees of the Federal Reserve, the Bank of England and the European Central Bank communicate their reaction to incoming data in their policy deliberation process by expressing confidence, surprise or uncertainty with respect to existing narratives. We use text analysis techniques to calculate forward and backward looking measures of relative surprise from the published Minutes of these decision-making bodies. We find many common patterns in this communication. Interestingly, policymakers tend to express more surprise and uncertainty with regard to developments in the real economy, whereas they are more likely to confirm their expectations with regard to inflation and monetary policy. When considering the monetary policy stance, we observe a tendency for policymakers to highlight surprise and uncertainty several meetings in advance of changes, particularly when easing monetary policy. Importantly, we document that a higher proportion of expressions of surprise and uncertainty increases the likelihood of an easier policy stance. By contrast, a higher proportion of expressions of confirmation tends to increase the likelihood of a tighter policy stance.
    Keywords: Central Banks, Monetary Policy, Communication, Minutes, Uncertainty
    JEL: E52 E58 C55
    Date: 2022
  2. By: Michele Andreolli; Hélène Rey
    Abstract: The European Central Bank is unique in setting monetary policy for several sovereign states with heterogeneous debt levels and different maturity structures. The monetary-fiscal nexus is central to the functioning of the euro area. We focus on one particular aspect of that nexus, the effect the reliability of the European Central Bank's monetary policy on public finances. We show that when the ECB misses its inflation target this has large heterogeneous fiscal consequences for Euro Area countries. For comparison we also estimate the fiscal consequences of the Federal Reserve and the Bank of England missing their inflation targets. They are also sizeable.
    JEL: E31 E44 E52 E60 F45 H63
    Date: 2023–01
  3. By: Federica Vassalli; Massimiliano Tancioni
    Abstract: The efficacy of monetary policy intervention against stock market bubbles depends on monetary policy shock identification. We estimate a Bayesian VAR identified with mixed zero-sign restriction, where we distinguish a pure monetary policy shock from a central bank information shock. We show that the two shocks affect the asset price components differently, where the asset price is the sum between the fundamental and the bubbly components. A pure tightening monetary policy shock reduces the S&P500 Index but causes the bubble to increase. In contrast, by disclosing information on the economy's future path, a central bank information shock increases the fundamental component causing a drop in the bubble. Ignoring the distinction between the two types of monetary shock helps to explain the ambiguity surrounding the efficacy of leaning against the wind policy in terms of the ability to deflate a bubble.
    Keywords: Monetary Policy; Bubbles; LAW; BVAR
    JEL: E44 E52 E58 G12
    Date: 2023–01
  4. By: Francesco Fusari (University of Surrey)
    Abstract: This paper proposes a new strategy for the identification of monetary policy shocks in structural vector autoregressions (SVARs). It combines traditional sign restrictions with external variable constraints on high-frequency monetary surprises and central bank’s macroeconomic projections. I use it to characterize the transmission of US monetary policy over the period 1965-2007. First, I find that contractionary monetary policy shocks unequivocally decrease output, sharpening the ambiguous implications of standard sign-restricted SVARs. Second, I show that the identified structural models are consistent with narrative sign restrictions and restrictions on the monetary policy equation. On the contrary, the shocks identified through these alternative methodologies turn out to be correlated with the information set of the central bank and to weakly comove with monetary surprises. Finally, I implement an algorithm for robust Bayesian inference in set-identified SVARs, providing further evidence in support of my identification strategy.
    JEL: E52 C51
    Date: 2023–01
  5. By: Alessandro Cantelmo (Bank of Italy); Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the macroeconomic stabilization properties, with particular reference to the exchange rate pass-through, of price level targeting (PLT), average inflation targeting (AIT) and inflation targeting (IT) strategies when the effective lower bound on the monetary policy rate can be binding. The results of simulating the canonical open-economy New Keynesian model -- in which the assumption of local currency pricing holds and which is calibrated without loss of generality to the euro area -- are as follows. First, make-up strategies (PLT and AIT) stabilize inflation better than IT, by favoring a smaller appreciation (larger depreciation) of the nominal exchange rate in the event of disinflationary demand (supply) shocks. Second, and in connection with this, the exchange rate pass-through to import prices is more limited under make-up strategies than under IT, as the former stabilize the inflation rate of imports to a greater extent. Third, the results are robust to alternative values of import price stickiness and elasticity of substitution between domestic and imported goods. Fourth, the stabilization properties of make-up strategies are qualitatively preserved under partially backward-looking inflation expectations, although the relative gains of make-up strategies with respect to IT are smaller than under model-consistent inflation expectations.
