nep-cba New Economics Papers
on Central Banking
Issue of 2023‒03‒20
27 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Money Market Disconnect By Benedikt Ballensiefen; Angelo Ranaldo; Hannah Winterberg
  2. To Demand or Not to Demand: On Quantifying the Future Appetite for CBDC By Mr. Marco Gross; Elisa Letizia
  3. Monetary policy and the drifting natural rate of interest By Daudignon, Sandra; Tristani, Oreste
  4. Macroprudential Policies in Response to External Financial Shocks By Mr. Irineu E de Carvalho Filho; DingXuan Ng
  5. Money, Exchange rate and Wage Inequality By Ganguly, Shrimoyee
  6. The effects of a green monetary policy on firms financing costs By Andrea Bacchiocchi; Sebastian Ille; Germana Giombini
  7. Credibility gains from communicating with the public: evidence from the ECB’s new monetary policy strategy By Ehrmann, Michael; Georgarakos, Dimitris; Kenny, Geoff
  8. Euro area banks’ market power, lending channel and stability: the effects of negative policy rates By Altunbas, Yener; Avignone, Giuseppe; Kok, Christoffer; Pancaro, Cosimo
  9. Passive monetary policy and active fiscal policy in a monetary union By Maćkowiak, Bartosz; Schmidt, Sebastian
  10. Effects of foreign and domestic central bank government bond purchases in a small open economy DSGE model: Evidence from Sweden before and during the coronavirus pandemic By Akkaya, Yildiz; Belfrage, Carl-Johan; Di Casola, Paola; Strid, Ingvar
  11. The Asymmetric Impact of Economic Policy and Oil Price Uncertainty on Inflation: Evidence from Developed and Emerging Economies By Christina Anderl; Guglielmo Maria Caporale
  12. Robust frequency-based monetary policy rules By Dück, Alexander; Verona, Fabio
  13. How Do Adaptive Learning Expectations Rationalize Stronger Monetary Policy Response in Brazil? By Hou Wang; Allan Dizioli
  14. Do High Interest Rates Reduce Inflation? A Test of Monetary Faith By Fix, Blair
  15. CBDC and financial stability By Ahnert, Toni; Hoffmann, Peter; Leonello, Agnese; Porcellacchia, Davide
  16. The effects of unconventional monetary policy on stock markets and household incomes in Japan By Israel, Karl-Friedrich; Sepp, Tim Florian; Sonnenberg, Nils
  17. Heterogeneity of inflation in the euro area: more complicated than it seems By Christophe Blot; Jérôme Creel; François Geerolf; Sandrine Levasseur
  18. Foreign price shocks and inflation targeting: Effects on income and inflation inequality By Rolim, Lilian; Marins, Nathalie
  19. Monetary Policy in the Presence of Supply Constraints: Evidence from German Firm-Level Data By Almut Balleer; Marvin Noeller
  20. Inflation, Business Cycle, and Monetary Policy: The Role of Inflationary Pressure By Masahiko Shibamoto
  21. Evaluating the impact of dividend restrictions on euro area bank market values By Andreeva, Desislava; Bochmann, Paul; Schneider, Julius
  22. The impact of demand and supply shocks on inflation. Evidence for the US and the Euro area By Dreger, Christian
  23. Leakages from macroprudential regulations: the case of household-specific tools and corporate credit By Bhargava, Apoorv; Gόrnicka, Lucyna; Xie, Peichu
  24. A central bank digital currency for offline payments By Cyrus Minwalla; John Miedema; Sebastian Hernandez; Alexandra Sutton-Lalani
  25. Leaning against housing booms fueled by credit By Carlos Cañizares Martínez
  26. Exorbitant Privilege? On the Rise (and Rise) of the Global Dollar System By Perry Mehrling
  27. Myth and Reality in the Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy By Thomas Ferguson; Servaas Storm

  1. By: Benedikt Ballensiefen (University of St. Gallen - School of Finance); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Hannah Winterberg (University of St. Gallen)
    Abstract: A repurchase agreement (repo) is a source of cash and collateral. We document that the money market is more segmented when the collateral motive prevails. Two crucial aspects of the central bank framework lead to this disconnect: banks’ access to the central bank's deposit facility and assets’ eligibility for Quantitative Easing (QE). We show that repo rates lent by banks with access to the deposit facility and secured by QE eligible assets are more collateral-driven and disconnected from funding-based money market rates. Our results are relevant for different monetary policies and have suggestive implications for the monetary policy pass-through.