    Keywords: effective lower bound, exchange rate pass-through, local currency pricing, make-up strategies, monetary policy
    JEL: E31 E52 F31 F41
    Date: 2022–12
  6. By: Francesco Grigoli; Damiano Sandri
    Abstract: We analyze the impact of monetary policy on consumer spending using confidential credit card data. Being available at daily frequency, these data improve the identification of the monetary transmission and allow for a more precise characterization of the transmission lags. We find that shocks to short-term interest rates affect spending much more rapidly than shocks to medium-term interest rates. We also document significant asymmetries in the effects of monetary policy. While interest rate hikes strongly curb spending-especially if coupled with reductions in stock prices reflecting pure monetary policy shocks-interest rate cuts appear unable to lift spending. Finally, we exploit the disaggregation of credit card data to examine the heterogeneous effects of monetary policy across spending categories and users' characteristics.
    Keywords: credit card spending, heterogeneity, monetary policy, transmission
    JEL: E21 E52
    Date: 2023–01
  7. By: Patozi, A.
    Abstract: In this paper, I investigate how the Net-Zero transition affects the transmission of monetary policy. I first document an upward trend in environmental performance among US publicly listed companies over the last decade. Second, I evaluate the implications of firms becoming ‘greener’ for the transmission of monetary policy on asset prices, credit risk and firm-level investment. In response to a shock to monetary policy, ‘green’ firms (with high environmental scores) are significantly less impacted than their ‘brown’ counterparts (with lower environmental scores). The dependence of monetary policy responses on firm-level greenness is not explained by intrinsic differences in firms’ characteristics. Instead, I show that the heterogeneous response is the result of investors’ preferences for sustainable investing. Using a stylized theoretical framework, I illustrate how incorporating such preferences attenuates the semi-elasticity of ‘green’ asset prices with respect to monetary policy shocks.
    Keywords: Climate Change, ESG, Heterogeneity, Monetary Policy, Sustainable Investing
    JEL: E52 G12 G14 G30
    Date: 2023–01–18
  8. By: Serafin Frache; Rodrigo Lluberas; Mathieu Pedemonte; Javier Turen
    Abstract: Motivated by the dominant role of the US dollar, we explore how monetary policy (MP) shocks in the US can affect a small open economy through the expectation channel. We combine data from a panel survey of firms' expectations in Uruguay with granular information about firms' debt position and total imports on a monthly basis. We show that a contractionary MP shock in the US reduces firms' inflation and cost expectations in Uruguay. This result contrasts with the inflationary effect of this shock on the Uruguayan economy, suggesting uncertainty about the policy regime. We discuss the issues and challenges of this expectation channel.
    Keywords: Firms' Expectations; Global Financial Cycle; Monetary Policy Spillovers
    JEL: E31 E58 F41 D84 E71
    Date: 2023–01–04
  9. By: Carin van der Cruijsen; Jakob de Haan; Maarten van Rooij
    Abstract: Little is known about the impact of high inflation on public trust. Using a survey in the Netherlands, we find that the recent increase in inflation is associated with a decline in trust in the Dutch central bank and Dutch politics. The higher individuals’ perceived inflation is and the harder it is for them to make ends meet, the lower their trust in the European Central Bank, the Dutch central bank, and Dutch politics. We also find that people trust authorities considered responsible for bringing inflation down less. Quite remarkably, most people think government is responsible for maintaining price stability.
    Keywords: inflation; trust; financial stress; central banks; national politics
    JEL: D12 D83 E31 E58
    Date: 2023–01
  10. By: Yuteng Cheng (Bank of Canada); Ryuichiro Izumi (Department of Economics, Wesleyan University)
    Abstract: What is the optimal design of anonymity in a central bank digital currency (CBDC)? We examine this question in the context of bank lending by building a stylized model of anonymity in payment instruments. We specify the anonymity of payment instruments in two dimensions: The bank has no information about the entrepreneur’s investment, and the bank has less control over the entrepreneur’s profits. An instrument with higher anonymity may discourage the bank from lending, and thus, the entrepreneur strategically chooses payment instruments. Our analysis shows that introducing a CBDC with modest anonymity can improve welfare in one equilibrium, but can also destroy valuable information in bank lending, leading to inefficient lending in another equilibrium. Our results suggest that central banks should either make a CBDC highly anonymous or share CBDC data with banks to eliminate this bad equilibrium.