    Keywords: Money Market, Segmentation, Deposit Facility, QE, Monetary Policy
    JEL: E40 E43 E50 E52 E58 G18
    Date: 2023–02
  2. By: Mr. Marco Gross; Elisa Letizia
    Abstract: We set up a model of banks, the central bank, the payment system, and the surrounding private sector economic environment. It is a structural, choice-theoretic model which is deeply rooted in data. We use the model to conduct a structural counterfactual that introduces a Central Bank Digital Currency (CBDC) which is optionally interest-bearing. The model can be used to provide estimates of the emerging CBDC-in-total-money shares, the drop of deposit rate spreads to policy rates, the impact on reserve needs, the implied rotation of profits away from banks toward central banks, and the extent to which monetary policy pass-through may become stronger. We obtain upper bound estimates for the CBDC-in-money shares of about 25 percent and 20 percent, respectively for the U.S. and euro area, when CBDC would be remunerated at the policy rates and be perceived as “deposit-like” by the public. Actual take-up may likely be below such upper bound estimates. The model codes—to replicate all results and to apply them to other countries—are made available along with the paper.
    Keywords: Central bank digital currency; bank funding costs; central bank seigniorage; monetary policy pass-through; reinforcement learning; Authorss e-mail; bank agent; Central Bank digital currencies; Deposit rates; Central bank policy rate; Monetary base; Bank deposits; Global
    Date: 2023–01–20
  3. By: Daudignon, Sandra; Tristani, Oreste
    Abstract: Empirical analyses starting from Laubach and Williams (2003) find that the natural rate of interest is not constant in the long-run. This paper studies the optimal response to stochastic changes of the long-run natural rate in a suitably modified version of the new Keynesian model. We show that, because of the zero lower bound (ZLB) on nominal interest rates, movements towards zero of the long-run natural rate cause an increasingly large downward bias in expectations. To offset this bias, the central bank should aim to keep the real interest rate systematically below the long-run natural rate, as long as policy is not constrained by the ZLB. The neutral rate – the level of the policy rate consistent with stable inflation and the natural rate at its long-run level – will be lower than the long-run natural rate. This is the case both under optimal policy, and under a price level targeting rule. In the latter case, the neutral rate is equal to zero as soon as the long-run natural rate falls below 1%. JEL Classification: C63, E31, E52
    Keywords: commitment, liquidity trap, New Keynesian, nonlinear optimal policy, zero lower bound
    Date: 2023–02
  4. By: Mr. Irineu E de Carvalho Filho; DingXuan Ng
    Abstract: This paper examines how countries use Macroprudential Policies (MaPs) to respond to external shocks such as US monetary policy surprises or fluctuations in capital flows. Constructing a model of a small open economy with financial frictions and a MaP authority that adjusts loan to value (LTV) ratio limits on borrowers and capital adequacy ratio (CAR) limits on banks, we show that using MaPs where stochastic external financial shocks are present entails a trade-off between macro-financial volatility and GDP growth. The terms of the trade-off are a function of a few country characteristics that amplify financial channels of external monetary shocks. Estimating MaP reaction functions for a panel of 41 countries in the period 2000–2017, we find that countercyclical macroprudential policy in response to surprise US monetary tightening is more likely for countries with net short currency mismatches (that is, foreign currency denominated liabilities larger than foreign currency denominated assets), consistent with the model’s predictions. The paper also finds that domestic credit and interest rates are more insulated from US monetary tightening for countries that employ MaPs countercyclically.