    Keywords: CBDC, Anonymity, Bank lending
    JEL: E42 E58 G28
    Date: 2023–01
  11. By: Ifrim, Adrian
    Abstract: Departures from full-information rational expectation models give rise to stock price wealth effects which introduce inefficient cyclical fluctuations in the economy. Waves of optimism/pessimism affect beliefs and asset prices which influence aggregate demand through expectation-driven wealth effects. Monetary policy can play an important role in eliminating the non-fundamental effects of belief-driven asset price cycle: reacting symmetrically and transparently to stock prices increases welfare significantly compared to flexible inflation targeting strategies. A quantitative model estimated on US data shows that increasing interest rates by 12 basis points for every 100% rise in stock prices accomplish this goal. Moreover, a nonlinear reaction to stock prices only when capital gains exceed 7% delivers similar efficiency gains.
    Keywords: monetary policy, wealth effects, learning, survey expectations, stock prices, animal spirits
    JEL: D84 E32 E44 E52
    Date: 2023
  12. By: Barry Eichengreen; Camille Macaire; Arnaud Mehl; Eric Monnet; Alain Naef
    Abstract: It is widely assumed that the renminbi (RMB) cannot acquire a meaningful place in central bank reserve portfolios without full liberalization of China’s capital account. We argue that the RMB can in fact develop into a consequential reserve currency in the absence of capital account convertibility. Trade and investment links can drive official use and accumulation despite limited access to Chinese financial markets. But this route to currency internationalization requires policy support. China must allow access to RMB through loans and People’s Bank of China (PBoC) currency swaps. It must ensure convertibility of RMB into US dollars on offshore markets. It must provide these RMB services at a stable and predictable price. Currency internationalization without full capital account liberalization thus requires the RMB to be backed by dollar reserves, which the PBoC consequently will continue to hold and use. Hence we do not foresee RMB internationalization as supplanting dollar dominance.
    Keywords: International Monetary System, Renminbi, International Reserve Currencies
    JEL: F31 F38 E58
    Date: 2022
  13. By: KAMKOUM, Arnaud Cedric
    Abstract: The financial crisis that started in the U.S. at the end of 2007 and later spread to other countries was the most severe economic and financial disaster since the Great Depression. The crisis began in the U.S. housing market in August 2007, rapidly extended to other sectors of the U.S. economy, and became global following the collapse of various U.S.-based international financial institutions. To counter the negative effects of the crisis, the Federal Reserve (the central bank of the United States) and other central banks conducted monetary policies that are widely considered unconventional. This master’s thesis examines the monetary policies the Federal Reserve implemented in response to the crisis. More specifically, the thesis analyzes the Federal Reserve’s quantitative easing (QE) programs, liquidity facilities, and forward guidance operations implemented from 2007 to 2018. The thesis’ detailed examination of these policies is concluded with an interrupted time-series (ITS) analysis of the causal effects of the QE programs on U.S. inflation and real GDP. The results of this design-based natural experimental approach show that the QE operations positively affected U.S. real GDP but did not significantly impact U.S. inflation. Specifically, it is found that, for the 2011Q2-2018Q4 post-QE period, real GDP per capita in the U.S. increased by an average of 231 dollars per quarter relative to how it would have changed had the QE programs not been conducted. Moreover, the results show that, in 2018Q4, ten years after the beginning of the Federal Reserve’s QE programs, real GDP per capita in the U.S. increased by 14% relative to what it would have been during that quarter had there not been the QE programs.
    Date: 2023–01–05
  14. By: Robert G. King; Yang K. Lu
    Abstract: A parsimonious model of shifting policy regimes can simultaneously capture expected and actual US inflation during 1969-2005. Our model features a forward-looking New Keynesian Phillips curve and purposeful policymakers that can or cannot commit. Private sector learning about policymaker type leads to a reputation state variable. We use model inflation forecasting rules to extract state variables from SPF inflation forecasts. US inflation is tracked by optimal policy without commitment before 1981 and by optimal policy with commitment afterward. In theory and quantification, the interaction of private sector learning and optimal policy within regimes is central to expected and actual inflation.