    Keywords: Macroprudential policy; external shocks; loan to value; figures entry; map authority; Model simulation; foreign currency; interest rate shock; bank profit; Credit; Real exchange rates; Financial statements; Bank credit; Self-employment; Global
    Date: 2023–01–20
  5. By: Ganguly, Shrimoyee
    Abstract: In the existing literature, several channels have been suggested for the effects of monetary policy on income inequality. This paper explores an altogether different channel by examining the effect of an expansionary monetary policy on wage inequality between skilled and unskilled workers in a competitive general equilibrium framework of a small open economy. This issue assumes relevance since monetary policies are often pursued by the central banks to manage exchange rate fluctuations under a managed float regime, which may adversely affect the wages to low skilled workers. Under optimal allocation of wealth over a portfolio of cash, domestic assets and foreign assets, we show that an increase in the domestic money supply affects the wage inequality primarily in two ways. One is through larger investment, capital formation and consequent endowment effect; the other is through changes in the nominal exchange rate. Expansionary monetary policy aggravates wage inequality if the labour to capital share required to produce the traditional export good exceeds that needed in the skill-based export good. A contractionary monetary policy in the foreign country on the other hand, minimises wage inequality if the capital-cost share in the export good Z is highest followed by that in the composite traded good and that in the non-traded good is least.
    Keywords: Monetary Policy, Wage inequality, Employment, Exchange rate, Portfolio choice.
    JEL: E24 E52 F11 F41
    Date: 2023–02
  6. By: Andrea Bacchiocchi (Department of Economics, Society & Politics, Università di Urbino Carlo Bo); Sebastian Ille (Northeastern University London); Germana Giombini (Department of Economics, Society & Politics, Università di Urbino Carlo Bo)
    Abstract: The monetary policy operations of a Central Bank (CB) involve allocation decisions when purchasing assets and taking collateral. A green monetary policy aims to steer or tilt the allocation of assets and collateral towards low-carbon industries, to reduce the cost of capital for these sectors in comparison to high-carbon ones. Starting from a corporate bonds purchase program (e.g. CSPP) that follows a carbon-neutral monetary policy, we analyze how a shift in the CB portfolio allocation towards bonds issued by low-carbon companies can favor green firms in the market. Relying on optimal portfolio theory, we study how the CB might include the risk related to the environmental sustainability of firms in its balance sheet. In addition, we analyze the interactions between the neutral or green CB re-balancing policy and the evolutionary choice (i.e. by means of expo- nential replicator dynamics) of a population of firms that can decide to be green or not according to bonds borrowing cost.
    Keywords: Monetary Policy; Optimal Portfolio Allocation; Environmental Economics; Interacting Agents; Evolutionary Dynamics
    JEL: E52 E58 G11 C61 C73 Q50
    Date: 2023
  7. By: Ehrmann, Michael; Georgarakos, Dimitris; Kenny, Geoff
    Abstract: We show that the announcement of the ECB’s Strategy Review and the revision of its inflation target in summer 2021 went largely unnoticed by the wider public. Although it is hard to reach out to this group, we find evidence that communicating key elements of the strategy can enhance the perceived credibility that price stability will be maintained in the medium-term. Randomised information treatments reveal that providing additional explanations about monetary policy’s stabilising role has the strongest positive impact on credibility, boosting credibility also among the less financially literate and generating more persistent credibility gains, even after inflation increased. JEL Classification: E52, E58, E31
    Keywords: central bank communication, Consumer Expectations Survey, credibility, financial literacy, randomised control trial
    Date: 2023–02
  8. By: Altunbas, Yener; Avignone, Giuseppe; Kok, Christoffer; Pancaro, Cosimo
    Abstract: This paper investigates to what extent the introduction of negative monetary policy rates altered competitive behaviour in the euro area banking sector. Specifically, it analyses the effect that negative policy rates had on euro area banks’ market power in comparison to banks that have not been subject to negative rates. The analysis, considering a sample of 4, 223 banks over the period 2011–2018 and relying on a difference-in-differences methodology, finds that negative monetary policy rates led to an increase in euro area banks’ market power. Furthermore, it shows that, during the negative interest rate policy period, change in banks’ competitive behaviour affected the bank lending channel and discouraged banks from taking excessive risks. JEL Classification: E44, E52, E58, G20, G21