    JEL: D82 E52
    Date: 2022–12
  15. By: Wilko Bolt; Jon Frost; Hyun Song Shin; Peter Wierts
    Abstract: Central banks can operate with negative equity, and many have done so in history without undermining trust in fiat money. However, there are limits. How negative can central bank equity be before fiat money loses credibility? We address this question using a global games approach motivated by the fall of the Bank of Amsterdam (1609–1820). We solve for the unique break point where negative equity and asset illiquidity renders fiat money worthless. We draw lessons on the role of fiscal support and central bank capital in sustaining trust in fiat money.
    Keywords: central banks, negative equity, fiat money, trust
    JEL: E42 E58 N13
    Date: 2023–01
  16. By: Dina Kassab (Cairo University)
    Abstract: This paper investigates the monetary-fiscal interaction in Egypt for the period 2001Q1 to 2020Q2, a period that includes several reform programs, the 2011 revolution but also the global financial and the Covid-crises. Markov-switching regression methods are employed to estimate fiscal and monetary policy feedback rules in Egypt and the overlay of the smoothed probabilities is used, in the spirit of Davig and Leeper (2007), to show the estimated timing of the joint monetary-fiscal regime and depict its evolution. A sign restricted vector autoregression (SRVAR) model is then used to analyze the effects of different potential fiscal-monetary policy mixes, similar to those undertaken by different governments the during the coronavirus pandemic, on macro variables in Egypt. Three main findings emerge from the analysis. First, fiscal policy in Egypt always responds to government debt, although the magnitude of this response differs throughout the periods. Second, regime-switches in monetary and fiscal policy rules do not exhibit any degree of synchronization which represents a novel way of tracking the time-series behaviour of government debt and inflation in Egypt. Third, the effect of a fiscal stimulus on real consumption and GDP in Egypt does not outlive the stimulus due to a Ricardian Equivalence effect, where agents expect higher future taxes to finance deficits resulting from the stimulus. This effect can be mitigated with an accommodating monetary policy, at the expense however of inflationary pressures that inflation targeting central bank will have to face.
    Date: 2022–12–20
  17. By: Paul Beaudry; Katya Kartashova; Césaire Meh
    Abstract: Many explanations for the decline in real interest rates over the last 30 years point to the role that population aging or rising income inequality plays in increasing the long-run aggregate demand for assets. Notwithstanding the importance of such factors, the starting point of this paper is to show that the major change driving household asset demand over this period is instead an increased desire—for a given age and income level—to hold assets. We begin by presenting a simple explanation for this pattern that relies on integrating retirement and inter-temporal substitution motives in saving decisions. We then show how the interaction of these two saving motives can have profound implications in terms of the shape of asset demands, the possibility of multiple steady state real interest rates, and a potential role for monetary policy to influence the long-run evolution of real rates. The framework highlights how an inflationary episode followed by a strong monetary response, as we are currently witnessing, can have long-term implications for real interest rates.
    Keywords: Economic models; Fiscal policy; Inflation and prices; Inflation targets; Interest rates; Monetary policy; Monetary policy framework
    JEL: E21 E52 E31 E43 E58 E62 G51 H6
    Date: 2023–01
  18. By: Luisa Corrado (University of Rome Tor Vergata); Daniela Fantozzi (Italian National Institute of Statistics); Simona Giglioli (Bank of Italy)
    Abstract: We investigate the effects of different policies implemented during the pandemic on real-time spatial inequalities in the US. We use a novel database built using anonymized data from the private sector, which enables us to compute daily measures of spending inequality at county level. Using a narrative approach combined with high-frequency data to identify the shocks, we evaluate the impact of monetary policy in a VAR framework. The main findings show that consumption spending inequality rose during the pandemic and that the Fed's policies did not mitigate this increase. Indeed, although these measures had a positive effect on spending for both richer and poorer counties, consumption was stimulated more for the former than for the latter ones. We distinguish two kinds of interventions: those regarding the federal funds rate, Repo agreements and QE programmes ('purely monetary') and those concerning subsidized lending facilities to support credit and avoid mass layoffs ('quasi-fiscal'). Our evidence suggests a greater contribution in the short run by the latter type to stimulating the consumption spending of higher-income counties.
    Keywords: monetary policy, inequality, high-frequency data, Covid-19
    JEL: D31 E21 E52 E58
    Date: 2022–12
  19. By: Mathieu Pedemonte; Hiroshi Toma; Estaban Verdugo
    Abstract: We show that inflation expectations are heterogeneous and depend on past individual experiences. We propose a diagnostic expectations-augmented Kalman filter to represent consumers’ heterogeneous inflation expectations-formation process, where heterogeneity comes from an anchoring-to-the-past mechanism. We estimate the diagnosticity parameter that governs the inflation expectations-formation process and show that the model can replicate systematic differences in inflation expectations across cohorts in the US. We introduce this mechanism into a New Keynesian model and find that heterogeneous expectations anchor aggregate responses to the agents’ memory, making shocks more persistent. Central banks should be more active to prevent agents from remembering current shocks far into the future.
    Keywords: Expectations; Survey Data; Belief Formation; Heterogeneous Expectations
    JEL: D84 E31 E58 E71
    Date: 2023–01–10
  20. By: Aldama Pierre; Gaulier Guillaume; Lemoine Matthieu; Robert Pierre-Antoine; Turunen Harri; Zhutova Anastasia
    Abstract: We develop in this paper a new two-country model of the euro area (EA-BDF), based on the large-scale FR-BDF model of France and a new medium-scale block of the rest of the euro area (STREAM). This new block follows an approach close to FR-BDF, being a semi-structural model with the same type of adjustment costs and that we can use with different types of expectations. Both countries of EA-BDF share a common endogenous monetary policy and, thanks to our multi-country setup, we can deal with both symmetric and asymmetric shocks. Our illustrations about the effects of a government spending shock in a monetary union deliver two key results, which are robust whatever the type of expectations. First, by studying symmetric and asymmetric shocks on government spending, kept constant for 2 years, we find that, at this 2-year horizon, trade spillovers would compensate monetary policy spillovers within the euro area. Second, we also find, in the case of a symmetric shock, that the government spending multiplier is smaller under a monetary policy rule based on price-level targeting than on inflation targeting.
    Keywords: Semi-Structural Modeling, Expectations, Monetary and Fiscal Policies
    JEL: C54 E37
    Date: 2022
  21. By: Takao Asano (Okayama University); Akihisa Shibata (Kyoto University); Masanori Yokoo (Okayama University)
    Abstract: This paper applies the chaos control method (the OGY method) proposed by Ott et al. (1990, Physical Review Letters) to policy making in macroeconomics. This paper demonstrates that the monetary equilibrium paths in a discrete-time, two-dimensional overlapping generations model exhibit chaotic fluctuations depending on the money supply rate and the elasticity of substitution between capital and labor under the assumption of the constant elasticity of substitution (CES) production function. We also show that the chaotic fluctuations can be stabilized by controlling the money supply rate by using the OGY method.
    Keywords: Macroeconomy; Chaos Control; OGY method; Monetary Policy; OLG model; Chaos
    Date: 2023–01
  22. By: Jean Barthélemy; Eric Mengus
    Abstract: The commitment ability of governments is neither infinite nor zero but intermediate. In this paper, we determine the commitment ability that a government needs to implement a unique equilibrium outcome and rule out undesired self-fulfilling expectations. We first show that, in a large class of static macroeconomic games, the government can implement any time-consistent equilibrium with any low level of commitment ability. We then show that this result may not be robust to imperfect information, fixed costs or repeated interactions. We finally derive implications for models of bailouts, inflation bias, and capital taxation.
    Keywords: Implementation, Limited Commitment, Policy Rules
    JEL: C73 E58 E61 G28
    Date: 2022
  23. By: Marco Bellifemine; Adrien Couturier; Rustam Jamilov
    Abstract: We study monetary policy transmission across space. Empirically, we show that two channels explain a sizable portion of the variation in the regional effects of identified U.S. monetary policy shocks: local marginal propensities to consume (MPCs), as captured by household wealth, and industry composition, as measured by the local share of non-tradable employment. Theoretically, we develop a heterogeneous agents New Keynesian (HANK) model of a monetary union with two-layered regional heterogeneity in household and industry composition. We provide a sequence-space characterization of the response of local employment to unexpected changes in interest rates as a function of intertemporal MPCs and industry composition: the regional Keynesian cross. Central to our theory is an equilibrium complementarity between these two sources of regional heterogeneity. We provide direct empirical evidence of this household industry complementarity, thus validating our key model mechanism. Quantitatively, reactions from fiscal authorities and the rest of the nation are key determining factors of the aggregate regional economic response.