    Keywords: Bank lending channel, Bank Stability, DiD, Lerner index, NIRP
    Date: 2023–02
  9. By: Maćkowiak, Bartosz; Schmidt, Sebastian
    Abstract: How is the price level determined in a monetary union when the common monetary policy pegs the nominal interest rate? How are the price levels in the member countries determined? We extend the fiscal theory of the price level to the case of a heterogenous monetary union. Price level determinacy follows if fiscal policy at the level of the union as a whole is active. Different combinations of national fiscal policies and a common fiscal policy with “Eurobonds” amount to active fiscal policy for the union, but can have very different implications for the effects of fiscal and monetary policy. We propose how to coordinate the national policies and the common policy for union-wide policy to be active. JEL Classification: E31, E63, F45
    Keywords: Eurobonds, monetary union, fiscal rules, fiscal theory of the price level
    Date: 2023–02
  10. By: Akkaya, Yildiz (Monetary Policy Department, Central Bank of Sweden); Belfrage, Carl-Johan (Monetary Policy Department, Central Bank of Sweden); Di Casola, Paola (European Central Bank); Strid, Ingvar (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper evaluates the macroeconomic effects of foreign and domestic central bank government bond purchases on the Swedish economy before and during the Corona pandemic using a small open economy DSGE model with segmented asset markets. In this model, the effects of foreign and domestic quantitative easing on the Swedish economy occur mainly through the exchange rate channel. The calibrated model is able to broadly capture the movements in foreign and domestic bond yields, capital flows and the Krona exchange rate associated with QE since the global financial crisis in 2007-2009. We find that foreign quantitative easing strengthened the Krona exchange rate and had modestly negative effects on Swedish GDP and inflation. Domestic QE, on the other hand, depreciated the Krona and had modestly positive macroeconomic effects. In 2015-2019 the government bond purchases on average depreciated the Krona by 2.5 percent, increased GDP by 0.2 percent, and increased inflation by 0.2 percentage points. The government bond purchases following the pandemic, which were more limited in size, had roughly half of these effects.
    Keywords: Unconventional Monetary Policy; Quantitative Easing; Effective Lower Bound; International Spillovers; DSGE model
    JEL: E44 E52 F41
    Date: 2023–02–01
  11. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper examines the asymmetric impact of economic policy uncertainty (EPU) and oil price uncertainty (OPU) on inflation by using a Nonlinear ARDL (NARDL) model, which is compared to a benchmark linear ARDL one. Using monthly data from the 1990s until August 2022 for a number of developed and emerging countries, we find that the estimated effects of both EPU and OPU shocks are larger when allowing for asymmetries in the context of the NARDL framework. Further, EPU shocks, especially negative ones, have a stronger impact on inflation than OPU ones and capture some of the monetary policy uncertainty, thereby reducing the direct effect of interest rate changes on inflation. Since EPU shocks reflect, at least to some extent, monetary policy uncertainty, greater transparency and more timely communications from monetary authorities to the public would be helpful to anchor inflation expectations.
    Keywords: inflation, asymmetries, NARDL, oil price uncertainty, economic policy uncertainty
    JEL: C22 E31 E60
    Date: 2023
  12. By: Dück, Alexander; Verona, Fabio
    Abstract: Optimal monetary policy studies typically rely on a single structural model and identification of model-specific rules that minimize the unconditional volatilities of inflation and real activity. In our proposed approach, we take a large set of structural models and look for the model-robust rules that minimize the volatilities at those frequencies that policymakers are most interested in stabilizing. Compared to the status quo approach, our results suggest that policymakers should be more restrained in their inflation responses when their aim is to stabilize inflation and output growth at specific frequencies. Additional caution is called for due to model uncertainty.