    Date: 2022–12–24
  24. By: Surjit Bhalla; Karan Bhasin; Mr. Prakash Loungani
    Abstract: We examine the impact of formal adoption of inflation targeting (IT) on inflation, growth and anchoring of inflation expectations in advanced economies and emerging markets and developing economies (EMDEs). Our paper reports several findings relevant to assessing the success of IT regimes. We find that while the early adopters of IT (pre-2000) all saw declines in inflation rates following adoption, IT adopters since then have enjoyed such success in only about half the cases. Since there is not much difference, on average, between IT and non-IT countries in mean inflation, inflation volatility and the extent of inflation anchoring, it is not easy to sort out what role IT has played in ensuring good outcomes; in particular, we cannot rule out the possibility that the success of IT may be due to ‘regression to the mean’. Our country-level analysis—using the Synthetic Control Method (SCM) to compare outcomes in IT countries to a synthetic cohort—shows that IT adoption delivers significant inflation gains in about a third of the cases. At the same time, we also find limited support for the concern that adoption of IT systematically leads to poorer growth outcomes. At a time when central banks are struggling to keep inflation in check, our results suggest that the belief that IT adoption will be sufficient to achieve this goal cannot be taken for granted.
    Keywords: Inflation targeting; Inflation expectations; Inflation forecasts
    Date: 2023–01–13
  25. By: Giovanardi, Francesco; Kaldorf, Matthias; Radke, Lucas; Wicknig, Florian
    Abstract: We study the preferential treatment of green bonds in the central bank collateral framework as an environmental policy instrument within a DSGE model with environmental and financial frictions. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral. The collateral premium associated to a relaxation in collateral policy induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Optimal collateral policy is characterized by modest preferential treatment, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal emission taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features preferential treatment of green bonds.
    Keywords: Green Investment, Collateral Framework, Environmental Policy
    JEL: E44 E58 E63 Q58
    Date: 2022
  26. By: Randal Verbrugge; Saeed Zaman
    Abstract: What drove inflation so high in 2022? Can it drop rapidly without a recession? The Phillips curve is central to the answers; its proper (nonlinear) specification reveals that the relationship is strong and frequency dependent, and inflation is very persistent. We embed this empirically successful Phillips curve – incorporating a supply-shocks variable – into a structural model. Identification is achieved using an underutilized data-dependent method. Despite imposing anchored inflation expectations and a rapid relaxation of supply-chain problems, we find that absent a recession, inflation will be more than 3 percent by the end of 2025. A simple welfare analysis supports a mild recession as preferred to an extended period of elevated inflation, under a typical loss function.
    Keywords: Nonlinear Phillips Curve; Frequency Decomposition; Supply Price Pressures; Structural VAR; Nonlinear Impulse Response Functions; Welfare Analysis
    JEL: E31 E32 E52 C32 C36
    Date: 2023–01–09
  27. By: Morell, Joe (Central Bank of Ireland); Rice, Jonathan (Central Bank of Ireland); Shaw, Frances (Central Bank of Ireland)
    Abstract: Demographic dynamics and the shift of population pyramids towards an inverted pyramid shape in advanced economies are leading to relative scarcity of labour and excess savings. What are the effects of these dynamics on the relative wealth accumulation journeys of different cohorts? Within a fixed-effect cross country panel framework, I find that savings by an increasing share of households aged between 45 and 65, a rise in retired over-65s, and a decrease in working-age and low-wealth agents in their twenties and thirties can explain most of the decline in rates of return across countries in the last few decades, and similarly a large part of the increase in wages. In this context and looking to the future, wealth accumulation out of income and capital returns by cohorts living in advanced economies and retiring in future decades is set to become increasingly difficult, as higher wages are not sufficient to compensate for lower returns over long periods of time. Current young and future generations are therefore set to face progressively lower standards of living at retirement and/or increasingly high saving ratios in working age.
    Keywords: macroprudential stress testing, capital buffers, scenario analysis.
    JEL: E37 E58 G21
    Date: 2022–11

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