    Keywords: monetary policy rules, policy evaluation, model comparison, model uncertainty, frequency domain
    JEL: C49 E32 E37 E52 E58
    Date: 2023
  13. By: Hou Wang; Allan Dizioli
    Abstract: This paper estimates a standard Dynamic Stochastic General Equilibrium (DSGE) model that includes a wage and price Phillip's curves with different expectation formation processes for Brazil and the USA. Other than the standard rational expectation process, we also use a limited rationality process, the adaptive learning model. In this context, we show that the separate inclusion of a labor market in the model helps to anchor inflation even in a situation of adaptive expectations, a positive output gap and inflation above target. The estimation results show that the adaptive learning model does a better job in fitting the data in both Brazil and the USA. In addition, the estimation shows that expectations are more backward-looking and started to drift away sooner in 2021 in Brazil than in the USA. We then conduct optimal policy exercises that prescribe early monetary policy tightening in the context of positive output gaps and inflation far above the central bank target.
    Keywords: DSGE; Inflation dynamics; optimal monetary policy; Forecasting and Simulation; Bayesian estimation.; learning expectation; inflation expectation; wages expectation; Inflation; Output gap; Real wages; Wage gap; Central bank policy rate; Global
    Date: 2023–01–27
  14. By: Fix, Blair
    Abstract: Whenever inflation rears its head, the call soon comes to raise interest rates. The rationale is simple. Higher interest rates put a damper on the supply of money. And this monetary clamp slows inflation. It’s so intuitive that it must be true. Or is it? As the Reverend Brooke observes, it takes a person of true conviction to ignore apparent contradictions. As such, this post is designed to test your monetary faith. According to monetary orthodoxy, higher interest rates reduce inflation. Yet the evidence demonstrates that the opposite is true: higher interest rates are associated with higher inflation. With this evidence in mind, I invite you to read on. Put your monetary faith to the fire and see if it can survive.
    Keywords: interest rate, inflation, Milton Friedman, monetarism, monetary policy
    JEL: E43 E52 E31 E4
    Date: 2023
  15. By: Ahnert, Toni; Hoffmann, Peter; Leonello, Agnese; Porcellacchia, Davide
    Abstract: What is the effect of Central Bank Digital Currency (CBDC) on financial stability? We answer this question by studying a model of financial intermediation with an endogenously determined probability of a bank run, using global games. As an alternative to bank deposits, consumers can also store their wealth in remunerated CBDC issued by the central bank. Consistent with widespread concerns among policymakers, higher CBDC remuneration increases the withdrawal incentives of consumers, and thus bank fragility. However, the bank optimally responds to the additional competition by offering better deposit rates to retain funding, which reduces fragility. Thus, the overall relationship between CBDC remuneration and bank fragility is U-shaped. JEL Classification: D82, G01, G21
    Keywords: bank fragility, central bank digital currency, demand deposits, global games
    Date: 2023–02
  16. By: Israel, Karl-Friedrich; Sepp, Tim Florian; Sonnenberg, Nils
    Abstract: In this study, we investigate the impact of monetary policy on Japanese household incomes using the Family Income and Expenditure Survey. Our analysis focuses on the savings and income structure of households, and covers the period from Q1 2007 to Q2 2021. We find that households in the highest income brackets have a higher proportion of their savings invested in stocks, while middle and lower income households hold a greater share of their savings in bank deposits. Our hypothesis is that the Bank of Japan's monetary policies have boosted stock markets in particular, leading to disproportionate benefits for high-income households through capital gains and dividends. Using local projections, we first identify a positive, lasting cumulative effect of both conventional and unconventional monetary expansion on Japanese stock markets. We then examine how stock market performance impacts household incomes, and find that the effect is strongest for high-income households, decreases for middle-income households, and disappears for lower-income households. Our results suggest that monetary policy may have contributed to the persistent growth in income inequality in Japan, as measured by metrics such as the Gini coefficient and top-to-bottom income ratios.
    Keywords: monetary policy, inequality, Japan, household income
    JEL: D31 D63 E52
    Date: 2023
  17. By: Christophe Blot (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); Jérôme Creel (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); François Geerolf (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); Sandrine Levasseur (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: We document different measures of inflation heterogeneity in the euro area. We ask what mostly drives this heterogeneity and whether there is cause for concern. Heterogeneity in headline inflation has increased substantially, and way more than heterogeneity in core inflation. We argue that core inflation dispersion is largely driven by small countries, where inflation reversion is the most likely. We then discuss about monetary policy as a limiting or aggravating factor of inflation heterogeneity.
    Date: 2022–11
  18. By: Rolim, Lilian; Marins, Nathalie
    Abstract: Foreign price shocks have significant effects on functional income distribution and on inflation inequality. By increasing prices in domestic currency that are linked to foreign prices, they increase the profit share in some sectors and reduce real wages, in particular of workers whose consumption basket is more sensitive to the price of certain goods (e.g. food prices for low-wage workers). Based on the conflicting-claims inflation literature, we propose a new extension to this framework by incorporating worker's heterogeneity (in terms of nominal income and consumption patterns) in an open economy model with an inflation-targeting regime. We investigate the impacts of foreign price shocks on income and inflation inequality and analyze how monetary policy influences these outcomes. Our simulation results indicate that a positive foreign price shock increases the profit share and the within-workers inequality (in real terms), since low-wage workers are more affected by these shocks. Yet, such effects are mediated by the strength of the monetary policy's transmission channels (domestic economic activity or nominal exchange rate), indicating that the monetary authority response may exacerbate or attenuate these distributive effects.
    Keywords: inflation, inequality, monetary policy, foreign shocks, transmission mechanisms
    JEL: D3 E12 E31 F41
    Date: 2023
  19. By: Almut Balleer; Marvin Noeller
    Abstract: Using firm-level survey data from Germany, this paper asks how do supply constraints propagate monetary policy shocks? To answer this question, we first offer a general discussion on the measurement of supply constraints. We show that capacity utilization, a widely accepted measure of bottlenecks and slack, is only an imperfect measure for supply constraints as a whole. Consequently, we distinguish between input and capacity constraints and show that this distinction is crucial to understand the propagation of monetary policy in the presence of supply constraints: the probability to increase prices rises sharply for input constraint firms in response to an expansionary monetary policy shock, independent of their level of capacity utilization. This result challenges a recent literature that argues that capacity utilization is a sufficient statistic to understand the propagation of aggregate shocks in the presence of production limitations.
    Keywords: supply constraints, capacity utilization, price setting, local projections, monetary policy
    JEL: E31 E52 C22
    Date: 2023
  20. By: Masahiko Shibamoto (Research Institute for Economics and Business Administration and Center for Computational Social Science, Kobe University, JAPAN)
    Abstract: A novel empirical framework is proposed to analyze the causal relationships among future inflation, the business cycle, and monetary policy. It measures inflationary pressures as anticipated shocks to future inflation caused by changes in some predictors of inflation in the structural vector autoregressive model. Empirical results reveal that identified inflationary pressures represent demand-pull factors in inflation dynamics and act as driving forces for stochastic changes in trend inflation. Furthermore, the economic significance of inflationary pressures hinges on the systematic monetary policy responses to them. The results indicate that proactive policy reactions to inflation forecasts are crucial for achieving macroeconomic stability.
    Keywords: Inflationary pressure; Business cycle; Monetary policy; Vector autoregressive model; Anticipated shock
    JEL: C32 E31 E32 E52 E58
    Date: 2023–03
  21. By: Andreeva, Desislava; Bochmann, Paul; Schneider, Julius
    Abstract: This paper evaluates the impact of the March 2020 European Central Bank recommenda-tion that banks do not pay dividends or buy back shares on their market values. It documents a causal negative impact on bank share prices of around 7% during the two weeks following its announcement. The recommendation affected the market values of banks directly, by delaying investor cash flows and indirectly, by increasing the uncertainty about future distri-butions and thus banks’ equity risk premia. The impact differed across banks depending on their distribution plans and risk-adjusted profitability. Our analysis highlights the impor-tance of managing perceptions about dividend uncertainty through credible communication about the expected duration, frequency and severity of dividend restrictions to limit their unintended side effects. JEL Classification: G12, G21, G28, G35
    Keywords: bank capital, bank cost of equity, bank dividends, banking supervision, COVID-19 pandemic
    Date: 2023–02
  22. By: Dreger, Christian
    Abstract: After a long period of price stability, inflation returned to record levels in many parts of the world economy. This paper investigates the role of demand and supply shocks behind this process. Structural VAR models are specified for the US and the euro area. Shocks are identified by sign restrictions and external instruments. Demand shocks dominate in the US and can explain roughly 75 percent of the inflation experience. Supply side shocks like bottlenecks in global value chains account for the remaining 25 percent of the variance of inflation forecast errors. In the euro area, the shocks are balanced. Depending on the specification, supply shocks may even play a larger role over longer periods. Higher interest rates can tame inflation due to their adverse effects on demand. However, supply factors are beyond the control of central banks. Thus, monetary policy might become overly restrictive if the impact of the non-demand drivers is neutralized. Due to the larger weight of supply shocks in the euro area, the risk of stagflation, i.e. a longer period of high inflation and low output growth is especially high in that region. To return to the inflation target of around 2 percent, a resolution of supply side pressures is required in any case.
    Keywords: Inflation, global value chains, supply and demand shocks, external instruments
    JEL: E31 E52 F62
    Date: 2023–02–13
  23. By: Bhargava, Apoorv; Gόrnicka, Lucyna; Xie, Peichu
    Abstract: Sector-specific macroprudential regulations can increase the riskiness of credit to other sec-tors. First, using cross-country bank-level data we find that after a tightening of household-specific macroprudential policy during a credit expansion, banks with larger portfolios of residential mortgages increase their corporate lending by more than banks with smaller mortgage portfolios. Second, we compute three country-level measures of the riskiness of corporate credit allocation based on firm-level data. Consistently across the measures, an unexpected tightening of household-specific macroprudential tools during a credit expansion is followed by an increase in riskiness of corporate credit. These effects are quantitatively meaningful: the riskiness of corporate credit increases by around 10 percent of the historical standard deviation following an unexpected policy tightening. Further evidence from bank lending standards surveys suggests that the leakage effects are stronger for larger firms com-pared to SMEs, consistent with recent evidence on the use of personal real estate as loan collateral by small firms. JEL Classification: G21, G28, G38
    Keywords: corporate credit risk, corporate loan growth, macroprudential regulations, sector-specific financial regulations
    Date: 2023–02
  24. By: Cyrus Minwalla; John Miedema; Sebastian Hernandez; Alexandra Sutton-Lalani
    Abstract: Offline functionality is a key consideration for a potential CBDC. We describe the different types of offline functionality based on their duration outside of network connection—either intermittent (for short periods) or extended (for longer periods). We discuss the advantages and drawbacks of each and consider implications for end-user devices, system resilience and universal accessibility.
    Keywords: Central bank research; Digital currencies and fintech
    JEL: E E42 E58 O O31
    Date: 2023–02
  25. By: Carlos Cañizares Martínez (Department of Economic and Monetary Analysis, National Bank of Slovakia, Slovakia; Rimini Centre for Economic Analysis)
    Abstract: The aim of this paper is to empirically identify the state of the US housing market and to set state-dependent policy rules to smooth the housing cycle. I do so by estimating a three states Markov-switching model of housing prices in which mortgage debt is the state-dependent variable. As a result, the housing market state might be classified as being in housing booms fueled by credit, normal or implosion times. Second, I propose a state-contingent policy rule fed with the probabilities of being in each state. I apply such rule to set a housing counter-cyclical capital buffer (SCCyB) and a time-varying home mortgage interest deduction rule. Finally, I show that such rules have forecasting ability to predict the charge-off rates on real estate residential loans. The significance of this study is that it informs policymakers about the state of the housing market mechanically while it also provides a simple rule that allows the implementation of state-contingent macroprudential policy. Further, the structure of such rule is general enough to be applied to other policy tools.
    Keywords: Housing prices, non-linear modeling, Markov switching model, housing demand, household debt, macroprudential policy
    JEL: C22 C24 G51 R21 R31
    Date: 2023–02
  26. By: Perry Mehrling (Boston University)
    Abstract: The global dollar system, though repeatedly reported to be on its last legs-most recently in the Global Financial Crisis of 2008, but most famously in the Nixon devaluation of 1971-has repeatedly instead consolidated and gone on to further geographical expansion (McCauley 2021). The key currency approach to international monetary economics, first put forward by John H. Williams in the aftermath of the 1931 devaluation of sterling, suggests that such resilience arises from the actions of market practitioners who appreciate the convenience of a global means of payment. So the question arises, why has the key currency approach remained a minority view, if not among practicing bankers then certainly among practicing academics? This paper proposes two main reasons—the discredit of monetary optimism during the depression, and the subsequent fateful adoption of Walrasian equilibrium as the frame for academic discussion after WWII.
    Keywords: key currency approach, Hahn Problem, sterling system, dollar system, exorbitant privilege.
    JEL: B2 F3 N1
    Date: 2023–01–09
  27. By: Thomas Ferguson (Institute for New Economic Thinking); Servaas Storm (Delft University of Technology)
    Abstract: This paper critically evaluates debates over the causes of U.S. inflation. We first show that claims that the Biden stimulus was the major cause of inflation are mistaken: the key data series - stimulus spending and inflation - move dramatically out of phase. While the first ebbs quickly, the second persistently surges. We then look at alternative explanations of the price rises. We assess four supply side factors: imports, energy prices, rises in corporate profit margins, and COVID. We argue that discussions of COVID's impact have thus far only tangentially acknowledged the pandemic's far-reaching effects on labor markets. We conclude that while all four factors played roles in bringing on and sustaining inflation, they cannot explain all of it. There really is an aggregate demand problem. But the surprise surge in demand did not arise from government spending. It came from the unprecedented gains in household wealth, particularly for the richest 10% of households, which we show powered the recovery of aggregate US consumption expenditure especially from July 2021. The final cause of the inflationary surge in the U.S., therefore, was in large measure the unequal (wealth) effects of ultra-loose monetary policy during 2020-2021. This conclusion is important because inflationary pressures are unlikely to subside soon. Going forward, COVID, war, climate change, and the drift to a belligerently multipolar world system are all likely to strain global supply chains. Our conclusion outlines how policy has to change to deal with the reality of steady, but irregular supply shocks. This type of inflation responds only at enormous cost to monetary policies, because it arises mostly from supply-side difficulties that require targeted solutions. But when supply plummets or becomes more variable, fiscal policy also has to adapt: existing explorations of ways to steady demand over the business cycle have to embrace much bolder macroeconomic measures to control over-spending when supply is temporarily constrained.
    Keywords: Monetary policy; fiscal policy; inflation; wealth effect; global supply chains; COVID-19; supply shocks; multipolar world economy, care economy, labor markets
    JEL: E0 E5 E6 E62 O23 I12 J08
    Date: 2023–01–01

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